<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 29, 1999
REGISTRATION NO. 333-74883
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PRISM FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 6162 36-4279417
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
------------------------
440 N. ORLEANS, CHICAGO, IL 60610
(312) 494-0020
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
------------------------------
BRUCE C. ABRAMS
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
PRISM FINANCIAL CORPORATION
440 N. ORLEANS
CHICAGO, IL 60610
(312) 494-0020
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
RODD M. SCHREIBER LARRY A. BARDEN
SKADDEN, ARPS, SLATE, MEAGHER & FLOM SIDLEY & AUSTIN
(ILLINOIS) ONE FIRST NATIONAL PLAZA
333 WEST WACKER DRIVE CHICAGO, IL 60603
CHICAGO, IL 60606 (312) 853-7000
(312) 407-0700
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
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, 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 the earlier effective
registration statement number 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 this form is a post-effective amendment filed pursuant to Rule 462(d)
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,
check the following box. / /
------------------------------
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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 29, 1999
PROSPECTUS
2,500,000 SHARES
[LOGO]
COMMON STOCK
Prism Financial Corporation is offering 2,500,000 shares of its common
stock.
This is our initial public offering. We anticipate that the initial public
offering price will be between $13.00 and $15.00 per share. We will list the
common stock on the Nasdaq National Market under the symbol "PRFN."
A substantial portion of the net proceeds will be used to fund a
distribution to our current stockholders which represents earned and
undistributed taxable S corporation earnings through the closing of this
offering. See "Transactions Related to the Offering" on page 18.
INVESTING IN THE COMMON STOCK INVOLVES RISKS. FOR MORE INFORMATION, PLEASE
SEE "RISK FACTORS" BEGINNING ON PAGE 8.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED THAT
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Public Offering Price..................................................... $ $
Underwriting Discount..................................................... $ $
Proceeds to Prism Financial Corporation................................... $ $
</TABLE>
The underwriters may also purchase from the selling stockholders identified
in the section entitled "Principal and Selling Stockholders" up to an additional
375,000 shares at the public offering price, less the underwriting discount,
within 30 days from the date of this prospectus to cover over-allotments. If the
underwriters exercise the over-allotment option in full, these stockholders will
receive $ million from the proceeds. Prism Financial will not receive any
proceeds from the exercise of the over-allotment option.
WILLIAM BLAIR & COMPANY
ABN AMRO ROTHSCHILD
A DIVISION OF ABN AMRO INCORPORATED
U.S. BANCORP PIPER JAFFRAY
The date of this prospectus is , 1999.
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THIS SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION AND
FINANCIAL STATEMENTS AND RELATED NOTES APPEARING IN THIS PROSPECTUS, INCLUDING
THE INFORMATION UNDER THE SECTION "RISK FACTORS."
THE COMPANY
Prism Financial is a leading retail mortgage banking company engaged in the
business of originating, selling and brokering residential mortgage loans. We
originated $8.3 billion in loans in 1998, making us the 3(rd) largest
non-depository retail originator in the United States and the 11(th) largest
overall, after giving effect to our 1998 acquisitions for the entire year.
Through our network of approximately 760 commission-only loan originators
operating out of 118 retail branches in 17 states as of March 31, 1999, and our
relationships with operators of leading Internet mortgage web sites, we offer a
broad array of residential mortgage products targeted primarily to
high-credit-quality borrowers. We operate as both (1) a mortgage banker,
underwriting, closing and funding loans, and (2) a mortgage broker, selling the
loan products of over 100 different lenders. We believe that our large loan
origination volume and this hybrid banker/broker structure enable us to
consistently offer our customers favorable rates on a wide range of mortgage
products and provide convenient, high-quality customer service.
Since being founded in 1992, we have focused on growing our origination
volume by building a retail origination network through internal growth,
selective acquisitions and, recently, relationships with operators of Internet
mortgage web sites.
- INTERNAL GROWTH. Excluding acquisitions, our annual origination volume
has grown from $15.7 million in 1992 to $3.2 billion in 1998. Since 1992,
we have opened 54 branches in 12 states, including 44 branches opened
since the beginning of January 1998.
- GROWTH THROUGH SELECTIVE ACQUISITIONS. Since 1996, we have completed
seven acquisitions, including our most recent acquisition of First City
Financial Corp. in April 1999. First City is a Denver-based mortgage
banking company with approximately $1.7 billion and $385 million of
mortgage originations in 1998 and the first three months of 1999,
respectively. As of their acquisition dates, these seven acquisitions
added over 650 loan originators operating out of 94 branches in 11 states
to our existing network.
- INTERNET GROWTH. Our objective is to become the leading provider of
mortgage products through the Internet. We have established strategic
relationships with operators of leading Internet mortgage web sites,
including Consumer Financial Network, E-Loan, GetSmart, iOwn.com, Intuit's
QuickenMortgage, iQualify, Keystroke, LendingTree, Loanz.com and
Microsoft's HomeAdvisor. In 1998, we originated over $122 million of the
over $4.0 billion of loans generated over the Internet. We have originated
approximately $125 million of loans over the Internet in the first three
months of 1999.
To support our growth, we have five principal business strategy elements.
First, we focus primarily on the retail channel. This channel allows us to
control the loan origination process and provides us with direct access to the
consumer. Second, we leverage our banker/broker structure in order to
consistently offer consumers low rates on a broad array of mortgage products.
Third, we provide consumers a "one-stop" source of mortgage-related products.
These mortgage-related product sales allow us to increase revenues without
significant capital investment. Fourth, we employ a commission and incentive
system for our loan originators and an incentive compensation system for our
operations employees that is designed to motivate them to maximize loan volume
and profitability while simultaneously creating a variable cost structure for us
which is adaptable to changes in origination volume. Last, we recruit
highly-skilled employees with mortgage industry experience and seek
3
<PAGE>
technologies and process improvements that streamline the origination process to
ensure the continuous delivery of superior customer service.
In 1998, mortgage origination volume in the U.S. reached a record high of
$1.5 trillion, compared to $834 billion for 1997. Demand for mortgage products
in recent years has been favorably affected by low interest rates, low
unemployment rates, increasing wages, high consumer confidence and strong
housing starts and home sales. The retail origination market of the mortgage
banking industry is highly fragmented. According to the National Association of
Mortgage Brokers, approximately 20,000 mortgage brokers were operating in the
U.S. in 1998, although we believe only a limited number originated mortgages
nationwide.
During the past 18 months, the Internet has been emerging as a major source
of mortgage originations. Industry analysts predict that Internet mortgage
originations will grow from over $4.0 billion in 1998 to nearly $100.0 billion
by 2003 as borrowers recognize the convenience and benefits of shopping for a
mortgage from the comfort of their home or office. Capturing market share on the
Internet will be dependent upon access to consumers and the ability to
consistently provide broad product offerings at competitive rates.
Our executive offices are located at 440 North Orleans, Chicago, IL 60610;
our telephone number is (312) 494-0020 and our facsimile number is (312)
494-0273.
* * *
Unless otherwise indicated, all share and per share data and information in
this prospectus:
- assumes that the underwriters will not exercise their over-allotment
option; and
- reflects the exchange of all of the issued and outstanding shares of
common stock of Prism Mortgage Company for 11,495,297 million shares of
Prism Financial Corporation, which will be completed immediately prior
to the closing of this offering.
The exchange is being effected to create a holding company for Prism
Mortgage and its subsidiaries. References in this prospectus to mortgage
originations include only mortgage originations that were closed during the
period. See "Transactions Related to the Offering" on page 18.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered.................................... 2,500,000 shares
Common stock to be outstanding after the offering....... 14,685,987 shares(1)(2)
Use of proceeds......................................... The net proceeds of the offering which are estimated to
be $31,750,000 will be used (a) principally to repay
outstanding indebtedness, including indebtedness
incurred to fund an S corporation distribution to
existing stockholders and (b) for general corporate and
working capital purposes, including funding
acquisitions. For a more detailed discussion of the S
corporation distribution to stockholders and the use of
proceeds, please refer to "Transactions Related to the
Offering" on page 18 and "Use of Proceeds" on page 19.
Proposed Nasdaq National Market Symbol.................. PRFN
</TABLE>
- ------------------------
(1) Includes, upon the closing of this offering:
- shares of common stock to be issued by us pursuant to the purchase
agreement relating to our acquisition of Pacific Guarantee Mortgage
Corporation, including shares of common stock to be issued pursuant to the
incentive plan established for employees of Pacific Guarantee; and
- shares of common stock to be issued by us pursuant to the incentive plan
established for employees of Mortgage Market, Inc.
(2) Excludes:
- shares of common stock to be issued by us pursuant to our 1999 Omnibus
Stock Incentive Plan and 1999 Employee Stock Purchase Plan;
- shares of common stock to be issued by us under the Prism2000 Profit
Sharing Plan;
- shares of common stock to be issued by us pursuant to a stock purchase
right; and
- shares of common stock to be issued by us pursuant to the purchase
agreements relating to our acquisitions of Mortgage Market and First City.
For a more detailed description of our capitalization, please refer to
"Capitalization" on page 20, "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Developments in the past 12 months" on page
40 and note 3 to our consolidated financial statements on page F-19.
5
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
The summary financial data set forth below should be read in conjunction
with our consolidated financial statements and related notes, "Unaudited Pro
Forma Combining Statement of Income" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
-------------------------------------------- MARCH 31,
PRO FORMA --------------------
1996 1997 1998 1998(1)(2) 1998 1999
--------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues
Loan origination income............ $ 9,494 $ 20,984 $ 66,514 $ 103,963 $ 11,011 $ 27,692
Net premium income................. 422 1,726 12,243 22,370 1,385 5,770
Loan-related fees and other........ 2,387 4,252 10,085 16,818 1,209 5,206
Net interest income (expense)...... (102) 392 2,000 1,116 278 1,280
--------- --------- --------- ----------- --------- ---------
Total revenues................... 12,201 27,354 90,842 144,267 13,883 39,948
--------- --------- --------- ----------- --------- ---------
Expenses
Commissions........................ 4,350 10,361 37,502 66,767 4,815 15,366
Loan-related expenses.............. 2,026 3,823 9,346 11,924 1,838 3,624
Salaries and benefits.............. 2,829 6,421 19,649 28,632 3,247 8,962
General and administrative expenses
and other........................ 1,871 3,919 11,777 19,093 2,133 6,635
Depreciation and amortization...... 105 327 1,473 1,775 200 465
--------- --------- --------- ----------- --------- ---------
Total expenses................... 11,181 24,851 79,747 128,191 12,233 35,052
--------- --------- --------- ----------- --------- ---------
Net income..................... 1,020 2,503 11,095 16,076 1,650 4,896
Pro forma data (unaudited):
Pro forma provision for income taxes
(3)................................ 410 995 4,212 6,167 626 1,909
--------- --------- --------- ----------- --------- ---------
Net income adjusted for pro forma
income tax provision............. $ 610 $ 1,508 $ 6,883 $ 9,909 $ 1,024 $ 2,987
--------- --------- --------- ----------- --------- ---------
--------- --------- --------- ----------- --------- ---------
Pro forma net income per share:
Basic.............................. $ 0.60 $ 0.84 $ 0.23
--------- ----------- ---------
--------- ----------- ---------
Diluted............................ $ 0.60 $ 0.83 $ 0.23
--------- ----------- ---------
--------- ----------- ---------
Pro forma weighted average number of
shares outstanding (4):
Basic.............................. 11,520 11,838 12,791
--------- ----------- ---------
--------- ----------- ---------
Diluted............................ 11,562 11,881 12,851
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
- ------------------------
(FOOTNOTES ON FOLLOWING PAGE)
6
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
-----------------------
<S> <C> <C>
AS ADJUSTED
1999 1999(5)
---------- -----------
BALANCE SHEET DATA:
Cash and cash equivalents................................................................ $ 17,168 $ 26,165
Loans held for sale...................................................................... 193,825 193,825
Total assets............................................................................. 230,648 249,456
Loans sold under agreements to repurchase................................................ 25,912 25,912
Warehouse lines of credit................................................................ 164,361 164,361
Total debt............................................................................... 4,906 320
Total stockholders' equity............................................................... 20,675 44,099
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
-------------------------------------------- MARCH 31,
PRO FORMA --------------------
1996 1997 1998 1998(1) 1998 1999
--------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total mortgage originations (in millions)............ $ 857 $ 1,469 $ 5,025 $ 8,305 $ 657 $ 1,982
Internet mortgage originations (in millions)......... $ -- $ -- $ 122 $ 180 $ -- $ 125
Number of loans originated........................... 5,460 10,086 31,943 49,176 4,481 11,462
Loan originators at period end....................... 126 203 749 749 213 765
Number of branches at period end..................... 11 17 95 95 22 118
</TABLE>
- --------------------------
(1) Gives effect to the creation of Prism Financial as the holding company for
Prism Mortgage, the acquisitions of Pacific Guarantee and Mortgage Market
and the contribution of Illinois Guaranty Title, L.L.C. to us by our
principal stockholders as if they had occurred on January 1, 1998.
(2) Excludes the issuance of 458,746 shares, based on an assumed offering price
of $14.00 per share, representing additional consideration of $6.4 million
pursuant to the Pacific Guarantee purchase agreement upon the closing of the
offering. This amount has been recognized as goodwill and will be amortized
over 20 years.
(3) Beginning January 1, 1996, Prism Financial elected to be treated as an S
corporation for federal and state income tax purposes. Pro forma income
taxes for the years ended December 31, 1996, 1997, 1998, Pro Forma 1998 and
the three months ended March 31, 1998 and March 31, 1999 reflect adjustments
for federal and state income taxes as if Prism Financial had been taxed as a
C corporation rather than an S corporation for such periods. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Termination of S corporation status and income taxes."
(4) The pro forma weighted average number of shares outstanding at December 31,
1998 includes the effect of the assumed issuance of 951,656 shares of common
stock to generate sufficient cash to pay the S corporation distribution
amount of $13.3 million at December 31, 1998. The pro forma weighted average
number of shares for March 31, 1999 includes the effect of the assumed
issuance of 1,295,463 shares of common stock to generate sufficient cash to
pay the S corporation distribution amount of $18.1 million at March 31,
1999. The issuance of common stock was based on an assumed $14.00 offering
price. Pro forma weighted average number of shares outstanding does not
include the shares of common stock to be issued upon the closing of the
offering pursuant to the Pacific Guarantee purchase agreement or under the
incentive plan established for employees of Mortgage Market. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Developments in the past 12 months."
(5) As adjusted to give effect to:
- an assumed S corporation distribution of $18.1 million as of March 31,
1999, which amount we expect will increase as a result of additional S
corporation income from April 1, 1999 to the closing of this offering;
- the recording by us of a one-time non-cash credit to earnings in the
amount of $855,000 to recognize a deferred income tax asset as a result of
the termination of our S corporation status, which amount may change by
the amount of net deferred tax assets or liabilities related to our
operations from April 1, 1999 through the date of the closing of this
offering;
- the shares of common stock to be issued by us upon the closing of the
offering pursuant to the Pacific Guarantee purchase agreement or pursuant
to the incentive plan established for employees of Mortgage Market; and
- the issuance and sale of the common stock offered by us in this offering
at an assumed offering price of $14.00 per share and application of the
net proceeds therefrom as described in "Use of Proceeds."
7
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS BEFORE DECIDING WHETHER TO
BUY OUR COMMON STOCK. THE RISKS DESCRIBED BELOW ARE NOT THE ONLY ONES THAT WE
FACE. ADDITIONAL RISKS THAT ARE NOT YET KNOWN TO US OR THAT WE CURRENTLY THINK
ARE IMMATERIAL COULD ALSO IMPAIR OUR BUSINESS, OPERATING RESULTS OR FINANCIAL
CONDITION. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO ANY OF
THESE RISKS, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT. YOU ALSO SHOULD
REFER TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, INCLUDING OUR
COMBINED FINANCIAL STATEMENTS AND THE RELATED NOTES.
IF WE DO NOT MANAGE OUR GROWTH EFFECTIVELY, OUR FINANCIAL PERFORMANCE COULD BE
ADVERSELY AFFECTED; OUR HISTORICAL GROWTH RATES ARE NOT LIKELY TO REFLECT OUR
FUTURE GROWTH
We have experienced rapid growth since our formation in 1992. Our revenues
have grown from approximately $200,000 in 1992 to $90.8 million in 1998. Our
workforce has grown from five employees to 1,462 employees during the same
period. We intend to continue to grow by adding new loan originators, opening
new branches, making strategic acquisitions and building our Internet
origination capabilities. Future growth will impose significant added
responsibilities on members of management, including the need to identify,
recruit, maintain and integrate additional employees, including management.
There can be no assurance that our systems, procedures and controls will be
adequate to support our operations as they expand. Our failure to manage growth
effectively, or our inability to recruit, maintain and integrate additional
qualified employees, could have a material adverse effect on our business and
results of operations. In addition, due to our rapid growth and recent
acquisitions, our historical growth rates are not likely to accurately reflect
our future growth rates or our growth potential. We cannot assure you that our
future revenues will increase or that we will continue to be profitable.
DEMAND FOR MORTGAGES CAN BE SIGNIFICANTLY AFFECTED BY AN ECONOMIC SLOWDOWN OR
RECESSION
Demand for mortgages will be adversely affected by periods of economic
slowdown or recession which may be accompanied by rising interest rates,
decreasing demand for consumer credit, declining home sales, declining real
estate values and declining ability of borrowers to make loan payments. Changes
in the level of consumer confidence, real estate values, prevailing interest
rates and investment returns expected by the financial community could make
mortgage loans of the types originated by us less attractive to borrowers or
investors because, among other things, the actual rates of delinquencies and
foreclosures on those loans could be higher under adverse economic conditions
than those currently experienced in the mortgage lending industry in general. A
material decline in the volume of sales of residential real estate could also
have a material adverse effect on our business and results of operations. While
demand for mortgages in the U.S. increased approximately 80% from 1997 to 1998,
industry analysts have reported their expectation that demand for mortgages in
1999 will decrease from 1998 levels.
Rising interest rates, which typically accompany an economic slowdown, may
also adversely affect demand for refinancings. Since January 1995, significant
declines in interest rates have produced significant levels of refinance
activity, in general, and for us in particular. If interest rates stabilize or
rise even moderately, our refinance loan origination volume is likely to be
adversely affected. We estimate that during the year ended December 31, 1998,
approximately 54% of our of mortgage loan origination volume were refinancings
of first mortgage loans.
THE LOSS OF KEY PURCHASERS OF OUR LOANS OR SERVICING RIGHTS OR A REDUCTION IN
PRICES PAID COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
We currently sell substantially all of the loans we fund to independent
whole loan or bulk loan buyers and sell the accompanying servicing rights to
approved servicers. The premium income
8
<PAGE>
generated from these sales represents a primary source of our revenues and
earnings. Further, we are dependent on the cash generated from sales of
mortgages and servicing rights to fund our future loan closings and repay
borrowings under our credit facilities. In 1998, we sold over 60% of the loans
funded by our mortgage bank to two large, national companies, one of which
directly competes with us for retail originations. In addition, in 1998, we sold
over 65% of our servicing rights to the same company that is a competitor of
ours and buys a substantial portion of our loans. In the event that any
purchasers of a significant amount of loans and/or servicing rights (1) ceases
to buy our loans and/or servicing rights and equivalent purchasers could not be
identified on a timely basis, (2) lowers the price it pays to us or (3)
adversely changes the material terms by which it currently makes purchases, our
business and results of operations would be materially adversely affected.
The prices for which we are able to sell our loans vary from time to time
and may be materially adversely affected by several factors, including, without
limitation, the following:
- any reduction in the number of potential buyers of our loans;
- any increase in the amount of similar loans available for sale;
- increased prepayments of, or defaults under, loans in general;
- the types and volume of loans being sold by us;
- the level and volatility of interest rates; and
- the quality of loans previously sold by us.
The prices for which we are able to sell our mortgage servicing rights vary
from time to time and may be materially adversely affected by a number of
factors, including the general supply of and demand for mortgage servicing
rights and changes in interest rates. Servicing rights for a particular loan
category originated with higher interest rates tend to have a lower value than
those originated with comparatively lower interest rates.
A reduction in the size of the secondary market for the types of loans
funded by us may adversely affect our ability to sell loans and servicing rights
in the secondary market, and accordingly adversely impact our profitability and
ability to fund future loan closings. Any decrease in the prices paid to us upon
the sale of our loans or servicing rights could materially adversely affect our
business and results of operations.
IF WE ARE UNABLE TO MAINTAIN ADEQUATE CREDIT FACILITIES OR ACCESS TO FUNDS, OUR
ABILITY TO MAKE LOANS WILL BE LIMITED
We fund substantially all of our loans through borrowings under our credit
facilities and through repurchase agreements and, to a lesser extent, through
internally generated funds. We repay borrowings under our credit facilities with
the proceeds received from sales of loans and servicing rights. If we are unable
to renew or replace our credit facilities or repurchase agreements on adequate
terms, are unable to comply with the terms of our credit facilities or
repurchase agreements, including the financial and other covenants, or are
unable to increase our credit facilities or expand our repurchase agreements if
required for future growth, our business and results of operations could be
materially adversely affected. If we cannot successfully maintain our existing
credit facilities or replace them with comparable financing sources, we may be
required to curtail our loan origination activities, which would have a material
adverse effect on our business and results of operations. Our principal credit
facility provides us with a current aggregate borrowing amount of $250.0
million, which amount may be increased to $400.0 million, is renewable annually
and expires on March 29, 2000. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and capital resources"
on page 35.
9
<PAGE>
THE PROFITABILITY OF OUR LOANS HELD FOR SALE COULD BE NEGATIVELY AFFECTED BY AN
INCREASE IN INTEREST RATES
The value of our loans is based, in part, on market interest rates, and we
may experience losses on loan sales if interest rates change rapidly or
unexpectedly. If interest rates rise after we fix a price for a loan but before
we sell the loan in the secondary market, the value of that loan will decrease.
If the amount we receive from originating and selling the loan is less than our
cost of borrowing to finance the loan, we could incur net losses and our
business and operating results could be adversely affected. Although we
typically know approximately how long we will keep a loan after funding, there
may be unexpected delays which could increase our interest rate exposure. While
we use various hedging strategies to provide some protection against interest
rate risks, no hedging strategy can completely protect us. The nature and timing
of hedging transactions may influence the effectiveness of hedging strategies
and poorly designed strategies or improperly executed transactions may increase
rather than decrease risk and losses. In addition, hedging strategies involve
transaction and other costs. We cannot assure you that our hedging strategy and
the hedges that we make will adequately offset the risks of interest rate
volatility or that our hedges will not result in losses.
IF WE DO NOT PROPERLY EXECUTE OUR ACQUISITION STRATEGY, INCLUDING SUCCESSFULLY
INTEGRATING OUR ACQUIRED COMPANIES, OUR BUSINESS MAY SUFFER
A key element of our growth strategy is to expand our operations through
selective acquisitions of independent mortgage brokers and bankers. Substantial
competition exists for acquisition opportunities in the mortgage industry. This
competition could result in an increase in the price of, and a decrease in the
number of, attractive acquisition targets. As a result we may not be able to
successfully acquire attractive targets on terms that we deem acceptable. In
addition, we cannot assure you that we will be able to obtain the additional
financing we may need for our acquisition program on terms that we deem
acceptable. Acquisitions may also involve a number of special risks, including
adverse short-term effects on our results of operations, dilution resulting from
issuances of our common stock, diversion of management's time, strain on our
financial and administrative infrastructure, difficulties in integrating
acquired businesses and personnel, loss of personnel and unanticipated legal
liabilities. We cannot assure you that we will be able to overcome these
acquisition risks or that they will not adversely affect our business and
results of operations.
IF WE LOSE OUR KEY PERSONNEL, OUR BUSINESS MAY SUFFER
Our future success depends to a significant extent on the continued services
of our senior management, particularly Bruce C. Abrams, Mark A. Filler, Terry A.
Markus, William D. Osenton and Martin E. Francis, our Chairman and Chief
Executive Officer, President, President of Prism Illinois, President of Pacific
Guarantee and President of Mortgage Market, respectively. The loss of the
services of Mr. Abrams, Mr. Filler, Mr. Markus, Mr. Osenton, Mr. Francis or
other key employees, could have a material adverse effect on our business and
results of operations. We do not maintain "key person" life insurance for any of
our personnel.
IF WE CANNOT ATTRACT OR RETAIN QUALIFIED LOAN ORIGINATORS, OUR BUSINESS MAY
SUFFER
We depend on our loan originators to generate customers by, among other
things, developing relationships with consumers, real estate agents and brokers,
builders, corporations and others, leading to repeat and referral business.
Accordingly, we must be able to attract, motivate and retain skilled loan
originators. In addition, our growth strategy contemplates hiring additional
loan originators. The market for skilled loan originators is highly competitive
and historically has experienced a high rate of turnover. Competition for
qualified loan originators may lead to increased costs for such loan
originators. If we are unable to attract or retain a sufficient number of
skilled loan originators or even if we are able to retain loan orginators but
our costs increase, our business and results of operations could be adversely
affected.
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INTENSE COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR FINANCIAL
PERFORMANCE
We face competition in the business of originating and selling mortgage
loans. Low barriers to entry result in a steady stream of new competitors
entering the traditional mortgage market and the Internet mortgage market. In
addition, the nature of the mortgage industry is changing as mortgage products
are becoming more commodity-like in nature due to, among other factors, price
and visibility on the Internet. Mortgage companies must be able to offer a broad
range of attractively priced products to remain competitive. We compete with a
wide range of other mortgage lenders, including:
- other mortgage banks;
- commercial banks, savings and loan associations;
- credit unions;
- insurance companies and other finance companies; and
- Internet mortgage web sites.
Many of these competitors or potential competitors are better established,
substantially larger and have more capital and other resources than we do. If we
expand into additional geographical markets, we will face competition from
consumer lenders with established positions in those markets. In the future, we
may also face competition from government-sponsored entities, such as Fannie Mae
and the Federal Home Loan Mortgage Corporation. Competition may lower the rates
we can charge borrowers, thereby potentially lowering the amount of premium
income on future loan sales and sales of servicing rights. Increased competition
may also reduce the volume of our loan originations and loan sales. We cannot
assure you that we will be able to compete successfully in this evolving market.
IF WE ARE UNABLE TO IMPLEMENT OUR INTERNET STRATEGY SUCCESSFULLY, OUR GROWTH MAY
BE AFFECTED
A portion of our growth is dependent on our ability to originate loans on
the Internet. Our Internet success will depend, in part, on the development and
maintenance of the Internet's infrastructure and consumer acceptance of it as a
distribution channel for mortgages. There can be no assurance that consumers
will increase their use of the Internet for obtaining mortgage loans. In order
to grow our loan volume on the Internet, we are dependent on relationships with
operators of Internet mortgage web sites to capture some of the on-line mortgage
growth. However, our ability to significantly increase the number of loans we
originate over the Internet and to continue to originate loans profitably
through the Internet remains uncertain. In addition, many of our agreements with
Internet mortgage web sites can be terminated with notice by either party. Our
business and results of operations may be materially, adversely affected by the
termination of these agreements.
CHANGES IN EXISTING GOVERNMENT SPONSORED AND FEDERAL MORTGAGE PROGRAMS COULD
NEGATIVELY AFFECT OUR BUSINESS
Our ability to generate revenue through the sale of mortgages is largely
dependent upon the continuation of programs administered by Fannie Mae, the
Federal Home Loan Mortgage Corporation and others which facilitate the issuance
of mortgage-backed securities. A portion of our business is also dependent upon
the continuation of various programs administered by the Federal Housing
Administration and the Veterans Administration. Any discontinuation of, or
significant reduction in, the operation of those programs could have a material
adverse effect on our business and results of operations.
OUR NON-PRIME MORTGAGE BUSINESS SUBJECTS US TO GREATER RISKS THAN OUR PRIME
BUSINESS
Lenders in the non-prime mortgage banking industry make loans to borrowers
who have impaired or limited credit histories or higher debt-to-income ratios
than traditional mortgage lenders allow. For
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the year ended December 31, 1998, only approximately 3% of the dollar amount and
5% of the total number of our loans originated were categorized as non-prime.
However, our dependence on this class of borrowers, and exposure to the greater
risks inherent to non-prime mortgage loans, may increase if we determine to
increase our focus on these loan programs. The non-prime mortgage banking
industry is a riskier business than the conforming mortgage business because
product offerings for non-prime mortgages frequently change which may make
selling a non-prime loan in the secondary market more difficult. If non-prime
lending becomes a more significant part of our business, our failure to
adequately address these and other related risks could have a material adverse
effect on our business and results of operations.
WE MAY BE REQUIRED TO RETURN PROCEEDS OBTAINED FROM THE SALE OF LOANS
When we sell a loan to an investor, we are required to make unqualified
representations and warranties regarding the loan, the borrower and the
property. These representations are made based in part on our due diligence and
information provided to us by borrowers and others. If any of these
representations or warranties are later determined not to be true, we may be
required to repurchase the loan from the investor or indemnify the investor for
any damages caused by the breach of such representation or warranty. In
connection with some non-prime loan sales, we may be required to return a
portion of the premium paid by the investor for the loan if the loan is prepaid
within the first year after its sale. If, to any significant extent, we are
required to repurchase loans, indemnify investors or return loan premiums, it
could have a material adverse effect on our business and results of operations.
BECAUSE OUR ORIGINATION VOLUME IS GEOGRAPHICALLY CONCENTRATED, OUR BUSINESS MAY
BE ADVERSELY AFFECTED BY DEVELOPMENTS IN INDIVIDUAL MARKETS
In 1998, approximately 39%, 28% and 21% of our mortgage loan originations,
as measured by principal balances, were secured by property located in
California, Illinois and the Pacific Northwest, respectively, after giving
effect to our 1998 acquisitions for the entire year. Should these states or
their surrounding regions experience adverse economic, political or business
developments or suffer natural disasters, our ability to originate loans would
be reduced, and the rates of delinquency and foreclosure on loans we originate
would be higher, than if we had greater geographic diversification. Moreover, if
any of these states' or if the region's real estate markets should experience an
overall decline in property values, the rates of delinquency, foreclosures,
bankruptcies and losses on the loans we originate may be expected to increase
substantially, which could negatively affect our ability to originate loans or
to sell our loans and servicing rights. Unless and until we achieve greater
geographic diversification, any disproportionate economic downturn in these
areas could have a material adverse effect on our business and results of
operations.
POTENTIAL FLUCTUATIONS IN OUR FINANCIAL RESULTS MAKES FINANCIAL FORECASTING MORE
DIFFICULT
Our quarterly revenues and net earnings have fluctuated in the past and are
expected to fluctuate in the future as a result of a number of factors,
including the following:
- size and timing of sales of loans and servicing rights;
- size and timing of acquisitions and internal expansion;
- the level and volatility of interest rates;
- the volume of mortgage loan originations;
- our ability to offer competitive rates; and
- changes in market rates for origination and processing fees.
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In addition, a delay in closing a sale of loans or servicing rights would
postpone recognition of premium income on these sales to a subsequent quarter.
Unanticipated delays in closing a sale of loans or servicing rights could also
increase our exposure to interest rate fluctuations by lengthening the period
during which our variable rate borrowings under our credit facilities are
outstanding. If we are unable to profitably sell a sufficient number of loans or
servicing rights in a particular reporting period, our revenues for that period
would decline. As a result, we could report lower net earnings or a loss
reported for that period. Our quarterly earnings will also be affected by:
- the timing of acquisitions and the recognition of costs associated with
those acquisitions;
- the generally lower initial profitability of newly opened branches
compared to mature branches; and
- the success of our hedging strategy.
These factors, among others, make it possible that in some future quarter
our results of operations may be below the expectations of securities analysts
and investors, which could have a material adverse effect on the price of our
common stock.
OUR DEPENDENCE ON INFORMATION SYSTEMS MAY RESULT IN COMPUTER PROBLEMS CAUSED BY
THE YEAR 2000
Our business is highly dependent on communications and information systems.
Any failure or interruption of our systems or third party systems on which we
rely could cause underwriting or other delays. Such failures or interruptions
may result from the inability of computing systems to recognize the year 2000.
We cannot assure you that these year 2000 issues have been or will be adequately
addressed by us or the third parties on which we rely, or that any such failures
or interruptions will not occur. The occurrence of any failures or interruptions
could have a materially adverse effect on our business and results of
operations.
WE MUST COMPLY WITH APPLICABLE GOVERNMENT REGULATIONS AND ARE SUBJECT TO CHANGES
IN APPLICABLE LAW
Most states have laws and regulations governing the registration or
licensing and conduct of persons providing mortgage brokerage services. Such
laws and regulations also typically require certain consumer protection
disclosures and compliance with loan solicitation procedures and a variety of
other practices, throughout the various stages of the mortgage solicitation,
application and approval process.
In addition to state law, mortgage brokerage services are heavily regulated
by federal law. For example, the Real Estate Settlement Procedures Act,
prohibits the payment and receipt of mortgage loan referral fees. The act,
however, does permit persons to be compensated for the fair market value of
non-referral services actually rendered.
Failure to comply with these requirements can lead to civil and/or criminal
liability, loss of approved status, demands for indemnification or loan
repurchases from buyers in the secondary market, rights of rescission for
mortgage loans, class action lawsuits and administrative and enforcement
actions.
In addition, members of Congress, government officials and political
candidates from time to time have suggested the elimination of or further
limitation on the mortgage interest deduction for federal income tax purposes
based on borrower income, type of loan or principal amount. Some of our loans
are made to borrowers for the purpose of consolidating consumer debt or
financing other consumer needs. The competitive advantages of tax deductible
interest, when compared with alternative sources of financing, could be
eliminated or seriously impaired by this government action.
Although we believe that we are currently in compliance in all material
respects with applicable federal, state and local laws, rules and regulations,
we cannot assure you that we are, or will be, in full compliance with current
laws, rules and regulations; that more restrictive laws, rules and regulations
will not be adopted or promulgated; that existing laws and regulations will not
be interpreted in a more
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restrictive manner, which could make compliance substantially more difficult or
expensive; or that new laws reducing or eliminating some of the benefits of
purchasing a mortgage will not be enacted. If we are unable to comply with those
laws or regulations or if new laws limit or eliminate some of the benefits of
purchasing a mortgage, our business and results of operations may be materially
adversely affected. For a more detailed discussion on governmental regulation,
please refer to "Business-- Government regulation" on page 54.
IF IN THE FUTURE WE DECIDE TO SECURITIZE AND/OR RETAIN THE SERVICING RIGHTS OF
OUR LOANS, WE WOULD BE SUBJECT TO ADDITIONAL RISKS THAT WE DO NOT CURRENTLY
FACE
We currently do not securitize the loans that we originate, but rather sell
them to the secondary market. However, in the future if the prices offered in
the secondary market for our loans are significantly lower than what we could
receive through securitization, we would consider securitizing our loans. If we
began securitizing our loans, we would be subject to numerous additional risks,
including:
- decreased operating cash flow;
- conditions in the general securities and securitization markets;
- the need to obtain satisfactory credit enhancements;
- retention of credit enhancing residual interests; and
- increased potential for earnings fluctuations.
Except during the short period of time before a loan is sold, we also do not
retain the servicing rights to the loans we originate. We sell the servicing
rights at the same time we sell the loan. However, we would consider retaining
the servicing rights to our loans if we believed that their value was
significantly greater than secondary market buyers were then willing to pay. If
we started retaining the servicing rights to our loans, we would be subject to
numerous additional risks, including:
- decreased operating cash flow; and
- the potential of having to write down the value of the servicing rights
through a charge to earnings, particularly as a result of changing
interest rates and alternative financing options which lead to increased
prepayments.
If we determined to securitize and/or retain the servicing rights to our loans,
and we did not adequately address the above mentioned and other related risks,
they could have a material adverse effect on our business and results of
operations.
PENDING INDUSTRY-WIDE LITIGATION COULD CHANGE THE MANNER IN WHICH WE DO BUSINESS
AND SUBJECT US TO POTENTIAL LIABILITY
Numerous lawsuits seeking class certification have been filed against
mortgage lenders alleging that a type of direct and indirect payments to
mortgage brokers by those lenders violate the Real Estate Settlement Procedures
Act. These lawsuits have generally been filed on behalf of a purported
nationwide class of borrowers and allege that various forms of direct and
indirect payments to mortgage brokers are referral fees or unearned fees
prohibited under RESPA, or that consumers were not informed of the brokers'
compensation, in violation of law. Several federal district courts construing
RESPA in these cases have reached conflicting results. In the only appellate
decision addressing the issue to date, the United States Court of Appeals for
the Eleventh Circuit in CULPEPPER V. INLAND MORTGAGE CORPORATION reversed the
lower court's summary judgment in favor of the lender defendant on the grounds
that the lender had failed to establish that the indirect payment in the form of
a "yield spread premium" made to a broker in a particular transaction was not a
referral fee prohibited by
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RESPA. The case was remanded to the district court for further proceedings. The
Department of Housing and Urban Development, acting upon Congress' direction,
issued a policy statement in January 1999 setting forth its position that the
legality of lender payments to mortgage brokers depends on a case-by-case
analysis that takes into consideration all direct and indirect compensation
received by the mortgage broker to determine whether (1) goods or facilities
have been actually furnished or services performed for the compensation paid,
and (2) the compensation is reasonably related to the value of the goods or
facilities actually furnished or services actually performed.
We receive various forms of direct and indirect payments from lenders for
loans we broker. If the pending cases on lender payments to brokers are
ultimately resolved against the lenders, it may cause an industry-wide change in
the way independent mortgage brokers are compensated. In addition, future
legislation, regulatory interpretations or judicial decisions may require us to
change our broker compensation programs or subject us to material monetary
judgments or other penalties. Any changes or penalties may have a material
adverse effect on our business and results of operations. For a more detailed
description of government regulation, please refer to "Business--Government
regulation" on page 54.
THERE IS NO PRIOR TRADING MARKET FOR OUR COMMON STOCK
Prior to this offering, you could not publicly buy or sell our common stock.
An active public market for our common stock may not develop or be sustained
after this offering. Although the initial public offering price will be
determined based on negotiations between the underwriters and us, the market
price after the offering may vary from and decline below the initial offering
price.
THE TRADING PRICE OF OUR COMMON STOCK MAY BE VOLATILE
The market price of our common stock may be highly volatile and subject to
wide fluctuations in response to numerous factors, including the following:
- actual or anticipated fluctuations in our operating results;
- changes in expectations as to our future financial performance, including
financial estimates by securities analysts and investors;
- the operating and stock performance of our competitors;
- announcements by us or our competitors of new products or services or
significant contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
- changes in interest rates;
- additions or departures of key personnel; and
- future sales of our common stock.
In addition, the stock markets from time to time experience extreme price
and volume fluctuations that may be unrelated or disproportionate to the
operating performance of companies. These broad fluctuations may adversely
affect the trading price of our common stock, regardless of our actual operating
performance.
In the past, stockholders have often brought securities class action
litigation against a company following periods of volatility in the market price
of their securities. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and divert management's
attention and resources.
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CONCENTRATED CONTROL COULD ADVERSELY AFFECT OUR STOCKHOLDERS
Upon the closing of this offering, our officers and directors, together with
entities affiliated with them, will beneficially own approximately 74% of our
outstanding common stock. These persons will own 71% if the underwriters'
over-allotment option is exercised in full. As a result, if acting together,
these stockholders will have the ability to control the outcome to all matters
requiring stockholder approval including:
- the election and removal of directors;
- amendments to our charter; and
- any merger, sale of all or substantially all of our assets or other major
corporate transactions.
Such control could discourage others from initiating potential merger,
takeover or other change of control transactions. As a result, the market price
of our common stock could be adversely affected. For a more detailed description
of our management team and their ownership of common stock, please refer to
"Management" on page 57 and "Principal and Selling Stockholders" on page 68.
ADDITIONAL SHARES MAY BE SOLD IN THE FUTURE
Sales of significant amounts of our common stock after this offering or the
perception that such sales will occur could adversely affect the market price of
our common stock or our future ability to raise capital through an offering of
equity securities. After this offering, we will have outstanding 14,685,987
shares of common stock. All of the shares of common stock to be sold in this
offering will be freely tradable without restriction or further registration
under the federal securities laws unless purchased by our "affiliates" within
the meaning of Rule 144 under the Securities Act. The 12,185,987 remaining
shares of outstanding common stock, representing approximately 83% of the
outstanding common stock upon completion of this offering, will be "restricted
securities" under the Securities Act, subject to restrictions on the timing,
manner and volume of sales of those shares.
Our directors, officers and all of our current stockholders immediately
prior to this offering have agreed for a period of 180 days after the date of
this prospectus, that they will not, without the prior written consent of
William Blair & Company, L.L.C., directly or indirectly, offer to sell, sell or
otherwise dispose of any shares of our common stock, other than shares acquired
in this offering. Subject to the preceding lock-up agreements, holders of up to
12,005,015 shares of common stock will have the right to request the
registration of their shares under the Securities Act. Upon the effectiveness of
that registration, all shares covered by that registration statement will be
freely transferable. Following the closing of this offering, we also intend to
file a registration statement on Form S-8 under the Securities Act covering
approximately 2.4 million shares of common stock reserved for issuance under the
1999 Omnibus Stock Incentive Plan, the 1999 Employee Stock Purchase Plan, the
Pacific Equity Value Plan and the Mortgage Market Equity Value Plan.
Accordingly, subject to applicable vesting requirements and exercise with
respect to options, shares registered under that registration statement will be
available for sale in the open market immediately after the 180-day lock-up
agreements expire. For a more detailed description of additional shares that may
be sold in the future, please refer to "Shares Eligible for Future Sale" on page
72 and "Underwriting" on page 74.
WE ARE DEPENDENT ON DIVIDENDS AND DISTRIBUTIONS FROM OUR OPERATING SUBSIDIARIES
TO FUND OUR OPERATIONS
Prism Financial will be a holding company, the principal assets of which
will initially be the shares of the capital stock of Prism Mortgage. As a
holding company without independent means of generating operating revenue, Prism
Financial will depend on dividends and other payments from Prism Mortgage to
fund its obligations and meet its cash needs. Prism Financial's expenses may
include salaries of its executive officers, insurance, professional fees and
service of indebtedness that may be outstanding from time to time. Financial
covenants under existing or future loan agreements of Prism Mortgage or its
subsidiaries, or provisions of the laws of the states where Prism Mortgage or
its
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subsidiaries are organized, may limit Prism Mortgage's ability to make
sufficient dividend or other payments to permit Prism Financial to fund its
obligations or meet its cash needs, in whole or in part. By virtue of Prism
Financial's holding company status, its common stock will be structurally junior
in right of payment to all existing and future liabilities of Prism Mortgage and
its subsidiaries.
ANTI-TAKEOVER PROVISIONS AFFECTING US COULD HAVE ADVERSE EFFECTS ON OUR
STOCKHOLDERS
Our amended and restated certificate of incorporation and amended and
restated bylaws and Delaware law contain anti-takeover provisions that could
have the effect of delaying or preventing changes in control that a stockholder
may consider favorable. The provisions in our charter documents include the
following:
- a classified board of directors pursuant to which our directors are
divided into three classes, with three-year staggered terms;
- the ability of our board of directors to issue shares of preferred stock
and to determine the price and other terms, including preferences and
voting rights, of those shares without stockholder approval;
- stockholder action to be taken only at a special or regular meeting; and
- advance notice procedures for nominating candidates to our board of
directors.
The foregoing provisions could have the effect of delaying, deferring or
preventing a change in control of Prism Financial; discourage bids for our
common stock at a premium over the market price; or adversely affect the market
price of, and the voting and other rights of the holders of, our common stock.
We are subject to certain Delaware laws that could have similar effects. One of
these laws prohibits us from engaging in a business combination with any
interested stockholder for a period of three years from the date the person
became an interested stockholder unless certain conditions are met.
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION IN NET TANGIBLE BOOK VALUE
The initial public offering price is expected to be substantially higher
than the net tangible book value of each outstanding share of common stock. If
you purchase common stock in this offering, you will suffer immediate and
substantial dilution. The dilution will be $11.63 per share in the net tangible
book value of the common stock from the expected initial public offering price.
For a more detailed discussion of dilution, please refer to "Dilution" on page
21.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance, or achievements expressed or implied
by those forward-looking statements. These factors include, among other things,
those listed under "Risk Factors" and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," or "continue" or the negative
of these words or other similar words or phrases.
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Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements. We
are under no duty to update any of the forward-looking statements after the date
of this prospectus.
TRANSACTIONS RELATED TO THE OFFERING
Prism Mortgage has been engaged in the residential mortgage lending business
since its incorporation in 1992. Prism Financial was formed in Delaware in
February of 1999 as a holding company for Prism Mortgage and its subsidiaries.
Immediately prior to this offering, the existing stockholders of Prism Mortgage
will exchange their shares for an aggregate of 11,495,297 shares of our common
stock. As a result of these transactions (collectively, the "Incorporation
Transactions"), immediately prior to this offering, the former stockholders of
Prism Mortgage will own all of the issued and outstanding common stock of Prism
Financial, and Prism Financial will own all of the issued and outstanding common
stock of Prism Mortgage. Prior to the Incorporation Transactions, Prism
Financial will not have conducted any business and will not have any assets or
liabilities.
Since 1996, Prism Mortgage has elected to be treated for federal and certain
state income tax purposes as an S corporation under the Internal Revenue Code,
and comparable state laws. As a result, earnings of Prism Mortgage since such
election have been included in the taxable income of its stockholders for
federal and state income tax purposes, and Prism Mortgage has not been subject
to income tax on such earnings. Upon the closing of this offering, Prism
Mortgage's S corporation status will be terminated. Immediately prior to
conversion to C corporation status, Prism Mortgage will make a distribution to
its stockholders (the "S Corporation Distribution") consisting of all of its
previously earned and undistributed taxable S corporation earnings through the
date of the closing of this offering. Had that distribution occurred on March
31, 1999, the amount of that distribution would have been approximately $18.1
million, which amount we expect to increase as a result of additional S
corporation income from April 1, 1999 to the closing of this offering. The
distribution will consist of promissory notes bearing interest at the rate
payable by Prism Financial on its principal credit facility (the "S Corporation
Distribution Notes"), and these S Corporation Distribution Notes will be repaid
as soon as practicable from the proceeds of this offering. Upon consummation of
the Incorporation Transactions, Prism Mortgage will no longer be treated as an S
corporation and, accordingly, will be fully subject to federal and state income
taxes. As a result of becoming taxable as a C corporation, for the quarter in
which this offering closes, we will record a one-time non-cash credit to
earnings to recognize a deferred income tax asset. If this credit had been
recorded at March 31, 1999, the amount credited to earnings would have been
approximately $855,000. This amount may change by the amount of net deferred tax
assets or liabilities related to our operations from April 1, 1999 through the
date of the closing of this offering. For more information, please refer to
"Capitalization" on page 20.
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USE OF PROCEEDS
The primary purposes of this offering are to repay outstanding indebtedness,
obtain additional capital, create a public market for our common stock and
facilitate future access to public markets. The net proceeds to us from the
issuance and sale of the shares of common stock are estimated to be
approximately $31.8 million, assuming an initial public offering price of $14.00
per share and after deducting estimated offering expenses of $800,000 and the
underwriting discount payable by us. We intend to use a portion of the net
proceeds received by us in this offering to pay, as soon as practicable after
the closing of this offering, the approximately $18.1 million aggregate
principal and interest outstanding under the S Corporation Distribution Notes as
of March 31, 1999. We expect this amount will increase as a result of additional
S corporation income from April 1, 1999 to the closing of this offering. Of the
remaining net proceeds, approximately $6.3 million will be used to repay
outstanding indebtedness, including interest, owed to a senior lender, of which
$3.3 million was outstanding at March 31, 1999. Portions of this indebtedness
were used to partially finance our acquisitions of Pacific Guarantee and First
City. This indebtedness currently bears interest at 7.25% and is required to be
repaid upon the consummation of this offering. In addition, approximately $1.3
million of the proceeds will be used to repay outstanding subordinated
indebtedness, including interest, owed to three individuals. This subordinated
indebtedness bears interest at a rate of 10% per annum and matures between March
31, 2000 and December 31, 2002. The balance of the net proceeds from this
offering will be used for general corporate and working capital purposes,
including acquisitions, although none of these proceeds has been allocated for
any specific acquisition. Pending those uses, we intend to invest the net
proceeds from this offering in short-term, interest-bearing, investment-grade
securities and deposit accounts. We will not receive any proceeds from the sale
of common stock by the selling stockholders pursuant to the exercise of the
over-allotment option. For more information on the use of proceeds, please refer
to "Management's Discussion and Analysis--Developments in the last 12 months" on
page 40, "Transactions Related to the Offering" on page 18 and "Certain
Transactions" on page 66.
DIVIDEND POLICY
Other than the S Corporation Distribution Notes, we do not expect to pay any
dividends in cash or notes on our capital stock in the foreseeable future. We
currently intend to retain future earnings, if any, to finance the expansion of
our business. In addition, since we are a holding company, our ability to pay
cash dividends depends in large measure on our subsidiaries' ability to make
distributions of cash or property to us. Our credit facilities impose
limitations on both dividends and distributions. For a more detailed discussion
of these limitations, please refer to "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and capital resources"
on page 35 and note 6 to our consolidated financial statements on page F-20.
Any further determination as to dividend policy will be made by our board of
directors and will depend on a number of factors, including our future earnings,
capital requirements, financial condition and future prospects and such other
factors as our board of directors may deem relevant.
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CAPITALIZATION
The following table sets forth Prism Financial's capitalization as of March
31, 1999 on an actual basis, assuming the Incorporation Transactions had
occurred on March 31, 1999 and as adjusted to reflect: (A) the sale of 2,500,000
shares of common stock offered by us in this offering at an assumed initial
public offering price of $14.00 per share; (B) an assumed S Corporation
Distribution of $18.1 million as of March 31, 1999, which amount we expect will
increase as a result of additional S corporation income from the period from
April 1, 1999 to the closing of this offering; (C) the creation of a deferred
tax asset in the amount of $855,000 as of March 31, 1999, which amount may
change by the amount of deferred tax assets or liabilities from April 1, 1999 to
the closing of this offering; (D) the issuance of 637,148 shares of common stock
pursuant to the acquisition agreement relating to our acquisition of Pacific
Guarantee, including 50,972 shares to an employee of Pacific Guarantee and
127,430 shares pursuant to the Pacific Equity Value Plan upon the closing of
this offering; (E) the issuance of 53,542 shares pursuant to the Mortgage Market
Equity Value Plan upon the closing of this offering; and (F) the application of
the remaining estimated net proceeds as described under "Use of Proceeds." This
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our consolidated financial
statements and related notes included elsewhere in this prospectus. For more
information, please refer to "Transactions Related to the Offering" on page 18.
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------------
(IN THOUSANDS,
EXCEPT SHARE DATA)
AS
ACTUAL ADJUSTED(1)(2)
--------- ----------------
<S> <C> <C>
Long-term debt....................................................................... $ 4,906 $ 320
--------- -------
Stockholders' equity:
Preferred stock, $0.01 par value per share, 10,000,000 shares authorized; no shares
issued and outstanding........................................................... --
Common stock, $0.01 par value per share, 100,000,000 shares authorized; 11,495,297
shares issued and outstanding actual, and 14,685,987 as adjusted................. 115 147
Additional paid-in capital........................................................... 4,003 43,952
Retained earnings.................................................................... 16,557 --
---------
Total stockholders' equity......................................................... 20,675 44,099
--------- -------
Total capitalization............................................................. $ 25,581 $ 44,419
--------- -------
--------- -------
</TABLE>
- ------------------------
(1) Excludes (A) 1.5 million shares of common stock reserved for issuance under
our 1999 Omnibus Stock Incentive Plan, including the 740,000 shares of
common stock issuable by us upon exercise of options to be granted upon the
closing of this offering, with an exercise price equal to the initial public
offering price; (B) 750,000 shares of common stock reserved for issuance by
us pursuant to our 1999 Employee Stock Purchase Plan; (C) up to $3.2 million
of common stock that may be issuable by us pursuant to the Prism2000 Profit
Sharing Plan; and (D) 102,690 shares of common stock issuable by us pursuant
to a stock purchase right.
(2) Excludes shares of common stock that may be issuable by us in the future
pursuant to the purchase agreements relating to our acquisitions of Mortgage
Market and First City. For a more detailed description of these purchase
agreements, please refer to "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Developments in the past 12
months" on page 40 and notes 3 and 5 to our consolidated financial
statements on page F-19 and page F-6, respectively.
20
<PAGE>
DILUTION
Prism Financial's net tangible book value as of March 31, 1999 was $17.8
million, or $1.55 per share, based on 11,495,297 shares of common stock
outstanding, assuming the Incorporation Transactions had occurred on March 31,
1999. Net tangible book value per share represents the amount of our total
tangible assets less total liabilities, divided by the number of shares of our
common stock outstanding. After giving effect to: (A) the sale of 2,500,000
shares of common stock offered by us in this offering at an assumed initial
public offering price of $14.00 per share; (B) an assumed S Corporation
Distribution of $18.1 million as of March 31, 1999, which amount we expect will
increase as a result of additional S corporation income from April 1, 1999 to
the closing of this offering; (C) the creation of a deferred tax asset in the
amount of $855,000, as of March 31, 1999, which amount may change by the amount
of deferred tax assets or liabilities from April 1, 1999 to the closing of this
offering; (D) the issuance of 637,148 shares of common stock pursuant to the
acquisition agreement relating to our acquisition of Pacific Guarantee and the
issuance of 53,542 shares of common stock under the Mortgage Market Equity Value
Plan upon the closing of this offering; and (E) the application of the remaining
estimated net proceeds as described under "Use of Proceeds," our pro forma net
tangible book value at March 31, 1999 would have been $34.8 million, or $2.37
per share. This represents an immediate increase in pro forma net tangible book
value of $0.82 per share to the existing stockholders and an immediate dilution
of $11.63 per share to new investors purchasing common stock in this offering.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 14.00
Net tangible book value per share as of
March 31, 1999........................................ $ 1.55
Decrease per share due to payment of the S Corporation
Distribution.......................................... (1.23)
Decrease per share due to issuance of shares to Pacific
Guarantee and Mortgage Market......................... (.17)
Increase per share due to deferred tax asset............ 0.06
Increase per share attributable to new investors........ 2.16
---------
Pro forma net tangible book value per share after this
offering.................................................. 2.37
---------
Dilution per share to new investors......................... $ 11.63
---------
---------
</TABLE>
The following table summarizes on a pro forma basis as of March 31, 1999,
the number of shares of common stock purchased from us, the total consideration
paid to us and the average price per share paid by existing stockholders and by
investors purchasing common stock in this offering, before deducting
underwriting discounts and commissions and estimated offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- ------------------------ PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ --------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders............ 12,185,987 82.9% $ 13,919,660 28.5% $ 1.14
New investors.................... 2,500,000 17.1 35,000,000 71.5 14.00
------------ --------- ------------- ---------
Total...................... 14,685,987 100.0% $ 48,919,660 100.0%
------------ --------- ------------- ---------
------------ --------- ------------- ---------
</TABLE>
The tables above exclude (A) 1.5 million shares of common stock reserved for
issuance by us pursuant to our 1999 Omnibus Stock Incentive Plan, including the
740,000 shares of common stock issuable by us upon exercise of options to be
granted upon the closing of this offering, with an exercise price equal to the
initial public offering price; (B) 750,000 shares of common stock reserved for
issuance by us pursuant to our 1999 Employee Stock Purchase Plan; (C) up to $3.2
million of common stock that may be issuable by us pursuant to the Prism2000
Profit Sharing Plan; and (D) 102,690 shares
21
<PAGE>
of common stock issuable by us pursuant to a stock purchase right. The tables
above also exclude shares of common stock that may be issuable by us in the
future pursuant to the purchase agreements relating to our acquisitions of
Mortgage Market and First City. For more information about these purchase
agreements, please refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Developments in the past 12 months" on page
40 and notes 3 and 5 to our consolidated financial statements on page F-19 and
page F-6, respectively.
If the underwriters' over-allotment option is exercised in full, sales by
the selling stockholders in this offering will reduce the number of shares held
by existing stockholders to 11.8 million, or 80%, and will increase the number
of shares to be purchased by the new investors to 2.9 million, or 20%. For a
more detailed description of shares being sold by the selling stockholders,
please refer to "Principal and Selling Stockholders" on page 68.
22
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
The following selected financial data for the year ended December 31, 1998
and as of December 31, 1998 have been derived from Prism Financial's
consolidated financial statements, included elsewhere in this prospectus, which
have been audited by PricewaterhouseCoopers LLP, independent accountants. The
following selected financial data for the years ended December 31, 1996 and 1997
and as of December 31, 1997 have been derived from Prism Financial's
consolidated financial statements, included elsewhere in this prospectus, which
have been audited by McGladrey & Pullen, LLP, independent public accountants.
The following selected financial data for the years ended December 31, 1994 and
1995 and as of December 31, 1994, 1995 and 1996 have been derived from the
audited financial statements of Prism Financial not included in this prospectus.
The following selected financial data for the three months ended March 31, 1999
and 1998 and as of March 31, 1999 have been derived from Prism Financial's
unaudited consolidated financial statements, included elsewhere in this
prospectus. Such financial statements include all adjustments, consisting of
normal recurring adjustments, which we consider necessary for a fair
presentation of our financial position and results of operations for these
periods. Operating results for the three months ended March 31, 1999 are not
necessarily indicative of results that may be expected for the entire year. The
operating data are derived from financial information compiled by Prism
Financial and are unaudited. The following information is qualified by reference
to, and should be read in conjunction with, our financial statements and related
notes, "Unaudited Pro Forma Combining Statement of Income" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
------------------------------------------------------------------ MARCH 31,
PRO FORMA --------------------
1994 1995 1996 1997 1998 1998(1)(2) 1998 1999
--------- --------- --------- --------- --------- ----------- --------- ---------
STATEMENT OF INCOME DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Loan origination income.............. $ 1,779 $ 5,709 $ 9,494 $ 20,984 $ 66,514 $ 103,963 $ 11,011 $ 27,692
Net premium income................... -- -- 422 1,726 12,243 22,370 1,385 5,770
Loan-related fees.................... 450 1,554 1,929 3,704 8,269 14,508 1,082 4,434
Net interest income (expense)........ 3 (168) (102) 392 2,000 1,116 278 1,280
Other................................ 37 482 458 548 1,816 2,310 127 772
--------- --------- --------- --------- --------- ----------- --------- ---------
Total revenues..................... 2,269 7,577 12,201 27,354 90,842 144,267 13,883 39,948
--------- --------- --------- --------- --------- ----------- --------- ---------
Expenses
Commissions.......................... 970 2,964 4,350 10,361 37,502 66,767 4,815 15,366
Loan-related expenses................ 379 1,085 2,026 3,823 9,346 11,924 1,838 3,624
Salaries and benefits................ 478 1,767 2,829 6,421 19,649 28,632 3,247 8,962
General and administrative
expenses........................... 299 1,336 1,851 3,770 11,576 18,527 2,108 6,554
Depreciation and amortization........ 36 50 105 327 1,473 1,775 200 465
Other(3)............................. 36 152 20 149 201 566 25 81
--------- --------- --------- --------- --------- ----------- --------- ---------
Total expenses..................... 2,198 7,354 11,181 24,851 79,747 128,191 12,233 35,052
--------- --------- --------- --------- --------- ----------- --------- ---------
Net income....................... $ 71 $ 223 1,020 2,503 11,095 16,076 1,650 4,896
--------- ---------
--------- ---------
Pro forma data (unaudited):
Pro forma provision for income
taxes(4)............................. 410 995 4,212 6,167 626 1,909
--------- --------- --------- ----------- --------- ---------
Net income adjusted for pro forma
income tax provision............... $ 610 $ 1,508 $ 6,883 $ 9,909 $ 1,024 $ 2,987
--------- --------- --------- ----------- --------- ---------
--------- --------- --------- ----------- --------- ---------
Pro forma net income per share:
Basic................................ $ 0.60 $ 0.84 $ 0.23
--------- ----------- ---------
--------- ----------- ---------
Diluted.............................. $ 0.60 $ 0.83 $ 0.23
--------- ----------- ---------
--------- ----------- ---------
Pro forma weighted average number of
shares outstanding(5):
Basic................................ 11,520 11,838 12,791
--------- ----------- ---------
--------- ----------- ---------
Diluted.............................. 11,562 11,881 12,851
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
- --------------------------
(FOOTNOTES ON FOLLOWING PAGE)
23
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
AS OF DECEMBER 31, -----------------------
------------------------------------------------------ AS ADJUSTED
1994 1995 1996 1997 1998 1999 1999(6)
--------- --------- --------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 75 $ 597 $ 1,144 $ 1,164 $ 12,124 $ 17,168 $ 26,165
Loans held for sale......................... -- 6,016 17,769 60,901 467,254 193,825 193,825
Total assets................................ 338 7,409 20,100 65,332 503,622 230,648 249,456
Loans sold under agreements to repurchase... -- -- -- -- 292,627 25,912 25,912
Warehouse lines of credit................... -- 6,016 17,595 59,634 170,217 164,361 164,361
Total debt.................................. -- -- -- -- 5,027 4,906 320
Total stockholders' equity.................. 280 503 1,523 3,076 16,203 20,675 44,099
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
-------------------------------------------- MARCH 31,
PRO FORMA --------------------
1996 1997 1998 1998(1) 1998 1999
--------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total mortgage originations (in millions)....... $ 857 $ 1,469 $ 5,025 $ 8,305 $ 657 $ 1,982
Internet mortgage originations (in millions).... $ -- $ -- $ 122 $ 180 $ -- $ 125
Number of loans originated...................... 5,460 10,086 31,943 49,176 4,481 11,462
Loan originators at period end.................. 126 203 749 749 213 765
Number of branches at period end................ 11 17 95 95 22 118
</TABLE>
- ------------------------
(1) Gives effect to the Incorporation Transactions, the acquisitions of Pacific
Guarantee and Mortgage Market and the contribution of Illinois Guaranty to
us by our principal stockholders as if they had occurred on January 1, 1998.
(2) Excludes the issuance of 458,746 shares, based on the assumed offering price
of $14.00 per share, representing additional consideration of $6.4 million
pursuant to the Pacific Guarantee purchase agreement upon the closing of the
offering. This amount has been recognized as goodwill and will be amortized
over 20 years.
(3) In 1994 and 1995, Prism Financial was taxed as a C corporation, and the
amounts reflected for such periods include actual federal and state income
taxes of $25,000 and $152,000, respectively.
(4) Beginning January 1, 1996, Prism Financial elected to be treated as an S
corporation for federal and state income tax purposes. Pro forma income
taxes for the years ended December 31, 1996, 1997, 1998, Pro Forma 1998 and
the three months ended March 31, 1998 and March 31, 1999 reflect adjustments
for federal and state income taxes as if Prism Financial had been taxed as a
C corporation rather than an S corporation for such periods. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Termination of S corporation status and income taxes."
(5) The pro forma weighted average number of shares for December 31, 1998
includes the effect of the assumed issuance of 951,656 shares of common
stock to generate sufficient cash to pay the S corporation distribution
amount of $13.3 million at December 31, 1998. The pro forma weighted average
number of shares for March 31, 1999 includes the effect of the assumed
issuance of 1,295,463 shares of common stock to generate sufficient cash to
pay the S corporation distribution amount of $18.1 million at March 31,
1999. The issuance of common stock was based on an assumed $14.00 offering
price. Pro forma weighted average number of shares outstanding does not
include the shares of common stock to be issued by us upon the closing of
the offering pursuant to the Pacific Guarantee purchase agreement or under
the incentive plan established for employees of
24
<PAGE>
Mortgage Market. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Developments in the past 12 months."
(6) As adjusted to give effect to:
- an assumed S corporation distribution of $18.1 million as of March 31,
1999, which amount we expect to increase as a result of additional S
corporation income from April 1, 1999 to the closing of this offering;
- the recording by us of a one-time non-cash credit to earnings in the
amount of $855,000 to recognize a deferred income tax asset as a result of
the termination of our S corporation status, which amount may change by
the amount of net deferred tax assets or liabilities related to our
operations from April 1, 1999 through the date of the closing of this
offering;
- the shares of common stock to be issued by us upon the closing of the
offering pursuant to the Pacific Guarantee purchase agreement and pursuant
to the incentive plan established for employees of Mortgage Market; and
- the issuance and sale of the common stock offered by us in this offering
at an assumed offering price of $14.00 per share and application of the
net proceeds therefrom as described in "Use of Proceeds."
25
<PAGE>
UNAUDITED PRO FORMA COMBINING STATEMENT OF INCOME
(IN THOUSANDS)
The unaudited pro forma combining statement of income gives effect to the
acquisitions of Pacific Guarantee and Mortgage Market and the contribution of
Illinois Guaranty by our principal stockholders as if these acquisitions and
contribution had occurred on January 1, 1998. Financial information for Pacific
Guarantee, Mortgage Market and Illinois Guaranty is included for the period
ending immediately prior to the acquisition or contribution, as applicable.
Prism Financial acquired all of the outstanding shares of Pacific Guarantee,
Mortgage Market and Illinois Guarantee on September 1, 1998, September 30, 1998
and April 30, 1998, respectively.
The pro forma statement of income is presented for illustrative purposes
only and is not necessarily indicative of the operating results that would have
occurred as if each acquisition and contribution had been consummated on January
1, 1998, nor is it necessarily indicative of the future operating results of the
combined companies. Pro forma provision for income taxes on the statement below
reflects adjustments for federal and state income taxes as if Prism Financial
had been taxed as a C corporation rather than an S corporation for the columns
presented. These financial statements should be read in conjunction with our
financial statements and related notes, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and other financial information
which are included elsewhere in this prospectus.
<TABLE>
<CAPTION>
PACIFIC ILLINOIS
PRISM GUARANTEE MORTGAGE MARKET GUARANTY
FINANCIAL EIGHT MONTHS NINE MONTHS FOUR MONTHS
YEAR ENDED ENDED ENDED ENDED
DECEMBER 31, AUGUST 31, SEPTEMBER 30, APRIL 30, PRO FORMA
1998 1998 1998 1998 ADJUSTMENTS
------------- ------------- ----------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Loan origination income................... $ 66,514 $ 21,817 $ 15,632 $ -- $ --
Net premium income........................ 12,243 3,196 6,931 -- --
Loan-related fees......................... 8,269 4,896 1,343 -- --
Net interest income (expense)............. 2,000 (363) (361) -- (160)(1)
Other..................................... 1,816 23 51 420 --
------------- ------------- ------- ------ -----------
Total revenues.......................... 90,842 29,569 23,596 420 (160)
------------- ------------- ------- ------ -----------
Expenses:
Commissions............................... 37,502 17,634 11,631 -- --
Loan-related expenses..................... 9,346 307 2,271 -- --
Salaries and benefits..................... 19,649 4,968 3,945 70 --
General and administrative expenses....... 11,576 3,472 3,449 30 --
Depreciation and amortization............. 1,473 55 153 -- 94(2)
Other..................................... 201 242 123 -- --
------------- ------------- ------- ------ -----------
Total expenses.......................... 79,747 26,678 21,572 100 94
------------- ------------- ------- ------ -----------
Net income............................ 11,095 $ 2,891 $ 2,024 $ 320 $ (254)
------------- ------- ------ -----------
------------- ------- ------ -----------
Pro forma provision for
income taxes............................ 4,212
-------------
Pro forma net income.................... $ 6,883
-------------
-------------
<CAPTION>
PRISM
FINANCIAL
PRO FORMA
YEAR ENDED
DECEMBER 31,
1998
------------
<S> <C>
Revenues:
Loan origination income................... $ 103,963
Net premium income........................ 22,370
Loan-related fees......................... 14,508
Net interest income (expense)............. 1,116
Other..................................... 2,310
------------
Total revenues.......................... 144,267
------------
Expenses:
Commissions............................... 66,767
Loan-related expenses..................... 11,924
Salaries and benefits..................... 28,632
General and administrative expenses....... 18,527
Depreciation and amortization............. 1,775
Other..................................... 566
------------
Total expenses.......................... 128,191
------------
Net income............................ 16,076
Pro forma provision for
income taxes............................ 6,167
------------
Pro forma net income.................... $ 9,909
------------
------------
</TABLE>
- ------------------------
(FOOTNOTES ON FOLLOWING PAGE)
26
<PAGE>
(1) Adjustment to decrease net interest income as a result of the additional
interest expense that Prism Financial would have recorded if the debt used
to partially fund the Pacific Guarantee acquisition had been issued on
January 1, 1998. Such debt totaled $3.4 million at an average interest rate
of 7.75%.
<TABLE>
<CAPTION>
Pro forma full year interest expense........................... $ 265
<S> <C>
Less: 1998 Prism Financial historical interest expense......... 105
-----------
Pro forma interest expense adjustment.......................... $ 160
-----------
-----------
</TABLE>
(2) Adjustment for the amortization of $2.8 million in goodwill resulting from
the acquisitions of Pacific Guarantee and Mortgage Market, assuming both
acquisitions had been consummated on January 1, 1998. Such goodwill is being
amortized over 20 years.
<TABLE>
<CAPTION>
<S> <C>
Pro forma full year goodwill amortization...................... $ 138
Less: 1998 Prism Financial historical goodwill amortization
expense...................................................... 44
-----------
Pro forma amortization adjustment............................ $ 94
-----------
-----------
</TABLE>
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF PRISM FINANCIAL. IN EVALUATING THE RISKS OF INVESTING IN
PRISM FINANCIAL, PROSPECTIVE INVESTORS SHOULD ALSO EVALUATE THE OTHER
INFORMATION SET FORTH IN THIS PROSPECTUS, INCLUDING THE RISK FACTORS.
GENERAL
Prism Financial is a leading retail mortgage banking company engaged in the
business of originating, selling and brokering residential mortgage loans. We
originated $8.3 billion in loans in 1998, making us the 3(rd) largest
non-depository retail originator in the United States and the 11(th) largest
overall, on a pro forma basis after giving effect to our 1998 acquisitions.
Through our network of approximately 760 commission-only loan originators
operating out of 118 retail branches in 17 states as of March 31, 1999, and our
relationships with operators of leading Internet mortgage web sites, we offer a
broad array of residential mortgage products targeted primarily to
high-credit-quality borrowers. We operate as both a mortgage banker,
underwriting, closing and funding loans, and a mortgage broker, selling the loan
products of over 100 different lenders.
Since being founded in 1992, we have focused on growing our origination
volume by building a retail origination network through internal growth and
selective acquisitions and, recently, through relationships with operators of
Internet mortgage web sites. In 1998, we opened 9 company-owned branches and 12
net branches and added approximately 145 new loan originators.
In addition, since September 1998 we acquired Pacific Guarantee, Mortgage
Market and First City which added approximately 600 loan originators operating
out of 88 branches and expanded our operations into California, the Pacific
Northwest and the Mountain States. At closing, we paid a total of $7.6 million
in cash and issued 548,851 shares of common stock in connection with these
acquisitions. The Pacific Guarantee, Mortgage Market and First City acquisitions
were structured so that a significant portion of the total consideration paid is
dependent on the future performance of the acquired businesses. Upon completion
of this offering, we will issue 458,746 additional shares of common stock to the
former stockholders of Pacific Guarantee in satisfaction of our contingent
payment obligation to them pursuant to the related acquisition agreement. The
additional amounts paid to the stockholders of Pacific Guarantee or to be paid
to the stockholders of Mortgage Market or First City will be added to the
purchase price and amortized as goodwill. See "--Developments in the past 12
months."
The Pacific Guarantee and Mortgage Market acquisitions were accounted for
using the purchase method of accounting. Accordingly, the accompanying
consolidated statements of income do not include any revenues or expenses of
those companies prior to the closing dates of those acquisitions.
We earn revenues both as a retail originator of loans as well as through our
mortgage banking activities. As a retail originator of loans, we generate loan
origination income and loan-related fees through funded and brokered loans. Loan
origination income consists of origination points paid to us by borrowers or
discount points paid to us by wholesale lenders. Loan-related fees consist of
application, documentation and processing fees paid by borrowers. On the loans
we close through our mortgage banking activities, we generate revenues from net
premium income and net interest income. Net premium income consists of the net
gain on the sale of mortgage loans and mortgage servicing rights, which are sold
generally within 45 days of origination. This net gain is recognized based upon
the difference between the combined selling price of the loan, and its related
servicing rights, and the carrying value of the mortgage loans and servicing
rights sold. Net interest income consists of the net difference between interest
received by us on our mortgage loans held for sale and interest paid by us under
our bank credit facilities. We also generate other revenue from the sale of
mortgage-related services, including mortgage insurance and title insurance
policies.
28
<PAGE>
Our expenses largely consist of (1) commissions paid to loan originators on
closed loans; (2) loan-related expenses, consisting of fees paid to third
parties for appraisal and credit report services and reserves for potential loan
repurchase and premium recapture obligations; (3) salaries and benefits paid to
employees other than loan originators; (4) general and administrative expenses
such as occupancy costs, office expenses and professional services; and (5)
depreciation and amortization expense related principally to our facilities,
computers and goodwill associated with our acquisitions. A substantial portion
of these expenses is variable in nature. Commissions paid to loan originators
are 100% variable, while loan-related expenses are nearly 100% variable, and
both fluctuate based upon the dollar volume of loans originated. In addition,
salaries and benefits fluctuate from quarter-to-quarter based on our assessment
of the appropriate levels of non-loan originator staffing, which correlates to
the current level of loan origination volume and our perception of future loan
origination volume.
Seasonality affects the mortgage industry as loan originations are typically
at their lowest levels during the first and fourth quarters due to a reduced
level of home buying activity during the winter months. Loan originations
generally increase during the warmer months beginning in March and continuing
through October. As a result, we may report earnings in the first and fourth
quarters that are generally lower than that of the remaining quarters. However,
due to significant refinance activity during 1997 and 1998, which was generally
affected more by changes in interest rates than by seasons, the expected
seasonal patterns are not evident in our historical financial statements.
Economic and interest rate cycles also affect the mortgage industry, as loan
originations typically fall in rising interest rate environments. During such
periods, refinancing originations decrease, as higher interest rates provide
reduced economic incentives for borrowers to refinance their existing mortgages.
Due to stable and decreasing interest rate environments over recent years, our
historical performance may not be indicative of results in rising interest rate
environments. In addition, our recent and rapid growth may distort some of our
ratios and financial statistics and may make period-to-period comparisons
difficult. In light of this growth, our historical earnings performance may be
of little relevance in predicting future performance. Furthermore, our financial
statistics may not be indicative of our results in future periods.
TERMINATION OF S CORPORATION STATUS AND INCOME TAXES
Since January 1, 1996, we have been subject to taxation under subchapter S
of the Internal Revenue Code and comparable state laws. As a result, our income
has been taxed, for federal, state and local income tax purposes, directly to
our stockholders rather than to the company itself. In connection with the
termination of our S corporation status and simultaneous with the closing of the
offering, we intend to make distributions to our existing stockholders in the
amount of their respective undistributed accumulated S corporation earnings.
This distribution will be made in the form of the S Corporation Distribution
Notes. We will repay the S Corporation Distribution Notes out of the net
proceeds of this offering. If the S Corporation Distribution had occurred as of
March 31, 1999, the amount would have been approximately $18.1 million, which
amount is expected to increase as a result of additional S corporation income
from April 1, 1999 to the closing of this offering. Upon termination of our S
corporation status, we will record a one-time, non-cash credit to earnings to
recognize a deferred income tax asset. If the S corporation status had been
terminated as of March 31, 1999, the amount of the deferred tax credit to
earnings would have been approximately $855,000, and this amount is expected to
change by the amount of net deferred tax assets or liabilities related to our
operations from April 1, 1999 to the closing of this offering. The pro forma
provision for income taxes in the selected consolidated financial data shows
results as if we had been subject to federal and state taxation at the tax rates
effective for the periods presented.
29
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information
derived from our statement of operations expressed as a percentage of total
revenues. Any trends illustrated in the following table are not necessarily
indicative of future results.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Loan origination income......................... 77.8% 76.7% 73.2% 79.3% 69.3%
Net premium income.............................. 3.4 6.3 13.5 10.0 14.5
Loan-related fees............................... 15.8 13.6 9.1 7.8 11.1
Net interest income (expense)................... (0.8) 1.4 2.2 2.0 3.2
Other........................................... 3.8 2.0 2.0 0.9 1.9
--------- --------- --------- --------- ---------
Total revenues................................ 100.0 100.0 100.0 100.0 100.0
--------- --------- --------- --------- ---------
Commissions..................................... 35.6 37.9 41.3 34.7 38.5
Loan-related expenses........................... 16.6 14.0 10.3 13.2 9.1
Salaries and benefits........................... 23.2 23.4 21.6 23.4 22.4
General and administrative expenses............. 15.2 13.8 12.8 15.2 16.4
Depreciation and amortization................... 0.9 1.2 1.6 1.4 1.1
Other........................................... 0.1 0.5 0.2 0.2 0.2
--------- --------- --------- --------- ---------
Total expenses................................ 91.6 90.8 87.8 88.1 87.7
--------- --------- --------- --------- ---------
Net income.................................. 8.4% 9.2% 12.2% 11.9% 12.3%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income adjusted for pro forma income tax
provision (unaudited)..................... 5.0% 5.5% 7.6% 7.4% 7.5%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1998
TOTAL REVENUES. Our total revenues for the three months ended March 31,
1999 increased to $39.9 million from $13.9 million for the same period in 1998,
an increase of $26.0 million, or 187.1%, primarily as a result of strong revenue
growth from loan origination income and net premium income and, to a lesser
extent, loan-related fees and net interest income. Loan origination volume
increased to $2.0 billion for the three months ended March 31, 1999 from $0.7
billion for the same period in 1998, resulting from the acquisitions of Pacific
Guarantee and Mortgage Market, new branch expansion and recruitment of
additional loan originators. During the three months ended March 31, 1999, we
opened 23 new branches and added approximately 16 loan originators. In addition,
refinancings accounted for approximately 60.0% of our origination volume during
the three months ended March 31, 1999 compared to approximately 63.0% during the
same period in 1998.
Loan origination income increased to $27.7 million for the three months
ended March 31, 1999 from $11.0 million for the same period in 1998, an increase
of $16.7 million, or 151.8%. The increase was attributable to the increase in
our origination volume.
Net premium income increased to $5.8 million for the three months ended
March 31, 1999 from $1.4 million for the same period in 1998, an increase of
$4.4 million, or 314.3%. The increase resulted primarily from the higher volume
of mortgage loan originations funded through our mortgage bank, both on an
absolute and percentage basis, and the improved pricing on our sales of
servicing rights resulting from improved market conditions and larger volume.
Mortgage loans sold during the three
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months ended March 31, 1999 increased to $1.2 billion from $293.0 million for
the same period in 1998. In addition, we increased net premium income through
improved execution of our loan sales, as we sold an increased amount of our
loans through bulk sales, assignment of trades and co-issue transactions, rather
than flow sales, as compared to the same period in 1998. These methods of loan
sales generate higher premiums than flow sales. As a percentage of our total
loan origination volume, our mortgage bank funded 49% of our loan origination
for both the 1999 and 1998 periods.
Loan-related fees increased to $4.4 million for the three months ended March
31, 1999 from $1.1 million for the same period in 1998, an increase of $3.3
million, or 300%. Loan-related fees increased due to increased mortgage loan
origination volume.
Net interest income increased to $1.3 million for the three months ended
March 31, 1999 from $278,000 for the same period in 1998, an increase of $1.0
million, or 359.7%. The increase in net interest income was due to several
factors, including the increase in loans funded by our mortgage bank, a higher
average balance of mortgage loans held for sale and increased usage of our
repurchase and other credit lines, including Fannie Mae's "As Soon as
Pooled/Early Purchase Option" (the "ASAP Plus" program), which reduced the rate
of interest charged on our loans held for sale. In addition, our increased usage
of bulk sales, assignment of trades and co-issue transactions resulted in an
increase in the length of time loans were held for sale, which allowed us to
further benefit from our positive net interest margin.
Other income increased to $772,000 for the three months ended March 31, 1999
from $127,000 for the same period in 1998, an increase of $645,000, or 507.9%.
The increase in other income was due primarily to income generated from the
issuance of title insurance policies prepared for borrowers by a wholly-owned
subsidiary which was contributed to us in April 1998 by our principal
stockholders.
COMMISSIONS. Commissions expense increased to $15.4 million for the three
months ended March 31, 1999 from $4.8 million for the same period in 1998, an
increase of $10.6 million, or 220.8%. The increase in commissions was due
primarily to higher loan origination volume. As a percentage of total revenues,
commissions increased to 38.5% for the three months ended March 31, 1999 from
34.7% for the same period in 1998 due to higher average production per loan
officer.
LOAN-RELATED EXPENSES. Loan-related expenses increased to $3.6 million for
the three months ended March 31, 1999 from $1.8 million for the same period in
1998, an increase of $1.8 million, or 100.0%. This increase resulted primarily
from the increased volume of loan closings.
SALARIES AND BENEFITS. Salaries and benefits increased to $9.0 million for
the three months ended March 31, 1999 from $3.2 million for the same period in
1998, an increase of $5.8 million, or 181.3%. The increase in personnel expense
related primarily to increased staffing, both at new branches and at acquired
branches. As of March 31, 1999, excluding loan originators, we employed 749
people compared to 362 people at March 31, 1998. These expenses are expected to
continue to increase in 1999 as a result of additional employees expected to be
hired in connection with the expansion of existing operations, new branch
openings and additional acquisitions.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $6.6 million for the three months ended March 31, 1999 from $2.1
million for the same period, an increase of $4.5 million, or 214.3%. The
increase in general and administrative expenses is due primarily to an increase
in occupancy costs as a result of the opening of our new corporate headquarters
in Chicago and five new company-owned branches since March 31, 1998, the Pacific
Guarantee and Mortgage Market acquisitions and expenses that fluctuate with
increases in loan volume, such as office supplies, telephone, computers and
delivery charges.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses increased to $465,000 for the three months ended March 31, 1999 from
$200,000 for the same period in 1998, an
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increase of $265,000, or 132.5%. The increase was primarily attributable to
purchases of additional equipment and leasehold improvements for new branches
and our new corporate headquarters, the continued development of our proprietary
in-house mortgage banking system and goodwill attributed to our 1998
acquisitions. These expenses are expected to continue to increase in 1999 as a
result of goodwill from the 1998 acquisitions, expansion of existing operations,
new branch openings, additional acquisitions and further banking systems
development.
NET INCOME. Net income increased to $4.9 million for the three months ended
March 31, 1999 from $1.6 million for the same period in 1998, an increase of
$3.3 million, or 206.3%. Net income as a percentage of loan origination volume
was 25 basis points for both the three months ended March 31, 1999 and March 31,
1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
TOTAL REVENUES. Our total revenues increased to $90.8 million in 1998 from
$27.4 million in 1997, an increase of $63.4 million, or 231.4%, primarily as a
result of strong revenue growth from loan origination income and net premium
income and, to a lesser extent, loan-related fees and net interest income. Loan
origination volume increased to $5.0 billion in 1998 from $1.5 billion in 1997
resulting from a significant increase in the number of loans funded through our
mortgage bank, new branch expansion, recruitment of additional loan originators
and significant refinancing activity caused by historically low interest rates
in 1998. During 1998, we opened 21 new branches and added approximately 197 loan
originators, excluding the effect of acquisitions prior to the date of
acquisition. In addition, refinancings accounted for 54% of our origination
volume in 1998 compared to 31% in 1997.
Loan origination income increased to $66.5 million in 1998 from $21.0
million in 1997, an increase of $45.5 million, or 216.7%. A total of $20.1
million of this increase was attributable to Pacific Guarantee and Mortgage
Market, which were both acquired in September 1998. The remaining increase was
attributable to the increase in our internal origination volume growth.
Net premium income increased to $12.2 million in 1998 from $1.7 million in
1997, an increase of $10.5 million, or 617.6%. The increase resulted primarily
from the higher volume of mortgage loan originations funded through our mortgage
bank, both on an absolute and percentage basis, and the improved pricing on our
sales of servicing rights resulting from improved market conditions and larger
volume. Mortgage loans sold during 1998 increased to $2.0 billion in 1998 from
$495.0 million in 1997. In addition, we increased net premium income through
improved execution of our loan sales, as we sold a majority of our loans through
bulk sales, assignment of trades and co-issue transactions, rather than flow
sales, which was the principal method we used in 1997. As a percentage of total
loan origination volume, our mortgage bank funded 47% of our loan originations
in 1998 compared to 37% in 1997.
Loan-related fees increased to $8.3 million in 1998 from $3.7 million in
1997, an increase of $4.6 million, or 124.3%. Loan-related fees increased due to
increased mortgage loan origination volume.
Net interest income increased to $2.0 million in 1998 from $392,000 in 1997,
an increase of $1.6 million, or 410.2%. The increase in net interest income was
due to several factors, including the increase in loans funded by our mortgage
bank, a higher average balance of mortgage loans held for sale and increased
usage of our repurchase and other credit lines, including Fannie Mae's "ASAP
Plus" program, which reduced the rate of interest charged on our loans held for
sale. In addition, our increased usage of bulk sales, assignment of trades and
co-issue transactions resulted in an increase in the length of time loans were
held for sale, which allowed us to further benefit from our positive net
interest margin.
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<PAGE>
Other income increased to $1.8 million in 1998 from $549,000 in 1997, an
increase of $1.3 million, or 227.9%. The increase in other income was due
primarily to income generated from the issuance of title insurance policies
prepared for borrowers by a wholly-owned subsidiary which was contributed to us
in April 1998 by our principal stockholders.
COMMISSIONS. Commissions expense increased to $37.5 million in 1998 from
$10.4 million in 1997, an increase of $27.1 million, or 260.6%. The increase in
commissions was due primarily to higher loan origination volume. As a percentage
of total revenues, commissions increased to 41.3% in 1998 from 37.9% in 1997 due
to a higher average commission percentage as a result of a higher average
production per loan officer.
LOAN-RELATED EXPENSES. Loan-related expenses increased to $9.3 million in
1998 from $3.8 million in 1997, an increase of $5.5 million, or 144.7%. This
increase resulted primarily from the increased volume of loan closings and
additional reserves established for potential loan repurchase, substitution and
premium recapture obligations. We recorded a reserve of $400,000 in 1998 for
potential repurchase or substitution requirements relating to loans sold before
December 31, 1998. In 1998, we also recorded a premium recapture reserve of
$150,000 for non-prime loans.
SALARIES AND BENEFITS. Salaries and benefits increased to $19.6 million in
1998 from $6.4 million in 1997, an increase of $13.2 million, or 206.3%. The
increase in personnel expense related primarily to increased staffing, both at
new branches and at acquired branches. As of December 31, 1998, excluding loan
originators, we employed 713 people compared to 314 people at December 31, 1997.
These expenses are expected to increase in 1999 as a result of additional
employees expected to be hired in 1999 in connection with the expansion of
existing operations, new branch openings and additional acquisitions.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $11.6 million in 1998 from $3.8 million in 1997, an increase of
$7.8 million, or 205.3%. The increase in general and administrative expenses is
due primarily to an increase in occupancy costs as a result of the opening of
our new corporate headquarters in Chicago and 9 new company-owned branches in
1998, the Pacific Guarantee and Mortgage Market acquisitions and expenses that
fluctuate with increases in loan volume, such as office supplies, telephone,
computers and delivery charges.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses increased to $1.5 million in 1998 from $327,000 in 1997, an increase of
$1.2 million, or 358.7%. The increase was primarily attributable to purchases of
additional equipment and leasehold improvements for new branches and our new
corporate headquarters, the continued development of our proprietary in-house
mortgage banking system and goodwill attributed to the 1998 acquisitions. These
expenses are expected to increase in 1999 as a result of goodwill from the 1998
acquisitions being included for the full year, expansion of existing operations,
new branch openings, additional acquisitions and further banking systems
development.
NET INCOME. Net income increased to $11.1 million in 1998 from $2.5 million
in 1997, an increase of $8.6 million, or 344.0%. Net income as a percentage of
loan origination volume grew to 22 basis points in 1998 from 17 basis points in
1997 due to the significant increase in the number of loans funded through our
mortgage bank, which generate higher margins than loans we broker.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
TOTAL REVENUES. Our total revenues increased to $27.4 million in 1997 from
$12.2 million in 1996, an increase of $15.2 million, or 124.6%, primarily as a
result of the significant increase in loan origination income and, to a lesser
extent, loan-related fees and net premium income. Overall loan origination
volume increased to $1.5 billion in 1997 from $857.3 million in 1996 due to new
branch expansion,
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<PAGE>
recruitment of additional loan originators and three acquisitions completed in
1997. During 1997, we opened one new branch and added approximately 23
additional loan officers, excluding the effect of acquisitions.
Loan origination income increased to $21.0 million for 1997 from $9.5
million in 1996, an increase of $11.5 million, or 121.1%, due to the increase in
our origination volume.
Net premium income increased to $1.7 million for 1997 from $422,000 in 1996,
an increase of $1.3 million, or 302.8%. The increase resulted primarily from the
expansion of products offered by our mortgage bank, which resulted in increased
origination volume funded by our mortgage bank, and the commencement of bulk
sales, assignment of trades and co-issue sales in the second half of 1997. We
sold $495.0 million of mortgage loans in 1997 compared to $125.7 in 1996.
Loan-related fees increased to $3.7 million during 1997 from $1.9 million in
1996, an increase of $1.8 million, or 94.7%. Loan-related fees increased
primarily due to increased mortgage loan origination volume.
Net interest income was $392,000 in 1997 compared to net interest expense of
$102,000 in 1996. The increase in net interest income was due to several
factors, including lower interest costs on our warehouse financing facilities,
the increased volume of mortgage loans funded by our mortgage bank and the usage
of bulk sales in the second half of 1997, which increased the length of time
loans were held for sale and allowed us to take advantage of our positive net
interest margin.
Other income increased to $548,000 in 1997 from $458,000 in 1996, an
increase of $90,000, or 19.7%.
COMMISSIONS. Commissions expense increased to $10.4 million in 1997 from
$4.3 million in 1996, an increase of $6.1 million, or 141.9%. The increase in
commissions was due primarily to the increased level of mortgage loan
origination volume. As a percentage of total revenues, commissions increased to
37.9% in 1997 from 35.6% in 1996 due to higher loan origination volume and the
implementation of a new incentive compensation system.
LOAN-RELATED EXPENSES. Loan-related expenses increased to $3.8 million in
1997 from $2.0 million in 1996, an increase of $1.8 million, or 90.0%.
Loan-related expenses increased due to the increased level of mortgage loan
origination volume.
SALARIES AND EMPLOYEE BENEFITS. Salaries and employee benefits increased to
$6.4 million in 1997 from $2.8 million in 1996, an increase of $3.6 million, or
128.6%. The increase in personnel expense was due primarily to increased
staffing in new branches, employees acquired through the 1997 acquisitions and
the expansion of our mortgage bank operations. As of December 31, 1997,
excluding loan originators, we employed 314 people compared to 140 people at
December 31, 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $3.8 million in 1997 from $1.9 million in 1996, an increase of $1.9
million, or 100.0%. The increase in general and administrative expenses is due
primarily to increased occupancy expenses resulting from the opening of six new
branches during 1997 and expenses incurred in connection with the increase in
loan originations.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses increased to $327,000 in 1997 from $105,000 in 1996, an increase of
$222,000, or 211.4%. The increase was primarily attributable to purchases of
additional equipment and leasehold improvements during 1997 for new branches
and, to a lesser extent, the 1997 acquisitions.
NET INCOME. Net income increased to $2.5 million in 1997 from $1.0 million
in 1996. Net income as a percentage of loan origination volume grew to 17 basis
points in 1997 from 12 basis points in 1996
34
<PAGE>
due to the increased percentage of loan originations funded by our mortgage bank
which generate higher margins than loans we broker.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased to $17.2 million at March 31, 1999 from
$12.1 million at December 31, 1998. This increase in cash and cash equivalents
was primarily attributable to net income of $5.8 million for the three months
ended March 31, 1999, before depreciation and amortization and provision for
loan and servicing losses.
Our primary uses of cash and cash equivalents during the three months ended
March 31, 1999 were as follows: (1) $809,000 to purchase furniture and office
and computer equipment for new branch openings and the continued development of
our proprietary in-house banking system and (2) $424,000 to fund a distribution
to our stockholders to enable them to pay income taxes attributable to them as a
result of our S corporation status.
Cash and cash equivalents increased to $12.1 million at December 31, 1998
from $1.2 million at December 31, 1997. This increase in cash and cash
equivalents was primarily attributable to the following sources of cash and cash
equivalents during 1998: (1) net income of $13.5 million in 1998, before
depreciation and amortization and provision for loan and servicing losses, (2)
the sale of a portion of our common stock to a private investor group for $2.5
million and (3) the receipt by us of a term note issued by a commercial bank in
the amount of $3.4 million to fund a portion of the purchase price of Pacific
Guarantee.
Our primary uses of cash and cash equivalents during 1998 were as follows:
(1) $4.8 million to purchase Pacific Guarantee and Mortgage Market, excluding
cash received from these companies, (2) $3.3 million to purchase furniture and
office and computer equipment for our new corporate headquarters and new branch
openings, to upgrade our telecommunications system and the continued development
of our proprietary in-house banking system, and (3) $2.0 million to fund a
distribution to our stockholders to enable them to pay income taxes attributable
to them as a result of our S corporation status.
Adequate credit facilities and other sources of funding, which permit us to
fund the loans we originate, are essential to our ability to close loans through
our mortgage bank. Net working capital was $15.6 million at March 31, 1999
compared to $11.8 million at December 31, 1998. After using available working
capital, we borrow money to fund our loan closings and repay these borrowings as
the loans and the accompanying servicing rights are sold. Upon the sale of loans
and servicing rights and the subsequent repayment of the borrowings, our credit
facilities become available to fund additional loan closings. On March 31, 1999,
we had six facilities which are used to finance loans ("warehouse facilities")
which provided us with up to $171.5 million of demand loans secured by loans
held for sale. Loans under the warehouse facilities bear interest at rates that
vary depending on the type of underlying loan, and the loans are subject to
sublimits, advance rates and terms that vary depending on the type of underlying
loan and the ratio of our liabilities to our tangible net worth. In 1998, we had
a weighted average interest rate of 7.10%, not including float on checks prior
to the time they clear our warehouse facilities account, compared with 7.15% in
1997. These warehouse facilities require us to comply with various operating and
financial covenants.
As of March 31, 1999, our borrowings under our warehouse facilities
decreased to $164.4 million from $170.2 million as of December 31, 1998. We had
a maximum of $7.1 million available for additional borrowings as of March 31,
1999. At March 31, 1999, our loans held for sale were $193.8 million compared to
$467.3 million at December 31, 1998. The percentage decrease in the borrowings
under our warehouse facilities was less than the percentage decrease in the
mortgage loans held for sale due to the timing of loan sales pursuant to Fannie
Mae's ASAP Plus program.
35
<PAGE>
Under the ASAP Plus program, Fannie Mae funds us on the loans we deliver to
them on a continual whole-loan basis upon receipt of the appropriate mortgage
collateral. The funding price is determined by the daily Fannie Mae 30-day cash
window price. At such time, we agree to deliver mortgage loans to Fannie Mae and
assign any related trades. We then redeliver all loans in the ASAP Plus program
to reflect related forward pricing on a monthly basis. Fannie Mae purchases the
mortgage loans for cash upon receipt of complete and accurate mortgage pool and
other documentation. On March 31, 1999, we had an outstanding balance of
approximately $25.9 million on the ASAP Plus line in repurchase agreements with
Fannie Mae, with interest accruing at 5.84%. As of December 31, 1998, we
exceeded certain covenants relating to total outstanding indebtedness and our
maximum leverage ratio as a result of the timing of loan deliveries, which in
1998 were made monthly, to Fannie Mae pursuant to the ASAP Plus program. We
received waivers from each of our lenders under our warehouse facilities prior
to year-end. We currently sell our loans to Fannie Mae on a weekly basis to
reduce the risk that such ratios will be exceeded in the future. We were in
compliance with all operating and financial covenants at December 31, 1998 and
March 31, 1999.
We also make regular use of uncommitted lines of credit and purchase and
sale agreements, such as repurchase agreements, provided by major investment
banks. These facilities permit us to diversify our borrowing resources, while
accelerating the turnover of mortgage loans in inventory, reducing interest
costs and permitting greater origination volumes. These agreements are not
committed facilities and may be terminated at the discretion of the repurchase
investor. We currently have two uncommitted whole-loan repurchase agreements
with major investment banks. Under the terms of these agreements, we may pledge
mortgage loans originated to obtain additional liquidity while mortgage loans
are held until sold through whole-loan sales. Amounts outstanding under these
agreements at March 31, 1999 and December 31, 1998 were $34.5 million and $29.6
million, respectively.
On March 31, 1999, we obtained a new credit facility that provides for a
current maximum aggregate borrowing amount of $250.0 million, which amount may
be increased to $400.0 million. Our new agreement will replace our existing
facilities which we will continue to use until June 30, 1999. The new facility
may be used for residential mortgage loan originations and mortgage loan
acquisitions and expires on March 29, 2000. The credit facility is secured by
the mortgage loans which it funds. Funds borrowed under the credit facility bear
interest at fixed or variable rates at our election.
Our credit agreement contains a number of covenants that, among other
things, require us to maintain a minimum ratio of total liabilities to tangible
net worth and maintain a minimum level of tangible net worth. The credit
agreement also contains covenants that limit our ability to:
- transfer or sell assets;
- create liens;
- pay dividends;
- enter into transactions with our affiliates; or
- enter into a merger, consolidation or sale of substantially all of our
assets.
Our credit facility provides for events of default typical of facilities of
its type, as well as an event of default if we default on specified other
indebtedness or fail to be at least 50% owned by Mr. Abrams, Mr. Markus and Mr.
Filler.
We have a $500,000 operating line of credit for working capital requirements
from a commercial bank. The operating line of credit is secured by a pledge of
our assets, other than loans securing our warehouse facilities. To date, we have
not borrowed funds under this line of credit. This operating line of credit is
renewable from time to time and expires on July 15, 2003.
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<PAGE>
The net proceeds of this offering, together with cash flows from operations,
our existing cash balances and funds available under our working capital credit
facilities, are expected to be sufficient to meet our liquidity requirements for
the next 12 months. We do, however, expect to continue our expansion and expect
that eventually we will need to arrange for additional sources of capital
through the issuance of debt or equity or additional bank borrowings. We have no
commitments for any such additional financings, and we cannot assure you that we
will be able to obtain any such additional financing at the times required and
on terms and conditions acceptable to us. In such event, our growth could slow
and operations could be affected.
RISK MANAGEMENT
Interest rate movements significantly impact our volume of originations. As
such, interest rate movements represent the primary component of market risk to
us. In a rising interest rate environment, consumer demand for mortgage loans,
particularly refinancing of existing mortgages, declines. Interest rate
movements affect the interest income earned on loans held for sale, interest
expense on the warehouse lines payable and the value of mortgage loans held for
sale.
To manage market risks, Prism Financial utilizes a risk management program
to hedge the value of its mortgage loans held for sale and in its pipeline.
Derivative financial instruments, such as forward contracts and options, are
used to manage interest rate exposure and resale pricing risk. Our management
designates the contracts as hedges and evaluates on an initial and ongoing basis
the effectiveness of the derivative contracts' correlation with an existing
asset. Accordingly, hedge gains or losses are deferred and recognized as a
component of the gain or loss on sale of the underlying mortgage loans or
mortgage-backed securities. Hedge losses are immediately recognized if the
deferral of such losses would result in mortgage loans held for sale or mortgage
loans in the pipeline being valued in excess of their estimated net realizable
value. Premiums on options contracts are recorded as an expense when incurred
due to their short term and relative immateriality of their costs.
To offset the risk that a change in interest rates will result in a decrease
in the value of our current mortgage loan inventory or loan commitments, we
enter into hedging transactions. Our hedging policies generally require that we
hedge the projected portion of our committed pipeline that may be closed with
forward contracts for the delivery of loans or options on treasury securities.
The mortgage loans that are to be delivered under these contracts are fixed- or
adjustable-rate, corresponding with the composition of our inventory and
committed pipeline. At March 31, 1999 and December 31, 1998, we had open forward
commitments with a total notional amount of approximately $383 million and $670
million, respectively, to sell mortgage loans with varying settlement dates up
to May 1999. On March 31, 1999, options to sell treasuries through April 1999
with a total notional amount of approximately $12.5 million, were outstanding.
No options were outstanding at December 31, 1998. We hedge our loans held for
sale by using whole-loan sale commitments to ultimate investors, which totaled
$11.8 million and $28.4 million at March 31, 1999 and December 31, 1998,
respectively.
While we do not anticipate nonperformance by any counterparty, we are
exposed to potential credit losses in the event of nonperformance by the
counterparties to the various instruments. We manage credit risk with respect to
forward contracts and whole-loan sales commitments by entering into agreements
with entities approved by senior management and attempt to limit our credit
exposure on forward sales arrangements by entering into forward sales contracts
solely with institutions that we believe are sound credit risks, and by limiting
exposure to any single counterparty by selling to a number of investors. Our
exposure to credit risk in the event of default by the counterparty is the
difference between the contract price and the current market price. Since we
only purchase options which allow us at our option to purchase or sell a
financial instrument, our exposure at any time is limited to the premium paid to
purchase the option.
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We test our hedges on a daily basis to ensure that our maximum exposure does
not exceed the
limits set by our board of directors.
YEAR 2000 COMPLIANCE
The year 2000 issue concerns the ability of automated applications to
process date-dependent processes, calculations and information by properly
interpreting the year. The year 2000 issue could potentially impact our
business-critical computerized applications relating to, among others, loan
origination, servicing, pipeline management, hedging, payroll, financing and
financial accounting and reporting. In addition, other non business-critical
systems and services may also be affected. We have assembled an internal project
team composed of executive personnel and personnel from the
information systems, operations and finance departments to:
- assess the readiness of our systems, vendors and suppliers, third-party
service providers, customers and financial institutions;
- replace or correct through program changes all non-compliant applications;
and
- develop contingency plans in the event systems and services are not
compliant.
The readiness assessment phase of the project is complete and consisted of a
detailed assessment and testing of substantially all internal computer systems.
In addition, we have received, or are seeking, documentation from many external
parties indicating their year 2000 readiness.
Because most of our computer hardware and software is less than two years
old and has been certified as year 2000 compliant, we have not been required to
incur significant expenses to ensure year 2000 compliance and believe that our
exposure to year 2000-related hardware and software problems is lower than if we
used older equipment or software. To date, our costs to become year 2000
compliant have been less than $100,000. We do not expect that the total cost of
making our computer systems year 2000 compliant will be material. However, the
actual cost to become year 2000 compliant is subject to certain risks and
uncertainties including, among others, our ability to timely identify all
affected business-critical systems, and the readiness of service providers,
vendors and suppliers, and our financial institutions and significant customers.
In addition, we have not been required to defer any information technology
projects due to the year 2000 issue. If we are unsuccessful in correcting our
business-critical systems and processes affected by the year 2000 issue, our
results of operations or financial condition could be materially affected. If
our service providers, vendors and suppliers or our financial institutions and
significant customers are adversely affected by the year 2000 issue, our
operations could face substantial interruptions and our business and financial
condition could be materially and adversely affected. These third party risks
include possible interruptions in our ability to fund loans utilizing our
warehouse facilities, our ability to sell loans to Fannie Mae and other
investors originate mortgages over the Internet and our hedging systems' ability
to link to financial data. We have contacted each of these parties and are
seeking assurance from them that their systems are year 2000 compliant. To date,
our service providers, vendors and suppliers have not responded to our surveys.
Although we are in the process of developing contingency plans, in the event our
key service providers, vendors or suppliers experience year 2000 issues, such
contingency plans may not be effective. We do not expect the cost of developing
such plans to be material.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities," as amended by SFAS No. 127, "Deferral of the Effective Date of
Certain Provisions," distinguishes transfers of financial assets that are sales
from transfers that are secured borrowings. A transfer of financial assets in
which the transferor surrenders control over those assets is accounted for as a
sale to the extent that
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consideration other than beneficial interest in the transferred assets is
received in exchange. SFAS No. 125 also established standards on the initial
recognition and measurement of servicing assets and other retained interests and
servicing liabilities, and their subsequent measurement.
SFAS No. 125 requires that debtors reclassify financial assets pledged as
collateral and that secured parties recognize those assets and their obligation
to return them in certain circumstances in which the secured party has taken
control of those assets. In addition, SFAS No. 125 requires that a liability be
reversed only if the debtor is relieved of its obligation through payment to the
creditor or is legally released from being the primary obligor under the
liability, either judicially or by the creditor.
SFAS No. 125 was effective for transactions occurring after December 31,
1996. Certain provisions related to repurchase agreements, secured borrowings
and collateral were effective for transfers of financial assets occurring after
December 31, 1997. On January 1, 1997, we adopted SFAS No. 125. The adoption of
this statement did not have a material effect on our consolidated financial
statements.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share." This statement specifies the computation,
presentation, and disclosure requirements for earnings per share for entities
with publicly-held common stock or potential common stock. This statement is
effective for financial statements for both interim and annual periods ending
after December 15, 1997 and will be implemented in our financial statements upon
completion of this offering. The pro forma earnings per share information
presented in this prospectus is computed in accordance with SFAS No. 128.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and displaying
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This statement is
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes is
required. At this time, we have determined that this statement will have no
significant impact on our financial position or results of operations for 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." This statement establishes standards for
the way public business enterprises report information about their operating
segments and requires them to report selected information about operating
segments, products and services, activities in different geographic areas, and
reliance on major customers. Effective 1998, we adopted SFAS No. 131. This
statement affects only financial statement presentation. Management has
determined that we currently operate primarily in the mortgage origination
industry.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires that all
derivatives be carried on the balance sheet at fair value and changes in the
fair value of derivatives be recognized in income when they occur, unless the
derivatives qualify as hedges in accordance with the standard. If a derivative
qualifies as a hedge, a company can elect to use hedge accounting. The type of
accounting to be applied varies depending upon whether the nature of the
exposure that is being hedged is classified as one of three hedged risks defined
in the statement: change in fair value, change in cash flows and change in
foreign-currency. This statement is effective for fiscal quarters of fiscal
years beginning after June 15, 1999 and cannot be applied retroactively. We
believe that the adoption of this statement will not have a material effect on
our financial position or results of operations.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed for Internal Use" ("SOP 98-1"), which will become effective for
financial statements for the calendar year 1999, with early adoption encouraged.
SOP 98-1 requires the capitalization of eligible costs of specified activities
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related to computer software developed or obtained for internal use. We do not
believe the impact of adoption will have a material impact on our financial
condition or results of operations.
DEVELOPMENTS IN THE PAST 12 MONTHS
On September 1, 1998, Prism Financial purchased all of the outstanding
common stock of Pacific Guarantee from Mr. William D. Osenton and Mr. Bruce P.
Barbera. At closing, they received approximately $3.4 million in cash and
548,851 shares of common stock. Mr. Osenton received approximately $1.5 million
in cash, subject to adjustment, plus 307,441 shares of common stock. In
addition, pursuant to a complex formula contained in the Pacific Guarantee
acquisition agreement, which is based in part on the earnings of Pacific
Guarantee during the twelve month period preceding the closing of this offering,
upon the closing of this offering, we are obligated to issue 637,148 additional
shares. Of these shares, Mr. Osenton, Mr. Barbera and the Pacific Equity Value
Plan will receive 256,968 shares, 201,778 shares and 127,430 shares,
respectively. For more information, please refer to "Management--Stock-based
plans--Pacific Equity Value Plan" on page 64.
On September 30, 1998, we paid Mr. Martin E. Francis $1.4 million in cash at
closing, subject to adjustment and modification, for all of the outstanding
common stock of Mortgage Market. In addition, if certain conditions are met, we
will be obligated to issue additional shares of our common stock to Mr. Francis,
or pay an equivalent amount of cash, on various dates from December 31, 1999 to
September 30, 2002 in an amount based on Mortgage Market's future operating
performance. Beginning on December 31, 1999, and annually thereafter until 2004,
we will be obligated to issue to certain individuals, other than Mr. Francis,
shares of common stock, or pay an equivalent amount of cash, in an amount
determined by a formula contained in the acquisition agreement which is based on
Mortgage Market's net income for the year. Further, upon the closing of this
offering, we will issue 53,542 shares of our common stock pursuant to the
Morgage Market Equity Value Plan, based on an assumed initial public offering
price of $14.00 per share (or an equivalent amount of cash). For more
information, please refer to "Management--Stock-based plans--Mortgage Market
Equity Value Plan" on page 64.
In April 1999, Prism Financial acquired First City Financial Corp., a
Denver-based mortgage banking company, for $2.8 million in cash. The purchase
agreement also provides for contingent consideration in each of the five years
following the acquisition based on First City's net income in each of those
years. The contingent consideration is payable in cash or common stock, at our
option. The amount of contingent consideration, if any, cannot currently be
determined. First City originated approximately $1.7 billion and $385 million in
loans in 1998 and the first three months of 1999, respectively, and had 31
branches in 12 states and employed 254 loan originators at March 31, 1999.
On April 9, 1999, Prism Financial entered into a $3.0 million revolving
credit line agreement with a commercial bank, paying monthly interest at the
prime rate less 0.5% and expiring on July 1, 1999.
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BUSINESS
OVERVIEW
Prism Financial is a leading retail mortgage banking company engaged in the
business of originating, selling and brokering mortgage loans. We originated
$8.3 billion in loans in 1998, making us the 3(rd) largest non-depository retail
originator in the United States and the 11(th) largest overall, after giving
effect to our 1998 acquisitions for the entire year. Through our network of
approximately 760 commission-only loan originators operating out of 118 retail
branches in 17 states as of March 31, 1999, and our relationships with operators
of leading Internet mortgage web sites, we offer a broad array of residential
mortgage products targeted primarily to high-credit-quality borrowers. We
operate as both a mortgage banker, underwriting, closing and funding loans, and
a mortgage broker, selling the loan products of over 100 different lenders.
Since being founded in 1992, we have focused on growing our origination
volume by building a retail origination network through internal growth and
selective acquisitions. In addition, we recently have established relationships
with operators of Internet mortgage web sites to take advantage of growth
opportunities provided by this origination channel.
INDUSTRY OVERVIEW
With over $4.4 trillion in outstanding debt, the mortgage banking industry
is the largest consumer debt related sector in the U.S. In 1998, loan
origination volume in the U.S. reached a record high of $1.5 trillion, compared
to $834 billion for 1997. Demand for mortgage products in recent years has been
favorably affected by low interest rates, low unemployment rates, increasing
wages, high consumer confidence and strong housing starts and home sales.
The mortgage banking business consists primarily of two businesses:
origination and servicing. Origination is the process of taking a loan from
application through underwriting and funding and either holding and servicing
the loan or selling the loan into the secondary mortgage market. Mortgage loans
are originated through three primary lending channels: retail, wholesale and
correspondent. Retail originators generate loans through direct contact with the
consumer. Wholesale originators buy application packages from independent
brokers who work directly with consumers. Correspondent lenders buy closed loans
from other originators. Retail originators generally consist of depository banks
and other lenders which market, fund and close their own loan products and
brokers who market the loan products of wholesale originators. Loan servicing
involves the collection of principal, interest and insurance payments,
processing prepayments and foreclosures and passing the payments through to
taxing authorities, insurance companies and investors for servicing fees.
Originators either retain servicing rights and collect servicing fees or sell
the servicing rights for cash payments in the secondary market.
The retail origination market of the mortgage banking industry is highly
fragmented. According to the National Association of Mortgage Brokers,
approximately 20,000 mortgage brokers were operating in the U.S. in 1998.
However, we believe only a limited number originated mortgages nationwide.
In recent years, mortgage loans have become more commodity-like in nature
due to the similarity of product offerings, the large number of companies
selling mortgages and the wide availability of mortgage products and pricing
information. Pressures resulting from commoditization have led to increasing
consolidation in the industry as smaller participants cannot achieve the
economies of scale or offer the breadth of competitively priced products
required to compete effectively in the mortgage industry.
During the past 18 months, the Internet has been emerging as a major source
of mortgage originations. Industry analysts predict that Internet mortgage loan
originations will grow from over $4.0 billion in 1998 to nearly $100 billion by
2003 as borrowers recognize the convenience and benefits
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of shopping for a mortgage from the comforts of home or the office. Mortgage
shopping on the Internet is expected to accelerate loan commoditization.
Capturing market share on the Internet will be dependent upon access to
consumers and the ability to consistently provide broad product offerings at the
lowest rates.
BUSINESS STRATEGY
Prism Financial's business objective is to be the leading retail originator
of high-credit-quality mortgages. The principal business strategy elements to
support this objective are:
FOCUS PRIMARILY ON RETAIL CHANNELS. Our retail focus has two principal
benefits; control over the loan origination process and direct access to the
consumer. By controlling the origination channel, we do not rely on third
parties for loan production volume. Direct access to consumers allows our loan
originators to develop relationships with their customers which, in turn, lead
to increased customer loyalty and new customer referrals. Direct consumer
selling also provides a platform to sell higher margin mortgage-related products
and services. As a retail originator, we are able to develop alliances with
consumers, real estate agents and brokers, homebuilders, corporations,
developers and professionals which creates referral business. In addition, we
have found that loan servicers will purchase servicing rights from retail
originations at more favorable prices than servicing rights from wholesale
originations.
LEVERAGE BANKER/BROKER STRUCTURE TO OFFER LOW PRICES ON A BROAD ARRAY OF
PRODUCTS. Our banker/broker structure provides our loan originators access to
the products and pricing of over 100 lenders throughout the U.S., including our
own mortgage bank. As a high-volume mortgage banker, we are able to consistently
provide loan originators with competitive prices on an array of products by
matching or beating the prices available to loan originators by other lenders.
Our mortgage bank also provides our loan originators with in-house underwriting
capabilities, better execution, fast loan approvals and reliable service. We
believe that our brokering relationships in combination with our mortgage
banking capabilities generally enable us to offer a larger variety of
competitively priced products with a higher level of customer service than is
possible for many larger banks and small brokers. Many large banks typically
offer only their own products and small brokers typically rely on a limited
number of local brokering arrangements.
INCREASE PROFITS THROUGH LOAN SALES CLOSED BY OUR MORTGAGE BANK. The value
of loans and servicing rights in the secondary market is volume dependent. As a
result, the large loan volume financed by our mortgage bank has led to favorable
pricing in the secondary mortgage market. We intend to leverage the benefit of
these economies by increasing origination volume through our mortgage bank on
existing products and by introducing additional mortgage products. In order to
facilitate this increase and lower our cost of funds, we have entered into a new
warehouse credit facility agreement in March 1999 with a current aggregate
borrowing amount of $250.0 million, which amount may be increased to $400.0
million.
PROVIDE A "ONE-STOP" SOURCE OF MORTGAGE-RELATED PRODUCTS. In 1998, we began
using our direct consumer access to sell mortgage-related products which are
required in connection with obtaining a loan. Our mortgage related products
include mortgage insurance and title insurance policies. We also intend to begin
marketing additional mortgage-related products and services to our retail
customers. By offering these products and services, we believe we can leverage
our retail origination network and customer access to increase revenues without
significant additional capital investment.
UTILIZE A COMMISSION AND INCENTIVE BASED COMPENSATION SYSTEM. We have a
compensation system designed to motivate our employees to maximize loan volume,
productivity and profitability. Our compensation system creates a variable cost
structure which is adaptable to changes in retail origination volume. Each of
our loan originators is compensated entirely by commissions earned on loans
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originated. In addition, loan originators are generally responsible for most of
their operating expenses, including health insurance and other benefits,
computers and marketing materials. As a result, our loan originators essentially
operate their own businesses and have the incentive to maximize revenue which we
share. In addition, our underwriters and processors are compensated, in part, on
the quality of their work product and on the number of files that they
underwrite or process. We also implemented the Prism2000 Profit Sharing Plan
which provides a bonus pool for our employees if specified levels of revenue and
profitability are met.
MAINTAIN EFFICIENT OPERATIONS. Since our inception, we have focused on
being a low-cost provider by controlling operating costs and increasing
efficiency. In addition to implementing our incentive-based, variable cost
structure, we continue to invest in process enabling technologies. For example,
in 1998, we began to widely use Fannie Mae's Desktop Underwriter-TM- system.
This system allows us to process loan applications and receive
approval/rejection decisions directly from Fannie Mae within a minute. This
capability has and will continue to increase our productivity and lower our
costs in processing and selling loans to Fannie Mae. Approximately 26% of the
loans funded through our mortgage bank in 1998 were sold to Fannie Mae. Our
numerous process improvements over the last two years have increased the number
of originations per non-originating employee per month from 39 in 1997 to 69 in
1998, after giving effect to our 1998 acquisitions for the entire year.
PROVIDE SUPERIOR CUSTOMER SERVICE. We believe that providing superior
customer service is a key to product differentiation in today's price sensitive
market. We believe we deliver differentiated service through a team of
highly-skilled management, loan originators and operating staff with many years
of industry-related experience. We also strive to deliver differentiated
customer service by continually streamlining the mortgage process to make
obtaining a mortgage loan more convenient and dependable. For example, in 1998,
we implemented Desktop Underwriter and began the deployment of laptop computers
to our loan originators. Our laptop program allows originators to take loan
applications and quickly receive approvals anywhere, any time, including in the
customer's home or office. Finally, unlike many of our competitors, we operate a
decentralized processing structure that enables us to provide efficient customer
service and fast decisions.
GROWTH STRATEGY
Prism Financial has increased the dollar value of its loan origination
volume from $15.7 million in 1992 to $8.3 billion in 1998, after giving effect
to its 1998 acquisitions for the entire year. Our growth strategy is to continue
to increase our loan origination volume through expanding our presence in
existing markets and capitalizing on opportunities to enter new geographic
markets. We are executing this strategy by growing internally, pursuing
selective acquisitions and expanding our Internet relationships.
GROW INTERNALLY. Since 1992, we have opened 20 company-owned branches in 8
states as well as 34 net branches and recruited over 400 new loan originators.
We intend to continue to generate internal growth through:
- RECRUITMENT OF ADDITIONAL LOAN ORIGINATORS IN EXISTING BRANCHES. We
intend to continue recruiting additional highly qualified loan
originators. We target loan originators with experience in the mortgage
industry and long-standing relationships with consumers, real estate
agents and brokers, homebuilders, corporations, developers, professionals
and other referral sources. We focus our recruitment efforts on loan
originators who we believe can immediately increase our origination
volume. Since January 1998, we added approximately 160 loan originators to
our existing branches.
- EXPANSION OF COMPANY-OWNED BRANCHES. We intend to expand our
company-owned retail branch network to reach new geographic areas and
further penetrate existing markets. Since 1992, we
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have opened 20 branches in 8 new states. We now have 52 company-owned
branches. We staff our new branches with the same type of experienced,
highly qualified loan originators as are recruited for existing branches.
- EXPANSION OF "NET BRANCH" NETWORK. We intend to capitalize on market
opportunities by opening additional net branches. Net branches differ from
company-owned branches in that the branch manager is solely responsible
for all costs associated with the branch, including rent, employee
salaries and overhead. In return, the branch manager receives a higher per
loan commission. Net branches provide a means of expanding into new
geographic markets without significant up-front costs or operating risk.
We currently have 66 net branches.
We believe that our attractive compensation system, together with our broad
product offerings of competitively priced products, will continue to enable us
to recruit additional, highly qualified loan originators and establish new net
branch relationships.
PURSUE SELECTIVE ACQUISITIONS. We intend to continue to capitalize on
consolidation opportunities in the mortgage banking industry by continuing to
pursue acquisitions of independent, high quality mortgage brokers and mortgage
banks. Since 1996, we have completed seven acquisitions, including Pacific
Guarantee and Mortgage Market in 1998 and First City in 1999. As of their
acquisition dates, these seven acquisitions resulted in the addition of over 650
loan originators and 94 branches in 11 states. We are able to quickly capture
origination volume from acquired companies which allows us to take advantage of
our lower cost of funds and better pricing on loan sales. As a result, the
additional volume created by acquisitions provides a means to capitalize on the
economies generated by our mortgage bank. We believe that our acquisition model
and operating structure make us an attractive acquirer for the following
reasons:
- BREADTH OF PRODUCT OFFERING. We offer the acquired business access to:
- the mortgage products and pricing of over 100 lenders throughout the
U.S.;
- the broad range of mortgage products, competitive rates, dependable
customer service and execution of our mortgage bank; and
- our mortgage-related services.
- FUTURE VALUE. A substantial portion of the value we pay for an
acquisition is dependent upon the future profitability of the acquired
company's business and, when common stock is issued as consideration, upon
our future profitability. Our size and the economies generated by our
mortgage bank encourage the former owners to increase the profitability of
their business by directing loan volume into our mortgage bank and earn
attractive returns. By selling our mortgage-related products, former
owners have the opportunity to increase the profitability of their
business.
- DECENTRALIZED MANAGEMENT. We believe that the former owners have
significant loan origination experience and have developed substantial
relationships with customers in their markets. Our decentralized
management structure provides former owners with significant autonomy to
utilize their experience and relationships to generate origination volume.
In addition, by reducing burdensome administrative and operational
functions, former owners are able to focus on generating originations.
ENHANCE AND EXPAND INTERNET RELATIONSHIPS. Our objective is to become the
leading provider of mortgage products through the Internet. Industry analysts
estimate the on-line mortgage market will increase from the over $4.0 billion
originated in 1998 to nearly $100 billion by 2003. During 1998, we originated
over $122 million of mortgage loans over the Internet. We have originated
approximately $125 million of loans over the Internet in the first three months
of 1999. We believe our broad range of competitively priced products and our
strategic relationships with leading Internet mortgage web sites
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position us to capitalize on the on-line mortgage origination growth. These
relationships have enabled us to become a leading provider of mortgage services
to the following Internet web sites (listed in reverse chronological order):
<TABLE>
<CAPTION>
RELATIONSHIP
COMPANY DESCRIPTION OF CONTRACT COMMENCED
- --------------------------- ---------------------------------------------------------------- ------------------
<S> <C> <C>
HomeAdvisor Microsoft's online real estate service which provides consumers April 1999
with a guide to finding homes and loans on the Internet. We
provide the outsourcing solution for the originating, processing
and closing of loans generated by HomeAdvisor for third parties
who choose to avoid the cost of operating an Internet mortgage
processing operation.
LendingTree A leading on-line marketplace for home financing and other April 1999
consumer loan services. In addition to serving as a direct
lender on the LendingTree site, we provide the outsourcing
solution for the originating, processing and closing of loans
generated by LendingTree for third parties who choose to avoid
the cost of operating an Internet mortgage processing operation.
iQualify An industry leader in applying technology products and services January 1999
that facilitate home financing. We are a wholesale lender on
this web site.
GetSmart A leading on-line provider of financial products and services. January 1999
We have a contract to receive referrals generated from on-line
applications.
Consumer Financial Network A financial services web site on which we provide mortgage December 1998
products to corporate employees using Consumer Financial
Network's web site.
Loanz.com An on-line marketplace for mortgage services. We have an November 1998
agreement to provide mortgage product and processing services.
QuickenMortgage A leading on-line marketplace for home financing services which September 1998
has distribution agreements with America Online, Excite and
Realtor.com. We have a two-year contract to receive
pre-qualifications and applications from consumers on the
Quicken Mortgage web site.
iOwn.com A leading on-line marketplace of home listing and home financing August 1998
services. We are a wholesale lender on this web site.
E-Loan A leading on-line marketplace for mortgage services with, July 1998
according to E-Loan, over $1 billion of originations in 1998. We
are a wholesale lender on this web site.
Keystroke A Pacific Guarantee net branch which is a provider of on-line April 1998
mortgage services.
</TABLE>
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Our on-line strategy of aligning ourself with leading Internet mortgage web
sites has provided us with access to consumers without any significant
advertising or other costs to date, and this strategy has enabled us to
originate loans profitably over the Internet. We intend to continue to expand
the breadth and scope of our Internet relationships. Many of our agreements with
the Internet mortgage web sites described above can be terminated with notice by
either party.
ORIGINATION CHANNELS
The following picture depicts our role in the mortgage lending process.
[LOGO]
Prism Financial operates primarily as a retail mortgage originator with two
small wholesale divisions operating in California and Texas.
RETAIL ORIGINATION. In 1998, approximately 95% of our mortgage originations
were generated through our approximately 750 loan originators and Internet
service representatives who respond to mortgage inquiries over the Internet. As
of December 31, 1998, our loan originators operated out of approximately 95
branches, including 51 company-owned branches and 44 net branches, collectively,
located in 17 states.
- COMPANY-OWNED BRANCHES. Our primary source of business is our network of
loan originators who cultivate relationships with consumers, real estate
agents and brokers, homebuilders, corporations, developers and
professionals in order to generate referrals. We generally do not engage
in advertising, direct marketing or telemarketing techniques to generate
leads. We believe that the direct customer contact of retail origination
creates the opportunity for repeat business and customer referrals and
provides us with greater control over the lending process. In addition,
direct customer contact enables us to sell mortgage-related products and
services to our customers. Our average company-owned branch consists of
approximately 3,000 square feet of leased office space and has 11 loan
originators. Each loan originator is responsible for most of his or her
own expenses, excluding office space and office services. In 1998,
originations generated from company-owned branches represented
approximately 83% of our total retail originations.
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- NET BRANCHES. "Net branches" are arrangements with branch managers or
branch operating companies in which the branch manager or operating
company assumes responsibility for all operating expenses of the branch,
including rent, employee salaries and overhead. In return, the net branch
receives a higher commission on loans originated than would a loan
originator in a company-owned branch. The net branch arrangement shifts to
the branch manager or branch operating company much of the financial risk
normally associated with retail expansion. In addition, net branching
creates significant incentive for the branch manager to operate the net
branch profitably and efficiently. Net branches reduce our financial risk
and provide easier access to diverse and remote markets. We target branch
operators with established referral sources and familiarity with local
lending practices, pricing and regulatory/compliance requirements. Net
branching also allows easy market entry and exit which gives us
substantial flexibility to address changes in the origination market. In
addition, net branches offer real estate broker/ owners interested in
conducting an in-house lending operation the ability to provide their
customers with high quality mortgage products and services without
undertaking the expenditures of capital and time normally associated with
establishing a mortgage company. In 1998, originations generated from net
branches represented approximately 16% of our total retail originations.
- INTERNET. We believe that the Internet provides a unique medium to
deliver mortgage services. In connection with originating on-line
mortgages, we opened an Internet call center which is staffed by our own
Internet service representatives. Our Internet service representatives
receive on-line generated applications and pre-qualified leads and work
directly with the consumer to originate the loan and sell mortgage-related
services. In 1998, originations generated over the Internet represented
approximately 1% of our total retail originations.
WHOLESALE ORIGINATION. A small percentage of our business is generated
through our wholesale operations conducted primarily by PointSource Financial,
L.L.C., a wholly-owned subsidiary. In wholesale originations, non-Prism
Financial brokers deal directly with the borrower by assisting in collecting all
necessary documents and information for a complete loan application. The broker
then submits the application to us to make an underwriting determination. In
1998, approximately 5% of our originations were generated through our wholesale
channels. We do not intend to commit significant resources to increase our
wholesale originations.
MORTGAGE BANK
The mortgage loans that we originate are funded through our mortgage bank or
are brokered to the lender providing the mortgage product. In 1998, we closed
47% of our loans through our mortgage bank. Our mortgage bank currently offers a
full range of single-family mortgage loan products. Mortgage loan applicants can
choose from among fixed-rate mortgage loans with several different term options,
including standard 15-year and 30-year terms, and "balloon" mortgage loans with
relatively shorter terms, such as five or seven years, and longer amortization
schedules, such as 30 years. An array of adjustable rate mortgage loans with
rates tied to various indices is also available. We offer a wide variety of
combinations of interest rates and origination fees ("points") on many of our
mortgage loan products. These options enable borrowers to elect to pay higher
points at closing and lower interest over the life of the mortgage loan, or pay
a higher interest rate and reduce or eliminate points payable at closing. In
addition, we offer buydown-type mortgage loans. This type of loan allows a
borrower to make lower monthly payments for the first one, two or three years of
the loan.
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MORTGAGE LOAN PRODUCTS
The following table summarizes our originations for the categories of
mortgage loans listed below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
PRO FORMA
1997 1998 1998(1)
--------- --------- ---------
(VOLUME DATA IN MILLIONS)
<S> <C> <C> <C>
Conforming and government insured mortgage loans:
Number of loans............................................. 8,185 24,272 34,530
Volume...................................................... $ 1,003 $ 3,186 $ 4,716
% of category volume funded through mortgage bank........... 49% 59% 54%
% of total loan volume...................................... 68% 63% 57%
Jumbo mortgage loans:
Number of loans............................................. 1,459 4,214 7,755
Volume...................................................... $ 423 $ 1,510 $ 2,912
% of category volume funded through mortgage bank........... 5% 20% 17%
% of total loan volume...................................... 29% 30% 35%
Alternative A mortgage loans:
Number of loans............................................. 145 947 1,481
Volume...................................................... $ 21 $ 153 $ 280
% of category volume funded through mortgage bank........... 80% 60% 52%
% of total loan volume...................................... 2% 3% 3%
Home equity and second mortgage loans:
Number of loans............................................. 99 1,019 2,921
Volume...................................................... $ 4 $ 55 $ 138
% of category volume funded through mortgage bank........... 10% 53% 38%
% of total loan volume...................................... * 1% 2%
Non-prime mortgage loans:
Number of loans............................................. 198 1,491 2,489
Volume...................................................... $ 18 $ 121 $ 259
% of category volume funded through mortgage bank........... 50% 54% 44%
% of total loan volume...................................... 1% 3% 3%
Total mortgage loans:
Number of loans............................................. 10,086 31,943 49,176
Volume...................................................... $ 1,469 $ 5,025 $ 8,305
% of total volume funded through mortgage bank.............. 37% 47% 41%
Average loan size........................................... $ 145,685 $ 157,308 $ 168,882
</TABLE>
- ------------------------
* Less than 1%.
(1) Pro forma 1998 gives effect to the acquisitions of Pacific Guarantee and
Mortgage Market as if they occurred on January 1, 1998.
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CONFORMING AND GOVERNMENT INSURED MORTGAGE LOANS. These mortgage loans
conform to the underwriting standards established by one of the government
sponsored mortgage entities, Fannie Mae or Freddie Mac, and are originated and
sold directly to Fannie Mae or Freddie Mac. This product is limited to high
quality borrowers with good credit records and involves adequate down payments
or mortgage insurance. These loans may qualify for guarantees from the Federal
Housing Authority or insurance from the Veterans Administration. Approximately
76% of the number of loans originated by us in 1998 were conforming and
government insured loans.
JUMBO MORTGAGE LOANS. These mortgage loans do not satisfy the criteria to
be conforming or government insured mortgage loans solely because they exceed
the maximum loan size. The maximum loan size is currently $240,000 for
single-family, one-unit mortgage loans in the continental United States. We sell
all jumbo mortgage loans to a number of national privately sponsored mortgage
conduits. Approximately 13% of the number of loans originated by us in 1998 were
jumbo mortgage loans.
ALTERNATIVE A MORTGAGE LOANS. These mortgage loans may fail to satisfy
other elements of the loan underwriting criteria, including those relating to
documentation, employment history, income verification, loan-to-value ratios,
qualifying ratios or required borrower net worth. Beginning in 1997, we began to
originate mortgage loans that did not satisfy one or more of the underwriting
criteria but which, from a credit risk standpoint as determined primarily by
credit score and loan-to-value, presented a comparable risk profile. We refer to
this category of mortgage loans generally as "alternative A" mortgage loans. We
sell all alternative A mortgage loans we originate to national conduits who pool
these loans for securitization. To reduce the risk of sale, we underwrite these
loans to the standards of the investor to whom the loan will be sold.
Approximately 3% of the number of loans originated by us in 1998 were
alternative A mortgage loans.
HOME EQUITY AND SECOND MORTGAGE LOANS. Home equity and second mortgage
loans are generally secured by second liens on the related property. Home equity
mortgage loans can take the form of a home equity line of credit. Second
mortgage loans are closed-end loans. Both types of loans are designed primarily
for high credit quality borrowers and are underwritten according to the
standards of the investor to whom the loans will be sold. Home equity lines have
a draw period during which the borrower may make cash withdrawals. The draws are
required to be repaid during the repayment period which follows the draw period.
Only interest payments are made during the draw period. Second mortgage loans
are fixed in amount at the time of origination and typically amortize over 30
years with a balloon payment due after 15 years. Home equity lines generally
bear adjustable interest rates while closed-end loans typically bear fixed
interest rates. Both types are frequently originated in conjunction with our
origination of a first-lien mortgage loan on the related property. Home equity
lines and second mortgage loans represented approximately 3% of the number of
loans originated by us in 1998.
NON-PRIME MORTGAGE LOANS. This category consists of mortgage loans for
borrowers who have impaired or limited credit profiles or higher debt-to-income
ratios than would be acceptable for sale of such loans to one of the agencies or
private-sponsored mortgage conduits. Such mortgage loans may also fail to
satisfy the underwriting criteria of the government sponsored entities in other
ways. We categorize these mortgage loans based on the borrower's credit profile
as "A-", "B" or "C" loans which are generally considered "non-prime" mortgage
loans in the secondary mortgage market. We do not originate mortgage loans that
we would categorize as "D" loans. We offer non-prime loans on a limited basis to
ensure that we have loan products for nearly every borrower. Non-prime loans are
underwritten to the standards of investors to whom the loans will be sold. These
loans, originated through Infiniti Mortgage, a wholly-owned-subsidiary of ours,
represented approximately 5% of the number of loans originated by us in 1998. We
do not intend to commit significant resources to increase our non-prime
business.
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MORTGAGE-RELATED LOAN PRODUCTS
Prism Financial generates revenue from mortgage insurance and title
insurance policies sold in connection with the loans it originates. In 1998, we
generated approximately $820,000 in revenue principally from the sale of title
insurance policies by Illinois Guaranty. In 1998, as a result of arrangements
with leading providers of mortgage-related loan products, we began to generate
revenue from our own mortgage insurance. Since many mortgage buyers require
mortgage insurance and all require title insurance policies, we believe that we
will be able to achieve substantial penetration from our customers for these
mortgage-related products due to the direct contact we have with the consumer.
We intend to use our loan originators to offer additional mortgage-related
products and services to our retail customers.
SALES OF LOANS AND SERVICING RIGHTS
LOAN SALES. Prism Financial customarily sells all loans funded through its
mortgage bank to one of the government-sponsored mortgage entities or to one of
the national privately sponsored mortgage conduits. A primary component of our
business strategy is to seek the most efficient method of selling our mortgage
loans. We evaluate the sale of each mortgage loan type and compare prices
available for each alternative method of sale, given current market conditions
at the time and the risk characteristics of the mortgage loan type to determine
which method of sale to utilize. While we currently do not securitize our loans,
if the prices offered for our loans decrease significantly relative to the value
we believe that we could receive by securitizing such loans, our management
would consider securitizing our loans. If we began to securitize our loans, we
would be subject to the risks described in "Risk Factors--If in the future we
decide to securitize and/or retain the servicing rights of our loans, we would
be subject to additional risks that we do not currently face."
We currently sell our conforming or government insured loans either through
co-issue/concurrent transactions, assignments of trade or whole-loan sales.
Co-issue/concurrent transactions involve a sale of the underlying mortgage loan
directly to Fannie Mae or Freddie Mac with a concurrent sale of the servicing
rights to an independent servicer. Assignment of trade sales are sales of
conforming or government insured loans to a third party who exchanges the loans
with Fannie Mae or Freddie Mac for mortgage backed securities issued by them. In
a whole-loan sale, individual loans are underwritten to the standards of and
sold to a specific buyer on a forward commitment basis. Jumbo and alternative A
mortgage loans are currently sold in whole-loan sales on a forward commitment
basis. We sell our non-prime loans and home equity lines and second mortgage
loans through whole-loan sales, bulk sales or flow sales in order to avoid the
credit risk associated with these types of mortgage loans. Bulk sales are sales
of loans underwritten to our underwriting standards that are pooled and then
sold to third parties for cash by us. Flow sales are sales of loans which are
underwritten by a third party who commits to purchase each individual loan its
underwriters approve. In 1998, we sold over 60% of the loans funded by our
mortgage bank to two large, national companies, one of which directly competes
with us for retail originations. For more information, please refer to "Risk
Factors -- The loss of key purchasers of our loans or servicing rights or a
reduction in prices paid could adversely affect our financial condition" on
pages 8 and 9.
The sale of mortgage loans may generate a gain or loss to us. Gains or
losses result primarily from two factors. First, we may originate a loan at a
price (i.e., interest rate and discount) that may be higher or lower than we
would receive if we immediately sold the loan. These pricing differences occur
principally as a result of competitive pricing conditions in the loan
origination market. Second, gains or losses upon the sale of loans may result
from changes in interest rates that cause changes in the market value of the
loans from the time the price commitment is given to the customer until the time
that the loan is sold by us to the investor. We apply interest rate risk
management techniques to reduce the net effect of interest-rate changes on the
gain and loss on loan sales. For a more detailed description, please refer to
"--Interest rate risk management" on page 52.
We sell some of our loans on a forward commitment or other deferred delivery
and payment basis and have credit risk exposure to the extent purchasers are
unable to meet the terms of their forward purchase contracts. As is customary in
the marketplace, none of the forward payment obligations of any of our
counterparties is currently secured or subject to margin requirements. However,
we attempt to
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limit our credit exposure on forward sales arrangements by entering into forward
sales contracts solely with institutions that we believe are sound credit risks,
and by limiting exposure to any single counterparty by selling to a number of
investors.
SALES OF SERVICING RIGHTS. When a loan is originated, a corresponding right
to service the loan for an annual yield is created. Our current strategy is to
realize the value of this right by selling our loans without retaining the right
to service the loan or by selling the servicing rights separately from the loan
to national servicers. As a result, we minimize risk associated with defaults
and early prepayments of those loans. However, we service the loans we close
between the date of funding the loan and the date we sell the loan and the
related servicing. This period averages approximately 30 days. We have developed
an in-house proprietary system to provide our loan servicing computing services.
We will consider selling our loans with the servicing rights retained if we
believe that the value of the servicing rights is or may become significantly
greater than buyers are then willing to pay for them. If we began to sell our
loans with servicing retained, we would be subject to the risks described in
"Risk Factors--If in the future we decide to securitize and/or retain the
servicing rights of our loans, we would be subject to additional risks that we
do not currently face." In 1998, we sold over 65% of our servicing rights to a
large national servicer that is a competitor of ours and also a principal
purchaser of loans funded by our mortgage bank. The loss of this servicer or any
significant reduction in the price this buyer is willing to pay for our
servicing rights could have an adverse effect on our business and results of
operations.
RECOURSE. By selling all the loans we close, we reduce our exposure to
default risk, except the risk of first-payment defaults by customers. These loan
sales also reduce most of the prepayment risk normally inherent in the mortgage
lending business. However, in connection with whole-loan sales and exchanges, we
make representations and warranties to the buyers thereof which we believe are
customary in the industry relating to, among other things, compliance with laws,
regulations and program standards and accuracy of information. Some of this
information is provided by the borrower. In the event of a breach of these
representations and warranties, we may be required to repurchase these mortgage
loans and indemnify the investors for damages caused by the breach. If a
repurchase request is made, we would either (1) attempt to remedy the deficiency
and have the investors rescind the rejection of the mortgage loan or (2)
refinance or sell the mortgage loan, sometimes at a loss. To date, we have never
been required to repurchase a mortgage loan. We have implemented a stringent
quality assurance program monitoring the most important stages of the mortgage
loan origination process to minimize the number of mortgage loans rejected by
investors. In addition, in connection with some non-prime loan sales, we may be
required to return a portion of the premium received upon the sale of the loan
if the loan is prepaid by the customer within the first year after sale.
MORTGAGE LOAN FUNDING AND BORROWING ARRANGEMENTS
Prism Financial uses its short-term mortgage loan warehouse facilities to
fund mortgage loan originations. In March 1999, we entered into a new loan
warehousing facility to replace our existing facilities which we will continue
to use until June 30, 1999. Under the new warehouse facility, we will have
available a current maximum aggregate borrowing amount of $250.0 million, which
amount may be increased to $400.0 million, secured by the mortgage loans we
originate. We are required to comply with various operating and financial
covenants as defined in the agreements governing our warehouse facilities. In
accordance with industry practice, our new warehouse facility will be renewable
by the lenders annually. At March 31, 1999, the outstanding balance under our
warehouse facilities was $164.4 million. For a more detailed description of our
warehouse facilities, please refer to "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and capital resources"
on page 35.
In addition to our warehouse facilities, we make regular use of uncommitted
lines of credit, short-term credit facilities and purchase and sale agreements,
such as repurchase agreements, provided by major investment banks and the ASAP
Plus program. These facilities permit us to diversify our borrowing resources,
while accelerating the turnover of mortgage loans in inventory, reducing
interest costs and permitting greater mortgage loan origination volumes. We
currently have two uncommitted whole-loan repurchase agreements with major
investment banks which allow us to obtain additional
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liquidity on our mortgage loan portfolio. Amounts outstanding under these
agreements at March 31, 1999 were $16.4 million and $18.1 million. The amount
outstanding pursuant to the ASAP Plus program at March 31, 1999 was $25.9
million.
We also have a $500,000 operating line of credit from a regional commercial
bank. This operating line of credit is secured by a pledge of our assets, other
than loans securing our Warehouse Facility. This operating line of credit is
renewable from time to time and expires on July 15, 2003. At March 31, 1999, we
had $140,000 available under this line of credit. We intend to repay the
outstanding balances under this credit line out of the proceeds of this
offering. See "Use of Proceeds" on page 19.
We are required to comply with various operating and financial covenants as
provided in the agreements as described above, the most restrictive of which
will be those relating to the Warehouse Facility.
INTEREST RATE RISK MANAGEMENT
Prior to the sale of originated mortgage loans, Prism Financial bears market
risk on the value of the loans. If prevailing interest rates rise between the
time we close loans and the time we commit to originate a loan at a specific
rate and the time such loans are priced for sale, the spread between the amount
loaned and the amount the purchaser is willing to pay for the loan narrows,
resulting in a loss in value of the loan. To protect against such losses, we
currently enter into hedges through a combination of forward sales of
mortgage-backed securities and forward whole-loan sales to fix the sales price
of our loans expected to be closed or hedge the value of those loans through
periodic purchases of short-duration treasury-based options. Before entering
into forward sales, forward commitments or hedging, we perform an analysis of
our loans with committed interest rates, taking into account such factors as the
estimated portion of such loans that will ultimately be funded, note rate,
interest rates, inventories of loans and applications and other factors to
determine the type and amount of forward commitment and hedging transactions. We
attempt to make forward commitments for or hedge substantially all of our
estimated interest rate risk on our loans. We do not believe that hedging our
interest rate risk with respect to our non-prime loans is cost effective as a
result of their generally higher interest spreads combined with their relative
lack of sensitivity to changes in market interest rates and considering the
period during which we intend to accumulate such loans for sale. We believe that
we have implemented a cost-effective hedging program to provide a level of
protection against changes in the market value of our fixed-rate mortgage loans
held for sale. Adjustable rate mortgages, second mortgages and home equity lines
are hedged by selling such loans to an investor on a "best efforts basis" at the
time of origination. However, an effective hedging strategy is complex and no
hedging strategy can completely insulate us against such interest rate changes.
For a more detailed description, please refer to "Risk Factors--The
profitability of our loans held for sale could be negatively affected by an
increase in interest rates" on page 10 and "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Risk management" on page 37.
OPERATIONS
In order to offer a broad range of conventional and specialized mortgage
loan products, we must deliver mortgage loan products to the branches on a
timely basis and carefully monitor and track the origination process through
delivery of the loans to the ultimate investors. For this reason, we continue to
develop our operational and technological capabilities. We have developed a
proprietary in-house mortgage banking and administration system that has largely
eliminated many of the manual efforts associated with underwriting, funding and
loan delivery. Our company-wide system provides real-time access to the
information used by each department in operations as well as the secondary
marketing and treasury departments. Our system provides a smooth flow of data
from the origination process until the investor purchases the mortgage loan. Our
system also improves data integrity since information is not re-keyed or
transferred to multiple mortgage loan-tracking systems.
Our processing is decentralized to provide fast and efficient service.
Unlike many regional and national banks, the processing of our customers' loan
files are performed in the local branches by processors who work in teams with
one or more loan originators. Our underwriting, unlike that provided by many
regional and national banks, is performed regionally at five sites, including
our
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regional operational centers and certain large branches. Our remaining mortgage
banking functions, including secondary marketing, corporate accounting, quality
assurance, systems programming and support, loan delivery and servicing are
centralized and maintained at our Chicago headquarters.
UNDERWRITING
Mortgage loan applications must be approved by Prism Financial's
underwriters in accordance with the underwriting criteria of the entity or the
investor to whom the loan will be sold. These standards include the customer's
mortgage, installment loan and revolving debt payment history, employment
history, capacity to pay, outstanding judgments, charge-offs and repossessions,
involvement in bankruptcies and foreclosures. Since loans are secured by a
mortgage lien, an appraisal of the property securing the loan is also essential.
Furthermore, we generally evaluate the applicant's creditworthiness through the
use of a consumer credit report, verification of employment and a review of the
debt-to-income ratio of the customer. In January 1998, we began utilizing Fannie
Mae's automated underwriting system, Desktop Underwriter. In under one minute,
this system evaluates and makes a decision on whether a borrower meets Fannie
Mae's guidelines. There are a number of attractive advantages of utilizing this
system. First, it reduces operating costs by reducing the amount of time an
underwriter spends on a file. Second, it reduces the typical liability
associated with underwriting when selling a loan to Fannie Mae because Fannie
Mae will have already approved the loan. Finally, it improves our customer
service by enabling us to approve loans more quickly. Our goal, when not using
Desktop Underwriter, is to make an underwriting determination within 24 to 48
hours after all loan documentation is complete.
To maintain the consistency of underwriting quality, our loan production
personnel are not permitted to underwrite the mortgage loan packages which they
originate. Underwriting reviews and decisions for loans underwritten by us are
made by separate underwriters located at our regional operational centers and at
some of our larger branches. Our underwriting manager is located in the
corporate headquarters in Chicago and is responsible for administering all
underwriting policies. The underwriting manager reports to our senior officers.
COMPLIANCE AND QUALITY CONTROL
Prism Financial's legal/compliance team is responsible for compliance and
quality control. Our centralized compliance function allows us to control and
supervise regulatory compliance and offer consistency to our customers. The
legal/compliance team also helps the servicing team handle delinquencies and
foreclosures that occur before a loan is sold. The quality control personnel
review loans that have already been made to monitor, evaluate and improve the
overall quality of loan production. Quality control personnel also review loans
to identify and communicate to the legal/ compliance team and management
existing and potential underwriting and loan file problems or areas of concern.
After loans close, the quality control personnel select a percentage of the
closed loans to check them for documentation, accuracy, compliance with law and
potential fraud. We perform a post-funding quality control review on a sample of
originated loans for complete re-verification of employment, income and liquid
assets used to qualify for such mortgage loan. Such review also includes
procedures intended to detect evidence of fraudulent documentation and/or
imprudent activity during the processing, funding, servicing or selling of the
mortgage loan. Verification of occupancy and applicable information is made by
regular mail.
In addition to our internal quality control policies and procedures, we
utilize the services of a third party, independent quality control consultant.
Each month the independent consultant reviews a random 10% sample of loans
funded by us. The review includes (1) a credit underwriting review, (2) a
complete loan package re-verification, (3) a loan program compliance review and
(4) a federal regulatory compliance review. Every loan selected for review by
the independent consultant undergoes a complete reverification of employment,
deposit, mortgage and rental history. A new residential mortgage credit report
is ordered on 10% of the selected files, while a new review appraisal is ordered
on another 10% of the selected loans. Over each 12-month period, the independent
consultant is required to include loans of all product types, all states of
operation and all loans with high-risk characteristics. The independent
consultant's quality control reports include individual loan overviews, loan
group overviews and key trends or patterns summarized on a monthly and
year-to-date basis.
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We evaluate our internal reports and the reports of our independent
consultant on a regular basis and address any deficiencies specified in the
reports. To date, neither our internal review nor the reviews of our independent
consultant have uncovered any material deficiencies.
INFORMATION SERVICES
The information services department is responsible for implementing,
supporting and improving the software and hardware technology employed
throughout Prism Financial. Specifically, the information services department
concentrates on the development of new technology to increase operational
efficiencies, applications programming, applications development and analysis of
new software technologies which can be used within our business to improve
information flow and reduce operating costs. For example, the information
services department was responsible for implementing Desktop Underwriter which
has greatly improved our operating efficiency. The information services
department also focuses on the integration and support of hardware technologies
including those established in the branch offices. In addition, the information
services department is currently involved in (1) deploying laptops to our loan
originators, which enables our loan originators to originate a loan anywhere, at
any time, including in a customer's home or office, (2) training loan
originators on laptop origination and (3) automating our underwriting process.
COMPETITION
TRADITIONAL CHANNELS. The mortgage lending industry is highly competitive
and fragmented. We face intense competition, primarily from commercial banks,
savings and loan associations, credit unions, insurance companies, mortgage
brokers, mortgage bankers and other consumer finance companies. If we expand
into additional geographic markets, we may face competition from consumer
lenders with established positions in such markets. We cannot provide any
assurances that we will be able to compete successfully with these consumer
lenders. Competition can take place on various levels, including convenience in
obtaining a loan, service, marketing, pricing, including the interest rates,
closing costs and processing fees charged, and range of products. We believe
that pricing, service and product breadth are the most important competitive
factors affecting our business. Many of our competitors in the mortgage lending
industry are better established, larger and have more capital and other
resources than Prism Financial. Barriers to entry into the mortgage lending
industry are low, and the current level of gains realized by us and our existing
competitors on the sale of loans has attracted additional competitors into the
market. Increases in the number of competitors seeking to originate consumer
loans could lower the rates of interest or reduce the amount of origination
points and fees we can charge customers, thereby reducing the potential
profitability of such loans. Competition might also reduce our loan origination
volume.
INTERNET. Mortgage origination over the Internet is relatively new.
Competition over the Internet is intense and rapidly evolving as mortgage
brokers and lenders continue to establish affiliations with current web sites.
Currently, competition is generally based on interest rates and fees charged and
on visibility over the Internet. Similarity of product offerings and the vast
amount of mortgage-related information available over the Internet may lead to
increasing price competition. Industry analysts predict that nearly $100 billion
of mortgage originations will be generated over the Internet by 2003.
EMPLOYEES
As of March 31, 1999, Prism Financial had 1,514 full-time employees.
Approximately 200 of our employees were employed at our headquarters in Chicago,
Illinois. Our employees are not represented by any collective bargaining unit.
We believe that we maintain good relations with our employees.
GOVERNMENT REGULATION
Prism Financial's business is subject to extensive regulation, supervision
and licensing by federal, state and local governmental authorities and will be
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, marketing efforts, credit
application and underwriting activities, maximum finance and other charges,
disclosure to customers, certain rights of
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rescission, closing and servicing loans, collection and foreclosure procedures,
qualification and licensing requirements for doing business in various
jurisdictions and other trade practices. Loan origination activities are subject
to the laws and regulations in each of the states in which those activities are
conducted. Lending activities are also subject to various federal laws. The
Truth in Lending Act ("TILA") and Regulation Z promulgated thereunder 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. If we are found not to be in compliance with TILA, aggrieved
customers could have the right to rescind their loan transactions with us and to
demand the return of finance charges paid to us, among other remedies. We are
also required to comply with the Equal Credit Opportunity Act of 1974, as
amended ("ECOA"), and the Fair Housing Act (the "FHA") which prohibit lenders
from discriminating against applicants on the basis of race, color, religion,
national origin, familial status, sex, age, marital status or other prohibited
bases. Regulation B promulgated under ECOA restricts lenders from obtaining
certain types of information from loan applicants. It also requires certain
consumer disclosures, including advising applicants of the reasons for any
credit denial. The Fair Credit Reporting Act of 1970, as amended ("FCRA"),
regulates the use of consumer credit information, and among other things,
requires the lender to supply the applicant with a name and address of the
reporting agency in instances where the applicant is denied credit or the rate
or charge for a loan increases as a result of information obtained from a
consumer credit agency. We are also subject to RESPA and the Fair Debt
Collection Practices Act and are required to collect certain applicant
information and file an annual report with HUD pursuant to the Home Mortgage
Disclosure Act ("HMA"). We are also subject to the rules and regulations of, and
examinations by, HUD, the Veterans Administration, Fannie Mae, Freddie Mac and
state regulatory authorities with respect to originating, processing,
underwriting, selling and servicing mortgage loans and to various other federal
and state laws, rules and regulations governing among other things, the
licensing of, and procedures that must be followed by, consumer lenders and
servicers, and disclosures that must be made to customers. Various state laws
affect our mortgage banking operations, including licensing requirements and, in
certain instances, state usury statutes.
Failure to comply with these requirements may lead to civil or criminal
liability, loss of licenses, termination or suspension of servicing contracts
without compensation to the servicer, demands for indemnification or loan
repurchases, rights of rescission for mortgage loans and administrative and
enforcement actions by regulatory authorities.
In addition, industry participants are frequently named as defendants in
class-action and other litigation involving alleged violations of federal and
state consumer lending laws and regulations. These actions and lawsuits allege
violations of RESPA, TILA, ECOA, FHA and various other federal and state lending
and consumer protection laws. Some of the practices which have been the subject
of lawsuits against other companies include, but are not limited to,
miscellaneous "add on" fees; truth in lending calculations and disclosures;
escrow and adjustable rate mortgage calculations and collections; private
mortgage insurance calculations, disclosures and cancellation; forced-placed
hazard, flood and optional insurance; payoff statement, release and reconveyance
fees; and unfair lending practices. If a significant judgment were rendered
against us in connection with any litigation, it could have a material adverse
effect on our business and results of operations. For more information, please
refer to "Risk Factors--Pending industry-wide litigation could change the manner
in which we do business and subject us to potential liability" on page 14.
In addition, because our business is highly regulated, the laws, rules and
regulations applicable to us are subject to modification and change. Any changes
in such laws, rules and regulations could make compliance much more difficult or
expensive, restrict our ability to originate or sell loans, limit or restrict
the amount of interest and other charges earned on loans closed or sold by us,
or otherwise adversely affect our business or our prospects.
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PROPERTIES
The principal executive and administrative offices of Prism Financial occupy
approximately 40,000 square feet of commercial office space in Chicago,
Illinois, under a sublease expiring in 2004. We lease the following properties
for our regional operations:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FOOTAGE
- ------------------------------------------------------------------------------ ---------------
<S> <C>
Englewood, Colorado........................................................... 15,741
Pt. Richmond, California...................................................... 15,000
Lake Oswego, Oregon........................................................... 8,224
Lee Summit, Missouri.......................................................... 3,448
Libertyville, Illinois........................................................ 6,410
</TABLE>
In addition, we lease 83 additional locations in connection with our branch
offices, for lease terms expiring at various dates from 1999 through 2004. We do
not own any real estate except for our mortgagee's interest in the ordinary
course of business. We intend to lease additional office space in connection
with the expansion of our branch office system. For a more detailed description
of the sublease, please refer to "Certain Transactions" on page 66.
LEGAL PROCEEDINGS
Prism Financial is involved from time to time in litigation incidental to
its business. We are not aware of any pending or threatened claims against us
that might materially adversely affect our operating or financial results.
SERVICE MARKS
Prism Financial has filed applications for the names "Prism Financial,"
"Prism Mortgage Company," "Prism," "America's Mortgage Team," "Pacific Guarantee
Mortgage," "PGMUSA" and "Dreams APPROVED Daily" as service marks with the United
States Patent and Trademark Office. The registrations of these service marks are
renewable indefinitely. We are not aware of any adverse claims concerning our
marks.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Set forth below is certain information regarding our directors, executive
officers and key employees as of the date of this prospectus.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------- --- ----------------------------------------------------------------
<S> <C> <C>
Bruce C. Abrams (1)............. 37 Chairman of the Board and Chief Executive Officer
Mark A. Filler.................. 38 President and Director
Terry A. Markus................. 38 President of Prism Illinois and Director
William D. Osenton.............. 54 President of Pacific Guarantee
Martin E. Francis............... 38 President of Mortgage Market
David A. Fisher................. 30 Senior Vice President, Chief Financial Officer and Secretary
Edward C. Ahern................. 35 Senior Vice President of Secondary Marketing
Kevin N. Christopher............ 33 Senior Vice President of Production
James P. Hayes.................. 29 Senior Vice President, Treasurer and Controller
Laurence E. Katz................ 30 Vice President of Electronic Commerce
Andrew S. Hochberg (1)(2)....... 36 Nominee for Director*
Michael P. Krasny............... 45 Nominee for Director*
Penny S. Pritzker (1)........... 39 Nominee for Director*
Richard L. Wellek (1)(2)........ 60 Nominee for Director*
</TABLE>
- ------------------------
* Has consented to become a director of Prism Financial following completion
of this offering.
(1) Member of our compensation committee.
(2) Member of our audit committee.
BRUCE C. ABRAMS. Mr. Abrams co-founded Prism Financial in June 1992 and has
served as Chairman of the Board and Chief Executive Officer since our inception.
Until January 1999, he also served as President. Mr. Abrams has also been
President of LR Development Company, a real estate development company, since
December 1988, with responsibility for overseeing strategic planning and major
decisions. Since 1998, Mr. Abrams has been a director of Apollo Housing Capital,
L.L.C., a tax credit syndication company. He holds a B.A. in accounting from the
University of Illinois and a J.D. from the University of Chicago.
MARK A. FILLER. Mr. Filler has served as President since January 1999 and
as a director since January 1995. From June 1994 to January 1999, he was an
Executive Vice President. From mid-1992 to May 1994, Mr. Filler served as Chief
Operating Officer of Uresil Corp., a medical device business. Prior to 1992, Mr.
Filler was employed by The Equity Group, a company engaged primarily in mergers
and acquisitions. Prior to 1990, Mr. Filler was an attorney at the Chicago law
firm Kirkland & Ellis. Mr. Filler holds a B.A. in political science from the
University of Michigan and a J.D. from Harvard University.
TERRY A. MARKUS. Mr. Markus is a co-founder of Prism Financial and has
served as a director since January 1995. He has been President of Prism
Illinois, an operating division of Prism Financial, since January 1999.
Previously, Mr. Markus served as an Executive Vice President of Prism Financial
from April 1994 to January 1999. Mr. Markus holds a B.S. in accountancy from the
University of Illinois and a J.D. from Northwestern University. Prior to
co-founding Prism Financial, Mr. Markus was an attorney at the Chicago law firm
Bell, Boyd & Lloyd.
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WILLIAM D. OSENTON. Mr. Osenton has served as President of Pacific
Guarantee since December 1987. Mr. Osenton was Chairman of the Board of Pacific
Guarantee from December 1987 to August 1998. Mr. Osenton served as a member of
our board of directors from October 1998 until March 1999. From August 1989
until August 1998, he was President of Pacific Guarantee Financial Services, a
residential loan brokerage and loan servicing company, where he was responsible
for overall management. Mr. Osenton holds a B.A. in history from Boston College
and an M.B.A. from Loyola College.
MARTIN E. FRANCIS. Mr. Francis is the founder of Mortgage Market and has
served as its President since November 1992. Prior to founding Mortgage Market,
Mr. Francis was a loan originator for several years. Mr. Francis holds a B.S. in
marketing from Southern Oregon State University.
DAVID A. FISHER. Mr. Fisher has served as Senior Vice President, Chief
Financial Officer and Secretary since January 1999, having been a Vice
President, General Counsel and Assistant Secretary since joining Prism Financial
in October 1997. From September 1994 to October 1997, Mr. Fisher was an attorney
at the Chicago law firm Katten Muchin & Zavis. He holds a B.S. in finance from
the University of Illinois and a J.D. from Northwestern University.
EDWARD C. AHERN. Mr. Ahern has served as Senior Vice President of Secondary
Marketing since January 1999. He joined Prism Financial as a Vice President in
June 1997. From 1993 to June 1997, Mr. Ahern was employed by LaSalle Home
Mortgage Company in Secondary Marketing, with responsibility for risk
management, investor relations and operations. Mr. Ahern holds a B.A. in
business economics from the University of Illinois and an M.B.A. from the
University of Chicago.
KEVIN N. CHRISTOPHER. Mr. Christopher has served as Senior Vice President
of Production since January 1999 and was a Vice President of Prism Financial
from June 1995 to January 1999. Prior to joining Prism Financial, Mr.
Christopher was a Branch Manager/Level II for Norwest Mortgage. Mr. Christopher
holds a B.A. in liberal arts from the University of Illinois.
JAMES P. HAYES. Mr. Hayes has served as Senior Vice President since January
1999 and as Treasurer since January 1998. He joined Prism Financial as
Controller in October 1995, a position he currently holds. From September 1991
to October 1995, Mr. Hayes was employed by Arthur Andersen LLP, where he managed
financial audit engagements. He holds a B.S. in accountancy from Northern
Illinois University. He is a certified public accountant.
LAURENCE E. KATZ. Mr. Katz has served as Vice President for Electronic
Commerce since September 1998. From August 1997 to August 1998, Mr. Katz was a
Senior Research Fellow at Harvard University's Graduate School of Business,
where he was a student in the M.B.A. program beginning in August 1995. From July
1994 to August 1995, Mr. Katz served as assistant to the chief operating officer
of Delray Farms, Inc., with responsibility for business development. From August
1991 to June 1994, he was a member of the Corporate Strategic Planning and
Development Department at The Walt Disney Company. Mr. Katz holds a B.A. in
political science from Yale College and an M.B.A. from Harvard University.
ANDREW S. HOCHBERG. Mr. Hochberg has been a Principal of Next Realty, LLC,
a commercial real estate development company, since February 1998. He has been a
director of Gart Sports Company ("Gart Sports"), a leading full-line sporting
goods retailer, since April 1998, and served as a director for Strouds, Inc., a
bed and bath retailer, from 1996 to 1997. Prior to establishing Next Realty,
LLC, Mr. Hochberg served in various capacities at Sportmart, Inc. from 1987 to
1998, including Chief Executive Officer from 1996 through January 1998, when
Sportmart, Inc. became a subsidiary of Gart Sports. Mr. Hochberg holds a B.S. in
economics from the University of Pennsylvania and a J.D. from Northwestern
University.
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MICHAEL P. KRASNY. Michael Krasny is the founder of CDW Computer Centers,
Inc., one of the nation's leading direct marketers of microcomputer products. He
currently serves as CDW Computer Centers, Inc.'s Chairman of the Board and Chief
Executive Officer. Michael Krasny holds a B.S. in finance from the University of
Illinois.
PENNY S. PRITZKER. Ms. Pritzker has been President of Classic Residence by
Hyatt, the senior living affiliate of Hyatt Corporation, since 1987 and a
director of the Wm. Wrigley Jr. Company since 1994. She is also President of
Pritzker Realty Group, a real estate investment company; chairman of the
executive committee of Encore Senior Living, which owns and develops assisted
living communities; and a director of Coast to Coast Financial Corporation, a
federally-chartered institution whose subsidiary, Alliance Funding Corporation,
originates non-conforming single family home mortgages throughout the United
States. Ms. Pritzker holds a B.A. in economics from Harvard University and a
J.D. and an M.B.A. from Stanford University.
RICHARD L. WELLEK. Mr. Wellek has been Chairman of Varlen Corporation, a
leading manufacturer of precision-engineered transportation products and
petroleum analyzers, since May 1997. He served as Chief Executive Officer of
Varlen Corporation from December 1983 through January 1999 and as President from
December 1983 to May 1997. Mr. Wellek holds a B.S. in industrial management from
the University of Illinois.
ELECTION OF DIRECTORS AND EXECUTIVE OFFICERS
Prism Financial's board of directors will be divided into three classes, and
each director will serve for a staggered three-year term. The board will consist
of two Class I directors (Mr. Krasny and Ms. Pritzker), two Class II directors
(Messrs. Hochberg and Wellek) and three Class III directors (Messrs. Abrams,
Filler and Markus). At each annual meeting of stockholders, a class of directors
will be elected for a three-year term to succeed the directors of the same class
whose terms are then expiring. The terms of the Class I directors, Class II
directors and Class III directors will expire upon the election and
qualification of successor directors at the annual meeting of stockholders held
during the calendar years 2000, 2001 and 2002, respectively.
Each officer serves at the discretion of the board of directors. There are
no family relationships among any of our directors and executive officers.
BOARD COMMITTEES
AUDIT COMMITTEE. As soon as practicable after the closing of this offering,
our board of directors will establish an audit committee which, among other
things, will perform the following functions:
- make recommendations to our board of directors concerning the engagement
of independent public accountants;
- monitor and review the quality and activities of our internal audit
function and those of our independent auditors; and
- monitor the adequacy of our operating and internal controls as reported by
management and the independent or internal auditors.
The initial members of the audit committee will be Ms. Pritzker and Messrs.
Hochberg and Wellek.
COMPENSATION COMMITTEE. As soon as practicable after the closing of this
offering, our board of directors will establish a compensation committee which
will, among other things, perform the following functions:
- review salaries, benefits and other compensation of our officers and other
employees;
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- make recommendations to our board of directors regarding salaries,
benefits and other compensation; and
- administer our employee benefit plans.
The initial members of the compensation committee will be Messrs. Abrams,
Hochberg and Wellek.
DIRECTOR COMPENSATION
Our directors are not currently compensated. In connection with this
offering, each non-employee director will receive an initial grant of options to
purchase 5,000 shares of common stock at an exercise price equal to the initial
public offering price. Each non-employee director elected to the board of
directors for the first time thereafter will receive upon such election an
initial grant of options to purchase 5,000 shares of common stock at fair market
value on the date of grant. In addition, each non-employee director will receive
an annual grant of options to purchase 2,500 shares for each year during such
director's term. All of the foregoing options will have a 10 year term and will
vest over a five year period, with 20% becoming vested on each anniversary of
the date of grant. The foregoing award of options will be granted automatically
under Prism's 1999 Omnibus Stock Incentive Plan. Following this offering, each
of our directors will receive reimbursement for all travel and other expenses
incurred in connection with attending each meeting of the board of directors or
committee meeting.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between our board of directors or our
planned compensation committee and any member of any other company's board of
directors or our compensation committee, nor has any interlocking relationship
existed in the past.
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EXECUTIVE COMPENSATION
SUMMARY OF COMPENSATION. The following summary compensation table sets
forth information concerning compensation earned in the fiscal year ended
December 31, 1998, by our Chief Executive Officer, our other four most highly
compensated executive officers and our two additional division presidents (the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)
- -------------------------------------------------- --------- --------- -----------
<S> <C> <C> <C>
Bruce C. Abrams................................... 1998 75,000(1) --
Chairman of the Board and
Chief Executive Officer
Mark A. Filler.................................... 1998 150,000(1) 25,000
President
Terry A. Markus................................... 1998 150,000(1) --
President of Prism Illinois
William D. Osenton................................ 1998 75,000(2) 70,000
President of Pacific Guarantee
Martin E. Francis................................. 1998 37,500(3) 50,000
President of Mortgage Market
David A. Fisher................................... 1998 90,000(1) 60,000
Senior Vice President,
Chief Financial Officer and Secretary
Kevin N. Christopher.............................. 1998 93,500(1) 66,500
Senior Vice President of Production
</TABLE>
- ------------------------
(1) Messrs. Abrams, Filler, Markus, Fisher and Christopher will each receive a
base salary in 1999 of $175,000, $175,000, $175,000, $105,000 and $110,000,
respectively.
(2) Reflects compensation paid from July 31, 1998, the initial date of his
employment. Mr. Osenton's employment agreement with us provides for a base
salary of $180,000 in 1999.
(3) Reflects compensation paid from September 30, 1998, the initial date of his
employment. Mr. Francis' employment agreement with us provides for a base
salary of $150,000 in 1999.
STOCK-BASED PLANS
1999 OMNIBUS STOCK INCENTIVE PLAN. Prism Financial's 1999 Omnibus Stock
Incentive Plan was adopted by our board of directors in March 1999, and will be
approved by our stockholders prior to the completion of this offering, for the
benefit of our officers, directors, key employees, advisors and consultants. An
aggregate of 1,500,000 shares of common stock is reserved for issuance under the
plan, which provides for the issuance of stock-based incentive awards, including
stock options, stock appreciation rights, limited stock appreciation rights,
restricted stock, deferred stock, and performance shares. An award may consist
of one arrangement or benefit or two or more of them in tandem or in the
alternative. Under this plan, awards covering no more than 20% of the shares
reserved for issuance under the plan may be granted to any participant in any
one year.
This plan will initially be administered by our board of directors, although
it may be administered by either our board of directors or any committee of our
board of directors (the board or committee being sometimes referred to as the
"plan administrator"). The plan administrator may interpret this
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plan and may prescribe, amend and rescind rules and make all other
determinations necessary or desirable for the administration of this plan. This
plan permits the plan administrator to select the officers, directors, key
employees, advisors and consultants (including directors who are also employees)
who will receive awards and generally to determine the terms and conditions of
those awards.
We may issue two types of stock options under this plan: incentive stock
options ("ISOs"), which are intended to qualify under the Code, and
non-qualified stock options ("NSOs"). The option price of each ISO granted under
this plan must be at least equal to the fair market value of a share of common
stock on the date the ISO is granted.
Stock appreciation rights ("SARs") and limited stock appreciation rights may
be granted under this plan either alone or in conjunction with all or part of
any stock option granted under this plan. An SAR granted under this plan
entitles its holder to receive, at the time of exercise, an amount per share
equal to the excess of the fair market value (at the date of exercise) of a
share of common stock over a specified price fixed by the plan administrator. A
limited stock appreciation right granted under this plan entitles its holder to
receive, at the time of exercise, an amount per share equal to the excess of the
change in control price of a share of common stock over a specified price fixed
by the plan administrator. A limited stock appreciation right may only be
exercised within the 30-day period following a change in control.
Restricted stock, deferred stock and performance shares may be granted under
this plan. The plan administrator will determine the purchase price, performance
period and performance goals, if any, with respect to the grant of restricted
stock, deferred stock and performance shares. Participants with restricted stock
and performance shares generally have all of the rights of a stockholder. With
respect to deferred stock, during the deferral period, subject to the terms and
conditions imposed by the plan administrator, the deferred stock units may be
credited with dividend equivalent rights. If the performance goals and other
restrictions are not attained, the participant will forfeit his or her shares of
restricted stock, deferred stock and/or performance shares.
In the event of a merger, consolidation, reorganization, recapitalization,
stock dividend or other change in corporate structure affecting the number of
issued shares of common stock, the plan administrator may make an equitable
substitution or proportionate adjustment in the number and type of shares
authorized by this plan, the number and type of shares covered by, or with
respect to which payments are measured under, outstanding awards and the
exercise prices. In addition, the plan administrator, in its discretion, may
terminate all awards with payment of cash or in-kind consideration.
The terms of this plan provide that the plan administrator may amend,
suspend or terminate this plan at any time, provided, however, that some
amendments require approval of our stockholders. Further, no action may be taken
which adversely affects any rights under outstanding awards without the holder's
consent.
The board of directors has authorized the grant of options to purchase
740,000 shares of common stock at the initial public offering price. The
recipients of the awards and the terms of the options will be determined by the
board prior to the closing of the offering.
In connection with this offering, each non-employee director will receive an
initial grant of options to purchase 5,000 shares of common stock at an exercise
price equal to the initial public offering price. Each non-employee director
elected to the board of directors for the first time thereafter will receive
upon such election an initial grant of options to purchase 5,000 shares of
common stock at fair market value on the date of grant. In addition, each
non-employee director will receive an annual grant of options to purchase 2,500
shares for each year during such director's term. All of the foregoing options
will have a 10 year term and will vest over a 5 year period, with 20% becoming
vested on each anniversary of the date of grant. The foregoing awards of options
will be granted automatically under this Plan.
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PRISM2000 PROFIT SHARING PLAN. This plan, effective as of January 1, 1998,
is administered by the Chairman of Prism Financial and awards incentive share
units, which vest in three equal annual installments beginning on December 31,
2001, to employees who enable Prism Financial to meet predetermined levels of
revenue and after tax profit margin.
Eligible employees consist of loan originators whose commissions exceed
predetermined levels and all other employees who were employed by Prism
Financial on or prior to January 1, 2000. Prism Financial has the option of
paying the incentive stock units in cash or stock. Termination of employment
prior to December 31, 2001 will result in complete forfeiture of all incentive
stock units. Our maximum payout under this plan is $3.2 million or an equivalent
amount of our common stock.
The terms of this plan provide that the Chairman may amend, suspend or
terminate this plan at any time, provided, however, no action may be taken which
adversely affects any holder's vested incentive stock units without the holder's
written consent.
1999 EMPLOYEE STOCK PURCHASE PLAN. In March 1999, the board of directors
adopted and prior to the offering our stockholders will approve our 1999
Employee Stock Purchase Plan (the "Purchase Plan") which allows eligible
employees to purchase our common stock at a discount from fair market value. A
total of 750,000 shares of common stock has been reserved for issuance under the
Purchase Plan, plus annual increases beginning in or after 2000 equal to the
lesser of 500,000 shares, 3% of the outstanding shares on such date or a lesser
amount determined by the board of directors.
The Purchase Plan will be administered by our board of directors, or a
specifically designated committee of the board of directors (this board or
committee is sometimes referred to as the "plan administrator"). The plan
administrator may interpret the Purchase Plan and, subject to its provisions,
may prescribe, amend and rescind rules and make all other determinations
necessary or desirable for the administration of the Purchase Plan.
The Purchase Plan contains offering periods that commence on the first
trading day on or after February 1 and August 1 of each year and end on the last
trading day prior to the commencement of the next offering period.
Employees are eligible to participate if they are employed by us or a
subsidiary designated by the plan administrator for at least 20 hours per week
and more than five months in any calendar year. However, an employee may not be
granted the right to purchase stock under the Purchase Plan if the employee (1)
immediately after the grant would own stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock, or (2) holds
rights to purchase stock under any of our employee stock purchase plans that
together accrue at a rate which exceeds $25,000 worth of stock for each calendar
year. The Purchase Plan permits each employee to purchase common stock through
payroll deductions of up to 10% of the employee's "compensation." Compensation
is defined as the employee's base salary, exclusive of any bonus, fee, overtime
pay, severance pay, expenses or other special compensation or any credit or
benefit under any of our employee plans. The maximum number of shares an
employee may purchase during a single purchase period is 2,500 shares.
Amounts deducted and accumulated by the employee are used to purchase shares
of common stock at the end of each offering period. The price of the common
stock offered under the Purchase Plan is an amount equal to 90% of the lower of
the fair market value of the common stock at the beginning or at the end of each
offering period. Employees may not sell shares acquired under the Purchase Plan
for a period of six-months following the end of the offering period with respect
to which the common stock was purchased. Employees may end their participation
in the Purchase Plan at any time during an offering period, in which event, any
amounts withheld through payroll deductions and not otherwise used to purchase
shares will be returned to them. Participation ends automatically upon
termination of employment with us.
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Rights granted under the Purchase Plan are not transferable by an employee
other than by will or the laws of descent and distribution. The Purchase Plan
provides that, in the event of a merger, consolidation, reorganization,
recapitalization, stock dividend or other change in corporate structure
affecting the number of issued shares of our common stock, the plan
administrator will conclusively determine the appropriate equitable adjustments.
The Purchase Plan will terminate in 2009. Our board of directors has the
authority to amend or terminate the Purchase Plan, except that no amendment or
termination may adversely affect any outstanding rights under the Purchase Plan.
PACIFIC EQUITY VALUE PLAN. In connection with the acquisition of Pacific
Guarantee, Prism Financial established the Pacific Equity Value Plan, an
employee incentive and retention plan, for designated key employees of Pacific
Guarantee. This plan was implemented to motivate these employees to remain with
Pacific Guarantee following the acquisition and to maximize Pacific Guarantee's
profitability. Pursuant to a complex formula contained in the Pacific Guarantee
acquisition agreement, upon the closing of the offering, we will issue under the
Pacific Equity Value Plan 127,430 shares of common stock, assuming an initial
public offering price of $14.00 per share. The actual number of shares is based
on Pacific Guarantee's earnings during the twelve month period immediately
preceding the closing of this offering. Awards under the Pacific Equity Value
Plan will vest at a rate of 20% per year over a period of five complete years of
service after the acquisition.
MORTGAGE MARKET EQUITY VALUE PLAN. In connection with the acquisition of
Mortgage Market, Prism Financial established the Mortgage Market Equity Value
Plan, an employee incentive and retention plan, for designated key employees of
Mortgage Market. This plan was implemented to motivate these employees to remain
with Mortgage Market following the acquisition and to maximize Mortgage Market's
profitability. Upon the closing of this offering, Prism Financial will issue
under the Mortgage Market Equity Value Plan 53,542 shares of common stock (or an
equivalent amount of cash), assuming an initial public offering price of $14.00
per share. The actual number of shares is based on Mortgage Market's earnings
during the twelve month period immediately preceding the closing of this
offering. Awards under the Mortgage Market Equity Value Plan will vest at a rate
of 20% per year over a period of five years of service after the acquisition.
EMPLOYMENT ARRANGEMENTS
Pacific Guarantee has an employment agreement with Mr. Osenton under which
(1) Pacific Guarantee agreed to employ Mr. Osenton as President through May 31,
2003, provided that Pacific Guarantee may terminate Mr. Osenton's employment at
any time for cause, and provided further that Mr. Osenton may terminate his
employment at any time after July 31, 1999. Under the agreement, Mr. Osenton
receives an annual salary of $180,000, is eligible each calendar year for a
bonus of $70,000 if Pacific Guarantee's pre-tax income exceeds $1 million for
the calendar year and receives employee benefits which are in effect from time
to time for Pacific Guarantee's management. Mr. Osenton agreed, during and after
his employment with Pacific Guarantee, not to disclose or use for his own
benefit confidential information regarding Pacific Guarantee and its affiliates.
Mortgage Market has an employment agreement with Mr. Francis under which
Mortgage Market agreed to employ Mr. Francis through July 31, 2000 as President,
subject to renewal for one-year terms by Mr. Francis and Mortgage Market,
provided that Mortgage Market may terminate Mr. Francis' employment for cause.
Under the agreement, Mr. Francis receives an annual salary of $150,000, is
eligible for a bonus of $50,000 if Mortgage Market's pre-tax income exceeds $1
million for the calendar year, and receives health and medical benefits and a
company car. Mr. Francis agreed, during and after his employment with Mortgage
Market, not to disclose or use for his own benefit confidential information
regarding Mortgage Market and its affiliates.
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INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Section 145 of the General Corporation Law of Delaware authorizes a
corporation's board of directors to grant indemnity to directors and officers in
terms sufficiently broad to permit the indemnification and reimbursement of
expenses incurred of directors for liabilities incurred arising under the
Securities Act and to provide for the reimbursement of expenses incurred.
As permitted by Delaware law, our amended certificate of incorporation
includes a provision that eliminates the personal liability of our directors for
monetary damages for breach of fiduciary duty as a director, except for
liability (1) for any breach of the director's duty of loyalty to us or our
stockholders; (2) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law; (3) under section 174 of
the Delaware General Corporation Law prohibiting unlawful dividends and stock
purchases or (4) for any transaction from which the director derived an improper
personal benefit.
As permitted by Delaware law, our amended certificate of incorporation
provides that (1) we are required to indemnify our directors and officers to the
fullest extent permitted by Delaware law, subject to very limited exceptions;
(2) we are permitted to indemnify our other employees to the extent that we
indemnify our officers and directors, unless otherwise required by law, our
amended certificate of incorporation, amended by-laws or agreements; (3) we are
required to advance expenses, as incurred, to our directors and officers in
connection with a legal proceeding to the fullest extent permitted by Delaware
law, subject to very limited exceptions and (4) the rights conferred in our
amended certficate of incorporation are not exclusive.
We intend to purchase insurance covering our directors and officers against
liability asserted against them in their capacity as directors or officers.
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CERTAIN TRANSACTIONS
On March 16, 1998, prior to its acquisition by Prism Financial, Pacific
Guarantee issued a subordinated promissory note to Mr. Osenton in the amount of
$200,000 which, together with interest of 10% per annum, is due on or before
March 31, 2000. Interest-only payments are payable monthly on unpaid principal
and are due on the first day of each month beginning on April 30, 1998. This
note was used to provide working capital. This note will be repaid out of the
proceeds of this offering.
On June 30, 1997, prior to its acquisition by Prism Financial, Pacific
Guarantee issued a subordinated promissory note to Mr. Osenton and his wife in
the amount of $400,000, which, together with interest of 10% per annum, is due
on or before June 30, 2002. Interest-only payments are payable monthly on unpaid
principal and are due on the first day of each month beginning August 1, 1997.
This note was used to provide working capital. This note will be repaid out of
the proceeds of this offering.
Mr. Osenton entered into a Purchase and Sale Agreement, dated as of July 23,
1998, pursuant to which he sold all of his capital stock of Pacific Guarantee to
Prism Financial. For a more detailed description of this agreement, please refer
to "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Developments in the past 12 months" on page 40 and note 3 to our
consolidated financial statements.
Mr. Francis entered into a Purchase and Sale Agreement, dated as of
September 30, 1998, pursuant to which he sold all of his capital stock of
Mortgage Market to Prism Financial. For a more detailed description of this
agreement, please refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Developments in the past 12 months" on page
40 and note 3 to our consolidated financial statements.
On January 1, 1996, Mr. Filler entered into a collateral note and pledge
agreement with Prism Financial under which Mr. Filler borrowed $100,000 from
Prism Financial. The principal balance bears interest from and after January 1,
1997 at an annual rate of 8.25%. Principal payments of $20,000 plus accrued
interest are due in five annual installments beginning on December 31, 1997. As
of January 1, 1999, $60,000 remained outstanding under this note. This
indebtedness is secured by a grant of a security interest in 513,450 shares of
common stock owned by Mr. Filler.
On January 1, 1996, Mr. Markus entered into a collateral note and pledge
agreement with Prism Financial under which Mr. Markus borrowed $100,000 from
Prism Financial. The principal balance bears interest from and after January 1,
1997 at an annual rate of 8.25%. Principal payments of $20,000 plus accrued
interest are due in five annual installments beginning on December 31, 1997. As
of January 1, 1999, $60,000 remained outstanding under this note. This
indebtedness is secured by a grant of a security interest in 513,450 shares of
common stock owned by Mr. Markus.
Mr. Abrams owns a one-third equity interest, and Mr. Hochberg has an
indirect equity interest, in Winners Limited Partnership, an Illinois limited
partnership, which is the landlord under a lease covering approximately 40,000
square feet of office space in Chicago, Illinois. Prism Financial subleases the
space from the original lessee of which Mr. Hochberg is a member of the board of
directors and makes annual sublease payments of $480,000 to the sublessor. Prism
Financial's sublease extends through August 30, 2004. The sublease was
negotiated between Prism Financial and the lessee on an arm's-length basis.
On December 31, 1998, several trusts, each of which Ms. Pritzker is an
affiliate of, purchased an aggregate of approximately 574,755 shares of our
common stock for an aggregate purchase price of $2.5 million.
In 1999, 1998 and 1997, several of our stockholders received distributions
from Prism Financial to enable them to pay S corporation taxes on Prism
Financial's taxable, undistributed earnings for the previous year which were
payable to them by virtue of their stock ownership. In 1999 to date,
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Mr. Abrams, Mr. Markus, Mr. Filler, an affiliate of Mr. Abrams and affiliates of
Ms. Pritzker received $694,020, $252,000, $252,000, $63,094 and $70,626,
respectively. In 1998, Mr. Abrams, Mr. Markus and Mr. Filler received $1.2
million, $398,000 and $437,000, respectively. In 1997, Mr. Abrams, Mr. Markus
and Mr. Filler received $600,000, $195,000 and $156,000, respectively.
In 1998, Mr. Bernard Filler, father of Mr. Mark Filler, received $75,240
from us for legal work relating to licensing. This amount represents the fair
value of the legal work performed for us.
Immediately prior to this offering, Prism Mortgage will issue S Corporation
Distribution Notes to each of Mr. Abrams, Mr. Filler, Mr. Markus, Mr. Osenton,
an affiliate of Mr. Abrams and affiliates of Ms. Pritzker. Had our S corporation
status been terminated as of March 31, 1999, the amounts of the S Corporation
Distribution Notes would have been $8.8 million, $3.1 million, $2.7 million,
$491,002, $820,011 and $806,811, respectively. We expect the amount of the S
Corporation Distribution Notes to increase from April 1, 1999 to the date of the
closing of this offering. The S Corporation Distribution Notes will bear
interest at the same rate of interest as our Warehouse Facility and will be
repaid out of the proceeds of this offering. For a more detailed description of
the S Corporation Distribution Notes, please refer to "Transactions Related to
the Offering" on page 18.
In 1996, LR Development Company, a company controlled by Mr. Abrams,
performed certain management services for us. Prior to 1999, we shared certain
services with LR Development Company. As reimbursement for those services, we
paid LR Development Company $420,000 and $187,000 during 1996 and 1998,
respectively.
CDW Computer Centers, Inc., of which Mr. Krasny is Chairman of the Board and
Chief Executive Officer, sold $62,258 and $125,355 worth of computer equipment
to us in 1998 and 1999, respectively. These purchases were negotiated on an
arm's-length basis.
Mr. Abrams, Mr. Filler, Mr. Markus, Mr. Osenton, an affiliate of Mr. Abrams,
affiliates of Ms. Pritzker and our other stockholders on the date hereof will
enter into a registration rights agreement with us effective upon the closing of
this offering pursuant to which such stockholders will have shelf, demand and
piggyback rights to register their restricted stock. For more information,
please refer to "Description of Capital Stock--Registration rights" on page 71.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information known to Prism Financial with
respect to beneficial ownership of our common stock as of March 31, 1999 after
giving effect to the Incorporation Transactions by (A) each stockholder known by
Prism Financial to be the beneficial owner of more than 5% of our common stock;
(B) each director and nominee for director of Prism Financial; (C) the Named
Executive Officers; and (D) all executive officers, directors and nominees for
directors as a group. The selling stockholders named below will sell shares in
the offering only if the underwriters exercise their over-allotment option.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER OFFERING
OFFERING(1)(2)(3) (1)(2)(3)(4)
---------------------- ----------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- ----------------------------------------------- --------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
Bruce C. Abrams(5)............................. 5,533,040 45.4 5,533,040(6) 37.7
Mark A. Filler(7).............................. 1,938,890 15.9 1,938,890(6) 13.2
Terry A. Markus(8)............................. 1,708,864 14.0 1,708,864(6) 11.6
William D. Osenton(9).......................... 564,410 4.6 564,410(6) 3.8
Martin E. Francis.............................. -- * -- *
David A. Fisher................................ -- * -- *
Kevin N. Christopher........................... -- * -- *
Andrew S. Hochberg............................. -- * -- *
Michael P. Krasny.............................. -- * -- *
Penny S. Pritzker.............................. -- * -- *
Richard L. Wellek.............................. -- * -- *
All executive officers, directors and nominees
for directors as a group (13
persons)(5)(7)(8)............................ 9,745,204 79.9 9,745,204(6)(9) 66.3
</TABLE>
- ------------------------
* Represents less than 1%
(1) Beneficial ownership is determined in accordance with Rule 13d-3 of the
Securities Exchange Act and generally includes voting and investment power
with respect to securities, subject to community property laws, where
applicable.
(2) Includes 637,148 shares of common stock issuable pursuant to the purchase
agreement relating to our acquisition of Pacific Guarantee upon the closing
of this offering, including 127,430 shares of common stock that we expect to
issue to the Pacific Equity Value Plan, assuming an initial public offering
price of $14.00 per share.
(3) Includes 53,542 shares of our common stock issuable to the Mortgage Market
Equity Value Plan upon the closing of this offering pursuant to the purchase
agreement relating to our acquisition of Mortgage Market, assuming an
initial public offering price of $14.00 per share.
(4) Excludes shares of our common stock issuable by us in the future to certain
individuals pursuant to the purchase agreements relating to our acquisitions
of Mortgage Market and First City and shares issuable pursuant to a stock
purchase right.
(5) Excludes 114,910 shares of common stock which will be transferred to GEM
Value/Prism LLC ("GVP") in satisfaction of indebtedness owed by Mr. Abrams
to GVP upon closing of this offering.
(6) Does not reflect exercise of the over-allotment option which relates to
375,000 shares held by current stockholders. Upon exercise of this option,
Mr. Abrams, Mr. Filler, Mr. Markus, Mr. Osenton, an affiliate of Mr. Abrams,
affiliates of Ms. Pritzker, GVP and Mr. Barbera will sell 180,499, 63,251,
55,747, 10,029, 16,750, 18,750, 18,750 and 7,875 shares, respectively.
68
<PAGE>
(7) Excludes 114,910 shares of common stock which will be transferred to GVP in
satisfaction of indebtedness owed by Mr. Filler to GVP upon closing of this
offering.
(8) Excludes 344,935 shares of common stock which will be transferred to GVP in
satisfaction of indebtedness owed by Mr. Markus to GVP upon closing of this
offering.
(9) Includes 256,968 shares of common stock issuable to Mr. Osenton upon the
closing of this offering pursuant to the purchase agreement relating to our
acquisition of Pacific Guarantee, assuming an initial public offering price
of $14.00 per share.
69
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Immediately following the closing of this offering, the authorized capital
stock will consist of 100,000,000 shares of common stock, par value $0.01 per
share, and 10,000,000 shares of preferred stock, par value $0.01 per share. Upon
completion of this offering, there will be outstanding 14,685,987 shares of
common stock and options to purchase 740,000 shares of common stock.
COMMON STOCK
Subject to preferences that may apply to shares of preferred stock
outstanding at the time, the holders of outstanding shares of common stock are
entitled to receive dividends out of assets legally available therefor at the
times and in the amounts as the board of directors may from time to time
determine. Each stockholder is entitled to one vote for each share of common
stock held on all matters submitted to a vote of stockholders. Cumulative voting
for the election of directors is not provided for in our amended certificate,
which means that the holders of a majority of the shares voted can elect all of
the directors then standing for election. The common stock is not entitled to
preemptive rights and is not subject to conversion or redemption. If we
liquidate, dissolve or wind up our business, the holders of shares of common
stock will be entitled to share ratably in the distribution of all our assets
remaining available for distribution after satisfaction of all our liabilities
and payment of the liquidation preference of any outstanding preferred stock.
Each outstanding share of common stock is, and all shares of common stock to be
outstanding upon completion of this offering will be, fully paid and
nonassessable.
PREFERRED STOCK
The board of directors has the authority, within the limitations and
restrictions stated in our amended certificate of incorporation, to provide by
resolution for the issuance of shares of preferred stock, in one or more classes
or series, and to fix the rights, preferences, privileges and restrictions of
the preferred stock, including dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preferences and the number of shares
constituting any series or the designation of that series. The issuance of
preferred stock could have the effect of decreasing the market price of the
common stock and could adversely affect the voting and other rights of the
holders of common stock.
SELECTED AMENDED CERTIFICATE AND AMENDED BYLAW PROVISIONS
As permitted by Delaware law, our directors will be indemnified against
certain expenses and liabilities incurred in their capacities as our directors
when acting in good faith and cannot be held personally liable for certain
breaches of their fiduciary duty of care.
Our amended certificate of incorporation will provide for the board of
directors to be divided into three classes, with staggered three-year terms. As
a result, only one class of directors will be elected at each annual meeting of
stockholders, with the other classes continuing for the remainder of their
respective terms.
Our amended certificate of incorporation also will provide that directors
may be removed from office only for cause and only by the affirmative vote of
the holders of at least two-thirds of our total outstanding voting stock.
Vacancies on our board of directors, including those resulting from an increase
in the number of directors, may be filled only by the remaining directors, not
by stockholders.
Any action required or permitted to be taken by our stockholders may be
effected only at an annual or special meeting of stockholders and will not be
permitted to be taken by written consent in lieu of a meeting. Our amended
certificate of incorporation and amended bylaws also will provide that special
meetings of stockholders may be called by the chairman of the board or a
majority of our board
70
<PAGE>
of directors. Stockholders will not be permitted to call a special meeting or to
require that the board of directors call a special meeting of stockholders.
There are provisions contained in our amended certificate of incorporation,
including those relating to the size and classification of the board of
directors, the removal of directors, the prohibition on action by written
consent and the calling of special meetings, which may only be amended by the
affirmative vote of the holders of at least two-thirds of our total outstanding
voting stock. In addition, our amended certificate of incorporation will provide
that our amended bylaws may only be amended by the affirmative vote of the
holders of at least two-thirds of our outstanding voting stock or by a vote of
two-thirds of the members of the board of directors in office.
Our amended certificate of incorporation and amended bylaws will establish
an advance notice procedure for nomination, other than by or at the direction of
the board of directors, of candidates for election as directors, as well as for
other stockholder proposals to be considered at annual meetings of stockholders.
In general, notice of intent to nominate a director or raise business at such
meeting must be received by us not less than 60 nor more than 90 days prior to
the scheduled annual meeting and must contain certain specified information
concerning the person to be nominated or the matter to be brought before the
meeting.
The preceding provisions could have the effect of discouraging, delaying or
making more difficult certain attempts to acquire us or to remove incumbent
directors even if a majority of our stockholders believe the attempt to be in
their or our best interests.
DELAWARE ANTI-TAKEOVER LAW
Delaware law prohibits certain "business combination" transactions between a
Delaware corporation and any "interested stockholder" owning 15% or more of the
corporation's outstanding voting stock for a period of three years after the
date on which such stockholder became an interested stockholder, unless (1) the
board of directors approves, prior to such date, either the proposed business
combination or the proposed acquisition of stock which resulted in the
stockholder becoming an interested stockholder, (2) upon consummation of the
transaction in which the stockholder becomes an interested stockholder, the
interested stockholder acquires at least 85% of those shares of the voting stock
of the corporation which are not held by the directors, officers or certain
employee stock plans or (3) on or subsequent to the consummation date, the
business combination with the interested stockholder is approved by the board of
directors and also approved at a stockholders' meeting by the affirmative vote
of the holders of at least two-thirds of the outstanding shares of the
corporation's voting stock other than shares held by the interested stockholder.
A "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder under Delaware
law.
OPTIONS
No options are currently outstanding. Options to purchase a total of 740,000
shares of common stock will be issued effective upon the closing of this
offering. A total of 760,000 additional shares may be subject to options or
awards granted in the future under the 1999 Omnibus Stock Incentive Plan. For a
more detailed description, please refer to "Management--Stock-based plans--1999
Omnibus Stock Incentive Plan" on page 61.
REGISTRATION RIGHTS
As of the completion of this offering, the holders of an aggregate of
12,185,987 shares of common stock will be entitled to several types of
registration rights. These rights are provided under the terms of a registration
rights agreement between us and the holders of the registrable securities, who
include Mr. Abrams, Mr. Markus, Mr. Filler and Mr. Osenton. This agreement
provides demand registration
71
<PAGE>
rights to the holders of substantially all of the registrable securities. In
addition, the holders of all of the registrable securities are entitled under
the agreement, subject to certain limitations, to require us to include their
registrable securities in future registration statements that we file.
Registration of shares of common stock pursuant to the rights granted in this
agreement will result in such shares becoming freely tradeable without
restriction under the Securities Act. We will bear all registration expenses
incurred in connection with the above registrations.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is LaSalle National
Bank.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, Prism Financial will have outstanding
14,685,987 shares of common stock, assuming no exercise of options issued in
conjunction with this offering. Of these shares, the 2,500,000 shares of common
stock sold in this offering (2,875,000 shares if the over-allotment option is
exercised in full) will be freely tradable without restriction under the
Securities Act except that any shares purchased by our "affiliates," as that
term is defined in Rule 144 under the Securities Act, may generally be sold only
in compliance with the limitations of Rule 144 described below.
SALES OF RESTRICTED SHARES
The remaining 12,185,987 shares of common stock outstanding upon completion
of this offering are deemed "restricted shares" pursuant to Rule 144 under the
Securities Act. Upon expiration of certain lock-up agreements described below,
180 days after the date of this prospectus, 10,345,785 shares of common stock
will have been held for at least one year and will be eligible for sale pursuant
to Rule 144 under the Securities Act.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned restricted shares for at least one year (including
the holding period of any prior owner except an affiliate) would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of (1) 1% of the number of shares of common stock then outstanding
(which will equal approximately 146,860 shares immediately after this offering,
assuming no exercise of options issued in connection with this offering) or (2)
the average weekly trading volume of the common stock during the four calendar
weeks preceding the filing of a Form 144 with respect to that sale. Sales under
Rule 144 also are subject to manner of sale provisions, notice requirements and
to the availability of current public information about us. Under Rule 144(k), a
person who is not deemed to have been our affiliate at any time during the three
months preceding a sale, and who has beneficially owned the shares proposed to
be sold for at least two years (including the holding period of any prior owner
except an affiliate), is entitled to sell those shares without complying with
the manner of sale, public information, volume limitation or notice provisions
of Rule 144.
We intend to file a registration statement on Form S-8 under the Securities
Act as soon as practicable after the completion of this offering to register
approximately 2.4 million shares of common stock reserved for issuance under our
1999 Omnibus Stock Incentive Plan, 1999 Employee Stock Purchase Plan, the
Pacific Equity Value Plan and the Mortgage Market Equity Value Plan.
Accordingly, subject to applicable vesting requirements and exercise with
respect to options, shares registered under that registration statement will be
available for sale on the open market immediately upon completion of the lock-up
period described below. Shares registered under such registration statement held
by affiliates will be subject to Rule 144 volume limitations.
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<PAGE>
LOCK-UP AGREEMENTS
Prism Financial and each stockholder of Prism Financial have agreed that,
without the prior written consent of William Blair & Company, L.L.C. on behalf
of the underwriters of this offering, he, she or it will not, during the period
ending 180 days after the date of this prospectus:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase, lend or otherwise transfer or dispose of, directly
or indirectly, any shares of common stock or any securities convertible
into or exercisable or exchangeable for common stock;
- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock, whether any of those transactions described in the previous
clause or this clause is to be settled by delivery of common stock or
other securities, in cash or otherwise; or
- in the case of Prism Financial, file a registration statement, other than
a registration statement on Form S-8 covering shares of common stock
subject to our employee benefit plans. None of the shares subject to
lock-up agreements may be sold during the applicable lock-up period
without the consent of William Blair & Company, L.L.C. except for
transfers pursuant to gifts or certain partnership distributions and
similar transfers in which the transferee enters into a substantially
similar lock-up agreement.
73
<PAGE>
UNDERWRITING
The several underwriters named below, for which William Blair & Company,
L.L.C., ABN AMRO Incorporated and U.S. Bancorp Piper Jaffray Inc. are acting as
representatives, have severally agreed, subject to the terms and conditions set
forth in the underwriting agreement by and among Prism Financial, the selling
stockholders and the underwriters, to purchase from Prism Financial, and Prism
Financial has agreed to sell to each of the underwriters, the respective number
of shares of common stock set forth opposite each underwriter's name in the
table below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
William Blair & Company, L.L.C. .................................................
ABN AMRO Incorporated............................................................
U.S. Bancorp Piper Jaffray Inc. .................................................
----------
Total...................................................................... 2,500,000
----------
----------
</TABLE>
This offering will be underwritten on a firm commitment basis. In the
underwriting agreement, the underwriters have agreed, subject to the terms and
conditions set forth therein, to purchase the shares of common stock being sold
pursuant thereto at a price per share equal to the public offering price less
the underwriting discounts and commissions specified on the cover page of this
prospectus. According to the terms of the underwriting agreement, the
underwriters will either purchase all of the shares or none of them. In the
event of default by any underwriter, in certain circumstances the purchase
commitments of the non-defaulting underwriters may be increased or the
underwriting agreement may be terminated.
The representatives have advised us that the underwriters will offer the
shares of common stock to the public initially at the public offering price
specified on the cover page of this prospectus. The underwriters may also offer
the shares to certain dealers at the public offering price less a concession of
up to $ per share. The underwriters may allow, and these dealers may
re-allow, a concession of up to $ per share to certain other dealers. The
underwriters will offer the shares subject to prior sale and subject to receipt
and acceptance of the shares by the underwriters. The underwriters may reject
any order to purchase shares in whole or in part. The underwriters expect that
we will deliver the shares to the underwriters through the facilities of the
Depository Trust Company in New York, New York, on or about , 1999.
At that time, the underwriters will pay us for the shares in immediately
available funds. After the commencement of the initial public offering, the
representatives may change the public offering price and the other selling
terms.
The underwriters have the option to purchase up to an aggregate of 375,000
additional shares of common stock from the selling stockholders at the same
price they are paying for the 2,500,000 shares offered hereby. The underwriters
may purchase additional shares only to cover over-allotments made in connection
with this offering and only within 30 days after the date of this prospectus. If
the underwriters decide to exercise this over-allotment option, each underwriter
will be required to purchase additional shares in approximately the same
proportion as set forth in the table above. The underwriters will offer any
additional shares that they purchase on the terms described in the preceding
paragraph.
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<PAGE>
The following table summarizes the compensation to be paid by us and the
selling stockholders to the underwriters:
<TABLE>
<CAPTION>
TOTAL
----------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
----------- ------------- -------------
<S> <C> <C> <C>
Public offering price....................
Underwriting discount paid by us.........
Underwriting discount paid by the selling
stockholders...........................
</TABLE>
We estimate the expenses of this offering payable by us (excluding
underwriting discounts and commissions) to be $800,000.
We and, if applicable, the selling stockholders have agreed to indemnify the
underwriters and their controlling persons against certain liabilities,
including liabilities under the Securities Act.
We and all of our existing stockholders have agreed not to sell or transfer
any shares of common stock, or to engage in certain hedging transactions with
respect to the common stock, for a period of 180 days from the date of this
prospectus without the consent of William Blair & Company, L.L.C., except in
certain limited circumstances. Stockholders who have agreed to this lock-up
arrangement hold an aggregate of 12,005,015 shares of common stock. For a more
detailed discussion of shares available for sale following this offering, please
refer to "Shares Eligible for Future Sale" on page 72.
In connection with this offering, the underwriters and other persons
participating in this offering may engage in transactions which affect the
market price of the common stock. These may include stabilizing and
over-allotment transactions and purchases to cover syndicate short positions.
Stabilizing transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the common stock. Over-allotment
involves selling more shares of common stock in this offering than are specified
on the cover page of this prospectus, which results in a syndicate short
position. The underwriters may cover this short position by purchasing common
stock in the open market or by exercising all or part of their over-allotment
option. In addition, the representatives may impose a penalty bid. This allows
the representatives to reclaim the selling concession allowed to an underwriter
or selling group member if common stock sold by such underwriter or selling
group member in this offering is repurchased by the representatives in
stabilizing or syndicate short covering transactions. These transactions, which
may be effected on the Nasdaq National Market or otherwise, may stabilize,
maintain or otherwise affect the market price of the common stock and could
cause the price to be higher than it would be without these transactions. The
underwriters and other participants in this offering are not required to engage
in any of these activities and may discontinue any of these activities at any
time without notice. Neither Prism Financial nor any of the underwriters makes
any representation or prediction as to whether the underwriters will engage in
such transactions or choose to discontinue any transactions engaged in or as to
the direction or magnitude of any effect that these transactions may have on the
price of the common stock.
The representatives have advised us that the underwriters do not intend to
confirm, without client authorization, sales to any account over which they
exercise discretionary authority.
Prior to this offering, there has been no public market for our common
stock. Consequently, we and the representatives will negotiate to determine the
initial public offering price. The initial public offering price will be based
on current market conditions, our operating results in recent periods, the
market capitalization of other companies in our industry, estimates of our
potential and other factors that we and the representatives deem relevant. The
estimated price range specified on the cover page of this prospectus may change
because of market conditions and other factors.
75
<PAGE>
The underwriters have reserved for sale, at the initial public offering
price, up to 250,000 shares of common stock in this offering for our employees
and certain other individuals. Purchases of the reserved shares would reduce the
number of shares available for sale to the general public. The underwriters will
offer any reserved shares which are not so purchased to the general public on
the same terms as the other shares.
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered hereby
will be passed upon for Prism Financial by Skadden, Arps, Slate, Meagher & Flom
(Illinois). Certain legal matters will be passed upon for the underwriters by
Sidley & Austin.
EXPERTS
The consolidated financial statements of Prism Financial and its
subsidiaries as of December 31, 1998 and for the year then ended included in
this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The consolidated financial statements of Prism Financial and its
subsidiaries as of December 31, 1997 and each of the years in the two-year
period ended December 31, 1997 included in this prospectus have been audited by
McGladrey & Pullen, LLP, independent auditors, as stated in their report
appearing in this prospectus and have been so included in reliance upon the
report of that firm given upon their authority as experts in accounting and
auditing.
The financial statements of Mortgage Market as of December 31, 1997 and for
the year then ended included in this prospectus have been audited by Stefani &
Matthews, L.L.P., independent auditors, as stated in their report appearing in
this prospectus and have been so included in reliance upon the report of that
firm given upon their authority as experts in accounting and auditing.
The financial statements of Pacific Guarantee as of December 31, 1997 and
for the year then ended included in this prospectus have been audited by Clay L.
Miller, certified public accountant, independent auditor, as stated in his
report appearing in this prospectus and have been so included in reliance upon
his report given upon his authority as an expert in accounting and auditing.
The financial statements of Pacific Guarantee as of December 31, 1996 and
for the year then ended included in this prospectus have been audited by William
M. Stoll, certified public accountant, independent auditor, as stated in his
report appearing in this prospectus and have been so included in reliance upon
his report given upon his authority as an expert in accounting and auditing.
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<PAGE>
CHANGE IN INDEPENDENT AUDITORS
As of December 7, 1998, we have engaged PricewaterhouseCoopers LLP as our
independent auditors for the year ending December 31, 1998 to replace the firm
of McGladrey & Pullen, LLP. The decision to change auditors was recommended and
approved by our board of directors in light of our intentions to commence an
initial public offering.
The reports of McGladrey & Pullen, LLP on our consolidated financial
statements as of December 31, 1997 and for each of the years in the two-year
period ended December 31, 1997 did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles.
In connection with the audits of our consolidated financial statements for
the year in the period ended December 31, 1997, and during the period from
January 1, 1998 through December 7, 1998, there were no disagreements with
McGladrey & Pullen, LLP on any matters of accounting principles or practices,
financial statement disclosure or auditing scope and procedures.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act for the shares of common stock
being offered by this prospectus. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits. For
further information about us and the common stock offered, see the registration
statement and the exhibits thereto. Statements contained in this prospectus
regarding the contents of any contract or any other document to which reference
is made are not necessarily complete, and, in each instance where a copy of a
contract or other document has been filed as an exhibit to the registration
statement, reference is made to the copy so filed, each of those statements
being qualified in all respects by that reference. A copy of the registration
statement and the exhibits may be inspected without charge at the Commission's
offices at Judiciary Plaza, 450 Fifth Street, Washington, D.C. 20549, and copies
of all or any part of the registration statement may be obtained from the Public
Reference Room of the Commission, Washington, D.C. 20549 upon the payment of the
fees prescribed by the Commission. The public may obtain information on the
operation of the Public Reference Room by calling the Commission at
1-800-SEC-0330. The Commission maintains a web site (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding registrants, such as Prism Financial, that file electronically with
the Commission. As a result of this offering, we will become subject to the
information and reporting requirements of the Securities Exchange Act of 1934,
as amended, and we will file period reports, proxy statements and other
information with the Commission. Upon approval of the common stock for quotation
on the Nasdaq National Market, our reports, proxy and information statements and
other information may also be inspected at the offices of Nasdaq Operations,
1735 K Street, N.W., Washington, D.C. 20006. We intend to furnish our
stockholders with annual reports containing audited financial statements and
with quarterly reports for the first three quarters of each year containing
unaudited interim financial information.
77
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEX PAGE
---------
<S> <C>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets as of December 31, 1998, March 31, 1999 (unaudited) and pro forma March 31,
1999................................................................................................... F-2
Consolidated Statements of Income for the three months ended March 31, 1998 and 1999 (unaudited)......... F-3
Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and 1999 (unaudited)..... F-4
Notes to Consolidated Financial Statements............................................................... F-5
Report of Independent Accountants........................................................................ F-7
Independent Auditor's Report............................................................................. F-8
Consolidated Balance Sheets as of December 31, 1997 and 1998 and pro forma 1998.......................... F-9
Consolidated Statements of Income for the years ended
December 31, 1996, 1997 and 1998....................................................................... F-10
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1996, 1997 and 1998....................................................................... F-11
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998....................................................................... F-12
Notes to Consolidated Financial Statements............................................................... F-13
MORTGAGE MARKET, INC.
Balance Sheet as of September 30, 1998 (unaudited)....................................................... F-32
Statements of Income for the nine months ended September 30, 1997 and 1998 (unaudited)................... F-34
Statements of Cash Flows for the nine months ended September 30, 1997 and 1998 (unaudited)............... F-35
Notes to Financial Statements............................................................................ F-37
Independent Auditors' Report............................................................................. F-38
Balance Sheet as of December 31, 1997.................................................................... F-39
Statement of Income for the year ended December 31, 1997................................................. F-41
Statement of Changes in Stockholder's Equity for the year
ended December 31, 1997................................................................................ F-42
Statement of Cash Flows for the year ended December 31, 1997............................................. F-43
Notes to Financial Statements............................................................................ F-45
PACIFIC GUARANTEE MORTGAGE CORPORATION
Balance Sheet as of August 31, 1998 (unaudited).......................................................... F-52
Statements of Operations for the eight months ended August 31, 1997 and 1998 (unaudited)................. F-53
Statements of Cash Flows for the eight months ended August 31, 1997 and 1998 (unaudited)................. F-54
Notes to Financial Statements............................................................................ F-55
Independent Auditor's Report............................................................................. F-56
Balance Sheet as of December 31, 1997.................................................................... F-57
Statement of Operations and Retained Earnings for the year
ended December 31, 1997................................................................................ F-58
Statement of Cash Flows for the year ended December 31, 1997............................................. F-59
Notes to Financial Statements............................................................................ F-60
Independent Auditor's Report............................................................................. F-65
Balance Sheet as of December 31, 1996.................................................................... F-66
Statement of Operations and Retained Earnings for the year
ended December 31, 1996................................................................................ F-67
Statement of Cash Flows for the year ended December 31, 1996............................................. F-68
Statement of Stockholders' Equity for HUD Requirement Purposes........................................... F-69
Notes to Financial Statements............................................................................ F-70
</TABLE>
F-1
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF PRO FORMA
DECEMBER 31, MARCH 31,
ASSETS 1998 1999 (NOTE 4)
- ---------------------------------------------------------------- -------------- AS OF --------------
MARCH 31,
1999
--------------
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents....................................... $ 12,123,893 $ 17,167,792 $ 17,167,792
Loans held for sale............................................. 467,254,128 193,824,907 193,824,907
Loan and other fees receivable, net............................. 14,206,790 10,256,513 10,256,513
Furniture, fixtures and equipment, net.......................... 4,284,214 4,685,030 4,685,030
Intangible assets............................................... 2,920,336 2,863,372 2,863,372
Investments in and advances to affiliates....................... 67,419 61,031 61,031
Other assets.................................................... 2,765,314 1,789,582 1,789,582
-------------- -------------- --------------
Total assets................................................ $ 503,622,094 $ 230,648,227 $ 230,648,227
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------
Liabilities:
Loans sold under agreements to repurchase....................... $ 292,626,673 $ 25,911,887 $ 25,911,887
Warehouse lines of credit....................................... 170,217,137 164,360,624 164,360,624
Current portion of long-term debt............................... 729,249 908,650 908,650
Long-term debt.................................................. 4,297,836 3,997,390 3,997,390
Commissions payable............................................. 4,290,899 3,352,952 3,352,952
Accounts payable................................................ 2,548,732 1,977,731 1,977,731
Accrued interest payable........................................ 2,153,402 1,063,021 1,063,021
Payable to affiliates........................................... 148,562 34,687 34,687
Accrued expenses and other liabilities.......................... 10,406,306 8,366,140 8,366,140
S corporation distribution notes................................ -- -- 18,136,475
-------------- -------------- --------------
Total liabilities........................................... 487,418,796 209,973,082 228,109,557
-------------- -------------- --------------
Commitments and contingencies...................................
Stockholders' equity:
Preferred stock, $0.01 par value per share, 10,000,000 shares
authorized, no shares issued and outstanding..................
Common stock, $0.01 par value; 100,000,000 shares authorized;
11,495,297 shares issued and outstanding...................... 114,953 114,953 114,953
Additional paid-in capital...................................... 4,002,779 4,002,779 2,423,717
Retained earnings............................................... 12,085,566 16,557,413 --
-------------- -------------- --------------
Total stockholders' equity.................................. 16,203,298 20,675,145 2,538,670
-------------- -------------- --------------
Total liabilities and stockholders' equity.................. $ 503,622,094 $ 230,648,227 $ 230,648,227
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1998 1999
------------- -------------
<S> <C> <C>
Revenues:
Loan origination income.......................................................... $ 11,011,141 $ 27,691,614
Net premium income............................................................... 1,385,359 5,769,684
Loan-related fees................................................................ 1,081,704 4,434,254
Net interest income.............................................................. 278,057 1,280,199
Other............................................................................ 126,623 772,175
------------- -------------
13,882,884 39,947,926
------------- -------------
Expenses:
Commissions...................................................................... 4,814,772 15,365,640
Loan-related expenses............................................................ 1,837,731 3,623,805
Salaries and benefits............................................................ 3,247,383 8,961,583
General and administrative expenses.............................................. 2,107,650 6,554,075
Depreciation and amortization.................................................... 200,000 464,990
Other............................................................................ 25,667 81,620
------------- -------------
12,233,203 35,051,713
------------- -------------
Net income..................................................................... $ 1,649,681 $ 4,896,213
------------- -------------
------------- -------------
Per share data:
Basic............................................................................ $ 0.43
-------------
-------------
Diluted.......................................................................... $ 0.42
-------------
-------------
Weighted average number of shares outstanding:
Basic............................................................................ 11,495,324
-------------
-------------
Diluted.......................................................................... 11,555,612
-------------
-------------
Pro forma data (unaudited):
Historical income before taxes................................................... $ 1,649,681 $ 4,896,213
Pro forma provision for income taxes............................................. 626,219 1,909,523
------------- -------------
Net income adjusted for pro forma income tax provision........................... $ 1,023,462 $ 2,986,690
------------- -------------
------------- -------------
Pro forma net income per common share:
Basic............................................................................ $ 0.23
-------------
-------------
Diluted.......................................................................... $ 0.23
-------------
-------------
Pro forma weighted average number of shares outstanding:
Basic............................................................................ 12,790,786
-------------
-------------
Diluted.......................................................................... 12,851,074
-------------
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------
1998 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................................... $ 1,649,681 $ 4,896,213
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization.............................................. 200,000 464,990
Provision for loan and servicing losses.................................... 161,842 456,504
Equity in net income of affiliates......................................... (80,193) (11,076)
Distributions from affiliates................................................ 80,193 17,464
Proceeds from sales of loans................................................. 292,971,454 1,237,985,910
Loans originated............................................................. (325,245,969) (964,556,689)
Changes in assets and liabilities, net of acquisitions:
Loan and other fees receivable............................................. (1,672,489) 3,493,773
Other assets............................................................... (26,105) 975,518
Commissions payable........................................................ 213,064 (937,947)
Accounts payable........................................................... 1,035,166 (571,001)
Payables to affiliates..................................................... (23,296) (113,875)
Accrued interest........................................................... (4,492) (1,090,381)
Accrued expenses and other liabilities..................................... 576,879 (2,040,166)
--------------- ---------------
Net cash (used in) provided by operating activities...................... (30,164,265) 278,969,237
--------------- ---------------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment............................... (488,901) (808,628)
--------------- ---------------
Net cash used in investing activities...................................... (488,901) (808,628)
--------------- ---------------
Cash flows from financing activities:
Borrowings on (repayments of) warehouse lines of credit, net............. 33,083,152 (272,571,299)
Repayments of long-term debt................................................. -- (121,045)
Dividends paid............................................................... (599,963) (424,366)
--------------- ---------------
Net cash provided by (used in) financing activities........................ 32,483,189 (273,116,710)
--------------- ---------------
Net increase in cash and cash equivalents.................................... 1,830,023 5,043,899
Cash and cash equivalents:
Beginning.................................................................... 1,163,971 12,123,893
--------------- ---------------
Ending....................................................................... $ 2,993,994 $ 17,167,792
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of
Prism Financial Corporation and subsidiaries (collectively "Prism Financial")
reflect all adjustments which, in the opinion of management are necessary for a
fair presentation of the results of the interim periods presented. All such
adjustments are of a normal recurring nature. All intercompany accounts and
transactions have been eliminated.
The unaudited interim consolidated financial statements should be read in
conjunction with Prism Financial's audited consolidated financial statements and
notes thereto for the year ended December 31, 1998 included herein.
Certain prior period items have been reclassified to conform to the current
period presentation.
NOTE 2 -- CHANGE IN ACCOUNTING METHOD
For furniture, fixtures and equipment purchased since January 1, 1999, Prism
Financial has changed from an accelerated method of depreciation to the
straight-line method of depreciation. This change did not have a material effect
on net income for the first three months of 1999.
NOTE 3 -- INCOME TAXES
Effective January 1, 1996, Prism Mortgage Company, the predecessor to Prism
Financial, ("Prism Mortgage"), with the consent of its stockholders, elected to
be treated as an S corporation for federal and certain state income tax
purposes, which provide that in lieu of corporation income taxes, the
stockholders separately account for their pro rata share of Prism Mortgage's
items of income, deductions, losses and credits. Therefore, the financial
statements for the periods covered by this election will not include a provision
for corporate income taxes, except for Illinois personal property replacement
taxes and other state income taxes that may be applicable, which are included in
operating expenses.
Assuming the completion of the proposed Initial Public Offering ("Offering")
of Prism Financial's stock, Prism Financial will be treated as a C corporation
and subject to corporate income taxes. Accordingly, a pro forma income tax
provision has been calculated as if Prism Financial was taxable as a C
corporation under the Internal Revenue Code for all periods presented.
In connection with Prism Financial's Offering, Prism Mortgage will terminate
its S corporation status and become taxable as a C corporation. Immediately
prior to its conversion to C corporation status, Prism Mortgage will distribute
to its stockholders ("the S Corporation Distribution") all of its previously
earned and undistributed taxable S corporation earnings through the date of the
closing of this Offering. As a result of becoming taxable as a C corporation,
for the quarter in which this Offering closes, Prism Financial will record a
one-time, non-cash credit to earnings in order to establish a deferred income
tax asset.
NOTE 4 -- UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AT MARCH 31, 1999
As discussed in Note 3, Prism Mortgage will distribute to its stockholders
all of its previously earned and undistributed taxable S corporation earnings
immediately prior to its conversion to C corporation status. Had this
distribution occurred at March 31, 1999, S corporation distribution notes would
have been issued in the amount of approximately $18.1 million offset by
reductions in retained earnings of $16.6 million and additional paid-in capital
of $1.5 million. The pro forma March 31, 1999 consolidated balance sheet
reflects the effects of this transaction.
F-5
<PAGE>
NOTE 5 -- ACQUISITIONS
In April 1999, Prism Financial acquired First City Financial Corp. ("First
City"), a Denver-based mortgage banking company, for $2.8 million in cash. The
purchase agreement provides for contingent consideration in each of the five
years following the acquisition based on First City's net income in each of
those five years. The contingent consideration is payable in cash or common
stock at our option. The amount of contingent consideration, if any, cannot
currently be determined. First City originated approximately $1.7 billion and
$385 million in loans in 1998 and the first three months of 1999, respectively.
At March 31, 1999, First City had 31 branches in 12 states and employed 254 loan
originators.
NOTE 6--INCORPORATION TRANSACTIONS
In February 1999, Prism Financial was formed as a holding company for Prism
Mortgage Company and its subsidiaries. Immediately prior to this offering, the
existing stockholders of Prism Mortgage will exchange their shares for an
aggregate of 11,495,297 shares of Prism Financial common stock. As a result of
these transactions (collectively called the "Incorporation Transactions"),
immediately prior to the offering, the former stockholders of Prism Mortgage
will own all of the issued and outstanding shares of Prism Financial, and Prism
Financial will own all of the outstanding shares of Prism Mortgage. Prior to the
Incorporation Transactions, Prism Financial will not have conducted any business
and has no assets or liabilities. The legal name of Prism Financial has been
retroactively applied to all periods presented in these financial statements.
These financial statements assume the consummation of the Incorporation
Transactions.
F-6
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Prism Financial Corporation
The Incorporation Transactions described in Note 22 to the financial
statements have not been consummated at April 29, 1999. When they have been
consummated, we will be in a position to furnish the following report:
"In our opinion, the accompanying consolidated balance sheet as of December
31, 1998 and the related consolidated statements of income, of changes in
stockholders' equity and of cash flows present fairly, in all material respects,
the financial position of Prism Financial Corporation and subsidiaries at
December 31, 1998, and the results of their operations and their cash flows for
the year then ended, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of Prism
Financial's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above."
PricewaterhouseCoopers LLP
Chicago, Illinois
March 10, 1999
F-7
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Prism Financial Corporation
Chicago, Illinois
The Incorporation Transactions described in Note 22 to the consolidated
financial statements have not been consummated at April 29, 1999. When they have
been consummated, we will be in a position to furnish the following report:
"We have audited the accompanying consolidated balance sheet of Prism
Financial Corporation and subsidiaries as of December 31, 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the two year period then ended. These financial statements are
the responsibility of Prism Financial Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Prism
Financial Corporation and subsidiaries as of December 31, 1997, and the results
of their operations and their cash flows for each of the years in the two year
period then ended in conformity with generally accepted accounting principles."
McGladrey & Pullen, LLP
Schaumburg, Illinois
March 27, 1998
F-8
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
PRO FORMA
1997 1998 1998 (NOTE 20)
------------- -------------- --------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Cash and cash equivalents........................................ $ 1,163,971 $ 12,123,893 $ 12,123,893
Loans held for sale.............................................. 60,900,793 467,254,128 467,254,128
Loan and other fees receivable, net.............................. 1,893,448 14,206,790 14,206,790
Furniture, fixtures and equipment, net........................... 1,061,243 4,284,214 4,284,214
Intangible assets................................................ -- 2,920,336 2,920,336
Investments in and advances to affiliates........................ 40,941 67,419 67,419
Other assets..................................................... 271,257 2,765,314 2,765,314
------------- -------------- --------------
Total assets................................................. $ 65,331,653 $ 503,622,094 $ 503,622,094
------------- -------------- --------------
------------- -------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Loans sold under agreements to repurchase...................... $ -- $ 292,626,673 $ 292,626,673
Warehouse lines of credit...................................... 59,634,340 170,217,137 170,217,137
Current portion of long-term debt.............................. -- 729,249 729,249
Long-term debt................................................. -- 4,297,836 4,297,836
Commissions payable............................................ 851,624 4,290,899 4,290,899
Accounts payable............................................... 611,595 2,548,732 2,548,732
Accrued interest payable....................................... 128,042 2,153,402 2,153,402
Payable to affiliates.......................................... 78,570 148,562 148,562
Accrued expenses and other liabilities......................... 951,775 10,406,306 10,406,306
S corporation distribution notes............................... -- -- 13,323,185
------------- -------------- --------------
Total liabilities............................................ 62,255,946 487,418,796 500,741,981
------------- -------------- --------------
Commitments and contingencies.................................... -- -- --
Stockholders' equity:
Preferred stock, $0.01 par value per share, 10,000,000 shares
authorized, no shares issued and outstanding................. -- -- --
Common stock, $0.01 par value; 100,000,000 shares authorized;
10,269,000 and 11,495,297, respectively, shares issued and
outstanding.................................................. 102,690 114,953 114,953
Additional paid-in capital..................................... (52,690) 4,002,779 2,765,160
Retained earnings.............................................. 3,025,707 12,085,566 --
------------- -------------- --------------
Total stockholders' equity................................... 3,075,707 16,203,298 2,880,113
------------- -------------- --------------
Total liabilities and stockholders' equity................... $ 65,331,653 $ 503,622,094 $ 503,622,094
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-9
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Loan origination income......................................... $ 9,494,193 $ 20,983,530 $ 66,514,381
Net premium income.............................................. 421,728 1,726,161 12,242,476
Loan-related fees............................................... 1,928,493 3,703,941 8,269,019
Net interest income (expense)................................... (102,114) 391,573 2,000,333
Other........................................................... 458,448 548,518 1,815,590
------------- ------------- -------------
12,200,748 27,353,723 90,841,799
------------- ------------- -------------
Expenses:
Commissions..................................................... 4,349,472 10,361,550 37,502,130
Loan-related expenses........................................... 2,025,624 3,822,681 9,345,779
Salaries and benefits........................................... 2,829,449 6,421,006 19,648,645
General and administrative expenses............................. 1,851,337 3,770,100 11,576,331
Depreciation and amortization................................... 105,255 326,626 1,472,985
Other........................................................... 19,666 148,501 201,351
------------- ------------- -------------
11,180,803 24,850,464 79,747,221
------------- ------------- -------------
Net income.................................................. $ 1,019,945 $ 2,503,259 $ 11,094,578
------------- ------------- -------------
------------- ------------- -------------
Per share data:
Basic........................................................... $ 1.05
-------------
-------------
Diluted......................................................... $ 1.05
-------------
-------------
Weighted average number of shares outstanding:
Basic........................................................... 10,567,995
-------------
-------------
Diluted......................................................... 10,610,714
-------------
-------------
Pro forma data (unaudited):
Historical income before taxes.................................. $ 1,019,945 $ 2,503,259 $ 11,094,578
Pro forma provision for income taxes............................ 410,144 995,589 4,211,947
------------- ------------- -------------
Net income adjusted for pro forma income tax provision.......... $ 609,801 $ 1,507,670 $ 6,882,631
------------- ------------- -------------
------------- ------------- -------------
Pro forma net income per common share:
Basic........................................................... $ 0.60
-------------
-------------
Diluted......................................................... $ 0.60
-------------
-------------
Pro forma weighted average number of shares outstanding:
Basic........................................................... 11,519,651
-------------
-------------
Diluted......................................................... 11,562,370
-------------
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-10
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
-------------------------- -------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------ ------------ -------------
Common stock:
Balance at beginning of year............. 10,269,000 $ 102,690 10,269,000 $ 102,690 10,269,000 $ 102,690
Stock issued for acquisitions............ -- -- -- -- 548,851 5,489
Capital contribution..................... -- -- -- -- 574,756 5,748
Other issuance of common stock........... -- -- -- -- 102,690 1,026
------------ ------------ ------------ ------------ ------------ -------------
Balance at end of year............... 10,269,000 102,690 10,269,000 102,690 11,495,297 114,953
------------ ------------ ------------ ------------ ------------ -------------
------------ ------------ ------------
Additional paid-in capital:
Balance at beginning of year............. (52,690) (52,690) (52,690)
Stock issued for acquisitions............ -- -- 1,494,511
Capital contribution..................... -- -- 2,494,252
Other issuance of common stock........... -- -- 66,706
------------ ------------ -------------
Balance at end of year............... (52,690) (52,690) 4,002,779
------------ ------------ -------------
Retained earnings:
Balance at beginning of year............. 453,498 1,473,443 3,025,707
Net income............................... 1,019,945 2,503,259 11,094,578
Cash dividends........................... -- (950,995) (2,034,719)
------------ ------------ -------------
Balance at end of year............... 1,473,443 3,025,707 12,085,566
------------ ------------ -------------
Total stockholders' equity............... $ 1,523,443 $ 3,075,707 $ 16,203,298
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-11
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
--------------- --------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 1,019,945 $ 2,503,259 $ 11,094,578
Adjustments to reconcile net income to net cash used by
operating activities:
Depreciation and amortization......................... 105,255 326,626 1,472,985
Provision for loan and servicing losses............... -- -- 900,000
Equity in net income of affiliates.................... (408,988) (511,806) (269,481)
Distributions from affiliates............................. 419,316 480,266 245,163
Proceeds from sales of loans.............................. 125,697,010 495,046,464 2,028,124,503
Loans originated.......................................... (137,450,036) (538,177,870) (2,367,554,285)
Changes in assets and liabilities, net of acquisitions:
Loan and other fees receivable........................ (94,037) (1,172,906) (10,435,890)
Other assets.......................................... (125,041) (115,859) (1,404,192)
Commissions payable................................... 85,238 525,583 3,439,275
Accounts payable...................................... 245,567 246,078 1,937,137
Accrued interest...................................... (44,932) 127,993 2,025,360
Payable to affiliates................................. 25,631 (34,198) 69,992
Accrued expenses and other liabilities................ (218,975) 774,707 2,626,403
--------------- --------------- -----------------
Net cash used in operating activities............. (10,744,047) (39,981,663) (327,728,452)
--------------- --------------- -----------------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment............ (287,344) (1,087,004) (3,344,754)
Net proceeds from acquisitions............................ -- -- 1,404,139
--------------- --------------- -----------------
Net cash used in investing activities............. (287,344) (1,087,004) (1,940,615)
--------------- --------------- -----------------
Cash flows from financing activities:
Borrowings on warehouse lines of credit, net.............. 11,578,735 42,039,244 336,937,102
Proceeds from issuance of bridge notes.................... -- -- 2,500,000
Repayments of bridge note................................. -- -- (1,250,000)
Proceeds from capital contribution........................ -- -- 1,250,000
Proceeds from issuance of long-term debt.................. -- -- 3,425,000
Repayments of long-term debt.............................. -- -- (198,394)
Dividends paid............................................ -- (950,995) (2,034,719)
--------------- --------------- -----------------
Net cash provided by financing activities......... 11,578,735 41,088,249 340,628,989
--------------- --------------- -----------------
Net increase in cash and cash equivalents................... 547,344 19,582 10,959,922
Cash and cash equivalents:
Beginning................................................. 597,045 1,144,389 1,163,971
--------------- --------------- -----------------
Ending.................................................... $ 1,144,389 $ 1,163,971 $ 12,123,893
--------------- --------------- -----------------
--------------- --------------- -----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-12
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--NATURE OF BUSINESS
Prism Financial Corporation and subsidiaries (collectively "Prism
Financial") is a retail mortgage banking company engaged in the business of
originating, selling and brokering residential mortgage loans. Prism Mortgage
Company ("Prism Mortgage"), the predecessor to Prism Financial, was incorporated
in the state of Illinois in 1992. In July 1997, Infiniti Mortgage, L.L.C.
("Infiniti"), a wholly-owned subsidiary, was formed to originate and sell
non-prime mortgages (B and C credit). Infiniti is currently licensed as a
mortgage lender in three states. In August 1997, Prism Financial formed
PointSource Financial, L.L.C. ("PointSource"), a wholly-owned subsidiary, which
provides wholesale lending of niche and expanded mortgage products. PointSource
is currently licensed as a mortgage lender in two states. As discussed in Note
3--Acquisitions, during 1998 Prism Financial acquired all of the outstanding
common shares of Mortgage Market, Inc. ("Mortgage Market") and Pacific Guarantee
Mortgage Corporation ("Pacific Guarantee"), both wholly-owned subsidiaries of
Prism Financial. In addition, 100 percent of the shares of Illinois Guaranty
Title ("IGT") were contributed to Prism Financial by its principal stockholders.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Prism
Financial and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The accounting and reporting polices of Prism Financial conform to generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS
Prism Financial considers all demand deposits and money market fund
investments to be cash equivalents. Prism Financial invests daily excess cash in
money market funds through a sweep mechanism.
LOANS HELD FOR SALE
Prism Financial sells all of the loans it originates, typically between 10
and 45 days after closing. Loans held for sale consist primarily of mortgage
loans made to individuals that are collateralized by residential real estate.
Loans held for sale are carried at the lower of aggregate cost or market. Market
value is determined based on the contractually established prices at which the
loans will be sold, or if the loans are not committed for sale, the current
market price. Deferred hedge gains and losses on risk management hedge
instruments are considered in determining the lower of aggregate cost or market
value.
F-13
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOAN FEES RECEIVABLE
Loan fees receivable represent fees on brokered loans which have closed, but
for which Prism Financial has not yet received the loan origination fees due
from the investor.
FURNITURE, FIXTURES AND EQUIPMENT, NET
Furniture, fixtures and equipment are stated at cost less accumulated
depreciation. Depreciation is computed primarily using accelerated methods over
estimated useful lives of generally five years.
INTANGIBLE ASSETS
Intangible assets are primarily comprised of goodwill and identifiable
intangible assets. Goodwill, representing the excess of the purchase
consideration over the fair value of the identifiable net assets acquired at the
date of acquisition, is recognized as an asset. Goodwill is amortized from the
date of acquisition by systematic charges on a straight-line basis against
income over the period in which the benefits are expected to arise, but not
exceeding 20 years. The carrying value of goodwill is reviewed when events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If the carrying value of goodwill exceeds the estimated discounted
future cash flows, the difference will be charged against income.
INVESTMENTS IN AND ADVANCES TO AFFILIATED BUSINESS ARRANGEMENTS
Prism Financial accounts for its investments in affiliated business
arrangements ("ABAs") by the equity method of accounting, under which Prism
Financial's equity in the net income (loss) of the affiliate is recognized in
Prism Financial's statement of income and added to (deducted from) its
investment in the affiliate. Distributions received are treated as a reduction
of the investment account.
LOAN ORIGINATION INCOME
For brokered loans, revenues consisting of loan origination, processing and
application fees are recognized at the time of closing. For loans funded by
Prism Financial, loan origination processing and application fees are recorded
as an adjustment to the cost basis of the loans and are recognized when the
mortgages are sold to investors.
NET PREMIUM INCOME
Net premium income represents the difference between the sales price and the
allocated cost basis of the loans sold to investors, which is the par value of
the loan plus the premium paid to the origination source of the loan. Loans and
servicing rights are generally sold to investors within 10 to 45 days of initial
closing.
PROVISION FOR LOAN AND SERVICING LOSSES
The provision for loan losses is charged to establish or maintain reserves
related to expenses or losses incurred due to the potential repurchase of loans
or indemnification of losses based on alleged violations of representations and
warranties at the time of sale of the loan. The provision for losses is charged
to loan-related expenses and a credit is recorded to other liabilities. The
allowance is
F-14
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
considered to be adequate by management based upon Prism Financial's evaluation
of the potential exposure related to actual activity and interpretations of the
loan sale agreements. The provision for servicing losses relates to potential
uncollectable servicing payments. The provision for servicing losses is charged
to net interest income, and a credit is recorded to the allowance for loan and
other fees receivable. The allowance is determined to be adequate by management
based upon Prism Financial's evaluation of the potential uncollectable servicing
payments.
INCOME TAXES
Effective January 1, 1996, Prism Mortgage, with the consent of its
stockholders, elected to be treated as an S corporation for federal and certain
state income tax purposes, which provide that in lieu of corporation income
taxes, the stockholders separately account for their pro rata share of Prism
Mortgage's items of income, deductions, losses and credits. Therefore, the
financial statements for the periods covered by this election will not include a
provision for corporate income taxes, except for Illinois personal property
replacement taxes and other state income taxes that may be applicable, which are
included in operating expenses.
Assuming the completion of the proposed Initial Public Offering ("Offering")
of Prism Financial's stock, Prism Financial will be treated as a C corporation
and subject to corporate income taxes. Accordingly, a pro forma income tax
provision has been calculated as if Prism Financial was taxable as a C
corporation under the Internal Revenue Code for all periods presented.
In connection with Prism Financial's Offering, Prism Mortgage will terminate
its S corporation status and become taxable as a C corporation. Immediately
prior to its conversion to C corporation status, Prism Mortgage will distribute
to its stockholders ("the S Corporation Distribution") all of its previously
earned and undistributed taxable S corporation earnings through the date of the
closing of this Offering. As a result of becoming taxable as a C corporation,
for the quarter in which this Offering closes, Prism Financial will record a
one-time, non-cash credit to earnings in order to establish a deferred income
tax asset.
RISK MANAGEMENT INSTRUMENTS
Prism Financial utilizes a risk management program to hedge the value of its
mortgage loans held for sale and in the pipeline. Derivative financial
instruments, such as forward contracts and options, are used in the management
of Prism Financial's interest rate exposure and resale pricing risk. These
instruments are accounted for under hedge accounting. Management designates the
contracts as hedges and evaluates on an initial, and ongoing basis, the
effectiveness of the derivative contract's correlation with an existing asset.
Accordingly, hedge gains or losses are deferred and recognized as a component of
the gain or loss on sale of the underlying mortgage loans or mortgage-backed
securities. Hedge losses are recognized currently if the deferral of such losses
would result in mortgage loans held for sale and in the pipeline being valued in
excess of their estimated net realizable value.
Premiums on options contracts are recorded as expenses when incurred due to
their short-term life and the immateriality of the amount.
F-15
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
Management reviews long-lived assets, certain identifiable intangibles and
goodwill held and used, and any long-lived assets to be disposed of, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENT OF LIABILITIES
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities" as amended by SFAS No. 127, "Deferral of the Effective Date of
Certain Provisions," distinguishes transfers of financial assets that are sales
from transfers that are secured borrowings. A transfer of financial assets in
which the transferor surrenders control over those assets is accounted for as a
sale to the extent that consideration other than beneficial interests in the
transferred assets is received in exchange. SFAS No. 125 also establishes
standards on the initial recognition and measurement of servicing assets and
other retained interests and servicing liabilities, and their subsequent
measurement.
SFAS No. 125 requires that debtors reclassify financial assets pledged as
collateral and that secured parties recognize those assets, and their obligation
to return them, in certain circumstances in which the secured party has taken
control of those assets. In addition, SFAS No. 125 requires that a liability be
derecognized only if the debtor is relieved of its obligation through payment to
the creditor or by being legally released from being the primary obligor under
the liability, either judicially or by the creditor.
SFAS No. 125 was effective for transactions occurring after December 31,
1996. Certain provisions related to repurchase agreements, secured borrowings
and collateral were effective for transfers of financial assets occurring after
December 31, 1997. On January 1, 1997, Prism Financial adopted SFAS No. 125,
which did not have a material effect on the consolidated financial statements of
Prism Financial.
F-16
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER COMMON SHARE
Basic earnings per common share are computed by dividing net income by the
weighted average number of common shares outstanding during the year. Diluted
earnings per share are computed by dividing net income by the weighted average
number of common shares outstanding, including the dilutive effect of stock
options.
<TABLE>
<CAPTION>
INCOME SHARES
(NUMERATOR) (DENOMINATOR) PER SHARE
------------- ------------- -----------
<S> <C> <C> <C>
For the year ended December 31, 1998:
Income per common share--basic........................................ $ 11,094,578 10,567,995 $ 1.05
------------- -----
------------- -----
Effect of dilutive securities......................................... 42,719
-------------
Income per common share--diluted...................................... $ 11,094,578 10,610,714 $ 1.05
------------- ------------- -----
------------- ------------- -----
Pro forma: (Unaudited)
For the year ended December 31, 1998
Income per common share--basic $ 6,882,631 11,519,651 $ 0.60
------------- -----
------------- -----
Effect of dilutive securities......................................... 42,719
-------------
Income per common share--diluted...................................... $ 6,882,631 11,562,370 $ 0.60
------------- ------------- -----
------------- ------------- -----
</TABLE>
Contingently issuable shares of an undeterminable amount will be issued in
case of an Offering, which have not been included in the earnings per share
calculation. See Note 3--Acquisitions.
On May 21, 1998, Prism Financial's board of directors declared a 1,000 for
one split of Prism Financial's common stock, effective May 31, 1998. Upon
consummation of the Incorporation Transactions, each stockholder of Prism
Mortgage will receive 102.69 shares of Prism Financial common stock in exchange
for each share of Prism Mortgage common stock held by such stockholder. In
addition, the par value of Prism Financial's common stock was changed from no
par value per share to $.01 per share, and authorized shares of common stock
were increased from one thousand to 100 million shares. All references in the
consolidated financial statements to shares and related prices, weighted average
number of shares and per share amounts have been adjusted to reflect the split
and the exchange.
The pro forma presentation of earnings per common share reflects (a) the
income tax adjustments for federal and state income taxes as if Prism Financial
had been taxed as a C corporation rather than an S corporation for the year
ended December 31, 1998 and (b) the effect of the assumed issuance of 951,656
shares of common stock to generate sufficient cash to pay the S corporation
distribution amount of $13.3 million at December 31, 1998.
REPORTING COMPREHENSIVE INCOME
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was issued,
which established standards for reporting and display of comprehensive income
and its components as separate amounts in the financial statements.
Comprehensive income includes all changes in equity during a period of an
enterprise that result from recognized transactions and other economic events
other than transactions with owners. This statement requires all items that are
to be recognized under accounting standards as
F-17
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This statement
affects only financial statement presentation. As of December 31, 1998, Prism
Financial does not carry any items required to be disclosed as other
comprehensive income in accordance with the statement.
SEGMENT REPORTING
Effective 1998, Prism Financial adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to stockholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement affects only financial statement presentation.
Management has determined that Prism Financial currently operates primarily in
the mortgage origination industry.
NET WORKING CAPITAL
Prism Financial prepares its consolidated financial statements using an
unclassified balance sheet presentation, as is customary in the mortgage
origination industry. A classified balance sheet presentation would have
aggregated current assets, current liabilities and net working capital as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
<S> <C> <C>
1997 1998
-------------- --------------
Current assets............................................... $ 63,962,162 $ 494,755,361
Current liabilities.......................................... (62,177,376) (482,972,398)
-------------- --------------
Net working capital.......................................... $ 1,784,786 $ 11,782,963
-------------- --------------
-------------- --------------
</TABLE>
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. The statement requires that all derivatives be
carried on the balance sheet at fair value and changes in the fair value of
derivatives be recognized in income when they occur, unless the derivatives
qualify as hedges in accordance with the standard. If a derivative qualifies as
a hedge, a company can elect to use hedge accounting. The type of accounting to
be applied varies depending on the nature of the exposure that is being hedged,
and the standard defines three hedged risks: change in fair value, change in
cash flows and change in foreign currency.
A fair-value hedge represents the hedge of an exposure to changes in the
fair value of an asset, liability or an unrecognized firm commitment. Changes in
fair value hedges are recognized in earnings, as well as the gain or loss on the
hedged item attributable to the hedged risk. Certain criteria must be met in
order for a hedging relationship to qualify as a fair-value hedge.
A cash-flow hedge is a hedge of an exposure to variability in cash flows
that is attributable to a particular risk. That exposure may be associated with
an existing recognized asset or liability or a
F-18
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
forecasted transaction. The effective portion of a hedging instrument's gain or
loss is initially reported as a component of other comprehensive income and is
reclassified as a component of earnings in the same period or periods during
which the hedged forecasted transaction affects earnings. As in fair value
hedges, certain criteria must be met in order for a hedging relationship to
qualify as a cash-flow hedge.
A foreign-currency hedge can be a fair-value hedge or a cash-flow hedge of
the foreign currency exposure, therefore it follows the same principles as those
that apply to the accounting for non-foreign hedges with some particularities
defined in the statement.
This statement is effective for fiscal quarters of fiscal years beginning
after June 15, 1999 and cannot be applied retroactively. Management believes
that the adoption of this statement will not have a material effect on Prism
Financial's financial position or results of operations.
ACCOUNTING FOR THE COST OF COMPUTER SOFTWARE DEVELOPED FOR INTERNAL USE
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed for Internal Use" ("SOP 98-1"), which will become effective for
financial statements for the calendar year 1999, with early adoption encouraged.
SOP 98-1 requires the capitalization of eligible costs of specified activities
related to computer software developed or obtained for internal use. Management
does not believe the impact of adoption will have a material effect on Prism
Financial's financial position or results of operations.
PRIOR YEAR RECLASSIFICATIONS
Certain items from prior years have been reclassified to conform with
current year presentation.
NOTE 3--ACQUISITIONS
On September 1, 1998, Prism Financial acquired all of the outstanding shares
of Pacific Guarantee, which is engaged primarily in residential mortgage
origination as a broker and mortgage banker. It is headquartered in Point
Richmond, California, with branch offices in 11 states. The purchase price paid
at closing was approximately $4.9 million.
On September 30, 1998, Prism Financial acquired all of the outstanding
shares of Mortgage Market for approximately $1.4 million in cash. Mortgage
Market is engaged primarily in residential mortgage origination as a broker and
mortgage banker. It is headquartered in Lake Oswego, Oregon and has other
offices in Oregon and Washington.
The total purchase price of these acquisitions exceeded the net assets
acquired by $2.8 million. This excess has been allocated between identifiable
intangible assets, which are being amortized over their estimated useful lives,
and goodwill, which is being amortized over 20 years. The acquisitions
agreements include a contingent consideration clause which could increase the
overall respective purchase price of the acquired companies in case of a public
offering or sale of assets of Prism Financial ("the Event"). The additional
consideration paid will be based on a formula contained in each agreement, which
is primarily based on the net income of the acquired companies during the 12
months
F-19
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--ACQUISITIONS (CONTINUED)
prior to the Event. Any additional consideration paid by Prism Financial will be
treated as an adjustment to the purchase price, recorded as goodwill and
amortized over the remainder of the 20-year goodwill term.
Approximately 458,746 shares valued at $6,422,446 using an assumed offering
price of $14.00 per share are expected to be issued as contingent consideration
with respect to the acquisition of Pacific Guarantee. This amount will be
recorded as goodwill and amortized over 20 years. Additional amounts which may
be paid under the contingent consideration clauses cannot currently be
determined.
In connection with each acquisition, an Equity Value Plan was created for
each subsidiary to cover designated key employees. These plans were implemented
to motivate these employees to remain with Prism Financial following the
acquisition. In case of a public offering, Prism Financial will be obligated to
contribute to each Equity Value Plan shares of common stock or an equivalent
amount of cash, based on a formula contained in each Equity Value Plan
agreement, which is mainly based on the net income of each subsidiary. Awards
under these plans will vest at a rate of 20% per year over a period of five
complete years of service. Compensation expense will be recognized by Prism
Financial consistent with the vesting of the awards under each Equity Value
Plan.
The acquisitions described above were accounted for using the purchase
method of accounting. Accordingly, the accompanying consolidated statements of
income do not include any revenues or expenses of those companies prior to the
consummation of the acquisitions. The cash consideration paid for these
acquisitions was financed through available cash, as well as the borrowings
described in Note 9--Long-Term Debt and Note 10--Capital Transactions.
As discussed more fully in Note 5--Related Party Transactions, on April 30,
1998, Prism Financial's principal stockholders contributed to Prism Financial
100 percent of the shares of Illinois Guaranty Title ("IGT"), a wholly-owned
subsidiary. IGT's results are included in the pro forma information presented
below.
The following unaudited condensed pro forma consolidated results of
operations are presented as if the Pacific Guarantee, Mortgage Market and IGT
transactions had occurred at January 1, 1997:
<TABLE>
<CAPTION>
1997 1998
------------- --------------
<S> <C> <C>
Revenues...................................................... $ 66,683,673 $ 144,266,853
Net income before pro forma income taxes...................... 3,286,401 16,076,075
Net income per share--diluted................................. $ 0.30 $ 1.47
</TABLE>
These pro forma results of operations have been prepared for informational
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisitions occurred on January 1,
1997, or which may result in the future.
NOTE 4--INVESTMENTS IN AFFILIATED BUSINESS ARRANGEMENTS
Prism Financial has a 50 percent interest in several ABAs, which provide
certain mortgage origination services in the same localities as Prism Financial.
These ABAs are organized as limited liability corporations and joint ventures.
Under these arrangements, Prism Financial is reimbursed for certain operating
costs incurred.
F-20
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--INVESTMENTS IN AFFILIATED BUSINESS ARRANGEMENTS (CONTINUED)
Condensed financial information of the combined ABA's as of and for the
years ended December 31, 1996, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Assets.............................................. $ 131,570 $ 109,950 $ 344,416
------------ ------------ ------------
------------ ------------ ------------
Liabilities......................................... $ -- $ -- $ 9,221
Members' equity..................................... 131,570 109,950 335,195
------------ ------------ ------------
$ 131,570 $ 109,950 $ 344,416
------------ ------------ ------------
------------ ------------ ------------
Revenue............................................. $ 2,635,716 $ 3,069,705 $ 1,434,606
Expenses............................................ 1,818,738 2,046,092 980,256
------------ ------------ ------------
Net income.......................................... $ 816,978 $ 1,023,613 $ 454,350
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
NOTE 5--RELATED PARTY TRANSACTIONS
In January 1996, Prism Financial loaned $100,000 each to two stockholders to
purchase outstanding common shares of Prism Financial from another stockholder.
Since January 1, 1997, the loans have accrued interest at 8.25% annually. The
principal is payable in five annual installments of $20,000, plus interest,
beginning December 31, 1997. The loans are secured by the common shares
acquired. At December 31, 1997 and 1998, Prism Financial had $200,000 and
$120,000 due from stockholders, respectively. At December 31, 1997, Prism
Financial had a receivable from a stockholder amounting to $14,000, which was
repaid in 1998. See Note 9 - Long-Term Debt, for notes payable issued to other
related parties.
On April 30, 1998, IGT became a wholly-owned subsidiary of Prism Financial
as a result of the transfer of stockholders' interests in IGT to Prism
Financial. The stockholders of IGT received no consideration for this
transaction. Prior to this transaction, IGT stock was fully held by Prism
Financial's principal stockholders. IGT is a full-service provider of
residential title services to in-house and third party customers. Under
generally accepted accounting principles, transfers of assets between companies
under common control are valued at the predecessor basis. The net book value of
the assets transferred at April 30, 1998 was zero.
Prism Financial paid management fees in 1996 of approximately $420,000 and
paid approximately $55,000 and $187,000 for the expense of shared services
during 1997 and 1998, respectively, to a company controlled by a stockholder. In
1998, Prism Financial paid legal fees of approximately $75,000 to a related
party.
A stockholder of Prism Financial owns a one-third equity interest, and Mr.
Hochberg has an indirect equity interest, in an Illinois limited partnership,
which is the landlord of an office building in Chicago, Illinois that is
occupied by Prism Financial. Prism Financial subleases the space from the
original lessee of which Mr. Hochberg is a member of the board of directors and
makes annual sublease payments of $480,000 to the sublessor.
F-21
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6-- WAREHOUSE LINES OF CREDIT AND OTHER SHORT-TERM BORROWINGS:
Prism Financial has several warehouse lines of credit with financial service
companies, which are used for warehousing loans prior to sale to investors,
consisting of the following at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
Advances under $15,600,000 warehouse line of credit (1997--$20,000,000), paying
monthly interest at LIBOR + 1.75%, expiring June 1, 1999............................ $10,707,241 $ 183,185
Advances under $50,000,000 warehouse line of credit (1997--$25,000,000), paying
monthly interest at GE commercial paper rate + 1.25%, expiring April 30, 1999. The
lender has, in its sole discretion, allowed Prism Financial to exceed its credit
limit for short periods of time..................................................... 48,927,099 92,490,276
Advances under $50,000,000 warehouse line of credit, paying monthly interest at
average LIBOR + 1.50%, expiring May 31, 1999........................................ -- 46,094,823
Advances under $5,900,000 warehouse line of credit, paying monthly interest at Bank of
America prime rate.................................................................. -- 1,556,593
Advances under $13,205,000 warehouse line of credit, paying monthly interest at prime
rate. The line of credit expired on November 30, 1998 and no additional loans have
been funded from this line since maturity........................................... -- 8,815,163
Advances under $25,000,000 warehouse line of credit, paying monthly interest at LIBOR
plus 2.50%. The line of credit expired on March 31, 1999 and no additional loans
have been funded from this line since maturity...................................... -- 3,657,500
Advances under $25,000,000 Warehouse Line of Credit, paying monthly interest at GE
commercial paper rate + 1.25%, expiring April 30, 1999.............................. -- 17,419,597
----------- ------------
Total........................................................................... $59,634,340 $170,217,137
----------- ------------
----------- ------------
</TABLE>
F-22
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6-- WAREHOUSE LINES OF CREDIT AND OTHER SHORT-TERM
BORROWINGS: (CONTINUED)
The weighted average interest rate of the warehouse lines of credit in 1996,
1997 and 1998 was 7.36%, 7.15% and 7.10%, respectively.
During the terms of the facilities, borrowings have no stated maturity other
than the repayment of obligations coincident with the principal payments of the
underlying loans. Mortgage loans held for sale are pledged as collateral on
these lines of credit. Upon the sales of the mortgage loans, the warehouse lines
of credit are repaid. These agreements contain various financial covenants,
including limitations on distributions and maintenance of a specified amount of
stockholders' equity and working capital. Prism Financial was in compliance with
all operating and financial covenants at December 31, 1998.
Prism Financial also has a $500,000 operating line of credit from a
commercial bank. The operating line of credit is secured by a pledge of Prism
Financial's assets, other than loans securing the warehouse facilities, and has
an annual fee of 1%. This operating line of credit is renewable from time to
time and expires on July 15, 2003.
NOTE 7--FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consisted of the following at December 31,
1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Furniture and equipment........................................... $ 657,336 $ 2,405,413
Leasehold improvements............................................ 221,508 896,944
Computer equipment................................................ 728,161 2,956,257
------------ ------------
1,607,005 6,258,614
Less accumulated depreciation..................................... 545,762 1,974,400
------------ ------------
Total....................................................... $ 1,061,243 $ 4,284,214
------------ ------------
------------ ------------
</TABLE>
Depreciation and amortization of furniture, fixtures and equipment for the years
1996, 1997 and 1998 was $105,255, $326,626 and $1,428,638, respectively.
NOTE 8--LOANS SOLD UNDER AGREEMENTS TO REPURCHASE
Prism Financial delivers loans to Fannie Mae under its "As soon as
pooled/early purchase Option" ("ASAP Plus"). Under the ASAP Plus program, Fannie
Mae funds Prism Financial on a continual, whole-loan basis upon receipt of
mortgage collateral (note assignment). The funding price is determined by the
daily Fannie Mae 30-day cash window price. Prism Financial agrees to deliver
mortgage loans to Fannie Mae and assigns any related trades. Prism Financial
then redelivers all loans in the ASAP Plus program to reflect related forward
pricing on a monthly basis. Fannie Mae purchases the mortgage loans for cash
upon receipt of complete and accurate mortgage pool documentation and other
documentation required by Fannie Mae for the forward trade.
On December 31, 1998, Prism Financial had an outstanding balance of
approximately $292.6 million on the ASAP Plus line in repurchase agreements with
Fannie Mae, with interest accruing at 5.84%. The underlying loans were sold
during 1999.
F-23
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--LONG-TERM DEBT
Long-term debt outstanding at December 31, 1998 consisted of the following:
<TABLE>
<CAPTION>
1997 1998
--------- ------------
<S> <C> <C>
Term note with a commercial bank......................................................... $ -- $ 3,425,000
Notes payable to stockholders, with maturities ranging from 2000 to 2002, paying monthly
interest at a fixed rate of 10.00%, unsecured. Notes subordinated in right of payment
to the prior payment in full of a designated warehouse line............................ -- 850,000
Notes payable to private investors, maturing in 2002, paying monthly interest at a fixed
rate of 10.00%, unsecured. Notes subordinated in right of payment to the prior payment
in full of a designated warehouse line................................................. -- 400,000
Notes payable to Key Bank and GMAC, with maturities ranging from 1999 to 2003, paying
monthly interest ranging from 8.00% to 9.99%, collateralized by various equipment...... -- 81,423
Notes payable to Winthrop, maturing in 2001, paying monthly interest at a fixed rate of
6.30%, collateralized by various equipment............................................. -- 270,662
--------- ------------
Total.............................................................................. -- 5,027,085
Less: current portion of long-term debt............................................ -- 729,249
--------- ------------
$ -- $ 4,297,836
--------- ------------
--------- ------------
</TABLE>
The term note of $3,425,000 was issued to fund a portion of the purchase
price of a certain acquisition described in Note 3--Acquisitions. The note
requires monthly principal payments of $64,815 beginning February 1, 1999, and
monthly interest payments at prime plus or minus a percentage that ranges from
minus 0.50% to plus 1.00%, based on the principal balance outstanding at reset
date starting on September 1, 1998. The note interest rate is adjusted
quarterly. At December 31, 1998, the interest rate was 7.75%. Prism Financial
has the right to prepay this note at any time, in whole or in part, in
accordance with the agreement. The note is collateralized by all the assets of
Prism Financial and Pacific Guarantee, as well as 100,000 of Prism Financial's
shares.
Long-term debt principal repayments are due as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31: AMOUNT
- -------------------------------------------------------------------------------- ------------
<S> <C>
1999............................................................................ $ 729,249
2000............................................................................ 1,219,114
2001............................................................................ 1,164,570
2002............................................................................ 1,502,673
2003............................................................................ 411,479
------------
Total..................................................................... $ 5,027,085
------------
------------
</TABLE>
NOTE 10--CAPITAL TRANSACTIONS
On October 2, 1998, Prism Financial issued five bridge notes totaling $2.5
million. One $1.25 million note was issued to GEM Value/Prism L.L.C. The
remaining four notes were issued to a group of private investors. The funds from
the bridge notes were used for certain acquisitions, as described in
F-24
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--CAPITAL TRANSACTIONS (CONTINUED)
Note 3--Acquisitions. On December 31, 1998, Prism Financial received from the
private investor group a capital infusion of $1.25 million and converted the
group's $1.25 million bridge note into common shares. Prism Financial issued
574,756 shares to this private investor group in exchange for their aggregate
investment of $2.5 million. The capital infusion was used to repay the GEM
Value/Prism L.L.C. $1.25 million bridge note.
The agreement with the private investor group stipulates that if Prism
Financial does not become a publicly-traded company or is not sold within 24
months of the agreement date, the new stockholders have the right to convert
half of their shares into a $1.25 million, 12% note with a one-year term. Prism
Financial may prepay the note, in whole or in part, without penalty or premium.
NOTE 11--LEASE COMMITMENTS
Prism Financial leases its offices under various noncancelable agreements
which expire through 2004 and require various minimum annual rental payments.
Prism Financial also leases office equipment under operating leases expiring
through December 1999. The total future minimum lease payments under these
leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31: AMOUNT
- ------------------------------------------------------------------------------- -------------
<S> <C>
1999........................................................................... $ 4,064,255
2000........................................................................... 3,568,041
2001........................................................................... 2,968,525
2002........................................................................... 2,382,328
2003........................................................................... 1,161,767
Thereafter..................................................................... 283,243
-------------
Total.................................................................... $ 14,428,159
-------------
-------------
</TABLE>
Total rent expense under all operating leases for 1996, 1997 and 1998 was
$307,835, $896,714 and $3,249,200, respectively.
NOTE 12--EMPLOYEE BENEFITS
DEFINED CONTRIBUTION PLAN
Prism Financial has a defined contribution retirement plan covering
substantially all employees. Participants may elect to contribute a percentage
of their annual compensation up to limits established by the Internal Revenue
Service. Prism Financial may, at its discretion, make contributions to the plan.
Prism Financial did not make any contributions to the plan during 1996, 1997 or
1998.
PROFIT SHARING PLAN
On January 31, 1998, Prism Financial adopted a profit sharing plan. Under
this plan, Prism Financial awards qualified employees a specified number of
incentive share units ("ISUs"), contingent upon reaching predefined performance
goals over a period of three years. The maximum total award which could be paid
out under the plan is $3.2 million. Incentive share units are credited to the
qualified employees based on commissions or compensation earned during the
three-year period, as defined in the plan agreement. The final number of ISUs
awarded is subject to a factor based on the level of
F-25
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--EMPLOYEE BENEFITS (CONTINUED)
attainment. Qualified employees are fully vested in their incentive share units
over three years of subsequent service, as defined in the plan agreement. For
the year ending December 31, 1998, no compensation expense was recognized under
the plan.
NOTE 13--INCOME TAXES
DISTRIBUTION TO STOCKHOLDERS
Prism Financial distributes cash to its stockholders in an amount
approximating the stockholder's federal and state income tax liabilities
resulting from the pass-through of Prism Financial's taxable income to the
stockholders.
PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
Since January 1, 1996 Prism Financial has elected to be an S corporation
under the Internal Revenue Code. Accordingly, taxable income or loss passes
directly to the stockholders, and Prism Financial does not provide for income
taxes. For information purposes, the statement of income includes unaudited pro
forma adjustments for income taxes, which would have been recorded had Prism
Financial not been an S corporation, based on the tax laws in effect during the
periods presented.
Unaudited pro forma provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ------------
<S> <C> <C> <C>
Current:
Federal.............................................. $ 331,186 $ 831,831 $ 4,100,881
State................................................ 80,790 180,735 693,871
Deferred:
Federal.............................................. (1,473) (13,947) (479,654)
State................................................ (359) (3,030) (103,151)
---------- ---------- ------------
$ 410,144 $ 995,589 $ 4,211,947
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
The differences between unaudited pro forma income taxes at the statutory
federal income tax rate of 35 percent and pro forma income taxes reported in the
statement of income are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------------------- --------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate................................... $ 356,981 35.0% $ 876,141 35.0% $ 3,883,102 35.0%
State income taxes, net of federal benefit.............. 42,884 4.2 117,285 4.7 383,968 3.5
Other................................................... 10,279 1.0 2,163 0.1 (55,123) (0.5)
---------- --- ---------- --- ------------ ---
Effective tax........................................... $ 410,144 40.2% $ 995,589 39.8% $ 4,211,947 38.0%
---------- --- ---------- --- ------------ ---
---------- --- ---------- --- ------------ ---
</TABLE>
Assuming the completion of the Offering, Prism Financial will no longer be
treated as an S corporation and will be subject to federal and state income
taxes. Upon termination of the S election, it is anticipated that a deferred tax
asset will be recorded for the cumulative difference between the
F-26
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--INCOME TAXES (CONTINUED)
financial statement amounts and the income tax bases of certain assets and
liabilities. If the S corporation status had terminated at December 31, 1998,
the amount of the deferred tax asset would have been approximately $602,000, as
follows:
<TABLE>
<CAPTION>
1998
----------
<S> <C>
Deferred tax assets:
Allowance for loan and servicing losses......................................... $ 514,000
Accrued expenses and other...................................................... 88,000
----------
Total deferred tax asset.......................................................... $ 602,000
----------
----------
</TABLE>
Management believes it is more likely than not that Prism Financial will
realize the benefits of the deferred tax asset. Accordingly, no valuation
reserve is considered necessary.
Prism Financial's S corporation election will terminate upon the closing of
the Offering. In connection with this termination, Prism Financial intends to
make a distribution of its previously earned and undistributed taxable income to
the existing stockholders (including estimated taxable income through the date
of the closing of the Offering, with provision for adjustment based on the final
determination of such taxable income) using a portion of the net proceeds from
the Offering. The shareholder distribution amount as of December 31, 1998 would
have been approximately $13.3 million, and the amount is expected to increase by
the time of the distribution as a result of additional S corporation income.
NOTE 14--OFF-BALANCE-SHEET RISK AND CONTINGENCIES
Prism Financial enters into commitments to fund mortgage loans, whole-loan
sale commitments, forward contracts on mortgage loans and option contracts on
Treasury securities in the normal course of business. These financial
instruments involve, to varying degrees, elements of credit and interest-rate
risk in excess of the amount recorded on the balance sheet.
COMMITMENTS TO FUND MORTGAGE LOANS
Prism Financial regularly enters into commitments to fund mortgage loans at
a future date, subject to compliance with stated conditions. The commitments, if
funded, would be collateralized primarily by residential real estate. The
obligation to lend may be voided if the customer's financial condition
deteriorates or if the customer fails to meet certain conditions. Commitments to
originate mortgage loans do not necessarily reflect future cash requirements
since some of the commitments will not be drawn upon before expiration. The
total contract amount for commitments to fund mortgage loans (committed
pipeline) as of December 31, 1997 and 1998 was $69.3 million and $268.8 million
respectively.
Prism Financial evaluates each customer's credit worthiness and obtains
appraisals to support the value of the underlying collateral. Commitments to
originate mortgage loans have off-balance- sheet risk to the extent Prism
Financial does not have matching commitments to sell loans. In a rising interest
rate environment, Prism Financial is exposed to lower of cost or market
valuation adjustments. Prism Financial reduces interest rate exposure by
limiting these commitments to varying periods of less than 60 days.
F-27
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--OFF-BALANCE-SHEET RISK AND CONTINGENCIES (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
In order to offset the risk that a change in interest rates will result in a
decrease in the value of Prism Financial's current mortgage loan inventory or
its loan commitments, Prism Financial enters into hedging transactions. Prism
Financial's hedging policies generally require that the maximum portion of its
committed pipeline that may close be hedged with forward contracts for the
delivery of loans or options on Treasury securities. The mortgage loans that are
to be delivered under these contracts are fixed or adjustable-rate,
corresponding with the composition of Prism Financial's inventory and committed
pipeline. At December 31, 1997 and 1998, Prism Financial had open forward
commitments with a total notional amount of approximately $34.0 million and
$670.0 million, respectively, to sell mortgage loans with varying settlement
dates not extending beyond March 1999. On December 31, 1997, options to sell
Treasuries through February 1998, with a total notional amount of approximately
$14.0 million, were outstanding. No options were outstanding at December 31,
1998. Prism Financial also hedges some of its loans held for sale by using
whole-loan sale commitments to ultimate investors, which totaled $53.9 million
and $28.4 million at December 31, 1997 and 1998, respectively.
While Prism Financial does not anticipate nonperformance by any
counterparty, Prism Financial is exposed to potential credit losses in the event
of nonperformance by the counterparties to the various instruments. Prism
Financial manages credit risk with respect to forward contracts and whole-loan
sale commitments by entering into agreements with entities approved by senior
management. These entities include Wall Street firms having primary dealer
status, money center banks and permanent investors. Prism Financial's exposure
to credit risk in the event of default by the counterparty is the difference
between the contract price and the current market price.
Since Prism Financial only purchases options which allow Prism Financial, at
its option, to purchase or sell a financial instrument, the exposure of Prism
Financial at any time is the premium paid to purchase the option.
MORTGAGE LOANS SOLD WITH RECOURSE
Through Prism Financial's various correspondent agreements with financial
institutions, Prism Financial may be required to repurchase mortgage loans sold
to a financial institution if significant defects in the loan documentation are
subsequently discovered by the financial institution or if the borrower defaults
on the first payment. If a repurchase request is made, Prism Financial will
either attempt to remedy the deficiency and have the investors rescind the
rejection of the mortgage loans, or refinance or sell the mortgage loan,
sometimes at a loss.
Additionally, in connection with some non-prime loan sales, Prism Financial
may be required to refund a portion of the gain recognized on the sale of a loan
to investors if the loan is repaid within one year of sale.
NOTE 15--CONCENTRATION RISK
Prism Financial grants principally residential first and second mortgage
loans to customers in 28 states. All loans are made on a secured basis after
reviewing each potential borrower's credit application and evaluating Prism
Financial's ability to sell the loan to investors. At December 31, 1997 and
1998, 71.0% and 32.0%, respectively, of Prism Financial's mortgage loans held
for sale consisted of loans secured by residential real estate in Chicago,
Illinois, and its surrounding communities.
F-28
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--CONCENTRATION RISK (CONTINUED)
In 1998, Prism Financial sold approximately 60% of its production to two
entities.
NOTE 16--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments," a summary of the estimated fair value of Prism Financial's
financial instruments as of December 31, 1997 and 1998, is presented below. The
estimated fair value amounts have been determined by management using available
market information and appropriate valuation methodologies. However,
considerable judgment is necessary in order to interpret market data and develop
the estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that Prism Financial could realize in a
current market exchange. The use of different assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
SFAS No. 107 excludes certain financial instruments and all nonfinancial assets
and liabilities from its disclosure requirements. Accordingly, the aggregate
fair value amounts presented below do not represent the underlying value of
Prism Financial.
<TABLE>
<CAPTION>
1997 1998
---------------------- ----------------------
<S> <C> <C> <C> <C>
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------- ----------- ---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents....................................... $ 1,164 $ 1,164 $ 12,124 $ 12,124
Loans held for sale............................................. 60,901 61,356 467,254 470,419
Loan and other fees receivable, net............................. 1,893 1,893 14,207 14,207
Liabilities:
Loans sold under agreements to repurchase....................... -- -- 292,627 292,627
Warehouse lines of credit....................................... 59,634 59,634 170,217 170,217
Current portion of long-term debt............................... -- -- 729 729
Long-term debt, less current portion............................ -- -- 4,298 4,298
Gain (loss) on derivative financial instruments:
Whole-loan sale commitments..................................... -- 257 -- 155
Forward contracts............................................... -- (396) -- (1,290)
Option contracts................................................ -- 3 -- --
</TABLE>
The fair value of cash and cash equivalents, loan and other fees receivable,
the warehouse line of credit and long-term debt approximate their carrying
amounts. The fair value of mortgage loans held for sale is based on the
estimated value at which the loans could be sold in the secondary market.
For derivative financial instruments, the fair value is defined as the
amount that Prism Financial would receive or pay to terminate the contracts at
the reporting date. The fair value of whole-loan sale commitments is estimated
by taking into account the rates being demanded on similar types of mortgage
loans. The fair value of option agreements is based upon quoted market values.
The fair value of forward contracts is calculated from quoted market rates.
F-29
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--CONTINGENT LIABILITIES
Prism Financial is a defendant in a number of legal proceedings arising in
the normal course of business. Management believes, based on the opinion of
legal counsel, that the final disposition of these matters will not have a
material adverse effect on Prism Financial's financial position or results of
operations.
NOTE 18--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1996 1997 1998
---------- ------------ -------------
<S> <C> <C> <C>
Cash paid during the year for interest.................................. $ 762,829 $ 2,452,115 $ 10,471,111
---------- ------------ -------------
---------- ------------ -------------
Detail of acquisitions:
Fair value of non-cash assets acquired................................ $ -- $ -- $ 74,512,717
Liabilities assumed................................................... -- -- (74,416,856)
-------------
Net non-cash assets acquired........................................ -- -- 95,861
Cash acquired in acquisition.......................................... -- -- 6,234,139
-------------
Fair value of net assets acquired..................................... -- -- 6,330,000
Common stock issued................................................... -- -- (1,500,000)
---------- ------------ -------------
Cash paid for acquisition......................................... $ -- $ -- $ 4,830,000
---------- ------------ -------------
---------- ------------ -------------
Net cash acquired................................................. $ -- $ -- $ 1,404,139
---------- ------------ -------------
---------- ------------ -------------
Non-cash transaction:
Conversion of bridge note into common shares.......................... $ -- $ -- $ 1,250,000
---------- ------------ -------------
---------- ------------ -------------
</TABLE>
NOTE 19--SEGMENT INFORMATION
Prism Financial operates primarily in the mortgage origination industry.
IGT, a wholly-owned subsidiary of Prism Financial, provides title services to
in-house and third party customers. Selected financial information of IGT is
presented below in the "Other" segment category.
<TABLE>
<CAPTION>
MORTGAGE
ORIGINATION OTHER CONSOLIDATED
-------------- ---------- --------------
<S> <C> <C> <C>
Revenue.............................................................. $ 90,023,998 $ 817,801 $ 90,841,799
-------------- ---------- --------------
-------------- ---------- --------------
Earnings before income taxes......................................... $ 10,528,192 $ 566,386 $ 11,094,578
-------------- ---------- --------------
-------------- ---------- --------------
Identifiable assets as of December 31, 1998.......................... $ 503,099,976 $ 522,118 $ 503,622,094
-------------- ---------- --------------
-------------- ---------- --------------
</TABLE>
F-30
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20--UNAUDITED PRO FORMA 1998 CONSOLIDATED BALANCE SHEET
As discussed in Note 2--Significant Accounting Policies--Income Taxes, Prism
Mortgage will distribute to its stockholders all of its previously earned and
undistributed taxable S corporation earnings immediately prior to its conversion
to C corporation status. Had this distribution occurred at December 31, 1998, S
corporation distribution notes would have been issued in the amount of
approximately $13.3 million offset by reductions in retained earnings of $12.1
million and additional paid-in capital of $1.2 million. The pro forma 1998
consolidated balance sheet reflects the effects of this transaction.
NOTE 21--SUBSEQUENT EVENTS
On January 15, 1999, Prism Financial entered into a $35 million revolving
credit and security agreement with a commercial bank, paying monthly interest at
the Eurodollar rate plus 1.25% and expiring on July 15, 1999.
Prism Financial has received commitments for a new $250 million syndicated
warehouse line agreement. Any outstanding balances under this agreement will be
secured by outstanding mortgage loans. Prism Financial will be required to
maintain various financial ratios.
NOTE 22--INCORPORATION TRANSACTIONS
In February 1999, Prism Financial was formed as a holding company for Prism
Mortgage Company and its subsidiaries. Immediately prior to this offering, the
existing stockholders of Prism Mortgage will exchange their shares for an
aggregate of 11,495,297 shares of Prism Financial common stock. As a result of
these transactions, immediately prior to the offering, the former stockholders
of Prism Mortgage will own all of the issued and outstanding shares of Prism
Financial, and Prism Financial will own all of the outstanding shares of Prism
Mortgage. Prior to the Incorporation Transactions, Prism Financial will not have
conducted any business and has no assets or liabilities. The legal name of Prism
Financial has been retroactively applied to all periods presented in these
financial statements.
F-31
<PAGE>
MORTGAGE MARKET, INC.
BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS:
Cash............................................................................................... $ 2,010,684
Cash-Client trust.................................................................................. 621,898
Haircut receivable................................................................................. 136,111
Accounts receivable................................................................................ 651,195
Employee advances.................................................................................. 64,952
Miscellaneous receivables.......................................................................... 49,726
Prepaid expenses................................................................................... 99,873
Promotional inventory.............................................................................. 166,962
Mortgage loans receivable.......................................................................... 22,344,929
-------------
Total Current Assets......................................................................... 26,146,330
-------------
PROPERTY AND EQUIPMENT:
Furniture and fixtures............................................................................. 598,438
Machinery and equipment............................................................................ 656,688
Automobiles........................................................................................ 87,683
Leasehold improvements............................................................................. 44,573
-------------
1,387,382
Less: accumulated depreciation..................................................................... (388,692)
-------------
Property and equipment-net................................................................... 998,690
OTHER ASSETS:
Deposits........................................................................................... 98,637
Loan fees (net of $180 amortization)............................................................... 220
Cash surrender value of life insurance............................................................. 44,905
Capitalized legal and accounting................................................................... 246,528
-------------
Total Other Assets........................................................................... 390,290
-------------
TOTAL ASSETS....................................................................................... $ 27,535,310
-------------
-------------
</TABLE>
See Notes to Financial Statements
F-32
<PAGE>
MORTGAGE MARKET, INC.
BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C>
CURRENT LIABILITIES
Accounts payable................................................................................... 377,882
Accrued interest................................................................................... 28,223
Client trust liability............................................................................. 588,925
Accrued payroll and withholding.................................................................... 107,077
Accrued commissions................................................................................ 1,086,034
Accrued expenses................................................................................... 169,840
Sublessee deposit.................................................................................. 2,974
Deferred revenue................................................................................... 1,276
Due to warehouse lending........................................................................... 22,344,929
Current portion of long-term debt.................................................................. 149,644
-------------
Total Current Liabilities.................................................................... 24,856,804
-------------
LONG-TERM LIABILITIES:
Notes payable...................................................................................... 267,501
STOCKHOLDER'S EQUITY:
Capital stock, no par value; 100,000 shares authorized, 1,000 issued and outstanding 1,000
Paid in capital.................................................................................... 146,650
Retained earnings.................................................................................. 2,263,355
-------------
Total Stockholder's Equity................................................................... 2,411,005
-------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY......................................................... $ 27,535,310
-------------
-------------
</TABLE>
See Notes to Financial Statements
F-33
<PAGE>
MORTGAGE MARKET, INC.
STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1998
-------------- -------------
<S> <C> <C>
REVENUE........................................................................... $ 10,755,443 $ 23,905,374
OPERATING EXPENSES................................................................ 9,869,731 21,418,648
-------------- -------------
INCOME FROM OPERATIONS............................................................ 885,712 2,486,726
-------------- -------------
OTHER INCOME (EXPENSE):
Interest income............................................................... 649,020 1,683,217
Interest expense.............................................................. (837,376) (2,044,268)
Depreciation and amortization................................................. (87,949) (153,514)
Gain on sale of assets........................................................ 2,918 1,153
Miscellaneous income.......................................................... 59,575 50,844
-------------- -------------
Total Other Expense....................................................... (213,812) (462,568)
-------------- -------------
NET INCOME........................................................................ $ 671,900 $ 2,024,158
-------------- -------------
-------------- -------------
</TABLE>
See Notes to Financial Statements
F-34
<PAGE>
MORTGAGE MARKET, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES: 1997 1998
------------ ------------
<S> <C> <C>
Net income..................................................... $ 671,900 $ 2,024,158
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................. 87,997 153,514
Gain on sale................................................... (2,918) (1,153)
Proceeds from sales of loans................................... 154,692,171 489,051,571
Loans originated............................................... (160,182,839) (494,618,812)
(Increase) decrease in:
Accounts receivable............................................ (377,500) (132,008)
Promotional inventory.......................................... -- (15,510)
Employee receivables........................................... (13,540) (25,787)
Miscellaneous receivables...................................... (13,713) (12,977)
Prepaid expenses............................................... (70,467) 8,216
Deposits....................................................... (40,305) (19,677)
Cash surrender value of life insurance......................... -- (43,475)
Capitalized legal and accounting............................... -- (246,528)
Increase (decrease) in:
Bank overdraft................................................. -- (162,794)
Accounts payable............................................... (61,847) 183,245
Accrued payroll and withholding................................ (110,009) 19,308
Accrued commissions............................................ 245,804 556,808
Client trust liability......................................... (60,398) (28,884)
Accrued expenses............................................... -- (9,421)
Accrued interest............................................... -- 28,223
Sublessee deposits............................................. 3,842 --
Due to warehouse lending....................................... 32,931 10,590
Deferred revenue............................................... -- (13,596)
------------ ------------
Net Cash Used in Operating Activities.................... (5,198,891) (3,294,989)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............................. (213,407) (187,763)
Proceeds from the sale of automobiles.......................... 27,900 --
------------ ------------
Net Cash Used by Investing Activities.................... (185,507) (187,763)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on warehouse line of credit, net.................... 5,622,539 5,529,129
Reduction of long-term debt.................................... (28,429) (27,456)
Proceeds from the issuance of long-term debt................... 60,000 --
Loan fees paid................................................. (400) --
Additional capital contributions by shareholder................ 26,253 --
Payments on capital lease obligations.......................... -- (27,945)
Shareholder distribution (205,640) (547,199)
------------ ------------
Net Cash Provided by Financing Activities................ 5,474,323 4,926,529
------------ ------------
NET INCREASE IN CASH........................................... 89,925 1,443,777
CASH AT BEGINNING OF YEAR...................................... 229,589 566,907
------------ ------------
CASH AT END OF YEAR............................................ $ 319,514 $ 2,010,684
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements
F-35
<PAGE>
MORTGAGE MARKET, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURES: 1997 1998
- -------------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Cash paid for:
Interest.............................................................................. $ 837,376 $ 2,016,045
------------ ------------
------------ ------------
Schedule of Noncash Investing and Financing Transactions:
Purchase of automobile................................................................ $ 25,000 $ 30,683
Amount financed....................................................................... (13,050) (30,683)
------------ ------------
Cash paid............................................................................. $ 11,950 $ 0
------------ ------------
------------ ------------
Equipment purchased through capital lease............................................. $ -- $ 319,878
------------ ------------
------------ ------------
Land and building contributed by shareholder.......................................... $ 168,000 $ --
Mortgage assumed...................................................................... (81,350) --
Net capital contributed by shareholder................................................ (86,350) --
------------ ------------
Cash received......................................................................... $ 0 $ --
------------ ------------
------------ ------------
Non-cash distributions to shareholder
Land and building at net book value................................................. $ -- $ 173,686
Mortgage............................................................................ -- (80,512)
------------ ------------
Net non-cash distributions............................................................ $ -- $ 93,174
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements
F-36
<PAGE>
MORTGAGE MARKET, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Mortgage Market,
Inc. ("Mortgage Market") reflect all adjustments which, in the opinion of
management, are necessary for a fair presentation of the results of the interim
periods presented. All such adjustments are of a normal recurring nature.
The unaudited interim financial statements should be read in conjunction
with Mortgage Market's audited financial statements and notes thereto for the
year ended December 31, 1997 included herein.
Certain prior period assets and liabilities and costs and expenses have been
reclassified to conform to the current period presentation.
F-37
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Mortgage Market, Inc.
We have audited the accompanying balance sheet of Mortgage Market, Inc. as
of December 31, 1997, and the related statements of income, changes in
stockholder's equity and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mortgage Market, Inc. as of
December 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Stefani & Matthews, L.L.P.
Portland, Oregon
April 3, 1998
F-38
<PAGE>
MORTGAGE MARKET, INC.
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash (Note 1)................................................................ $ 566,907
Cash--Client trust (Note 1).................................................. 263,796
Haircut receivable (Note 3).................................................. 97,999
Accounts receivable--trade (Note 4).......................................... 450,656
Promotional inventory........................................................ 84,363
Employee advances............................................................ 39,165
Miscellaneous receivables.................................................... 36,749
Prepaid expenses............................................................. 18,772
Mortgage loans receivable (Note 5)........................................... 16,815,800
----------
Total Current Assets..................................................... 18,374,207
----------
PROPERTY AND EQUIPMENT (Note 1):
Furniture and fixtures....................................................... 219,001
Machinery and equipment...................................................... 559,854
Automobiles.................................................................. 57,000
Leasehold improvements....................................................... 22,523
Land and building............................................................ 177,659
----------
1,036,037
Less: accumulated depreciation............................................... (241,372)
----------
Property and equipment--net.............................................. 794,665
----------
OTHER ASSETS:
Note receivable--shareholder (Note 12)....................................... 108,451
Deposits..................................................................... 78,960
Loan fees (net of $80 amortization) (Note 1)................................. 320
Cash surrender value of life insurance....................................... 1,430
----------
Total Other Assets....................................................... 189,161
----------
TOTAL ASSETS................................................................... $19,358,033
----------
----------
</TABLE>
See Notes to Financial Statements
F-39
<PAGE>
MORTGAGE MARKET, INC.
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Bank overdraft............................................................... $ 162,794
Accounts payable............................................................. 194,637
Client trust liability (Note 1).............................................. 303,144
Accrued payroll and taxes.................................................... 85,414
Accrued commissions.......................................................... 529,226
Accrued expenses............................................................. 11,899
Cafeteria plan withholdings.................................................. 2,355
Sublessee deposit............................................................ 2,974
Note payable - line of credit (Note 6)....................................... 16,815,800
Due to Warehouse Lending..................................................... 27,262
Current portion of long-term debt (Note 9)................................... 35,293
Current portion of capital lease obligation (Note 10)........................ 5,645
----------
Total Current Liabilities................................................ 18,176,443
----------
LONG-TERM LIABILITIES:
Notes payable (Note 9)....................................................... 127,530
Obligations under capital lease (Note 10).................................... 42,380
----------
Total Long-Term Liabilities.............................................. 169,910
----------
STOCKHOLDER'S EQUITY:
Capital stock, no par value; 100,000 shares authorized, 1,000 issued and
outstanding................................................................ 1,000
Paid in capital.............................................................. 146,650
Retained earnings............................................................ 864,030
----------
Total Stockholder's Equity............................................... 1,011,680
----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY..................................... $19,358,033
----------
----------
</TABLE>
See Notes to Financial Statements
F-40
<PAGE>
MORTGAGE MARKET, INC.
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
AMOUNT % OF SALES
------------- -----------
<S> <C> <C>
REVENUE................................................................................ $ 14,470,945 100.00%
OPERATING EXPENSES..................................................................... 13,728,206 94.87
------------- -----------
INCOME FROM OPERATIONS................................................................. 742,739 5.13
------------- -----------
OTHER INCOME (EXPENSE):
Gain on sale of assets............................................................... 2,918 0.02
Loss on foreclosure.................................................................. (15,259) (0.10)
------------- -----------
Total Other Income (Expense)..................................................... (12,341) 0.08
------------- -----------
NET INCOME............................................................................. $ 730,398 5.05%
------------- -----------
------------- -----------
</TABLE>
See Notes to Financial Statements
F-41
<PAGE>
MORTGAGE MARKET, INC.
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
COMMON STOCK:.................................................................... $ 1,000
---------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year................................................... 60,000
Capital received from stockholder.............................................. 86,650
---------
Balance at end of year......................................................... $ 146,650
---------
---------
RETAINED EARNINGS:
Balance at beginning of year................................................... 468,518
Net income for the year........................................................ 730,398
Shareholder distribution....................................................... (334,886)
---------
Balance at end of year......................................................... $ 864,030
---------
---------
</TABLE>
See Notes to Financial Statements
F-42
<PAGE>
MORTGAGE MARKET, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................. $ 730,398
Adjustments to reconcile net income to net cash provided by operating
activities:
Gain on sale.............................................................. (2,918)
Depreciation and amortization............................................. 129,081
Proceeds from sales of loans.............................................. 239,984,121
Loans originated.......................................................... (244,889,416)
(Increase) decrease in:
Accounts receivable..................................................... (158,093)
Promotional inventory................................................... (84,363)
Employee receivables.................................................... 31,841
Miscellaneous receivables............................................... (15,793)
Prepaid expenses........................................................ (5,093)
Deposits................................................................ (44,260)
Cash surrender value of split dollar life............................... (1,430)
Increase (decrease) in:
Bank overdraft............................................................ 162,794
Accounts payable.......................................................... 40,313
Accrued payroll and withholding........................................... (96,248)
Accrued commissions....................................................... 130,957
Client trust liability.................................................... (22,381)
Cafeteria plan withholdings............................................... 35
Accrued expenses.......................................................... 39,161
Sublessee deposits........................................................ 2,974
------------
Net Cash Used in Operating Activities....................................... (4,068,320)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......................................... (266,139)
Proceeds from sale of property and equipment................................ 27,900
------------
Net Cash Used by Investing Activities..................................... (238,239)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on warehouse line of credit, net................................. 5,087,039
Loans to shareholders....................................................... (108,451)
Reduction of long-term debt................................................. (36,777)
Payments on capital lease obligations....................................... (2,648)
Issuance of note payable for cash........................................... 60,000
Loan fees paid.............................................................. (400)
Shareholder distribution.................................................... (334,886)
------------
Net Cash Provided by Financing Activities............................... 1,643,877
------------
NET INCREASE IN CASH.......................................................... 337,318
CASH AT BEGINNING OF YEAR..................................................... 229,589
------------
CASH AT END OF YEAR........................................................... $ 566,907
------------
------------
</TABLE>
See Notes to Financial Statements
F-43
<PAGE>
MORTGAGE MARKET, INC.
STATEMENT OF CASH FLOWS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest.................................................................... $1,280,426
---------
---------
Schedule of Noncash Investing and Financing Transactions
Capital lease obligations incurred for acquisition of office equipment...... $ 50,673
---------
---------
Automobile acquired through direct financing................................ $ 13,050
---------
---------
Property contributed to the company in exchange for shares of stock......... $ 168,000
---------
---------
Mortgage note assumed on contributed property............................... $ 81,350
---------
---------
</TABLE>
See Notes to Financial Statements
F-44
<PAGE>
MORTGAGE MARKET, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS DESCRIPTION
Mortgage Market, Inc. was incorporated in Oregon in February, 1992. The
Company is a mortgage broker specializing in residential mortgage loans without
loan origination fees or loan discount charges to borrowers. It also finances
and sells its own loans on the secondary market. The Company has offices in Lake
Oswego, Beaverton, Tigard, Eugene, Clackamas, Salem, Medford, Gresham and
Portland, Oregon, and Vancouver, Federal Way, Lynnwood and Bellevue, Washington.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with a maturity of
three months or less to be cash equivalents.
CLIENT TRUST CASH AND LIABILITY
Client trust cash consists of funds paid to the Company by customers for
real estate appraisals and credit reports. Client trust liability records the
Company's obligation to remit these funds to the service providers or title
companies at closing.
REVENUE RECOGNITION
The Company's policy is to recognize loan revenue at the time the loan is
closed or settled. Generally, borrowers do not have an obligation to pay loan
processing fees until their loan is funded.
INCOME TAX
The Company has elected to have its income tax under Section 1372
(Subcharter S Corporation) of the Internal Revenue Code, which provides that, in
lieu of corporate income taxes, the shareholders are taxed on the Company's
taxable income.
PROPERTY AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation is provided using
the straight-line method over estimated useful lives, generally five to ten
years. Depreciation expense for the year ended December 31, 1997 was $129,001.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
LOAN FEES
Loan fees are amortized using the straight line method over the terms of the
agreements. Amortization for the year ended December 31, 1997 totaled $80.
F-45
<PAGE>
MORTGAGE MARKET, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
ADVERTISING
All advertising costs are expensed as incurred. Advertising expense for the
year ended December 31, 1997 was $638,527.
2. CONCENTRATIONS OF CREDIT RISK:
The Company maintains most of its cash balances in one financial institution
located in Oregon. The balances are insured by the Federal Deposit Insurance
Corporation up to $100,000. At December 31, 1997, the Company's uninsured
balances totaled $580,856.
The Company is engaged in mortgage brokerage for residential property
located primarily in Oregon and Washington.
3. HAIRCUTS RECEIVABLE:
Haircuts receivable represents the portion of the mortgage loan advanced
from the company's funds. These amounts are combined with the funds advanced
from the company's financing source to provide the mortgage financing. The
amounts are repaid upon sale of the mortgage loan. As of December 31, 1997,
haircuts outstanding totaled $97,999.
4. ACCOUNTS RECEIVABLE:
Accounts receivable are primarily funds due from escrows for closed loan
transactions. Bad debts are provided by an allowance for doubtful accounts. As
of December 31, 1997, the allowance was $0. Bad debt expense for 1997 totaled
$50,105, the majority of which was from advances to former employees, not
accounts receivable.
5. MORTGAGE LOANS RECEIVABLE:
Mortgage loans receivable consist of demand notes secured by liens on real
property. The notes bear interest at the various rates depending on the market
rate. The notes are due in 15 or 30 years. These mortgages are sold on the
secondary market.
6. NOTE PAYABLE--LINE OF CREDIT:
In August 1996, the Company renewed its line of credit with Warehouse
Lending Corporation of America in the amount of $7,000,000, with a bulge
provision of $2,002,000. Advances from the line of credit are used to fund
mortgage loans which are secured by residential real property. Increases in the
maximum borrowing amount are approved on an interim basis by the financial
institutions credit department. Terms of the agreement include interest at the
current LIBOR rate plus 3%. The maturity date is July 31, 1998. The loan is
collateralized by all mortgage loans of the Company. In addition, it is
guaranteed by the shareholder. At December 31, 1997, the amount outstanding was
$16,815,800.
The company has a $200,000 operating line of credit with interest at a
variable index plus 1.0%. The agreement expires January 2, 1998. There was no
balance outstanding at December 31, 1997.
F-46
<PAGE>
MORTGAGE MARKET, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
7. LEASE COMMITMENTS:
The Company entered into a lease agreement for office space in Lake Oswego,
Oregon on January 1, 1993, which was extended on January 31, 1996. Lease terms
provide for monthly rent of $3,500. The lease expires December 31, 1999. The
Company subleases various spaces for varying amounts. Net rent paid under this
agreement totaled $19,579 for the year ended December 31, 1997.
The Company renewed its lease agreement for office space in Vancouver ,
Washington effective April 15, 1997. Lease terms provide for monthly rent of
$1,846 in addition to a portion of common area maintenance costs. The lease
expires April 14, 1998. Rent paid under this agreement totaled $32,040 for the
year ended December 31, 1997.
The Company entered into a lease agreement for office space in Clackamas,
Oregon on December 15, 1993. Lease terms provide for monthly rent of $2,106,
with annual adjustments based on property taxes assessed. The lease expires
December 14, 1998. Rent paid under this agreement totaled $25,992 for the year
ended December 31, 1997.
The Company entered into a lease agreement for office space in Beaverton,
Oregon on July 1, 1995. Lease terms provide for monthly rent of $1,900 with
annual increases tied to the consumer price index. The lease expires June 30,
1998. Rent paid under this agreement totaled $24,539 for the year ended December
31, 1997.
The Company renewed its lease agreement for office space in Tigard, Oregon
on March 15, 1996. Lease terms provide for monthly rent of $5,205 in addition to
a portion of the real property taxes. The lease expires June 14, 1999. Extra
office space was rented for a portion of the year. Rent paid under this
agreement totaled $64,451 for the year ended December 31, 1997.
The Company entered into a lease agreement for office space in Eugene,
Oregon on October 6, 1995. Lease terms provide for monthly rent of $2,100, plus
property taxes, starting January 1, 1996, with annual increases tied to the
consumer price index. The lease expires December 31, 2000. Rent paid aunder this
agreement totaled $25,931 for the year ended December 31, 1997.
The Company entered into a lease agreement for office space in Salem, Oregon
on May 1, 1996. Lease terms provide for monthly rent of $2,440 plus common area
maintenance, with annual increases. The lease expires May 1, 2001. Rent paid
under this agreement totaled $32,005 for the year ended December 31, 1997.
The Company entered into a lease agreement for office space in Medford,
Oregon beginning April 1, 1997. Lease terms provide for monthly rent of $1,690,
with annual increases tied to the consumer price index. Extra office space was
rented periodically throughout the year. The lease expires April 30, 2001. Rent
paid under this agreement totaled $20,333 for the year ended December 31, 1997.
The Company entered into a lease agreement for office space in Portland,
Oregon on May 31, 1997. Lease terms provide for monthly rent of $1,280. The
lease was canceled in April 1997. Rent paid under this agreement totaled $4,489
for the year ended December 31, 1997.
The Company entered into a lease agreement for office space in Federal Way,
Washington on May 31, 1996. Lease terms provide for monthly rent of $2,533, with
annual increases every February. The lease expires July 31, 1999. Rent paid
under this agreement totaled $30,990 for the year ended December 31, 1997.
F-47
<PAGE>
MORTGAGE MARKET, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
7. LEASE COMMITMENTS: (CONTINUED)
The Company entered into a lease agreement for office space in Bellevue,
Washington on October 1, 1996. Lease terms provide for monthly rent of $5,321.
The lease expires October 1, 1998. The company subleases a portion of this space
for $1,540 to $1,570 per month. Net rent paid under this agreement totaled
$45,100 for the year ended December 31, 1997.
The Company entered into a lease agreement for office space in Lake Oswego,
Oregon on January 16, 1997 with an addendum added March 19, 1997. Lease terms
provide for monthly rent of $12,679, starting May 1, 1997. The lease expires
April 30, 2002. Rent paid under this agreement totaled $96,773 for the year
ended December 31, 1997.
The Company entered into a lease agreement for office space in Medford,
Oregon on May 21, 1997. Lease terms provide for monthly rent of $3,672, plus
triple net charges starting July 1, 1997. The lease expires June 30, 2002. Rent
paid under this agreement totaled $16,944 for the year ended December 31, 1997.
The Company entered into a lease agreement for office space in Portland,
Oregon on March 10, 1997. Lease terms provide for monthly rent of $2,550,
starting April 15, 1997. The lease expires April 30, 2002. Rent paid under this
agreement totaled $21,760 for the year ended December 31, 1997.
The Company entered into a lease agreement for office space in Lynnwood,
Washington on February 25, 1997. Lease terms provide for monthly rent of $4,452,
starting March 1, 1997. The lease expires April 30, 2002. The company
occasionally subleases a portion of this space. Net rent paid under this
agreement totaled $34,489 for the year ended December 31, 1997.
The Company entered into a lease agreement for office space in Gresham,
Oregon on October 7, 1997. Lease terms provide for monthly rent of $2,800,
starting in December 1997. The lease expires November 30, 2000. Rent paid under
this agreement totaled $279 for the year ended December 31, 1997.
The Company entered into a lease agreement for office space in Vancouver,
Washington on September 1, 1997. Lease terms provide for monthly rent of $1,140,
plus taxes and common area maintenance starting September 1, 1997. The lease
expires April 14, 1998. Rent paid under this agreement totaled $4,415 for the
year ended December 31, 1997.
The future minimum lease payments required under the above leases are as
follows:
<TABLE>
<S> <C>
1998............................................................ $ 536,395
1999............................................................ 427,656
2000............................................................ 322,150
2001............................................................ 270,764
2002............................................................ 94,650
---------
Total....................................................... $1,651,615
---------
---------
</TABLE>
F-48
<PAGE>
MORTGAGE MARKET, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
7. LEASE COMMITMENTS: (CONTINUED)
The Company entered into an agreement dated November 26, 1997 to lease high
tech computer equipment and furniture on a $350,000 credit line until May 31,
1998 at which time it will be converted to a 36 month note. There were no assets
received as of December 31, 1997.
8. DEFINED CONTRIBUTION PENSION PLAN:
The Company sponsors a defined contribution pension plan (401(k) plan)
covering substantially all of its employees. The plan was adopted effective
January 1, 1994. Employees may elect to contribute up to 15% of their salary to
the plan. Company contributions to the plan are discretionary. There were no
Company contributions in 1997.
9. LONG-TERM DEBT:
As of December 31, 1997, long-term debt consisted of the following:
<TABLE>
<S> <C>
Note payable to Key Bank, payable in monthly installments of
$1,038, including interest at 9.50%, due December 25, 1999.
Collateralized by a 1994 BMW, net book value of $23,467......... $ 22,573
Note payable to Key Bank, payable in monthly installments of $423,
including interest at 9.99%, due June 1, 2000. Collateralized by
a 1995 GMC Suburban, net book value of $22,500.................. 11,136
Note payable to Key Bank, payable in monthly installments of
$1,926, including interest at 9.50%, due April 22, 2000.
Collateralized by equipment and furniture and fixtures.......... 48,134
Note payable to GMAC, payable in monthly installments of $616,
including interest at 8.00%, due April 1, 2028.................. 80,980
---------
162,823
Less: current portion............................................. (35,293)
---------
Long-Term Debt................................................ $ 127,530
---------
---------
</TABLE>
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31 AMOUNT
- ---------------------------------------------------------------------------------- ----------
<S> <C>
1998.............................................................................. $ 35,293
1999.............................................................................. 38,649
2000.............................................................................. 10,988
2001.............................................................................. 1,204
2002.............................................................................. 1,304
Thereafter........................................................................ 75,385
----------
Total......................................................................... $ 162,823
----------
----------
</TABLE>
F-49
<PAGE>
MORTGAGE MARKET, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
10. CAPITAL LEASES
The company is obligated under various capital leases for copiers that
expire at various dates during 2002. Copiers under capital leases are amortized
over five years, the terms of the leases. The property under capital lease as of
December 31, 1997 had a cost of $50,673, accumulated amortization of $6,470, and
a net book value of $44,203. Amortization of the leased copiers is included in
depreciation.
As of December 31, 1997, the future minimum lease payments under capital
leases are as follows:
<TABLE>
<CAPTION>
1998............................................................... $ 21,510
<S> <C>
1999............................................................... 21,510
2000............................................................... 21,510
2001............................................................... 21,510
2002............................................................... 8,079
---------
94,119
Less: interest..................................................... (46,094)
---------
Present value of net minimum obligations........................... 48,025
Less: current obligations under capital leases..................... 5,645
---------
Long term obligations under capital leases......................... $ 42,380
---------
---------
</TABLE>
11. OPERATING LEASES
The company has several operating leases for office equipment which are
non-cancelable. The total annual rental for such leases was approximately
$37,982 for the year ended December 31, 1997.
The total minimum future commitment under such leases for years beginning
January 1998 is as follows:
<TABLE>
<CAPTION>
1998.............................................................. $ 37,982
<S> <C>
1999.............................................................. 37,982
2000.............................................................. 31,310
2001.............................................................. 16,575
---------
Total......................................................... $ 123,849
---------
---------
</TABLE>
12. NOTE RECEIVABLE--SHAREHOLDER
The Company had a note receivable from its principal shareholder for
$108,451 at December 31, 1997. The balance included accrued interest at the
applicable federal rate for midterm loans during 1997. Interest income
recognized on this note totaled $419 for the year ended December 31, 1997.
13. INTERCOMPANY TRANSACTIONS
The Company operates under three separate divisions. For internal financial
reporting, these divisions are recognized as separate entities with revenues
being recognized on the brokerage books for commissions paid by Mortgage Market
Lending and Mortgage Market Funding. The intercompany sales and expenses have
been eliminated in the financial statements.
F-50
<PAGE>
MORTGAGE MARKET, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
13. INTERCOMPANY TRANSACTIONS (CONTINUED)
The supplemental schedules reflect income from operations for each division,
including intercompany transactions.
<TABLE>
<CAPTION>
Revenues:
<S> <C>
Brokerage.................................................. $12,036,108
Lending.................................................... 4,135,723
Funding.................................................... 751,693
----------
Less: Intercompany transactions................................ (2,452,579)
----------
Adjusted Revenues.............................................. $14,470,945
Operating expenses:
Brokerage.................................................. $11,485,487
Lending.................................................... 4,054,317
Funding.................................................... 640,981
----------
16,180,785
Less: Intercompany transactions................................ (2,452,579)
----------
Adjusted Operating Expenses............................ $13,728,206
----------
----------
</TABLE>
14. SUBSEQUENT EVENTS:
On March 4, 1998, the company renegotiated its line of credit with Warehouse
Lending Corporation of America in the amount of $25,000,000 with a bulge
provision of $5,000,000.
F-51
<PAGE>
PACIFIC GUARANTEE MORTGAGE CORPORATION
BALANCE SHEET
AUGUST 31, 1998
(UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS
Current assets
Cash................................................................. $3,640,569
Accounts receivable.................................................. 1,776,336
Loans held for sale.................................................. 44,615,314
Prepaid expenses..................................................... 581,601
----------
Total current assets................................................. 50,613,820
----------
Property and equipment
Furniture and fixtures............................................... $ 197,232
Office equipment..................................................... 522,817
Leasehold improvements............................................... 19,597
---------
739,646
Less accumulated depreciation........................................ (429,659)
---------
Total property and equipment......................................... 309,987
Other assets.........................................................
Investments in affiliates............................................ 2,160
Investment in real estate............................................ 337,058
---------
Total other assets................................................... 339,218
----------
Total assets......................................................... $51,263,025
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of notes payable..................................... $ 133,334
Accounts payable..................................................... 2,231,149
Deferred income...................................................... 704,155
Advances under lines of credit....................................... 43,963,030
----------
Total current liabilities............................................ 47,031,668
Notes payable........................................................ 1,250,000
Stockholders' equity
Common stock, no par, 2,000,000 shares authorized, 1,075,900 shares
issued and 1,039,000 outstanding................................... $ 500,318
Retained earnings.................................................... 2,556,439
Less: treasury stock at cost......................................... (75,400)
---------
Total stockholders' equity........................................... 2,981,357
----------
Total liabilities and stockholders' equity........................... $51,263,025
----------
----------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-52
<PAGE>
PACIFIC GUARANTEE MORTGAGE CORPORATION
STATEMENTS OF OPERATIONS
FOR THE EIGHT MONTHS ENDED AUGUST 31,
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
Revenue
Broker origination fees................................................................ $ 7,182,229 $ 15,775,143
PGM origination fees................................................................... 1,511,059 6,041,805
Lenders' incentives.................................................................... 86,966 417,436
Government service release premiums.................................................... 159,584 262,053
CB service release premiums............................................................ 463,870 2,934,045
CB fees................................................................................ 395,878 1,174,002
Processing fees........................................................................ 1,148,996 2,806,548
Interest............................................................................... 270,771 2,116,594
Administration fees.................................................................... 477,472 498,307
Miscellaneous income................................................................... 40,304 23,007
----------- ------------
Total revenue.......................................................................... 11,737,129 32,048,940
----------- ------------
Cost of Sales
Commissions............................................................................ 5,746,967 14,855,290
Administration......................................................................... 125,605 328,710
----------- ------------
Total cost of sales.................................................................... 5,872,572 15,184,000
----------- ------------
Gross profit........................................................................... 5,864,557 16,864,940
----------- ------------
Operating expenses
Processors' salaries................................................................... 768,464 1,356,737
Staff salaries......................................................................... 920,010 2,020,752
Processor bonus........................................................................ 223,967 612,269
Branch manager......................................................................... 138,787 378,800
Professional services.................................................................. 171,307 393,136
Legal.................................................................................. 26,641 112,036
Payroll expenses....................................................................... 282,163 599,337
Rent and utilities..................................................................... 522,021 823,782
Advertising............................................................................ 53,158 119,272
Deliveries............................................................................. 50,551 160,345
Supplies............................................................................... 322,798 703,736
Printing............................................................................... 14,565 37,642
Postage................................................................................ 43,047 56,934
Telephone.............................................................................. 149,129 312,174
Interest expense....................................................................... 396,035 2,479,998
Miscellaneous office expense........................................................... 89,391 410,589
Promotion and marketing................................................................ 19,148 55,345
Travel and entertainment............................................................... 42,844 39,065
Equipment rental and maintenance....................................................... 159,966 243,691
Depreciation and amortization.......................................................... 23,986 54,806
Documentation and underwriting......................................................... 85,895 307,127
Miscellaneous expense.................................................................. 115,013 242,154
----------- ------------
Total operating expenses............................................................... 4,618,886 11,519,727
----------- ------------
Income before profit distribution...................................................... 1,245,671 5,345,213
Branch distribution.................................................................... (701,447) (2,778,942)
Administration fees.................................................................... 125,605 324,510
----------- ------------
Net income............................................................................. 669,829 2,890,781
Retained earnings beginning of period.................................................. 35,266 54,986
Less withdrawls of capital............................................................. -- (389,328)
----------- ------------
Retained earnings end of period........................................................ $ 705,095 $ 2,556,439
----------- ------------
----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-53
<PAGE>
PACIFIC GUARANTEE MORTGAGE CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE EIGHT MONTHS ENDED AUGUST 31,
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1998
--------------- ---------------
<S> <C> <C>
Cash flow from operating activities
Net income..................................................................... $ 669,829 $ 2,890,781
--------------- ---------------
Depreciation and amortization.................................................. 21,290 54,806
Proceeds from sales of loans................................................... 137,142,460 490,811,715
Loans originated............................................................... (144,687,045) (506,892,199)
(Increase) in accounts receivable.............................................. (28,910) (1,220,897)
(Increase) in prepaid expenses................................................. (256,531) (512,509)
Decrease in deposits........................................................... 37,460 56,838
Increase (decrease) in accounts payable........................................ (284,587) 353,704
Increase in deferred income.................................................... 304,621 704,155
--------------- ---------------
Total adjustments.............................................................. (7,751,242) (16,644,387)
--------------- ---------------
Net cash used in operations.................................................... (7,081,413) (13,753,606)
--------------- ---------------
Cash flows from investing activities
Acquisition of property and equipment.......................................... (43,456) (107,921)
Proceeds from sale of real estate.............................................. -- 178,092
(Increase) in investment in real estate........................................ (22,584) --
(Increase) in furniture and fixtures........................................... (5,856) --
(Increase) in notes receivable................................................. (182,575) --
--------------- ---------------
Net cash provided by (used in) investing activities............................ (254,471) 70,171
--------------- ---------------
Cash flows from financing activities
Proceeds from lines of credit.................................................. 7,451,491 16,248,824
Payment on notes payable....................................................... -- (57,777)
Proceeds from notes payable.................................................... 773,334 400,000
Payments to shareholders....................................................... -- (389,328)
Purchase of treasury stock..................................................... -- (75,400)
--------------- ---------------
Net cash provided by (used in) financing activities............................ 8,224,825 16,126,319
--------------- ---------------
Net increase in cash........................................................... 888,941 2,442,884
Cash and cash equivalents - beginning of period................................ 456,257 1,197,685
--------------- ---------------
Cash and cash equivalents - end of period...................................... $ 1,345,198 $ 3,640,569
--------------- ---------------
--------------- ---------------
Cash paid for interest......................................................... $ 315,847 $ 2,226,444
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-54
<PAGE>
PACIFIC GUARANTEE MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Pacific Guarantee
Mortgage Corporation ("Pacific Guarantee") reflect all adjustments which, in the
opinion of management are necessary for a fair presentation of the results of
the interim periods presented. All such adjustments are of a normal recurring
nature.
The unaudited interim financial statements should be read in conjunction
with Pacific Guarantee's audited financial statements and notes thereto for the
year ended December 31, 1997 included herein.
Certain prior period assets and liabilities and costs and expenses have been
reclassified to conform to the current period presentation.
F-55
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Pacific Guarantee Mortgage Corporation
I have audited the accompanying balance sheet of Pacific Guarantee Mortgage
Corporation as of December 31, 1997 and the related statements of operations and
retained earnings, and cash flows for the year then ended. These financial
statements are the responsibility of the corporation's management. My
responsibility is to express an opinion on these financial statements based on
my audit.
I conducted the audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation. I
believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Pacific Guarantee Mortgage
Corporation as of December 31, 1997, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
Clay L. Miller
Certified Public Accountant
Healdsburg, California
March 6, 1998
F-56
<PAGE>
PACIFIC GUARANTEE MORTGAGE CORPORATION
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
Current assets
Cash............................................................... $1,197,685
Accounts receivable................................................ 555,439
Loans held for sale................................................ 28,534,830
Prepaid expenses................................................... 69,092
----------
Total current assets................................................. 30,357,046
Property and equipment
Furniture and fixtures............................................. $ 186,556
Office equipment................................................... 467,022
Leasehold improvements............................................. 15,442
---------
669,020
Less accumulated depreciation...................................... (409,328)
---------
Total property and equipment......................................... 259,692
Other assets
Deposits........................................................... 56,838
Investments in affiliates.......................................... 2,160
Investment in real estate.......................................... 512,330
---------
Total other assets................................................... 571,328
----------
Total assets......................................................... $31,188,066
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of notes payable................................... $ 191,111
Accounts payable................................................... 1,874,314
Advances under lines of credit..................................... 27,714,206
----------
Total current liabilities............................................ 29,779,631
Notes payable........................................................ 850,000
Deferred tax liability............................................... 3,131
Stockholders' equity
Common stock, no par, 2,000,000 shares authorized, 1,075,900 shares
issued and outstanding........................................... $ 500,318
Retained earnings.................................................. 54,986
---------
Total stockholders' equity........................................... 555,304
----------
Total liabilities and stockholders' equity........................... $31,188,066
----------
----------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-57
<PAGE>
PACIFIC GUARANTEE MORTGAGE CORPORATION
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Revenue
<S> <C>
Commissions and fees......................................................... $23,594,039
Income from investments...................................................... 134,069
Interest income.............................................................. 709,102
Miscellaneous income......................................................... 83,847
----------
Total revenue.................................................................. 24,521,057
----------
Operating expenses
Salaries and wages........................................................... 4,907,357
Commissions.................................................................. 12,787,603
Payroll taxes................................................................ 402,401
Employee benefits............................................................ 145,240
Advertising and promotion.................................................... 188,982
Closing costs and loan processing............................................ 1,002,801
Insurance.................................................................... 189,737
Telephone and utilities...................................................... 246,140
Professional services........................................................ 1,106,758
Office expense............................................................... 893,545
Equipment rental............................................................. 236,425
Rent......................................................................... 877,415
Repairs and maintenance...................................................... 54,279
Other expense................................................................ 145,643
Bad debts.................................................................... 77,870
Interest expense............................................................. 1,009,967
Loss on investment in affiliate.............................................. 133,000
Depreciation................................................................. 66,825
----------
Total operating expenses....................................................... 24,471,988
----------
Income before income taxes..................................................... 49,069
Provision for income taxes..................................................... 29,349
----------
Net income..................................................................... 19,720
Retained earnings--January 1, 1997............................................. 35,266
----------
Retained earnings--December 31, 1997........................................... 54,986
----------
----------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-58
<PAGE>
PACIFIC GUARANTEE MORTGAGE CORPORATION
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash flow from operating activities
Net income.................................................................... $ 19,720
------------
Adjustments to reconcile net income to net cash
Provided by operations
Depreciation.................................................................. 66,825
Loss on investment in affiliate............................................... 133,000
Non-cash portion on trade-ins................................................. (4,651)
(Increase) in accounts receivable............................................. (251,924)
(Increase) in prepaid expenses................................................ (24,642)
Proceeds from sales of loans.................................................. 306,186,345
Loans originated.............................................................. (321,675,175)
(Increase) in deposits........................................................ (19,378)
Increase in accounts payable.................................................. 838,775
(Decrease) in deferred tax liability.......................................... (33,818)
------------
Total adjustments............................................................. (14,784,643)
------------
Net cash used in operations................................................... (14,764,923)
------------
Cash flows from investing activities
Acquisition of property and equipment......................................... (108,465)
Collection of notes receivable................................................ 3,429
Return of capital invested in partnerships.................................... 3,515
Investment in real estate..................................................... (285,941)
------------
Net cash used by investing activities......................................... (387,462)
------------
Cash flows from financing activities
Payment on notes payable...................................................... (48,889)
Proceeds from notes payable................................................... 890,000
Proceeds from lines of credit................................................. 14,998,952
Proceeds from issuance of common stock........................................ 53,750
------------
Net cash provided by financing activities..................................... 15,893,813
------------
Net increase in cash.......................................................... 741,428
Cash and cash equivalents - January 1, 1997................................... 456,257
Cash and cash equivalents - December 31, 1997................................. $ 1,197,685
------------
------------
Cash paid during the year for income taxes.................................... $ 11,816
------------
------------
Cash paid during the year for interest........................................ $ 869,677
------------
------------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-59
<PAGE>
PACIFIC GUARANTEE MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS--The Company is engaged in the origination and funding
of residential mortgage loans. Generally, the loans are subsequently sold to
financial institutions who sell these loans to investors as part of secured
investment packages.
ACCOUNTING METHOD--The Company uses the accrual method of accounting whereby
revenues are recognized when earned and expenses are recognized when incurred.
ACCOUNTS RECEIVABLE--No provision has been made for uncollectible accounts
as of the balance sheet date because management considers all accounts to be
fully collectible.
PROPERTY AND EQUIPMENT--Property and equipment are recorded at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives ranging from three to fifteen years. Depreciation expense for the
year amounted to $66,825.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the period. Actual results may differ from those estimates.
CASH EQUIVALENTS--For purposes of the statement of cash flows, the Company
considers all highly liquid investments with a maturity of three months or less
to be cash equivalents.
CONCENTRATIONS OF CREDIT RISK--During the course of normal operations, the
Company maintains cash deposits that occasionally exceed amounts covered by
insurance provided by the U.S. Federal Deposit Insurance Corporation (FDIC). The
Company has not experienced any losses in such accounts and believes it is not
exposed to any significant credit risk of cash.
LOANS HELD FOR SALE--Loans held for sale are recorded at face value. All
loans are secured by residential real estate. Management believes that all loans
will be sold, therefore, no allowance has been provided for uncollectible loans.
INCOME TAXES--The Company accounts for its income taxes using Statement of
Financial Standards No. 9, Accounting for Income Taxes ("FAS 109"). Under FAS
109, deferred income arises from different bases in assets and liabilities for
financial reporting and tax purposes. A deferred tax asset or liability is
established for the recognition of future deductible or taxable amounts, and
loss carryforwards. Deferred tax expense or benefit is recognized as a result of
the changes in assets and liabilities during the year.
INVESTMENTS--Investments are stated at cost and consist of real estate and
ownership of related companies. The Company's equity in these related companies
is less than 20%.
F-60
<PAGE>
PACIFIC GUARANTEE MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 2--RELATED PARTY TRANSACTIONS
The Company is the general partner in affiliated partnerships. The Company's
ownership interest is less than 20%. The Company earned $134,069 in investment
income and $573,235 in management fees from these partnerships.
Notes payable in the amount of $450,000 are due to majority stockholders.
These notes bear an interest rate of 10.00% and have been subordinated to Cooper
River Funding, Inc.
NOTE 3--LINES OF CREDIT
The Company has lines of credit with Flagstar Bank, Imperial Warehouse
Lending Group, and Cooper River Funding Inc. with a combined credit limit of
$35,000,000. These lines of credit are secured by mortgage loans receivable.
Advances are repaid upon the sale of the mortgage loans receivable. The
Company's majority stockholders also provide continuing personal guarantees. The
Company also has a $200,000 operating line of credit with WestAmerica Bank for
which the Company's majority stockholders have provided continuing personal
guarantees.
At December 31, 1997 the lines of credit consisted of the following:
<TABLE>
<S> <C>
Flagstar Bank--Monthly interest payments at bank's prime rate
on funds advanced 1 to 29 days and 3.00% plus bank's prime
rate on funds advanced more than 30 days, due March 30,
1998. ....................................................... $11,468,614
Cooper River Funding Inc.--Monthly interest payments of (a)
1.75% plus commercial paper rate on funds advanced 1 to 15
days and 2.20% plus commercial paper rate on funds advanced
more than 15 days for eligible mortgage loans, and (b) 2.25%
plus commercial paper rate on funds advanced 1 to 15 days and
2.50% plus commercial paper rate on funds advanced more than
15 days for eligible nonconforming loans, no due date. ...... 14,106,818
Imperial Warehouse Lending Group--Monthly interest payments of
1.00% plus bank's prime rate on all funds advanced, no due
date. ....................................................... 1,988,774
WestAmerica Bank--Monthly interest payments of 11.50% plus bank
index rate, due May 31, 1998................................. 150,000
----------
Total.......................................................... $27,714,206
----------
----------
</TABLE>
F-61
<PAGE>
PACIFIC GUARANTEE MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 4--NOTES PAYABLE
<TABLE>
<CAPTION>
WestAmerica Bank--Monthly principal payments of $3,333 plus interest of
1.75% plus bank index rate, secured by equipment, due December 31,
1998.................................................................. $ 40,000
<S> <C>
Cananwill Inc.--Monthly payments of $4,616.55 include interest of 5.55%,
due June 26, 1998..................................................... 31,111
Stockholder--Monthly interest only payments of $416.67 at 10.00%,
unsecured, due December 31, 2002. Note subordinated to Cooper River
Funding, Inc.......................................................... 50,000
Individual--Monthly interest only payments of $900 at 9.00%, secured by
real estate, due November 1, 1998..................................... 120,000
Individual--Monthly interest only payments of $1,667 at 10.00%, secured
by real estate, due July 1, 2002. Note subordinated to Cooper River
Funding, Inc.......................................................... 200,000
Individual--Monthly interest only payments of $1,667 at 10.00%, secured
by real estate, due July 1, 2002. Note subordinated to Cooper River
Funding, Inc.......................................................... 200,000
Stockholder--Monthly interest only payments of $3,333 at 10.00%,
unsecured, due June 30, 2002. Note subordinated to Cooper River
Funding, Inc.......................................................... 400,000
---------
Total notes payable..................................................... 1,041,111
Less current portion.................................................... (191,111)
---------
$ 850,000
---------
---------
Principal maturities for the years ending December 31, are as follows:
1998................................................................ $ 191,111
1999 thru 2001...................................................... --
2002................................................................ 850,000
---------
Total................................................................... $1,041,111
---------
---------
</TABLE>
NOTE 5--STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Capital Stock--December 31, 1996.......................................... 446,568
<S> <C>
Plus issuance of 125,000 shares of stock................................ 53,750
---------
Capital stock--December 31, 1997.......................................... 500,318
Retained earnings......................................................... 54,986
---------
Total stockholders' equity................................................ $ 555,304
---------
---------
</TABLE>
F-62
<PAGE>
PACIFIC GUARANTEE MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 6--OPERATING LEASES
The Company leases office facilities and certain office equipment under
noncancelable operating leases which expire on various dates between 1998 and
2005. The future minimum rental payments under these leases as of December 31,
1997 are as follows:
<TABLE>
<S> <C>
1998................................................................ $ 742,695
1999................................................................ 593,802
2000................................................................ 544,854
2001................................................................ 280,830
2002 and thereafter................................................. 186,391
---------
Total................................................................... $2,348,572
---------
---------
</TABLE>
Total payments under the leases for the year ended December 31, 1997 were
$603,147.
NOTE 7--OFFICERS' COMPENSATION
Officers' Compensation for 1997 was $1,506,883.
NOTE 8--PENSION PLAN
The Company maintains a 401(k) profit sharing plan that covers substantially
all full-time employees. Company contributions are discretionary under the plan.
Eligible employees have the option of contributing to the plan.
NOTE 9--INCOME TAXES
The provision (benefit) for income taxes consists of:
<TABLE>
<S> <C>
Current
Federal............................................................... $ 47,592
State................................................................. 16,326
Deferred
Federal............................................................... (19,949)
State................................................................. (14,620)
---------
$ 29,349
---------
---------
</TABLE>
F-63
<PAGE>
PACIFIC GUARANTEE MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 10--STOCK OPTIONS
In 1996, the Board of Directors approved a nonqualified stock option plan.
Under the plan, certain employees have been granted options to purchase 375,000
shares of common stock at $.43 per share in exchange for continuing personal
guarantees of corporate debt.
NOTE 11--CONTINGENCIES
The Company is periodically involved in legal actions and claims that arise
as a result of events that occur in the normal course of business. Management is
of the opinion that the outcome of any such actions will not have a material
adverse effect on the financial statements.
F-64
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Pacific Guarantee Mortgage Corporation
I have audited the accompanying balance sheet of Pacific Guarantee Mortgage
Corporation as of December 31, 1996 and the related statements of operations and
retained earnings, cash flows, and stockholders' equity for HUD requirement
purposes for the year then ended. These financial statements are the
responsibility of the corporation's management. My responsibility is to express
an opinion on these financial statements based on my audit.
I conducted the audit in accordance with generally accepted auditing
standards and GOVERNMENT AUDITING STANDARDS, issued by the Comptroller General
of the United States, and the CONSOLIDATED AUDIT GUIDE FOR AUDITS OF HUD
PROGRAMS (the "Guide"), issued by the U.S. Department of Housing and Urban
Development, Office of the Inspector General, in July 1993. Those standards
require that I plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management as well
as evaluating the overall financial statement presentation. I believe that my
audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pacific Guarantee Mortgage
Corporation as of December 31, 1996, and the results of its operations and its
cash flows and stockholders' equity for HUD requirement purposes for the year
then ended in conformity with generally accepted accounting principles.
William M. Stoll
Certified Public Accountant
Santa Rosa, California
February 21, 1997
F-65
<PAGE>
PACIFIC GUARANTEE MORTGAGE CORPORATION
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C> <C>
ASSETS
Current Assets:
Cash............................................................... $ 456,257
Accounts Receivable................................................ 303,515
Mortgage Loans Receivable.......................................... 13,046,000
Notes Receivable................................................... 3,429
Prepaid Expenses................................................... 44,450
----------
Total Current Assets................................................. 13,853,651
Property and Equipment:
Furniture and Fixtures............................................. $ 180,700
Office Equipment................................................... 362,263
Leasehold Improvements............................................. 15,442
---------
558,405
Less: Accumulated Depreciation..................................... (345,004)
---------
Total Property and Equipment......................................... 213,401
Other Assets:
Deposits........................................................... 37,460
Investment in Affiliates........................................... 138,675
Investment in Real Estate.......................................... 226,389
---------
Total Other Assets................................................... 402,524
----------
Total Assets......................................................... $14,469,576
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Portion of Notes Payable................................... $ 40,000
Accounts Payable................................................... 1,035,539
Advances Under Lines of Credit..................................... 12,715,254
----------
Total Current Liabilities............................................ 13,790,793
Notes Payable........................................................ 160,000
Deferred Tax Liability............................................... 36,949
Stockholders' Equity:
Common Stock No-Par or Stated Value, 10,000,000 Authorized, 950,900
Shares Issued and Outstanding.................................... $ 446,568
Retained Earnings.................................................... $ 35,266
---------
Total Stockholders' Equity........................................... 481,834
----------
Total Liabilities and Stockholders' Equity........................... $14,469,576
----------
----------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-66
<PAGE>
PACIFIC GUARANTEE MORTGAGE CORPORATION
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Revenue:
Commissions and Fees......................................................... $12,116,586
Income from Investments...................................................... 93,496
Interest Income.............................................................. 198,259
Miscellaneous Income......................................................... $ 40,457
----------
Total Revenue.................................................................. 12,448,798
----------
Operating Expenses:
Salaries and Wages........................................................... 2,978,651
Commissions.................................................................. 6,926,881
Payroll Taxes................................................................ 246,987
Employee Benefits............................................................ 103,221
Advertising and Promotion.................................................... 119,951
Closing Costs and Loan Processing............................................ 130,640
Insurance.................................................................... 72,924
Telephone and Utilities...................................................... 175,172
Professional Services........................................................ 133,456
Office Expense............................................................... 497,419
Equipment Rent............................................................... 148,189
Rent......................................................................... 542,613
Repairs and Maintenance...................................................... 23,047
Other Expense................................................................ 36,807
Interest Expense............................................................. 222,693
Depreciation................................................................. 64,402
----------
Total Operating Expenses....................................................... 12,423,053
----------
Income Before Provision for Income Taxes....................................... 25,745
Provision for Income Taxes..................................................... 13,796
----------
Net Income..................................................................... 11,949
Retained Earnings--January 1, 1996............................................. 23,317
----------
Retained Earnings--December 31, 1996........................................... 35,266
----------
----------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-67
<PAGE>
PACIFIC GUARANTEE MORTGAGE CORPORATION
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Cash Flows From Operating Activities:
<S> <C>
Net Income..................................................................... $ 11,949
---------
Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operations:
Depreciation................................................................... 64,402
(Increase) in Accounts Receivable.............................................. (124,094)
(Increase) in Prepaid Expenses................................................. (24,043)
(Increase) in Mortgage Notes Receivable, net of change in Advances Under Lines
of Credit.................................................................... (330,746)
Decrease in Deposits........................................................... 3,026
Decrease in Deferred Tax Asset................................................. 4,856
Increase in Accounts Payable................................................... 547,279
(Decrease) in Deferred Tax Liability........................................... (279)
---------
Total Adjustments................................................................ 140,401
---------
Cash Provided by Operations...................................................... 152,350
---------
Cash Flows From Investing Activities:
Acquisition of Property and Equipment.......................................... (38,432)
Collection of Notes Receivable................................................. 221,180
Investment in Partnerships..................................................... (4,125)
Investment in Real Estate...................................................... (226,389)
---------
Cash Provided by Investing Activities............................................ (47,766)
---------
Cash Flows From Financing Activities:
Payment on Notes Payable....................................................... (40,000)
Proceeds from Notes Payable.................................................... 120,000
---------
Cash Used by Financing Activities................................................ 80,000
---------
Increase in Cash................................................................. 184,584
Cash and Cash Equivalents--January 1, 1996....................................... 271,673
---------
Cash and Cash Equivalents--December 31, 1996..................................... $ 456,257
---------
---------
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Year for Taxes............................................ $ 5,800
Cash Paid During the Year for Interest......................................... 222,693
</TABLE>
The accompanying notes are an integral part of these financial statements
F-68
<PAGE>
PACIFIC GUARANTEE MORTGAGE CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY FOR HUD REQUIREMENT PURPOSES
DECEMBER 31, 1996
<TABLE>
<S> <C>
Stockholders' Equity, December 31, 1996.......................................... $ 481,834
Less Unacceptable Asset:
Investments in Related Companies............................................... (138,675)
---------
Adjusted Stockholders' Equity for HUD Requirement Purposes....................... $ 343,159
---------
---------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-69
<PAGE>
PACIFIC GUARANTEE MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS--The Company is engaged in the origination and funding
of residential mortgage loans. Generally, the loans are subsequently sold to
financial institutions who sell these loans to investors as part of secured
investment packages.
ACCOUNTING METHOD--The Company uses the accrual method of accounting whereby
revenues are recognized when earned and expenses are recognized when incurred.
ACCOUNTS AND NOTES RECEIVABLE--No provision has been made for uncollectible
accounts and notes receivable as of the balance sheet date because management
considers all accounts and notes to be fully collectible.
PROPERTY AND EQUIPMENT--Property and equipment are recorded at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives ranging from seven to fifteen years. Depreciation expense for the
year amounted to $64,402.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles require management to make estimates
and assumptions that effect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the period. Actual results may differ from those estimates.
CASH EQUIVALENTS--For purposes of the statement of cash flows, the Company
considers all highly liquid investments with a maturity of three months or less
to be cash equivalents.
CONCENTRATIONS OF CREDIT RISK--During the course of normal operations, the
Company maintains cash deposits that occasionally exceed amounts covered by
insurance provided by the U.S. Federal Deposit Insurance Corporation. (FDIC).
The Company has not experienced any losses in such accounts and believes it is
not exposed to any significant credit risk of cash.
MORTGAGE LOANS RECEIVABLE--Mortgage loans receivable are held for sale and
are recorded at face value. All mortgages are secured by residential real
estate. Management believes that all loans will be sold, therefore, no allowance
has been provided for uncollectible loans.
INCOME TAXES--The Company accounts for its income taxes using Statement of
Financial Standards No. 109, Accounting for Income Taxes ("FAS 109"). Under FAS
109 deferred income taxes arise from different bases in assets and liabilities
for financial reporting and tax purposes. A deferred tax asset or liability is
established for the recognition of future deductible or taxable amounts, and
operating loss carryforwards. Deferred tax expense or benefit is recognized as a
result of the changes in assets and liabilities during the year. Deferred taxes
are classified as current or non-current, depending on the assets and
liabilities to which they relate. The Company's deferred taxes primarily result
from differences in fixed asset bases.
INVESTMENTS--Investments are stated at cost and consist of real estate and
ownership in related companies. The Company's equity in these related companies
is less than 20%.
NOTE 2--NOTES RECEIVABLE
<TABLE>
<S> <C>
Notes Receivable--individuals with monthly principal payments of
$873 including interest at 9.75%, due May 1, 1997................. $ 3,429
---------
---------
</TABLE>
F-70
<PAGE>
PACIFIC GUARANTEE MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 3--LINE OF CREDIT
The Company has lines of credit with Flagstar Bank and Imperial Warehouse
Lending Group with a combined limit of $11,000,000. These lines of credit are
secured by mortgage loans receivable. Advances are repaid upon the sale of the
mortgage loans receivable. The Company's majority stockholders also provide
continuing personal guarantees. At December 31, 1996, the Company exceeded its
borrowing limits on these lines of credit. Flagstar Bank and Imperial Warehouse
Lending Group temporarily increased the Company's credit limits. On January 4,
1997, repayments reduced the lines of credit below the maximum limit.
At December 31 the lines of credit consisted of the following:
<TABLE>
<S> <C>
Flagstar Bank--Monthly interest payments of .50% plus Prime on
funds advanced 1 to 15 days, 3.00% plus Prime on funds
advanced 16 to 30 days and 7.00% on funds advanced more than
30 days, due July 1997....................................... $7,445,711
Imperial Warehouse Lending Group--Monthly interest payments of
1.00% plus Prime on all funds advanced, no due date.......... 5,269,543
----------
Total.......................................................... $12,715,254
----------
----------
</TABLE>
NOTE 4--NOTES PAYABLE
<TABLE>
<S> <C>
Westamerica Bank--Monthly principal payments of $3,333 plus
interest at the Bank's index rate plus 1.75%, secured by
equipment, due December 1998.................................... $ 80,000
Individual--Monthly interest only payments of $900 at 9.00%
secured by real estate, due November 1998....................... 120,000
---------
Total Notes Payable............................................... 200,000
Less: Current Portion (40,000)
---------
$ 160,000
---------
---------
Principal maturities for the next three years ending December 31,
are as follows:
1997........................................................ 40,000
1998........................................................ 160,000
---------
Total............................................................. $ 200,000
---------
---------
</TABLE>
F-71
<PAGE>
PACIFIC GUARANTEE MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 5--OPERATING LEASES
The Company leases office facilities and certain office equipment under
noncancelable operating leases which expire on various dates between 1996 and
2000. The future minimum rental payments under these leases as of December 31
are as follows:
<TABLE>
<S> <C>
1997............................................................ $ 488,218
1998............................................................ 376,944
1999............................................................ 280,487
2000............................................................ 17,359
---------
Total $1,163,008
---------
---------
</TABLE>
Total rent expense under these leases for the year ended December 31, 1996
was $690,802.
NOTE 6--OFFICERS COMPENSATION
Officers' compensation for 1996 totaled $1,013,791.
NOTE 7--PENSION PLAN
The Company maintains a 401(k) profit sharing plan that covers substantially
all full-time employees. Company contributions are discretionary under the plan.
Eligible employees have the option of contributing to the plan.
NOTE 8--STOCK OPTION
On February 16, 1996, the Board of Directors approved a nonqualified stock
option plan. Under the plan, certain employees have been granted options to
purchase 125,000 shares of common stock at $.43 per share in exchange for
continuing personal guarantees of corporate debt.
NOTE 9--INCOME TAXES
As a result of the loss incurred in 1994, the Company has a California loss
carryforward of $38,459 which has been utilized to offset taxable income and
income taxes in the current year.
The provision (benefit) for income taxes consists of:
<TABLE>
<S> <C>
Current:
Federal......................................................... $ 12,362
State........................................................... 7,361
Deferred:
Federal......................................................... 5,729
State........................................................... (11,656)
---------
$ 13,796
---------
---------
</TABLE>
F-72
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
YOU SHOULD RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT WHICH IS
SET FORTH IN THIS PROSPECTUS. WE ARE OFFERING TO SELL SHARES OF COMMON STOCK AND
SEEKING OFFERS TO BUY SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS
AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS
ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF
DELIVERY OF THE PROSPECTUS OR OF ANY SALE OF COMMON STOCK.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 8
Special Note Regarding Forward-Looking
Statements.................................... 17
Transactions Related to the Offering............ 18
Use of Proceeds................................. 19
Dividend Policy................................. 19
Capitalization.................................. 20
Dilution........................................ 21
Selected Financial Data......................... 23
Unaudited Pro Forma Combining Statement of
Income........................................ 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 28
Business........................................ 41
Management...................................... 57
Certain Transactions............................ 66
Principal and Selling Stockholders.............. 68
Description of Capital Stock.................... 70
Shares Eligible for Future Sale................. 72
Underwriting.................................... 74
Legal Matters................................... 76
Experts......................................... 76
Change in Independent Auditors.................. 77
Where You Can Find More Information............. 77
Index to Financial Statements................... F-1
</TABLE>
------------------------
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
2,500,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
, 1999
------------------------
WILLIAM BLAIR & COMPANY
ABN AMRO ROTHSCHILD
A DIVISION OF ABN AMRO INCORPORATED
U.S. BANCORP PIPER JAFFRAY
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of common stock being registered. All amounts are estimates.
<TABLE>
<S> <C>
SEC registration fee............................................. $ 11,190
NASD Filing fee.................................................. 4,813
Nasdaq National Market listing fee............................... 88,500
Printing and engraving expenses.................................. 180,000
Legal fees and expenses.......................................... 300,000
Accounting fees and expenses..................................... 185,000
Blue sky fees and expenses....................................... 5,000
Transfer agent and registrar fees and expenses................... 5,000
Miscellaneous fees and expenses.................................. 20,497
---------
Total...................................................... $ 800,000
---------
---------
</TABLE>
- ------------------------
Prism Financial will bear all of the expenses shown above.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of Delaware Law authorizes a court to award or a corporation's
board of directors to grant indemnity to directors and officers in terms
sufficiently broad to permit such indemnification under some circumstances for
liabilities arising under the Securities Act and to provide for the
reimbursement of expenses incurred.
As permitted by the Delaware Law, Article VIII of our Amended Bylaws provide
that (1) we are required to indemnify our directors and officers to the fullest
extent permitted by the Delaware Law, subject to very limited exceptions; (2) we
are permitted to indemnify our other employees to the extent that we indemnify
our officers and directors, unless otherwise required by law, our Amended
Certificate, our Amended Bylaws or agreements; (3) we are required to advance
expenses, as incurred, to our directors and officers in connection with a legal
proceeding to the fullest extent permitted by the Delaware Law, subject to very
limited exceptions; and (4) the rights conferred in the Amended Bylaws are not
exclusive. As permitted by the Delaware Law, our Amended Certificate includes a
provision that eliminates the personal liability of our directors for monetary
damages for breach of fiduciary duty as a director, except for liability (1) for
any breach of the director's duty of loyalty to us or our stockholders; (2) for
acts of omissions not in good faith or that involve intentional misconduct or a
knowing violation of law; (3) under Section 174 of the Delaware Law (regarding
payments of dividends; stock purchases or redemptions which are unlawful) or (4)
for any transaction from which the director derived an improper personal
benefit. This provision in the Amended Certificate does not eliminate the
directors' fiduciary duty, and in appropriate circumstances equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware Law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to us for acts or
omissions not in good faith or involving intentional misconduct, for knowing
violations of law, for actions leading to improper personal benefit to the
director and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware Law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws.
II-1
<PAGE>
Under Article VIII, Section 8, of our Amended Bylaws, we will be authorized
to, and intend to purchase, insurance covering our directors and officers
against liability asserted against them in their capacity as officers or
directors. The Underwriting Agreement, contained in Exhibit 1.1 hereto, will
contain provisions indemnifying our officers and directors against some types of
liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On May 1, 1998, the Registrant issued 102,690 shares of its common stock to
Ms. Abby Reisler as consideration for services rendered to the registrant. The
issuance of common stock did not constitute "a transaction by any issuer not
involving any public offering" and thus was exempt from the registration
requirements of the Securities Act by virtue of Section 4(2) of the Securities
Act.
On August 1, 1998, the Registrant issued 307,441 shares of its common stock
to Mr. William Osenton and 241,410 shares of its common stock to Mr. Bruce
Barbera as partial consideration for the purchase by the registrant of all of
the issued and outstanding common stock of Pacific Guarantee Mortgage
Corporation. The issuance of common stock did not constitute "a transaction by
any issuer not involving any public offering" and thus was exempt from the
registration requirements of the Securities Act by virtue of Section 4(2) of the
Securities Act.
On December 31, 1998, the Registrant entered into an Agreement Relating to
the Purchase of Common Stock of Prism Mortgage Company with CTC Trust, Donrose
Trust, T&M Childrens Trust and JBR Trust #4 (collectively, the "Trust Buyers"),
pursuant to which the registrant issued 523,000 shares of its common stock to
CTC Trust and 17,251 shares of its common stock to each of Donrose Trust, JBR
Trust #4 and T&M Childrens Trust as consideration for the $2.5 million received
by the registrant in the form of cash and the satisfaction of indebtedness owed
by the registrant to the Trust Buyers. The issuance of common stock did not
constitute "a transaction by any issuer not involving any public offering" and
thus was exempt from the registration requirements of the Securities Act by
virtue of Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Form of Amended and Restated Certificate of Incorporation of the Registrant.
3.2* Form of Amended and Restated Bylaws of the Registrant.
4.1 Reference is hereby made to Exhibits 3.1 and 3.2.
4.2* Specimen Certificate for the Registrant's Common Stock.
4.3* Registration Rights Agreement, dated as of , among the Registrant and the stockholders
of the Registrant.
5.1* Opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois), special counsel to the Registrant.
10.1** Form of 1999 Omnibus Stock Incentive Plan of the Registrant.
10.2+ Agreement for the Purchase and Sale of the Capital Stock of Pacific Guarantee Mortgage Corporation,
dated as of July 31, 1998, by and between Prism Mortgage Company and William D. Osenton and Bruce P.
Barbera.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.3+ Agreement for the Purchase and Sale of the Capital Stock of Mortgage Market, Inc., dated as of
September 30, 1998, by and among Prism Mortgage Company and Martin E. Francis, Kenneth Bartley,
Melissa Stashin and Curt Vanderzanden.
10.4+ Prism Equity Value Plan, effective as of August 31, 1998, by Prism Mortgage Company and by personnel
of Pacific Guarantee Mortgage Corporation.
10.5+ Executive Employment Agreement, dated as of July 31, 1998, by and between Pacific Guarantee Mortgage
Corporation and William D. Osenton.
10.6+ Executive Employment Agreement, dated as of September 30, 1998, by and between Mortgage Market, Inc.
and Martin E. Francis.
10.7** Prism 2000 Profit Sharing Plan.
10.8++ Credit Agreement, dated as of March 31, 1999, among Prism Mortgage Company and its subsidiaries, the
lending institutions listed on the signature pages thereto and The First National Bank of Chicago, as
Agent.
11.1++ Statement Regarding Computation of Per Share Earnings.
16.1++ Letter Regarding Change in Certified Independent Auditors.
21.1*** Subsidiaries of Prism Financial Corporation.
23.1++ Consent of PricewaterhouseCoopers LLP.
23.2++ Consent of McGladrey & Pullen, LLP.
23.3++ Consent of Stefani & Matthews, L.L.P.
23.4++ Consent of Clay L. Miller.
23.5++ Consent of William M. Stoll.
23.6* Consent of Skadden, Arps, Slate, Meagher & Flom (Illinois) (included in Exhibit 5.1).
23.7*** Consent of Andrew S. Hochberg.
23.8*** Consent of Michael P. Krasny.
23.9*** Consent of Penny S. Pritzker.
23.10*** Consent of Richard L. Wellek.
24.1*** Power of Attorney (included on signature page).
27.1++ Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
** Filed with Amendment No. 1 to Prism Financial Corporation's Registration
Statement on Form S-1, dated April 1, 1999.
+ Filed with Amendment No. 1 to Prism Financial Corporation's Registration
Statement on Form S-1, dated April 1, 1999, with a confidential treatment
request.
++ Filed herewith.
*** Filed with Prism Financial Corporation's Registration Statement on Form S-1,
dated March 23, 1999.
II-3
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES:
All schedules have been omitted because the information required to be set
forth in those schedules is not applicable or is shown in the combined financial
statements or notes thereto.
II-4
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
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 Securities 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 Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
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) of (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act, 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.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Chicago,
State of Illinois, on April 29, 1999.
PRISM FINANCIAL CORPORATION
By: /s/ DAVID A. FISHER
-----------------------------------------
Name: David A. Fisher
Title: Chief Financial Officer and Senior
Vice President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed by the following persons in the
capacities indicated below on April 29, 1999:
SIGNATURE TITLE
- ------------------------------ ---------------------------
Chairman and Chief
/s/ BRUCE C. ABRAMS* Executive Officer
- ------------------------------ (Principal Executive
Bruce C. Abrams Officer)
Chief Financial Officer and
/s/ DAVID A. FISHER* Senior Vice President
- ------------------------------ (Principal Financial
David A. Fisher Officer)
/s/ JAMES P. HAYES* Controller (Principal
- ------------------------------ Accounting Officer)
James P. Hayes
/s/ MARK A. FILLER* Director
- ------------------------------
Mark A. Filler
/s/ TERRY A. MARKUS* Director
- ------------------------------
Terry A. Markus
<TABLE>
<S> <C> <C> <C>
*By: /s/ DAVID A. FISHER
-------------------------
David A. Fisher
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Form of Amended and Restated Certificate of Incorporation of the Registrant.
3.2* Form of Amended and Restated Bylaws of the Registrant.
4.1 Reference is hereby made to Exhibits 3.1 and 3.2.
4.2* Specimen Certificate for the Registrant's Common Stock.
4.3* Registration Rights Agreement, dated as of , among the Registrant and the stockholders
of the Registrant.
5.1* Opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois), special counsel to the Registrant.
10.1** Form of 1999 Omnibus Stock Incentive Plan of the Registrant.
10.2+ Agreement for the Purchase and Sale of the Capital Stock of Pacific Guarantee Mortgage Corporation,
dated as of July 31, 1998, by and between Prism Mortgage Company and William D. Osenton and Bruce P.
Barbera.
10.3+ Agreement for the Purchase and Sale of the Capital Stock of Mortgage Market, Inc., dated as of
September 30, 1998, by and among Prism Mortgage Company and Martin E. Francis, Kenneth Bartley,
Melissa Stashin and Curt Vanderzanden.
10.4+ Prism Equity Value Plan, effective as of August 31, 1998, by Prism Mortgage Company and by personnel
of Pacific Guarantee Mortgage Corporation.
10.5+ Executive Employment Agreement, dated as of July 31, 1998, by and between Pacific Guarantee Mortgage
Corporation and William D. Osenton.
10.6+ Executive Employment Agreement, dated as of September 30, 1998, by and between Mortgage Market, Inc.
and Martin E. Francis.
10.7** Prism 2000 Profit Sharing Plan.
10.8++ Credit Agreement, dated as of March 31, 1999, among Prism Mortgage Company and its subsidiaries, the
lending institutions listed on the signature pages thereto and The First National Bank of Chicago, as
Agent.
11.1++ Statement Regarding Computation of Per Share Earnings.
16.1++ Letter Regarding Change in Certified Independent Auditors.
21.1*** Subsidiaries of Prism Financial Corporation.
23.1++ Consent of PricewaterhouseCoopers LLP.
23.2++ Consent of McGladrey & Pullen, LLP.
23.3++ Consent of Stefani & Matthews, L.L.P.
23.4++ Consent of Clay L. Miller.
23.5++ Consent of William M. Stoll.
23.6* Consent of Skadden, Arps, Slate, Meagher & Flom (Illinois) (included in Exhibit 5.1).
23.7*** Consent of Andrew S. Hochberg.
23.8*** Consent of Michael P. Krasny.
23.9*** Consent of Penny S. Pritzker.
23.10*** Consent of Richard L. Wellek.
24.1*** Power of Attorney (included on signature page).
27.1++ Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
** Filed with Amendment No. 1 to Prism Financial Corporation's Registration
Statement on Form S-1, dated April 1, 1999.
<PAGE>
+ Filed with Amendment No. 1 to Prism Financial Corporation's Registration
Statement on Form S-1, dated April 1, 1999, with a confidential treatment
request.
++ Filed herewith.
*** Filed with Prism Financial Corporation's Registration Statement on Form S-1,
dated March 23, 1999.
<PAGE>
Exhibit 10.8
CREDIT AGREEMENT
This Agreement, dated as of March 31, 1999, is among Prism Mortgage
Company, an Illinois corporation, Pacific Guarantee Mortgage Corporation, a
California corporation, Mortgage Market, Inc., an Oregon corporation,
PointSource Financial, L.L.C., an Illinois limited liability company,
Infiniti Mortgage, L.L.C., an Illinois limited liability company, the Lenders
and The First National Bank of Chicago, as Agent.
RECITALS
The revolving credit facility made available to the Borrower and the
Borrowing Subsidiaries pursuant to this Agreement shall be used for
residential mortgage loan origination and acquisition. The Borrower will
request Advances hereunder for its own use for the purposes set forth in the
preceding sentence, and the Borrower may request Advances on behalf of one or
more Borrowing Subsidiaries (which are co-borrowers hereunder along with
Borrower) for purposes of mortgage loan originations by such Borrowing
Subsidiaries. Accordingly, the Borrower and the Borrowing Subsidiaries shall
pledge certain of the Collateral securing the Loans made pursuant to this
Agreement and the Borrowing Subsidiaries shall be co-makers (with the
Borrower) of any Notes executed in connection herewith. The Borrower is
considering creating a holding company to acquire all of the stock of the
Borrower and thereafter making an initial public offering of a portion of the
stock in such holding company. In such event the Borrower may request that
this Agreement and the other Loan Documents be amended and restated in
substantially the same form but substituting the holding company for the
Borrower. In consideration of the foregoing and for other good and valuable
consideration, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement:
"Additional Required Mortgage Documents" means the instruments and
documents described in Schedule "B" to the Security Agreement.
"Advance" means a borrowing hereunder (or conversion or continuation
thereof) consisting of the aggregate amount of the several Loans made on the
same Borrowing Date (or date of conversion or continuation) by some or all of
the Lenders to the Borrower or a Borrowing Subsidiary of the same Type and,
in the case of Fixed Rate Advances, for the same Interest Period.
"Affiliate" of any Person means any other Person directly or
indirectly controlling, controlled by or under common control with such
Person. A Person shall be deemed to control another Person if the
controlling Person owns, directly or indirectly, 10% or more of any class of
voting securities (or other ownership interests) of the controlled Person or
possesses, directly or indirectly, the power to direct or cause the direction
of the management or policies of the controlled Person, whether through
ownership of stock, by contract or otherwise.
<PAGE>
"Agent" means The First National Bank of Chicago in its capacity as
contractual representative of the Lenders pursuant to Article X, and not in
its individual capacity as a Lender, and any successor Agent appointed
pursuant to Article X.
"Aggregate Commitment" means, as of any date, the aggregate of the
Lenders' then-current Commitments under this Agreement, as reduced or
increased from time to time, but in no event shall the Aggregate Commitment
exceed $400,000,000 without the approval of the Borrower, the Agent and all
of the Lenders. The Aggregate Commitment as of the date hereof is
$250,000,000, as shown on Schedule "1".
"Agreement" means this credit agreement, as it may be amended or
modified and in effect from time to time.
"Agreement Accounting Principles" means GAAP, applied in a manner
consistent with that used in preparing the financial statements referred to
in Section 5.4.
"Agreement to Pledge" means either a written pledge substantially in
the form of Exhibit "D" to this Agreement executed by the Borrower or a
Borrowing Subsidiary and delivered by facsimile to the Collateral Agent or an
electronic data transmission to the Collateral Agent, in either case
specifically identifying all Mortgage Loans with respect to which the
Required Mortgage Documents are not being delivered on or before the Pledge
Date of such Mortgage Loans.
"Alternate Base Rate" means, for any day, a rate of interest per annum
equal to the higher of (i) the Corporate Base Rate for such day and (ii) the
sum of Federal Funds Effective Rate for such day plus 1/2% per annum.
"Alternate Base Rate Advance" means an Advance which bears interest at
the Alternate Base Rate.
"Alternate Base Rate Loan" means a Loan which bears interest at the
Alternate Base Rate.
"AP Mortgage" means, on any date, any Mortgage Loan which has been
identified in an Agreement to Pledge and for which the Collateral Agent has
not received the Required Mortgage Documents for such Mortgage Loan by such
date.
"Approved Investor" means, as of any time with respect to any category
of Eligible Collateral, any of the institutions listed on Schedule "2"
attached hereto as an Approved Investor for such category of Eligible
Collateral, and any other institution approved in writing by the Agent (with
one Business Day's prior written notice to the Lenders of any such newly
approved investor), such approval not to be unreasonably withheld; PROVIDED
that any such institutions listed on Schedule "2" or previously approved by
the Agent may be eliminated as an Approved Investor (or as an Approved
Investor of a specific type) by prior written notice to the Borrower from the
Agent, which elimination notice shall be given only for reasonable cause or
at the election of the Required Lenders for reasonable cause, and in either
case any commitments issued by any such formerly-Approved Investor after such
elimination shall not constitute Approved Investor Commitments, but
commitments of such formerly-Approved Investor existing at the time of such
elimination shall continue to be Approved Investor Commitments.
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"Approved Investor Commitment" means a bona fide current, unused and
unexpired forward sale commitment, issued by an Approved Investor of the
required type, under which such Approved Investor agrees, prior to expiration
thereof, upon the satisfaction of certain terms and conditions therein, to
provide for the purchase of Mortgage Loans, the exchange of Securities for
Mortgage Loans or the purchase of Securities, each at a specified price,
which commitment is not subject to any term or condition which is not
customary in commitments of like nature or which, in the reasonably
anticipated course of events, cannot be fully complied with prior to the
expiration thereof.
"Approved MBS Custodian" is defined in Paragraph 7(b) of the Security
Agreement.
"Approved Program" means the program commonly known as DLJ Streamlined
Refinance Program and any other Approved Investor program approved in writing
by the Agent (with one Business Day's prior written notice to the Lenders of
any such newly approved program), such approval not to be unreasonably
withheld; PROVIDED that DLJ Streamlined Refinance Program and any such other
program may be eliminated as an Approved Program by prior written notice to
the Borrower from the Agent, which elimination notice shall be given only for
reasonable cause or at the election of the Required Lenders for reasonable
cause, but in either case any Pledged Mortgages which qualified under the
previously-Approved Program and which were pledged prior to the time of such
elimination shall continue to be deemed part of an Approved Program.
"Arranger" means First Chicago Capital Markets, Inc., a Delaware
corporation, and its successors, as lead arranger and sole bookrunner.
"Article" means an article of this Agreement unless another document
is specifically referenced.
"Assignment" means a duly executed assignment in blank or in favor of
the Collateral Agent for the benefit of the Lenders of a Mortgage, of the
indebtedness secured thereby, and of all documents and rights related to the
Mortgage Loan secured by such Mortgage in accordance with the requirements of
the Security Agreement.
"Authorized Officer" means any Senior Vice President or Vice President
of the Borrower, or any Person designated by any such Person, acting singly.
"Basic Eligibility Requirements" means the requirements that each of
the following statements is accurate and complete with respect to any Pledged
Item:
(i) The Pledgor is the legal and equitable owner and holder of
such Pledged Item and has full power and authority to pledge such Pledged
Item. Such Pledged Item has been duly and validly issued to the Pledgor;
each commitment of a Person to purchase Mortgage Loans and Securities
from the Borrower or the Pledgor (including Approved Investor
Commitments) has been duly and validly issued to the Borrower or the
Pledgor; and each Pledged Item constitutes Eligible Collateral, has been
duly and validly pledged to the Collateral Agent for the benefit of the
Lenders and is subject to no Lien other than the lien of the Security
Agreement in favor of the Collateral Agent for the benefit of the
Lenders.
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(ii) Each requirement of any federal, state or local law
including, without limitation, usury, truth-in-lending, real estate
settlement procedures, consumer credit protection, equal credit
opportunity or disclosure laws applicable to such Pledged Item has been
complied with.
(iii) If such Pledged Item is a Pledged Mortgage:
(1) it has been duly executed and delivered by the
parties thereto at a closing,
(2) it is valid and enforceable in accordance with its
terms, without defense or offset, subject to bankruptcy and
similar laws and other general restrictions on creditors' rights
and equitable principles (whether raised in an equity proceeding
or an action at law),
(3) the property covered by said Pledged Mortgage is
free and clear of all Liens except in favor of the Pledgor subject
only to (a) the Lien of current real property taxes and
assessments not yet due and payable; (b) covenants, conditions and
restrictions, rights of way, easements and other matters of the
public record, as of the date of recording, as are acceptable to
mortgage lending institutions generally and specifically referred
to in a lender's title insurance policy delivered to the
originator of said Pledged Mortgage and (i) referred to or
otherwise considered in the appraisal made for the originator of
said Pledged Mortgage or (ii) which do not materially adversely
affect the appraised value of such property as set forth in such
appraisal; and (c) other matters to which like properties are
commonly subject which do not materially interfere with the
benefits of the security intended to be provided by said Pledged
Mortgage or the use, enjoyment, value or marketability of the
related property (including liens junior to said Pledged
Mortgage); and (d) a first Lien (for Pledged Mortgages
constituting Non-Agency Mortgage Loans, HELOC Loans and Sub-Prime
Mortgage Loans only) to the extent permitted under the Borrowing
Base Sublimits,
(4) it has been correctly described in the Collateral
Transmittal submitted to the Collateral Agent in respect of said
Pledged Mortgage,
(5) it has been either (i) fully funded to or to the
order of the mortgagor (i.e by cleared check or draft or by wire
transfer which has been disbursed to or to the order of the
mortgagor) or (ii) funded directly from the Funding Account to an
escrow or closing agent by wire transfer, transmittal through the
"Automated Clearing House" or any similar private clearing house
for interbank transfers of funds or by check or draft,
(6) the Collateral Agent has in its possession (other
than with respect to Pledged Mortgages which are then the subject
of an Agreement to Pledge) all Required Mortgage Documents other
than those documents and instruments which are in the possession
of the Borrower or the Pledgor pursuant to a Trust Receipt or in
the possession of a Person to whom delivery was made pursuant to
an Investor Transmittal Letter,
(7) it has been or will be promptly duly recorded where
necessary and complies with all applicable state or local
recording, registration and filing laws and regulations,
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(8) there are no defenses, counterclaims or offsets of
any nature whatsoever with respect to said Pledged Mortgage or the
indebtedness evidenced and secured thereby or with respect to any
Required Mortgage Document and, other than the related Required
Mortgage Documents and Additional Required Mortgage Documents,
there are no instruments or documents evidencing, securing or
guaranteeing payment of the indebtedness constituting said Pledged
Mortgage,
(9) each Assignment (a) has been duly authorized by all
necessary corporate action by the Pledgor, has been duly executed
and delivered by the Pledgor and is the legal, valid and binding
obligation of the Pledgor enforceable in accordance with its
terms, subject to bankruptcy and similar laws and other general
restrictions on creditors' rights and equitable principles, and
(b) complies with all applicable laws including all applicable
recording, filing and registration laws and regulations and is
adequate and legally sufficient for the purpose intended to be
accomplished thereby, including, without limitation, the
assignment of the rights, powers and benefits of the Pledgor as
mortgagee,
(10) upon the recordation of each Assignment and assuming
the possession of the Required Mortgage Documents by the
Collateral Agent and filing of Uniform Commercial Code financing
statements in proper form in the applicable filing offices, the
Collateral Agent, for the benefit of the Lenders, will have a
valid and perfected first priority security interest in said
Pledged Mortgage and all proceeds, products and profits derived
therefrom, including, without limitation, all moneys, goods,
insurance proceeds and other tangible or intangible property
received upon liquidation thereof, subject to applicable
bankruptcy, insolvency, reorganization, moratorium and other laws
affecting the enforcement of creditors' rights generally and to
general principles of equity,
(11) the Pledgor has complied with all laws, rules and
regulations in respect of said Pledged Mortgage if it is insured
by FHA or guaranteed by VA and the related insurance or guarantee
is in full force and effect. Said Pledged Mortgage complies in
all respects with all applicable requirements for purchase under
the GNMA standard form of selling contract for FHA insured and VA
guaranteed loans and any supplement thereto then in effect,
(12) the Pledgor has received an appraisal on the
property underlying said Pledged Mortgage, which appraisal shall
be from a licensed appraiser and in conformity with the applicable
requirements of any Approved Investor Commitment to which said
Pledged Mortgage may be subject; provided that an appraisal need
not be obtained for any Pledged Mortgage if said Pledged Mortgage
meets all of the underwriting and other requirements of an
Approved Program which does not require that appraisals be
obtained with respect to Mortgages meeting the requirements of
such Approved Program,
(13) all fire and casualty policies covering the premises
encumbered by said Pledged Mortgage (a) name the Pledgor as the
insured under a standard mortgagee clause not less favorable in
coverage to the mortgagee than is customarily used in the state
where such premises is located, (b) are in full force and effect,
and (c) afford insurance against fire and such other risks as are
usually insured against in the broad form of extended
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coverage insurance from time to time available, as well as
insurance against flood hazards as required by FHA or VA, and
(14) it is not, unless it constitutes an Eligible HELOC
Loan, a revolving credit facility.
(iv) There shall be no material breach of the covenants
contained in Paragraph 12 of the Security Agreement and there shall be no
breach of any of the following covenants (the sole remedy for which shall
be the removal of the affected Pledged Item as Eligible Collateral):
(1) The Pledgor shall not (a) amend or modify, or waive
any of the terms and conditions of, or settle or compromise any
claim in respect of, such Pledged Item or any rights related to
any of the foregoing, if such amendment, modification or waiver
materially and adversely affects the Collateral Value of such
Pledged Item, or impairs the marketability of such Pledged Item or
(b) release any security or obligor, or, through any other
activity or inactivity, cause such Pledged Item which shall have
been eligible for purchase to become ineligible for purchase in
accordance with the Approved Investor Commitment related to such
Pledged Item.
(2) The Pledgor shall not sell, assign, transfer or
otherwise dispose of, or grant any option with respect to, or
pledge or otherwise encumber (except pursuant to the Security
Agreement), any of the Collateral or any interest therein, except
as provided in Section 8.3 with respect to releases of Pledged
Items.
(3) The Pledgor or the Borrower is the servicer for and
shall service all Pledged Mortgages pledged by the Pledgor in
accordance with the requirements of the Approved Investor
Commitments until the sale thereof. The Borrower or the Pledgor
shall service all Mortgage Loans which are the subject of Pledged
Securities for which Borrower or the Pledgor retains servicing
responsibility in accordance with the standard requirements of the
Federal Agency issuing or guaranteeing such Securities and all
applicable FHA and VA requirements.
(4) The Borrower shall hold all escrow funds collected
in respect of Pledged Items in trust, without commingling the same
with any other funds, and apply the same for the purposes for
which such funds were collected provided that such obligation with
respect to Pledged Mortgages shall not arise until 30 days after
the origination or acquisition of the applicable Mortgage Loan.
(5) Neither the Borrower nor any Borrowing Subsidiary
shall fail to observe and perform all of its respective
obligations in connection with each Approved Investor Commitment
related to any Pledged Mortgage or Pledged Security to the extent
that any such failure would permit the relevant Approved Investor
to terminate its Approved Investor Commitment or refuse to
purchase the Mortgages which it has committed to purchase
thereunder. Within forty-eight (48) hours after a request
therefor by the Agent, a copy of each Approved Investor Commitment
certified by the Borrower, or if requested by the Agent at any
time after a Default has occurred, the originals of such Approved
Investor Commitments, shall be delivered to the Agent.
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(6) The Borrower shall promptly notify the Agent and the
Collateral Agent if and when the Borrower or any Borrowing
Subsidiary receives any prepayment (which term excludes the
principal portion of scheduled monthly payments made on a Mortgage
Loan) arising from or relating to any Pledged Mortgage and hold
the same in trust, as security for the Lenders, until such
Mortgage Loan is removed from the Borrowing Base in accordance
with this Agreement or, if a Default has occurred and is
continuing, then immediately remit to the Agent such prepayments
(and all interest and earnings thereon or with respect thereto).
(7) The Borrower and each Borrowing Subsidiary shall do,
execute, acknowledge and deliver, or cause to be done, executed,
acknowledged and delivered, all such other acts, instruments and
transfers (including, without limitation, Assignments) as the
Agent or the Collateral Agent may reasonably request from time to
time in order to create and maintain a perfected first priority
security interest in the Collateral in favor of the Collateral
Agent for the benefit of the Lenders and to create, maintain and
preserve the security and benefits intended to be afforded by this
Agreement and the Security Agreement, subject to no prior or equal
security interest, lien, charge or encumbrance, or agreement
purporting to grant to any Person a security interest in the
Collateral.
(8) The Borrower shall promptly notify the Agent and the
Collateral Agent of the occurrence of any event which would cause
any Eligible Collateral to become Ineligible Collateral.
"Borrower" means Prism Mortgage Company, an Illinois corporation, and its
successors and assigns.
"Borrowing Base" means, as of any date, subject to the Borrowing Base
Sublimits, the sum of the amounts determined by applying the following
percentages to the Collateral Values of the following categories of Eligible
Collateral, without duplication as any asset is converted from one category to
another, as described below (and the Borrower, by including any Pledged Item in
any computation of the Borrowing Base, and the Pledgor, shall be deemed to
represent and warrant to the Agent, the Collateral Agent and the Lenders that
such Pledged Item constitutes Eligible Collateral):
(i) ninety-nine percent (99%) of the Collateral Value of all
Gestation Collateral constituting Eligible Collateral;
(ii) ninety-eight percent (98%) of the Collateral Value of all
Eligible Conforming Mortgage Loans, Eligible Jumbo Mortgage Loans,
Eligible Non-Agency Mortgage Loans and Eligible Sub-Prime Mortgage Loans
not constituting Gestation Collateral; and
(iii) ninety-five percent (95%) of the Collateral Value of all
Eligible HELOC Loans not constituting Gestation Collateral.
In connection with the Borrowing Base, the Agent is hereby authorized by the
Lenders to grant temporary waivers of strict compliance by the Borrower with the
eligibility requirements regarding qualification of any Collateral as Eligible
Collateral or with the Lending Sublimits and Borrowing Base Sublimits when the
Agent deems it appropriate, in its sole discretion, (i) as to all matters other
than (x) those described in the
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definition "Basic Eligibility Requirements" (except that temporary waivers
may be granted for any of clauses (iii)(6), (12) or (13) of such definition)
and (y) those described in the definition of "Residential Mortgage Loan", if
the aggregate amount of deviation from strict compliance, based on the
Collateral Value so included in the Borrowing Base and the amount of excess
permitted over the Lending Sublimits or Borrowing Base Sublimits does not
exceed $5,000,000 at any time or (ii) as to any matter, up to any amount for
up to one (1) Business Day, if the satisfaction of such eligibility
requirements or sublimits cannot be independently determined because of
events beyond the reasonable control of the Borrower (i.e. natural disasters,
transmission failures, etc.), provided that, the Borrower certifies in
writing that all such eligibility requirements and sublimits are in fact
satisfied.
"Borrowing Base Certificate" means a certificate executed by the chief
financial officer or controller of the Borrower (or other employees of the
Borrower so authorized in writing, an original of which authorization shall
be delivered to the Agent, by the chief financial officer or controller)
substantially in the form attached hereto as Exhibit "F".
"Borrowing Base Sublimits" is defined in Section 2.1.2.
"Borrowing Date" means a date on which an Advance is made hereunder.
"Borrowing Notice" is defined in Section 2.8.
"Borrowing Subsidiary" means any of Pacific Guarantee Mortgage
Corporation, Mortgage Market, Inc., Point Source Financial, L.L.C. and
Infiniti Mortgage, L.L.C., each of which is a Wholly-Owned Subsidiary of the
Borrower, and any other Wholly-Owned Subsidiaries of the Borrower which may
hereafter be approved by the Required Lenders, which approval shall not be
unreasonably withheld or delayed (provided that the Borrower, the then
existing Borrowing Subsidiaries and any such new Borrowing Subsidiary shall
execute such amendments or further documents as the Agent may require to
evidence the admission of and obligations of such new Borrowing Subsidiary).
"Business Day" means (i) with respect to any borrowing, payment or
rate selection of Eurodollar Advances, a day (other than a Saturday or
Sunday) on which banks generally are open in Chicago and New York for the
conduct of substantially all of their commercial lending activities and on
which dealings in United States dollars are carried on in the London
interbank market and (ii) for all other purposes, a day (other than a
Saturday or Sunday) on which banks generally are open in Chicago for the
conduct of substantially all of their commercial lending activities.
"Capitalized Lease" of a Person means any lease of Property by such
Person as lessee which would be capitalized on a balance sheet of such Person
prepared in accordance with Agreement Accounting Principles.
"Capitalized Lease Obligations" of a Person means the amount of the
obligations of such Person under Capitalized Leases which would be shown as a
liability on a balance sheet of such Person prepared in accordance with
Agreement Accounting Principles.
"Cash Equivalent Investments" means (i) short-term obligations of, or
fully guaranteed by, the United States of America, (ii) commercial paper
rated A-1 or better by S&P or P-1 or better by Moody's, (iii) demand deposit
accounts maintained in the ordinary course of business, (iv) money market
accounts
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maintained in the ordinary course of business, and (v) certificates of
deposit issued by and time deposits with commercial banks (whether domestic
or foreign) having capital and surplus in excess of $100,000,000; PROVIDED in
each case that the same provides for payment of both principal and interest
(and not principal alone or interest alone) and is not subject to any
contingency regarding the payment of principal or interest.
"Change in Control" means Bruce Abrams, Mark Filler and/or Terry
Markus shall cease to collectively own, free and clear of all Liens or other
encumbrances, more than 50% of the outstanding shares of voting stock of the
Borrower on a fully diluted basis; provided, however, that if ownership of
all of the shares of stock of the Borrower is transferred to a holding
company in connection with an initial public offering of the stock of such
holding company, then Change of Control shall mean that Bruce Abrams, Mark
Filler and/or Terry Markus shall cease to collectively own, free and clear of
all Liens or other encumbrances, more than 50% of the outstanding shares of
voting stock of such holding company on a fully diluted basis.
"Code" means the Internal Revenue Code of 1986, as amended, reformed
or otherwise modified from time to time.
"Collateral" means all right, title and interest of the Borrower and
the Borrowing Subsidiaries, as applicable, of every kind and nature, in and
to all of the following property, assets and rights of the Borrower and the
Borrowing Subsidiaries, as applicable, wherever located, whether now existing
or hereafter arising, and whether now or hereafter owned, or acquired by or
accruing or owing to the Borrower or any of the Borrowing Subsidiaries, as
applicable, and all proceeds and products thereof:
(i) all Pledged Mortgages and Pledged Securities, whether
Eligible Collateral or Ineligible Collateral, including all Required
Mortgage Documents related thereto;
(ii) any commitments or other agreements issued by any private
mortgage insurer or by the FHA or VA to insure or guarantee any Pledged
Mortgage;
(iii) all Approved Investor Commitments to purchase Pledged
Securities or Pledged Mortgages (or any Securities to be issued based on
such Pledged Mortgages) from the Borrower or a Borrowing Subsidiary;
(iv) any options to sell or purchase Securities, future
contracts, or any other interest rate protection products which directly
or indirectly protect the Borrower or a Borrowing Subsidiary against
reductions in value of such Pledged Mortgages or Pledged Securities due
to changes in mortgage interest rates;
(v) the Settlement Account and all uncollected deposits into
the Settlement Account, the Funding Account, and any Custodian Settlement
Accounts then in existence with Approved MBS Custodians, as described in
Paragraph 7(c) of the Security Agreement, and all uncollected deposits in
such accounts;
(vi) all property related to the foregoing, including without
limitation, the right to service Pledged Mortgages while owned by the
Borrower or a Borrowing Subsidiary, all accounts and general intangibles
of whatsoever kind so related and all documents or instruments delivered
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to the Collateral Agent in respect of any Pledged Item, including,
without limitation, the right to receive all insurance proceeds and
condemnation awards which may be payable in respect of the premises
encumbered by any Pledged Mortgage; and
(vii) all proceeds and products of any of the foregoing.
"Collateral Agent" means BANK ONE, Texas, N.A. in its capacity as
contractual representative of the Lenders pursuant to Article X and the Security
Agreement, and any successor Collateral Agent appointed in accordance with the
terms of the Security Agreement.
"Collateral Agent Review Procedure" means the required review steps set
forth in Exhibit "1" to the Security Agreement.
"Collateral Transmittal" means a transmittal from the Borrower or a
Borrowing Subsidiary to the Collateral Agent in electronic form (or, at any time
when transmission in electronic form is not practicable, in written form) of the
following information for the following submissions or special treatment of
different types of Collateral: (i) the information described on Exhibit "C" for
each AP Mortgage covered by any Agreement to Pledge, (ii) the information
described on Exhibit "C" (other than the entry thereon for "AP Status Code" and
the entry indicating whether an AP Mortgage is to be funded by check (including
check number) or wire transfer) for each Pledged Mortgage not covered by an
Agreement to Pledge, (iii) the information described on Exhibit 3 to the
Security Agreement for each Pledged Mortgage to be treated as a Gestation
Mortgage Loan, and (iv) such other information as may be reasonably required
from time to time by the Collateral Agent for any Pledged Security.
"Collateral Value" means, with respect to each asset included in
Eligible Collateral on any given day, a value determined as follows:
(i) Each Security shall be valued at the purchase price
committed to under the Approved Investor Commitment which covers such
Security or, if so reasonably required by the Agent from time to time,
the market value of such Security as of any date of determination
thereof, as conclusively determined in good faith by the Agent;
(ii) Each Pledged Mortgage other than a HELOC Loan shall
be valued at the lowest of (A) the unpaid principal balance of such
Pledged Mortgage on its Pledge Date, or (B) the net acquisition cost
(including any discounts and excluding any servicing released premium) of
such Pledged Mortgage, if acquired by the Borrower, or (C) the weighted
average reflected as a percentage (expressed as a percentage of par and
not to exceed 100%) of the unfilled purchase price (net of commitment
fees) of all Approved Investor Commitments which could cover such Pledged
Mortgage applied to the unpaid principal balance of such Pledged Mortgage
on its Pledge Date, or (D) if requested by the Required Lenders, the
then-current market value of such Pledged Mortgage as reasonably
determined by the Agent (in cooperation with the Collateral Agent). The
values described in (A) and (B) of the preceding sentence shall be as
determined by the Borrower as of the Pledge Date of the applicable
Pledged Mortgage and reported to the Collateral Agent, and the value in
(C) of the preceding sentence shall be as determined by the Borrower as
of the Pledge Date of the applicable Pledged Mortgage and on or before
the first Business Day of each month thereafter and reported to the
Collateral Agent; and
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(iii) Each HELOC Loan shall be valued at (1) the lowest of
(A) the unpaid outstanding principal balance, as of the Pledge Date, of
such HELOC Loan (which excludes any fundings made to the mortgagor
thereunder after such Pledge Date), less any principal payments made with
respect to such HELOC Loan after its acquisition date, or (B) the net
acquisition cost (including any discounts and excluding any servicing
released premium) for such HELOC Loan, if acquired by the Pledgor, less
any principal payments made with respect to such HELOC Loan after its
acquisition date, or (C) the weighted average reflected as a percentage
(expressed as a percentage of par and not to exceed 100%) of the unfilled
purchase price (net of commitment fees) of all Approved Investor
Commitments which could cover such HELOC Loan applied to the then current
outstanding principal balance of such HELOC Loan, less any principal
payments made with respect to such HELOC Loan after the most recent
calculation of the weighted average purchase price, or (D) if requested
by the Required Lenders, the then-current market value of such HELOC Loan
as reasonably determined by the Agent (in cooperation with the Collateral
Agent). The values described in (A) and (B) of the preceding sentence
shall be as determined by the Borrower as of the Pledge Date of the
applicable Pledged Mortgage and reported to the Collateral Agent (subject
to reductions due to principal payments as described in (A) and (B)), and
the value in (C) of the preceding sentence shall be as determined by the
Borrower as of the Pledge Date of the applicable Pledged Mortgage and on
or before the first Business Day of each month thereafter and reported to
the Collateral Agent (subject to reductions due to principal payments as
described in (C)).
"Commitment" means, for each Lender, the sum of such Lender's Primary
Commitment and Swingline Commitment, if any.
"Commitment Percentage" means, for each Lender as of any date, the
percentage of the Aggregate Commitment represented by such Lender's Commitment,
as it may be amended from time to time, which initially shall be as set forth on
Schedule "1".
"Conforming Mortgage Loan" means a first priority Residential Mortgage
Loan which (i) either is insured by the FHA or guaranteed by the VA or which
fully conforms to all underwriting and other requirements for sale to FNMA,
FHLMC or GNMA and (ii) if said Mortgage Loan has a loan-to-value-ratio which is
greater than eighty percent (80%), and is not subject to a commitment by the VA
or FHA to guarantee or insure repayment thereof, said Mortgage Loan is covered
by a policy of private mortgage insurance acceptable to FNMA and the Agent.
"Contingent Obligation" of a Person means any agreement, undertaking or
arrangement by which such Person assumes, guarantees, endorses, contingently
agrees to purchase or provide funds for the payment of, or otherwise becomes or
is contingently liable upon, the obligation or liability of any other Person, or
agrees to maintain the net worth or working capital or other financial condition
of any other Person, or otherwise assures any creditor of such other Person
against loss, including, without limitation, any comfort letter, operating
agreement or take-or-pay contract.
"Controlled Group" means all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with the Borrower or any of its Subsidiaries, are
treated as a single employer under Section 414 of the Code.
"Conversion/Continuation Notice" is defined in Section 2.9.
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"Corporate Base Rate" means a rate per annum equal to the corporate
base rate of interest announced by First Chicago from time to time, changing
when and as said corporate base rate changes.
"Coverage Requirement" means, as of any date, the sum of the aggregate
unpaid principal amount of Loans then outstanding under this Agreement.
"Custodian Settlement Accounts" is defined in the Security Agreement.
"Default" means an event described in Article VII.
"Effective Date" is defined in Section 4.1.
"Eligible Collateral" means, as of any date, all Eligible Conforming
Mortgage Loans, Eligible HELOC Loans, Eligible Jumbo Mortgage Loans, Eligible
Non-Agency Mortgage Loans, Eligible Sub-Prime Mortgage Loans and Eligible
Securities.
"Eligible Conforming Mortgage Loan" means an Eligible Mortgage Loan
which: (i) is a Conforming Mortgage Loan; (ii) is subject to an Approved
Investor Commitment; (iii) has been included in Collateral for 180 days or
less since the Pledge Date of such Mortgage Loan; and (iv) has been
originated less than 120 days prior to its Pledge Date.
"Eligible HELOC Loan" means an Eligible Mortgage Loan which: (i) is a
HELOC Loan; (ii) is a first or second priority Residential Mortgage Loan;
(iii) has a maximum line of credit limit of $100,000; (iv) is subject to an
Approved Investor Commitment pursuant to which the right to service such
Mortgage Loan is to be purchased along with the purchase of such Mortgage
Loan (i.e. it is to be sold on a "servicing released" basis); (v) fully
conforms to all underwriting and other requirements for sale to an Approved
Investor issuing an Approved Investor Commitment; (vi) has a loan-to-value
ratio (on a combined basis with the first priority Mortgage Loan in the case
of second priority Pledged Mortgages) not in excess of ninety-five percent
(95%); (vii) has a FICO score of no less than 620; (viii) has been included
in Collateral for 60 days or less since the Pledge Date of such Mortgage
Loan; and (ix) has been originated less than 60 days prior to its Pledge Date.
"Eligible Jumbo Mortgage Loan" means an Eligible Mortgage Loan which:
(i) is a Jumbo Mortgage Loan; (ii) is subject to an Approved Investor
Commitment; (iii) has been included in Collateral for 180 days or less since
the Pledge Date of such Mortgage Loan; and (iv) has been originated less than
120 days prior to its Pledge Date.
"Eligible Mortgage Loan" means any Pledged Mortgage:
(i) which meets the Basic Eligibility Requirements;
(ii) which has no monthly installment of principal and/or
interest which is more than 30 days past due;
(iii) for which, if it is an AP Mortgage:
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(1) the Borrower expects such AP Mortgage to close and
become a valid lien securing actual indebtedness by funding to the
order of the mortgagor thereunder, has not learned of any
information to the contrary and has not received any returned
proceeds of such AP Mortgage from the escrow or closing agent for
such Pledged Mortgage;
(2) the Collateral Agent has received or will receive
the Required Mortgage Documents within seven (7) Business Days
after the date of the related Agreement to Pledge; provided that,
so long as no Default or Unmatured Default is continuing, if (but
only if) a FNMA ASAP Tri-Party Agreement has been executed and is
in effect, the Borrower may sell AP Mortgages to (and deliver the
related Required Mortgage Documents directly to) FNMA so long as
the related sale proceeds (i) will be deposited in the Settlement
Account within seven (7) Business Days after the date of the
related Agreement to Pledge, and (ii) will be no less than the
Collateral Value of the applicable sold AP Mortgages;
(3) the Collateral Value attributable to all AP
Mortgages included in any category of the Borrowing Base does not
exceed forty-five percent (45%) of the Aggregate Commitment during
the first and last seven days in any calendar month, and
(4) the Collateral Value attributable to all AP
Mortgages included in any category of the Borrowing Base does not
exceed thirty-five percent (35%) of the Aggregate Commitment for
any day other than the first and last seven days of any calendar
month;
(iv) which, if subject to an Investor Transmittal Letter or
Trust Receipt and if said Pledged Mortgage was:
(1) withdrawn by the Borrower or any Borrowing
Subsidiary for purposes of correcting clerical or other
non-substantive documentation problems: (i) the promissory
note and other documents relating to said Pledged Mortgage were
returned to the Collateral Agent within fifteen (15) calendar
days from the date of withdrawal, (ii) said Pledged Mortgage
was released to the Borrower or any Borrowing Subsidiary
pursuant to a Trust Receipt and (iii) the Collateral Value of
said Pledged Mortgage when added to the Collateral Value of all
other Pledged Mortgages which have been similarly released to
the Borrower or any Borrowing Subsidiary does not exceed the
lesser of $5,000,000 or two and one-half percent (2.5%) of the
Aggregate Commitment;
(2) shipped by the Collateral Agent directly to an
Approved Investor for purchase pursuant to an Investor Transmittal
Letter which is a "Whole Loan Sale Transmittal Letter" in
substantially the form of Exhibit "4" to the Security Agreement,
the full purchase price therefor has been received by the
Collateral Agent (or said Pledged Mortgage has been returned to
the Collateral Agent) within forty-five (45) days from the date of
shipment by the Collateral Agent; and
(3) shipped by the Collateral Agent directly to a
custodian for purposes of formation of a pool supporting a
Security, such Security is issued and sold and the purchase price
therefor has been received by the Collateral Agent (or said
Pledged
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Mortgage has been returned to the Collateral Agent) within
forty-five (45) days from the date of shipment by the
Collateral Agent; and
(v) which has not been previously included in the Borrowing
Base, then shipped to an investor and returned, for whatever reason, to
the Collateral Agent (provided that the Agent may waive the requirement
of this clause (v) if the Borrower explains to Agent the reason such
Pledged Mortgage was returned and demonstrates to Agent's satisfaction
that such Pledged Mortgage continues to satisfy all eligibility
requirements hereunder).
"Eligible Non-Agency Mortgage Loan" means an Eligible Mortgage Loan
which: (i) is not a Conforming Mortgage Loan or a Jumbo Mortgage Loan; (ii)
is a first or second priority Residential Mortgage Loan; (iii) has an
original principal balance not in excess of $1,000,000; (iv) is subject to an
Approved Investor Commitment pursuant to which the right to service such
Mortgage Loan is to be purchased along with the purchase of such Mortgage
Loan (i.e. it is to be sold on a "servicing released" basis); (v) fully
conforms to all underwriting and other requirements for sale to an Approved
Investor issuing an Approved Investor Commitment; (vi) has a FICO score of no
less than 620; (vii) has a loan-to-value ratio (on a combined basis with the
first priority Mortgage Loan in the case of second priority Pledged
Mortgages) not in excess of ninety-five percent (95%); (viii) has been
included in Collateral for 120 days or less since the Pledge Date of such
Mortgage Loan; and (ix) has been originated less than 60 days prior to its
Pledge Date.
"Eligible Security" means any Pledged Security: (i) which is covered
by an Approved Investor Commitment; and (ii) for which the Collateral Agent
shall have received such evidence as may be required under the Security
Agreement to confirm the existence of the security interest in favor of the
Collateral Agent for the benefit of the Lenders in such Pledged Security.
"Eligible Sub-Prime Mortgage Loan" means an Eligible Mortgage Loan
which: (i) would not otherwise be includable in the Borrowing Base because
either (1) it is none of an Eligible Conforming Mortgage Loan, Eligible HELOC
Loan, Eligible Jumbo Mortgage Loan or Eligible Non-Agency Mortgage Loan or
(2) the Borrowing Base Sublimits listed in clauses (i) through (vii) of
Section 2.1.2 would otherwise limit its inclusion; (ii) is a first or second
priority Residential Mortgage Loan; (iii) has an original principal balance
not in excess of $250,000; (iv) is subject to an Approved Investor Commitment
pursuant to which the right to service such Mortgage Loan is to be purchased
along with the purchase of such Mortgage Loan (i.e. it is to be sold on a
"servicing released" basis); (v) fully conforms to all underwriting and other
requirements for sale to an Approved Investor issuing an Approved Investor
Commitment; (vi) has a loan-to-value ratio (on a combined basis with the
first priority Mortgage Loan in the case of second priority Pledged
Mortgages) not in excess of ninety-five percent (95%); (vii) has been
included in Collateral for 90 days or less since the Pledge Date of such
Mortgage Loan; and (viii) has been originated less than 60 days prior to its
Pledge Date.
"Environmental Laws" means any and all federal, state, local and
foreign statutes, laws, judicial decisions, regulations, ordinances, rules,
judgments, orders, decrees, plans, injunctions, permits, concessions, grants,
franchises, licenses, agreements and other governmental restrictions relating
to (i) the protection of the environment, (ii) the effect of the environment
on human health, (iii) emissions, discharges or releases of pollutants,
contaminants, hazardous substances or wastes into surface water, ground water
or land, or (iv) the manufacture, processing, distribution, use, treatment,
storage, disposal,
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transport or handling of pollutants, contaminants, hazardous substances or
wastes or the clean-up or other remediation thereof.
"ERISA" means the Employee Retirement Income Security Act of l974, as
amended from time to time, and any rule or regulation issued thereunder.
"Eurodollar Advance" means an Advance which bears interest at a
Eurodollar Rate.
"Eurodollar Base Rate" means the rate determined by the Agent to be
the rate at which First Chicago offers to place deposits in U.S. dollars with
first-class banks in the London interbank market at approximately 11 a.m.
(London time) two Business Days prior to the first day of the applicable
Interest Period, in the approximate amount of $1,000,000 and having a
maturity approximately equal to such Interest Period.
"Eurodollar Loan" means a Loan which bears interest at a Eurodollar
Rate.
"Eurodollar Rate" means, with respect to a Eurodollar Advance, the sum
of (i) the quotient of (a) the Eurodollar Base Rate applicable to such
Interest Period, divided by (b) one minus the Reserve Requirement (expressed
as a decimal) applicable to such Interest Period, plus (ii) one percent
(1.0%) per annum. The Eurodollar Rate shall be rounded to the next higher
multiple of 1/16 of 1% if the rate is not such a multiple.
"Excluded Taxes" means, in the case of each Lender or applicable
Lending Installation and the Agent, taxes imposed on its overall net income,
and franchise taxes imposed on it, by (i) the jurisdiction under the laws of
which such Lender or the Agent is incorporated or organized or (ii) the
jurisdiction in which the Agent's or such Lender's principal executive office
or such Lender's applicable Lending Installation is located.
"Existing Warehouse Facilities" means the credit facilities (other
than the facility created pursuant to this Agreement) in existence on the
date hereof maintained by the Borrower and/or one or more Borrowing
Subsidiaries for the purpose of originating or purchasing (and secured by)
Mortgage Loans or Securities.
"Facility Fee Rate" means one-eighth of one percent (0.125%) per annum.
"Federal Agency" means FHLMC, FNMA, GNMA, FHA or VA.
"Federal Funds Effective Rate" means, for any day, an interest rate
per annum equal to the weighted average of the rates on overnight Federal
funds transactions with members of the Federal Reserve System arranged by
Federal funds brokers on such day, as published for such day (or, if such day
is not a Business Day, for the immediately preceding Business Day) by the
Federal Reserve Bank of New York, or, if such rate is not so published for
any day which is a Business Day, the average of the quotations at
approximately 10 a.m. (Chicago time) on such day on such transactions
received by the Agent from three Federal funds brokers of recognized standing
selected by the Agent in its sole discretion.
"Federal Funds Funding Rate" means, with respect to any Fed Funds Loan
for any day, the rate per annum equal to the consensus (or if no consensus
exists, the arithmetic average) of the rates at which
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reserves are offered by first-class banks to other first-class banks (at
approximately 10:00 a.m. (Chicago time)) on such day (or if such day is not a
Business Day, on the immediately preceding Business Day) on overnight federal
funds transactions with members of the Federal Reserve System arranged by
federal funds brokers, based on quotes received by the Agent from three
federal funds brokers of recognized standing selected by the Agent in its
sole discretion.
"Federal Funds Rate" means, for any day, an interest rate per annum
equal to the Federal Funds Funding Rate for such day plus one and one-eighth
percent (1.125%) per annum.
"Fed Funds Advance" means an Advance which bears interest at the
Federal Funds Rate.
"Fed Funds Loan" means any Loan which bears interest at the Federal
Funds Rate.
"Fees" is defined in Section 2.7.
"FHA" means the Federal Housing Administration or any other agency,
corporation or instrumentality of the United States to which the powers and
duties of the Federal Housing Administration have been transferred.
"FHA-Approved Mortgagee" means an institution that is approved by the
FHA to act as a servicer and mortgagee of record with respect to a Mortgage
Loan insured by the FHA.
"FHLMC" means the Federal Home Loan Mortgage Corporation or any other
agency, corporation or instrumentality of the United States to which the
powers and duties of the Federal Home Loan Mortgage Corporation have been
transferred.
"FHLMC-Approved Lender" means an institution that is approved by the
FHLMC to act as a lender in connection with the origination of any Mortgage
Loan purchased by the FHLMC.
"FHLMC Security" means a security representing an undivided fractional
interest in a pool of Mortgage Loans, which security is issued and guaranteed
as to full and timely payment of interest and full collection of principal by
FHLMC.
"FICO" means the "delinquency predictor" model established by Fair
Isaac Co. and shown on a credit report prepared by Equifax, TRW or Trans
Union.
"First Chicago" means The First National Bank of Chicago in its
individual capacity, and its successors.
"Fixed Rate" means the Eurodollar Rate.
"Fixed Rate Advance" means an Advance which bears interest at a Fixed
Rate.
"Fixed Rate Loan" means a Loan which bears interest at a Fixed Rate.
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"FNMA" means the Federal National Mortgage Association or any other
agency, corporation or instrumentality of the United States to which the
powers and duties of the Federal National Mortgage Association have been
transferred.
"FNMA-Approved Lender" means an institution that is approved by FNMA
to act as a lender in connection with the origination of any Mortgage Loan
purchased by FNMA.
"FNMA ASAP Tri-Party Agreement" means an agreement by and among the
Borrower and the Borrowing Subsidiaries, FNMA and the Collateral Agent
pursuant to which the parties thereto agree that the proceeds of all AP
Mortgages sold by the Borrower or any Borrowing Subsidiary to FNMA shall be
wired directly to the Settlement Account.
"FNMA Security" means a security representing an undivided fractional
interest in a pool of Mortgage Loans, which security is issued and guaranteed
as to full and timely payment of principal and interest by FNMA.
"Funding Account" is defined in Section 8.4.
"GAAP" means generally accepted accounting principles as in effect
from time to time, consistently applied.
"GAAP Carrying Value" means, with respect to any asset of the
Borrower, the value at which such asset is carried on the books of the
Borrower in accordance with GAAP after excluding capitalized items. Any
changes in the methodology used for adjusting such book value shall be
subject to the prior approval of the Agent.
"Gestation Collateral" means that portion of the Collateral which
consists of Gestation Mortgage Loans and Securities issued in exchange for
Gestation Mortgage Loans.
"Gestation Mortgage Loans" means, as of any date, any Pledged
Mortgages which the Borrower has identified as fully qualified for initial
certification for the purpose of creating a pool of Mortgage Loans to support
the issuance of a Security and with respect to which the Borrower has
requested that the Collateral Agent either (i) acting in its capacity as pool
custodian, initially certify for inclusion in such a pool or (ii) acting in
its capacity as Collateral Agent, ship to a Federal Agency to obtain initial
certification by such Federal Agency for inclusion in such a pool.
"GNMA" means the Government National Mortgage Association or any other
agency, corporation or instrumentality of the United States as to which the
powers and duties of the Governmental National Mortgage Association have been
transferred.
"GNMA Security" means a security representing an undivided fractional
interest in a pool of Mortgage Loans, which security is issued by the
Borrower and guaranteed as to full and timely payment of principal and
interest by GNMA without regard as to whether the Borrower collects any
payments on such Mortgage Loans.
"HELOC Loan" means a "home equity" line of credit secured by a first
or second priority Mortgage on a Single Family Residence.
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"Ineligible Collateral" means any Pledged Item that does not at the
time constitute Eligible Collateral.
"Indebtedness" of a Person means such Person's (i) obligations for
borrowed money, (ii) obligations representing the deferred purchase price of
Property or services (other than accounts payable arising in the ordinary
course of such Person's business payable on terms customary in the trade),
(iii) obligations, whether or not assumed, secured by Liens or payable out of
the proceeds or production from property now or hereafter owned or acquired
by such Person, (iv) obligations which are evidenced by notes, acceptances,
or other instruments, (v) Capitalized Lease Obligations, (vi) Contingent
Obligations, (vii) obligations (contingent or otherwise) in respect of
Letters of Credit, (viii) obligations in respect of Sale and Leaseback
Transactions, (ix) Operating Lease Obligations, (x) Net Mark-to-Market
Exposure of Rate Hedging Agreements, and (xi) any other obligation for
borrowed money or other financial accommodation which in accordance with
Agreement Accounting Principles would be shown as a liability on a
consolidated balance sheet of such Person.
"Interest Period" means, with respect to a Eurodollar Advance, a
period of one, two or three months commencing on a Business Day, all as
selected by the Borrower pursuant to this Agreement. An Interest Period of
one, two or three months shall end on the day which corresponds numerically
to such date one, two or three months thereafter, provided, however, that if
there is no such numerically corresponding day in such next, second or third
succeeding month, such Interest Period shall end on the last Business Day of
such next, second or third succeeding month. If an Interest Period would
otherwise end on a day which is not a Business Day, such Interest Period
shall end on the next succeeding Business Day, provided, however, that if
said next succeeding Business Day falls in a new calendar month, such
Interest Period shall end on the immediately preceding Business Day.
"Investment" of a Person means any loan, advance (other than
commission, travel and similar advances to officers and employees made in the
ordinary course of business), extension of credit (other than accounts
receivable arising in the ordinary course of business on terms customary in
the trade) or contribution of capital by such Person; any stocks, bonds,
mutual funds, partnership interests, notes, debentures or other securities
owned by such Person; any deposit accounts and certificates of deposit owned
by such Person; and any structured notes, derivative financial instruments
and other similar instruments or contracts owned by such Person.
"Investor Transmittal Letter" means either a "Whole Loan Sale
Transmittal Letter" or a "Warehouse-Related MBS Transmittal Letter"
substantially in the form of Exhibits "4" and "5", respectively, to the
Security Agreement.
"Jumbo Mortgage Loan" means a Conforming Mortgage Loan except for
size, but which has an original principal balance of not more than $1,000,000.
"Lenders" means the lending institutions listed on the signature pages
of this Agreement and their respective successors and assigns.
"Lending Installation" means, with respect to a Lender or the Agent,
the office, branch, subsidiary or affiliate of such Lender or the Agent
listed on the signature pages hereto or on a Schedule hereto or otherwise
selected by such Lender or the Agent pursuant to Section 2.19.
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"Lending Sublimits" is defined in Section 2.1.1.
"Letter of Credit" of a Person means a letter of credit or similar
instrument which is issued upon the application of such Person or upon which
such Person is an account party or for which such Person is in any way liable.
"Leverage Ratio" means the ratio of Total Liabilities to Tangible Net
Worth.
"Lien" means any lien (statutory or other), mortgage, pledge,
hypothecation, assignment, encumbrance or preference, priority or other
security agreement of any kind or nature whatsoever (including, without
limitation, the interest of a vendor or lessor under any conditional sale,
Capitalized Lease or other title retention agreement).
"Loan" means, with respect to a Lender, such Lender's loan made
pursuant to Article II (or any conversion or continuation thereof).
"Loan Documents" means this Agreement, any Notes issued pursuant to
Section 2.15, the Security Agreement, the mandate letter agreement among the
Borrower, the Agent and the Arranger dated January 22, 1999, and the other
documents and agreements contemplated hereby and executed by the Borrower or
any Borrowing Subsidiary or any other Person in favor of the Agent, the
Collateral Agent or any Lender.
"Material Adverse Effect" means a material adverse effect on (i) the
business, financial condition or results of operations of the Borrower and
its Subsidiaries taken as a whole, (ii) the ability of the Borrower or any
Borrowing Subsidiary to perform its obligations under the Loan Documents, or
(iii) the validity or enforceability of any of the Loan Documents or the
rights or remedies of the Agent or the Lenders thereunder.
"Material Subsidiary" means each Borrowing Subsidiary and each other
Subsidiary of the Borrower which (i) represents more than 5% of the
consolidated assets of the Borrower and its Subsidiaries as would be shown in
the consolidated financial statements of the Borrower and its Subsidiaries as
at the beginning of the twelve-month period ending with the month in which
such determination is made, or (ii) is responsible for more than 5% of the
consolidated net sales or of the consolidated net income of the Borrower and
its Subsidiaries as reflected in the financial statements referred to in
clause (i) above.
"Moody's" means Moody's Investors Service, Inc. or any successor to
its business.
"Mortgage" means a mortgage, deed of trust, security deed or similar
instrument purporting to create a first or second lien or similar interest in
real estate and improvements thereon.
"Mortgage Loan" means a loan of money evidenced by a Mortgage Note and
secured by a Mortgage.
"Mortgage Note" means a note evidencing the indebtedness secured by a
Mortgage.
"Multiemployer Plan" means a Plan maintained pursuant to a collective
bargaining agreement or any other arrangement to which the Borrower or any
member of the Controlled Group is a party to which more than one employer is
obligated to make contributions.
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"Net Mark-to-Market Exposure" of a Person means, as of any date of
determination, the excess (if any) of all unrealized losses over all
unrealized profits of such Person arising from Rate Hedging Agreements.
"Unrealized losses" means the fair market value of the cost to such Person of
replacing a Rate Hedging Agreement as of the date of determination (assuming
such Rate Hedging Agreement were to be terminated as of that date), and
"unrealized profits" means the fair market value of the gain to such Person
of replacing a Rate Hedging Agreement as of the date of determination
(assuming such Rate Hedging Agreement were to be terminated as of that date).
"Net Worth" means, as of any date of determination thereof, the net
worth of the Borrower and its Subsidiaries on a consolidated basis as
determined in accordance with Agreement Accounting Principles.
"Non-Agency and HELOC Premium Balance" means, for any day, the amount
(if any) by which (i) the aggregate principal balance of all Loans
outstanding on such day exceeds (ii) that portion of the Borrowing Base on
such date attributable to (collectively) Eligible Conforming Mortgage Loans,
Eligible Jumbo Mortgage Loans and Eligible Sub-Prime Mortgage Loans.
"Note" means any promissory note issued at the request of a Lender
pursuant to Section 2.15 evidencing amounts that may be advanced from time to
time under this Agreement in substantially the form of Exhibit "A" attached
hereto, including any amendment, modification, renewal or replacement of any
such promissory note.
"Notice of Assignment" is defined in Section 12.3.2.
"Obligations" means all unpaid principal of and accrued and unpaid
interest on the Loans, all accrued and unpaid fees and all expenses,
reimbursements, indemnities and other obligations of the Borrower or any
Borrowing Subsidiary to the Lenders or to any Lender, the Agent, the
Collateral Agent or any indemnified party arising under the Loan Documents.
"Operating Lease" of a Person means any lease of Property (other than
a Capitalized Lease) by such Person as lessee which has an original term
(including any required renewals and any renewals effective at the option of
the lessor) of one year or more.
"Operating Lease Obligations" means, as at any date of determination,
the amount obtained by aggregating the present values, determined in the case
of each particular Operating Lease by applying a discount rate (which
discount rate shall equal the discount rate which would be applied under
Agreement Accounting Principles if such Operating Lease were a Capitalized
Lease) from the date on which each fixed lease payment is due under such
Operating Lease to such date of determination, of all fixed lease payments
due under all Operating Leases of the Borrower and its Subsidiaries.
"Other Taxes" is defined in Section 3.5(ii).
"Overnight Transaction Loan Effective Rate" means, as of any day, a
fluctuating rate of interest per annum determined by the Agent as its
overnight transaction loan rate for such day.
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"Overnight Transaction Loan Rate" means, with respect to a Swingline
Advance, a rate equal to the sum of (i) the Overnight Transaction Loan
Effective Rate plus (ii) one and one-quarter percent (1.25%) per annum.
"Oversize Jumbo Loans" means a Jumbo Mortgage Loan which has an
original principal balance in excess of $650,000.
"Participants" is defined in Section 12.2.1.
"Payment Date" means the first Business Day of each calendar month.
"PBGC" means the Pension Benefit Guaranty Corporation, or any
successor thereto.
"Person" means any natural person, corporation, firm, joint venture,
partnership, association, limited liability company, enterprise, trust or
other entity or organization, or any government or political subdivision or
any agency, department or instrumentality thereof.
"Plan" means an employee pension benefit plan which is covered by
Title IV of ERISA or subject to the minimum funding standards under Section
412 of the Code as to which the Borrower or any member of the Controlled
Group may have any liability.
"Pledge Date" means the date on which a Pledged Item is first
delivered in pledge to the Collateral Agent for the benefit of the Lenders or
is otherwise made subject to a security interest in favor of the Collateral
Agent for the benefit of the Lenders, provided that the date of delivery of a
Mortgage Loan covered by an Agreement to Pledge shall be deemed to be the
date of delivery of such Agreement to Pledge even after subsequent delivery
of the related Required Mortgage Documents.
"Pledged Item" means any Pledged Mortgage or Pledged Security.
"Pledged Mortgages" means all Mortgage Loans that are from time to
time delivered (or, in the case of AP Mortgages, are committed to be
delivered) to the Collateral Agent for the benefit of the Lenders pursuant to
this Agreement and the Security Agreement.
"Pledged Securities" means all Securities that are from time to time
pledged to the Collateral Agent for the benefit of the Lenders pursuant to
this Agreement and the Security Agreement.
"Pledgor" means, with respect to any Pledged Item, the Borrower or the
applicable Borrowing Subsidiary which owns such Pledged Item.
"Post-Default Swingline Advance" means any Swingline Advance made at a
time when the Swingline Lender has actual knowledge that a Default or
Unmatured Default which has not been waived exists or would exist upon the
making of such Swingline Advance; provided that any such Swingline Advance
shall cease to be a Post-Default Swingline Advance at such time, if any, as
the Lenders waive or accept cure of the applicable Default or Unmatured
Default.
"Primary Advance" means a Eurodollar Advance, a Fed Funds Advance or
an Alternate Base Rate Advance.
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"Primary Commitment" means, for each Lender, the obligation of such
Lender to make Loans not exceeding the amount set forth as its "Primary
Commitment" (which equals its Commitment MINUS its Swingline Commitment, if
any) on Schedule "1" attached hereto or as set forth in any Notice of
Assignment relating to any assignment that has become effective pursuant to
Section 12.3.2, as such amount may be modified from time to time pursuant to
the terms hereof.
"Primary Commitment Percentage" means, for each Lender as of any date,
the quotient of (a) such Lender's Primary Commitment divided by (b) the
aggregate Primary Commitments (which equals the Aggregate Commitment MINUS
the Swingline Commitment), which Primary Commitment Percentage shall
initially be as set forth on Schedule "1" attached hereto, as it may be
amended from time to time.
"Primary Loan" means a Loan consisting of a portion of a Primary
Advance.
"Property" of a Person means any and all property, whether real,
personal, tangible, intangible, or mixed, of such Person, or other assets
owned, leased or operated by such Person.
"Purchasers" is defined in Section 12.3.1.
"Rate Hedging Agreement" means an agreement, device or arrangement
providing for payments which are related to fluctuations of interest rates,
exchange rates or forward rates, including, but not limited to,
dollar-denominated or cross-currency interest rate exchange agreements,
forward currency exchange agreements, interest rate floor, cap or collar
protection agreements, forward rate currency or interest rate options, puts
and warrants.
"Rate Hedging Obligations" of a Person means any and all obligations
of such Person, whether absolute or contingent and howsoever and whensoever
created, arising, evidenced or acquired (including all renewals, extensions
and modifications thereof and substitutions therefor), under (i) any and all
Rate Hedging Agreements, and (ii) any and all cancellations, buy backs,
reversals, terminations or assignments of any Rate Hedging Agreement.
"Recourse Servicing" means any servicing rights under a Servicing
Agreement which obligates the Borrower or any Borrowing Subsidiary either to
repurchase Mortgage Loans upon default by the borrower thereunder or to
indemnify any party having an interest in such Mortgage Loans against any
loss arising from such a default for reasons other than (i) a breach of any
representations or warranties regarding the condition of such Mortgage Loans
at origination which were made by the Borrower or any Borrowing Subsidiary as
originator of such Mortgage Loans, or (ii) the default in payment by the
mortgagor with respect to the first payment due after the date on which the
applicable Mortgage Loan was sold.
"Regulation D" means Regulation D of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor
thereto or other regulation or official interpretation of said Board of
Governors relating to reserve requirements applicable to member banks of the
Federal Reserve System.
"Regulation U" means Regulation U of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor or
other regulation or official interpretation of said Board of Governors
relating to the extension of credit by banks for the purpose of purchasing or
carrying margin stocks applicable to member banks of the Federal Reserve
System.
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"Reportable Event" means a reportable event as defined in Section 4043
of ERISA and the regulations issued under such section, with respect to a
Plan, excluding, however, such events as to which the PBGC by regulation
waived the requirement of Section 4043(a) of ERISA that it be notified within
30 days of the occurrence of such event, provided, however, that a failure to
meet the minimum funding standard of Section 412 of the Code and of Section
302 of ERISA shall be a Reportable Event regardless of the issuance of any
such waiver of the notice requirement in accordance with either Section
4043(a) of ERISA or Section 412(d) of the Code.
"Reports" is defined in Section 10.14.
"Required Lenders" means Lenders in the aggregate having at least 51%
of the Aggregate Commitment or, if the Aggregate Commitment has been
terminated, Lenders in the aggregate holding at least 51% of the aggregate
unpaid principal amount of the outstanding Advances.
"Required Mortgage Documents" means the instruments and documents
described in Schedule "A" to the Security Agreement, as applicable to a
particular Mortgage Loan, which are required to be delivered to the
Collateral Agent.
"Reserve Requirement" means, with respect to the Eurodollar Rate
applicable to an Interest Period, the maximum aggregate reserve requirement
(including all basic, supplemental, marginal and other reserves) which is
imposed under Regulation D on eurocurrency liabilities.
"Residential Mortgage Loan" means a Mortgage Loan secured by a
Mortgage on a Single Family Residence.
"S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., or any successor to its business.
"Sale and Leaseback Transaction" means any sale or other transfer of
Property by any Person with the intent to lease such Property as lessee.
"Section" means a numbered section of this Agreement, unless another
document is specifically referenced.
"Security" means any FHLMC Security, FNMA Security or GNMA Security.
"Security Agreement" means the Security and Collateral Agency
Agreement as of even date herewith, substantially in the form of Exhibit "G"
attached hereto, by and among the Borrower, the Borrowing Subsidiaries, the
Agent, and the Collateral Agent, pursuant to which a security interest is
created in favor of the Collateral Agent for the Lenders under this Agreement
in certain Collateral to be pledged pursuant to this Agreement, as the same
may, from time to time, be further supplemented, modified or amended.
"Servicing Agreement" means a written contract of the Borrower with
another Person to act on behalf of such other Person to, among other things,
receive payments in respect of Mortgage Loans and to service Mortgage Loans,
whether or not such Mortgage Loans are Pledged Mortgages.
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"Settlement Account" is defined in Section 8.4.
"Single Employer Plan" means a Plan maintained by the Borrower or any
member of the Controlled Group for employees of the Borrower or any member of
the Controlled Group.
"Single Family Residence" means a one to four family dwelling unit,
which may be a condominium unit but which shall not be a mobile home,
manufactured housing or a dwelling unit in a cooperative apartment building.
"Subordinated Indebtedness" means the Indebtedness of Pacific
Guarantee Mortgage Corporation described on Exhibit K hereto and any other
Indebtedness which the Required Lenders may hereafter approve as qualifying
as Subordinated Indebtedness, the payment of which in either case shall be
subordinated to the payment of the Obligations pursuant to subordination
agreements in the form attached hereto as Exhibit L.
"Sub-Prime Premium Balance" means, for any day, the amount (if any) by
which (i) the aggregate principal balance of all Loans outstanding on such
day exceeds (ii) that portion of the Borrowing Base on such date attributable
to (collectively) Eligible Conforming Mortgage Loans, Eligible HELOC Loans,
Eligible Jumbo Mortgage Loans and Eligible Non-Agency Mortgage Loans.
"Subservicing Agreement" means a Servicing Agreement between the
Borrower or any Borrowing Subsidiary and a Person which does not own the
Mortgage Loans being serviced thereunder but only has servicing or other
non-ownership rights with respect thereto, pursuant to which the Borrower or
any Borrowing Subsidiary subservices Mortgage Loans for others.
"Subsidiary" of a Person means (i) any corporation more than 50% of
the outstanding securities having ordinary voting power of which shall at the
time be owned or controlled, directly or indirectly, by such Person or by one
or more of its Subsidiaries or by such Person and one or more of its
Subsidiaries, or (ii) any partnership, limited liability company,
association, joint venture or similar business organization more than 50% of
the ownership interests having ordinary voting power of which shall at the
time be so owned or controlled. Unless otherwise expressly provided, all
references herein to a "Subsidiary" shall mean a Subsidiary of the Borrower.
"Substantial Portion" means, with respect to the Property of the
Borrower and its Subsidiaries, Property which (i) represents more than 20% of
the consolidated assets of the Borrower and its Subsidiaries as would be
shown in the consolidated financial statements of the Borrower and its
Subsidiaries as at the beginning of the twelve-month period ending with the
month in which such determination is made, or (ii) is responsible for more
than 20% of the consolidated net sales or of the consolidated net income of
the Borrower and its Subsidiaries as reflected in the financial statements
referred to in clause (i) above.
"Swingline Advances" means an Advance made by the Swingline Lender
under the special availability provisions described in Section 2.4 bearing
interest at the Overnight Transaction Loan Rate (except that Swingline
Advances made pursuant to Section 2.4.2 and Swingline Advances requested
after 4:00 p.m. shall bear interest at the Alternate Base Rate).
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"Swingline Commitment" means the obligation of First Chicago to make
Swingline Loans not exceeding the amount set forth as its "Swingline
Commitment" on Schedule "1" hereto, as such amount may be modified from time
to time pursuant to the terms hereof.
"Swingline Lender" means First Chicago.
"Swingline Loan" means a Loan consisting of a Swingline Advance.
"Tangible Net Worth" means Net Worth, PLUS the principal balance of
the Subordinated Indebtedness, LESS the sum of the following (without
duplication): (a) any assets of the Borrower and its consolidated
Subsidiaries which would be treated as intangibles under Agreement Accounting
Principles including, without limitation, any write-up of assets (other than
in connection with acquisitions of new Subsidiaries or assets), good-will,
research and development costs, trade-marks, trade names, copyrights, patents
and unamortized debt discount and expenses and (b) loans or other extensions
of credit to Affiliates of the Borrower or to officers or employees of the
Borrower or of any of its Affiliates (but only to the extent such loans or
extensions of credit are accounted for in the computation of Net Worth and
not offset by corresponding liabilities pursuant to consolidation in such
computation of Net Worth) other than (i) Mortgage Loans made to such Persons
in the ordinary course of business and (ii) the Subordinated Indebtedness.
"Taxes" means any and all present or future taxes, duties, levies,
imposts, deductions, charges or withholdings, and any liabilities with
respect to the foregoing, but excluding Excluded Taxes.
"Termination Date" means March 29, 2000 or any earlier date on which
the Aggregate Commitment is reduced to zero or otherwise terminated pursuant
to the terms hereof.
"Total Liabilities" means the total liabilities of the Borrower and
its Subsidiaries, all as determined on a consolidated basis, in accordance
with Agreement Accounting Principles, EXCLUDING the Subordinated Indebtedness.
"Transferee" is defined in Section 12.5.
"Trust Receipt" means a trust receipt substantially in the form of
Exhibit "2" to the Security Agreement.
"Type" means, with respect to any Advance, its nature as an Alternate
Base Rate Advance, Eurodollar Advance, Fed Funds Advance or Swingline
Advance.
"Unfunded Liabilities" means the amount (if any) by which the present
value of all vested and unvested accrued benefits under all Single Employer
Plans exceeds the fair market value of all such Plan assets allocable to such
benefits, all determined as of the then most recent valuation date for such
Plans using PBGC actuarial assumptions for single employer plan terminations.
"Unmatured Default" means an event which but for the lapse of time or
the giving of notice, or both, would constitute a Default.
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"VA" means the Veterans Administration or any other agency,
corporation or instrumentality of the United States as to which the powers
and duties of the Veterans Administration have been transferred.
"VA-Approved Lender" means an institution that is approved by the VA
to act as a lender in connection with the origination of any Mortgage Loan
guaranteed by the VA.
"Wholly-Owned Subsidiary" of a Person means (i) any Subsidiary all of
the outstanding voting securities of which shall at the time be owned or
controlled, directly or indirectly, by such Person or one or more
Wholly-Owned Subsidiaries of such Person, or by such Person and one or more
Wholly-Owned Subsidiaries of such Person, or (ii) any partnership, limited
liability company, association, joint venture or similar business
organization 100% of the ownership interests having ordinary voting power of
which shall at the time be so owned or controlled.
"Year 2000 Issues" means anticipated costs, problems and uncertainties
associated with the inability of certain computer applications to effectively
handle data including dates on and after January 1, 2000, as such inability
materially affects the business, operations and financial condition of the
Borrower and its Subsidiaries and of the Borrower's and its Subsidiaries'
material customers, suppliers and vendors.
"Year 2000 Program" is defined in Section 5.19.
The foregoing definitions shall be equally applicable to both the
singular and plural forms of the defined terms.
ARTICLE II
THE CREDITS
2.1. COMMITMENT, SUBLIMITS AND TYPES OF ADVANCES.
2.1.1. COMMITMENT AND LENDING SUBLIMITS. From and including
the date of this Agreement and prior to the Termination Date, each Lender
severally agrees, on the terms and conditions set forth in this Agreement
(including the lending sublimits (the "Lending Sublimits") set forth below),
to make Loans to the Borrower and the Borrowing Subsidiaries from time to
time; provided that, on any date, after giving effect to such Loans and all
other Loans that the Borrower (on behalf of itself or any Borrowing
Subsidiary) has requested be made on such date under this Agreement:
(1) the aggregate principal balance then outstanding of Loans
then held by such Lender shall not exceed the amount of such Lender's
then-current Commitment;
(2) the aggregate principal balance then outstanding of all
Primary Loans then held by such Lender shall not exceed the amount of
such Lender's Primary Commitment;
(3) subject to Section 2.4.2, the aggregate principal balance
of all outstanding Swingline Loans held by the Swingline Lender on such
date shall not exceed the Swingline Lender's Swingline Commitment;
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(4) the aggregate principal balance of all outstanding Advances
under this Agreement on such date shall not exceed the Aggregate
Commitment; and
(5) the Coverage Requirement, on such date, shall not exceed
the lesser of the Aggregate Commitment or the then-current Borrowing
Base.
Subject to the terms of this Agreement, the Borrower and the Borrowing
Subsidiaries may borrow, repay and reborrow at any time prior to the
Termination Date. The Commitments to lend hereunder shall expire on the
Termination Date.
2.1.2. BORROWING BASE SUBLIMITS. The maximum amount that can
be credited toward the Borrowing Base from certain types of Collateral shall
be limited (the "Borrowing Base Sublimits") so that the Borrowing Base value
attributable to:
(i) all Jumbo Mortgage Loans shall not exceed thirty-five
percent (35%) of the Aggregate Commitment;
(ii) Oversize Jumbo Loans shall not exceed five percent (5%) of
the Aggregate Commitment;
(iii) Eligible Non-Agency Mortgage Loans shall not exceed ten
percent (10%) of the Aggregate Commitment;
(iv) Eligible Non-Agency Mortgage Loans having original
principal balances in excess of $650,000 shall not exceed
two and one-half percent (2.5%) of the Aggregate
Commitment;
(v) Eligible Non-Agency Mortgage Loans having FICO scores less
than 650 shall not exceed two and one-half percent (2.5%)
of the Aggregate Commitment;
(vi) Eligible Non-Agency Mortgage Loans, Eligible HELOC Loans
and Eligible Sub-Prime Mortgage Loans which are not first
priority Mortgage Loans shall not collectively exceed five
percent (5%) of the Aggregate Commitment;
(vii) Eligible HELOC Loans shall not exceed two percent (2%) of
the Aggregate Commitment; and
(viii) Eligible Sub-Prime Mortgage Loans shall not exceed five
percent (5%) of the Aggregate Commitment.
2.1.3. TYPES OF ADVANCES. Each Advance hereunder shall consist
of one or more Primary Advances or Swingline Advances requested by the
Borrower in accordance with Sections 2.8 and 2.9. Primary Advances shall be
available as provided in Section 2.2 and Swingline Advances shall be
available as provided in Section 2.4.
2.2. PRIMARY ADVANCES. Subject to the terms and conditions herein
(including the Lending Sublimits) the Borrower may request Primary Advances
from the Lenders on a pro rata basis in accordance
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with each Lender's Primary Commitment Percentage. Primary Advances shall
accrue interest at the Eurodollar Rate, the Federal Funds Rate or the
Alternate Base Rate, as selected by the Borrower in accordance with Sections
2.8 and 2.9.
2.3. INTENTIONALLY OMITTED.
2.4 SWINGLINE ADVANCES.
2.4.1 GENERAL. Subject to the terms and conditions herein
(including the Lending Sublimits), the Borrower may request Swingline
Advances from the Swingline Lender. On any Borrowing Date each Swingline
Advance requested by the Borrower shall be funded to the Borrower by the
Swingline Lender in such amounts as designated in the Borrowing Notice.
2.4.2 SWINGLINE ADVANCES TO PAY AMOUNTS DUE TO SWINGLINE
LENDERS. If any amounts are advanced by the Swingline Lender to cover checks
or wire transfers from any accounts of the Borrower or any Borrowing
Subsidiary maintained with the Swingline Lender when there are insufficient
funds in such accounts to cover the applicable check or wire transfer and
sufficient funds are not deposited in the applicable account before the close
of business on the day on which the applicable check or wire transfer request
is honored, then the Borrower shall be deemed to have requested, and the
Swingline Lender may (but shall not be obligated to) elect to make, a
Swingline Advance at the Alternate Base Rate to pay such overdraft amount
(even if such a Swingline Advance would cause the aggregate amount of all
outstanding Swingline Advances to exceed the Swingline Commitment); PROVIDED
HOWEVER, that (i) the Swingline Lender shall not make any such Swingline
Advance to the extent such Advance would cause (x) the Coverage Requirement
to exceed the Borrowing Base or (y) the aggregate principal balance of all
outstanding Advances under this Agreement to exceed the Aggregate Commitment,
and (ii) the reallocations of any such Swingline Advances among the Lenders
shall be as set forth in Section 2.6.
2.5. INTENTIONALLY OMITTED.
2.6. REALLOCATION. At the request of the Swingline Lender at any
time, and at the request of any Lender given during the continuance of a
Default, all Advances shall be reallocated among all Lenders in accordance
with each Lender's Commitment Percentage, and all Swingline Advances shall be
deemed Alternate Base Rate Advances upon such reallocation. Each Lender
holding less than its Commitment Percentage of all Advances shall immediately
purchase for cash and at face value such participations in the Notes and
Loans held by other Lenders, and make such other adjustments, as may be
needed to cause each Lender to hold its Commitment Percentage of the
Advances. No Lender shall be required to so purchase such participations to
the extent that such purchase would cause such Lender's share of the
aggregate unpaid principal amount of all Loans then outstanding under this
Agreement to exceed its Commitment hereunder. Notwithstanding anything to the
contrary contained in this Agreement, after any such reallocation has
occurred following the occurrence and during the continuance of a Default
(but not upon a reallocation made at the election of the Swingline Lender
absent any Default): (i) the Swingline Commitment shall be zero and (ii) all
future Advances, if any, shall be made as Alternate Base Rate Advances.
Notwithstanding the provisions of this Section, Post-Default Swingline
Advances shall not be reallocated among the Lenders but shall be held solely
by the Swingline Lender. In no event shall the Swingline Lender be obligated
to make any Post-Default Swingline Advances.
2.7. FEES. The Borrower shall pay the following fees (the "Fees"):
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2.7.1. UP-FRONT FEES. The up-front fees payable to the Lenders
on the Effective Date pursuant to the terms of the offer letter dated
February 8, 1999 from the Arranger to prospective Lenders.
2.7.2. FACILITY FEES. A facility fee based on the Aggregate
Commitment from time to time from and after the date hereof, calculated at
the Facility Fee Rate, expressed as a per diem rate on the actual Aggregate
Commitment for each day during the preceding full or partial calendar
quarter, payable (without duplication) in arrears, on the first Business Day
of each calendar quarter, upon each reduction in or termination of the
Aggregate Commitment and on the Termination Date. This fee shall be paid to
the Agent and allocated among the Lenders on a pro rata basis in accordance
with their respective Commitments during the applicable period.
2.7.3. COLLATERAL PREMIUM FEES.
(1) For each day on which a Non-Agency and HELOC Premium
Balance exists, a fee ("Non-Agency Premium Fee") to the Lenders in an
amount equal to (A) 0.125% multiplied by (B) such Non-Agency and HELOC
Premium Balance and divided by (C) 360, which Non-Agency Premium Fee
shall be allocated among the Lenders pro-rata in proportion to their
respective outstanding Loans on such day.
(2) For each day on which a Sub-Prime Premium Balance
exists, a fee ("Sub-Prime Premium Fee") to the Lenders in an amount equal
to (A) 0.25% multiplied by (B) such Sub-Prime Premium Balance and divided
by (C) 360, which Sub-Prime Premium Fee shall be allocated among the
Lenders pro-rata in proportion to their respective outstanding Loans on
such day.
(3) Notwithstanding the fact that the Non-Agency Premium
Fee and the Sub-Prime Premium Fee shall be calculated and accrued daily,
such Fees shall be payable in arrears on each Payment Date and on the
Termination Date.
2.7.4. LEVERAGE PREMIUM FEE. A leverage premium fee based on
the outstanding Loans from time to time, calculated at the Leverage Premium
Fee Rate (as defined below in this Section), on the actual outstanding Loans
for each day during the preceding full or partial calendar month, payable in
arrears on each Payment Date and on the Termination Date. This fee shall be
paid to the Agent and allocated among the Lenders on a pro rata basis in
proportion to their respective outstanding Loans during the applicable
period. "Leverage Premium Fee Rate" shall mean 0.125% per annum for each
month for which the Leverage Ratio exceeds 10.0 to 1.0 as of the last day of
the prior month (e.g. the Leverage Premium Fee Rate for March, 1999 shall be
based on the Leverage Ratio as of the last day of February, 1999); provided
that (i) the Leverage Premium Fee Rate shall be increased to 0.25% per annum
for each month through and including August, 1999 for which the Leverage
Ratio exceeds 12.0 to 1.0 as of the last day of the prior month, and (ii) if
the Leverage Ratio exceeds 12.0 to 1.0 as of the last day of August, 1999,
then the Leverage Premium Fee Rate for the period from September 1, 1999
through September 30, 1999 shall equal 0.25% per annum (and shall equal
0.125% per annum for the remainder of September, 1999).
2.7.5. AMENDMENT FEE. An amendment fee of $2,500 to each
Lender for each amendment to this Agreement other than (i) the first
amendment hereto made at the request of the Borrower, or (ii) any amendment
hereto made solely at the request of the Agent or one or more Lenders.
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2.7.6. AGENT FEES. Any fees payable to the Agent pursuant to
the Borrower's prior letter agreement with the Agent dated January 22, 1999.
2.7.7. COLLATERAL AGENT FEES. Any fees payable to the
Collateral Agent for its services rendered pursuant to the Security Agreement
as agreed to by the Borrower and charged by the Collateral Agent from time to
time.
2.8. METHOD OF SELECTING TYPES AND INTEREST PERIODS FOR NEW
ADVANCES. The Borrower shall select the Type of Advance and, in the case of
each Fixed Rate Advance, the Interest Period applicable to each Advance from
time to time. The Borrower shall give the Agent irrevocable notice (a
"Borrowing Notice") not later than (i) 11:00 a.m. (Chicago time) on the
Borrowing Date of each Alternate Base Rate Advance or Fed Funds Advance, (ii)
4:45 p.m. (Chicago time) on the proposed Borrowing Date for each Swingline
Advance (provided that Swingline Advances requested after 4:00 shall bear
interest at the Alternate Base Rate rather than at the Overnight Transaction
Loan Rate), and (iii) 11:00 a.m. (Chicago time) at least three Business Days
before the Borrowing Date for each Eurodollar Advance, specifying:
(a) the Borrowing Date, which shall be a Business Day, of such
Advance,
(b) the aggregate amount of such Advance, which shall (1) not be less
than $3,500,000 for all Advances other than Swingline Advances,
and (2) not be less than $100,000 for Swingline Advances,
(c) the Type of Advance selected,
(d) in the case of each Eurodollar Advance, the Interest Period
applicable thereto, and
(e) if the Advance request is on behalf of a Borrowing Subsidiary, the
identity of applicable Borrowing Subsidiary.
All Advances shall be requested by the Borrower, and each of the Borrowing
Subsidiaries irrevocably authorizes (i) the Borrower to request Advances on
its behalf and (ii) the Agent to honor requests for Advances made by the
Borrower. Not later than noon (Chicago time) on each Borrowing Date, with
respect to all Advances other than Swingline Advances, each Lender shall make
available its Loan or Loans comprising such Advance, in funds immediately
available in Chicago to the Agent at its address specified pursuant to
Article XIII; provided that Swingline Advances may be made available at any
time up to the close of business. The Agent will make the funds so received
from the Lenders available to the Borrower at the Agent's aforesaid address.
2.9. CONVERSION AND CONTINUATION OF OUTSTANDING ADVANCES. An
Alternate Base Rate Advance shall continue as an Alternate Base Rate Advance
unless and until such Alternate Base Rate Advance is converted into another
Type of Advance (other than a Swingline Advance). A Fed Funds Advance shall
continue as a Fed Funds Advance unless and until (a) such Advance is
converted into a different Type of Advance (other than a Swingline Advance)
in accordance with the terms hereof or (b) the Borrower or a Borrowing
Subsidiary has paid any such Fed Funds Advance prior to 11:00 a.m. (Chicago
time) on any Business Day. A Swingline Advance shall continue as a Swingline
Advance unless and until the Borrower has paid any such Swingline Advance
prior to 4:00 p.m. (Chicago time) on any Business Day. Each Eurodollar
Advance shall continue as a Eurodollar Advance until the end of the then
applicable Interest
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Period therefor, at which time such Eurodollar Advance shall be automatically
converted into an Alternate Base Rate Advance unless the Borrower shall have
given the Agent a Conversion/Continuation Notice requesting that, at the end
of such Interest Period, such Eurodollar Advance either continue as a
Eurodollar Advance for the same or another Interest Period or be converted
into an Advance of another Type (other than a Swingline Advance). Swingline
Advances may be repaid out of new Advances hereunder but may not be converted
to a different Type of Advance. The Borrower may elect from time to time to
convert all or any part of an Advance of any Type (other than a Swingline
Advance) into any other Type or Types of Advances (other than a Swingline
Advance); provided that any conversion of any Eurodollar Advance shall be
made on, and only on, the last day of the Interest Period applicable thereto.
The Borrower shall give the Agent irrevocable notice (a
"Conversion/Continuation Notice") of each conversion of an Alternate Base
Rate Advance or Fed Funds Advance or conversion or continuation of a
Eurodollar Advance not later than (i) 11:00 a.m. (Chicago time) on the date
of the requested conversion, in the case of a conversion into an Alternate
Base Rate Advance or Fed Funds Advance or (ii) 11:00 a.m. (Chicago time) at
least three Business Days prior to the date of the requested conversion into
or continuation of a Eurodollar Advance, specifying:
(i) the requested date which shall be a Business Day, of such
conversion or continuation,
(ii) the aggregate amount (which meets the minimums set forth in
Section 2.8(b)) and Type of the Advance which is to be converted
or continued, and
(iii) the amount and Type(s) of Advance(s) into which such Advance is to
be converted or continued and, in the case of a conversion into or
continuation of a Eurodollar Advance, the duration of the Interest
Period applicable thereto.
2.10. REDUCTIONS TO AGGREGATE COMMITMENT. The Borrower may from time
to time permanently reduce the Aggregate Commitment in whole, or in part
ratably among the Lenders in integral multiples of $10,000,000, upon at least
ten (10) Business Days' written notice to the Agent, which notice shall
specify the amount of any such reduction. On or before the effective date of
any such reduction, the Borrower shall, if necessary, repay sufficient Loans
to prevent the remaining outstanding Loans hereunder, after giving effect to
such permanent reduction, from exceeding the Lending Sublimits. Upon any
reduction of the Aggregate Commitment, upon the election of the Swingline
Lender, the reduction in such Lender's Commitment may be allocated either
solely to such Lender's Primary Commitment or in part to its Primary
Commitment and in part to its Swingline Commitment on a pro rata basis.
2.11. PRINCIPAL PAYMENTS.
2.11.1. OPTIONAL PRINCIPAL PAYMENTS. The Borrower or any
Borrowing Subsidiary may from time to time pay, without penalty or premium,
all outstanding Alternate Base Rate Advances or, in integral multiples of
$100,000, any portion of the outstanding Alternate Base Rate Advances, upon
prior written notice to the Agent. The Borrower or any Borrowing Subsidiary
may from time to time pay, subject to the payment of any funding
indemnification amounts required by Section 3.4 but without penalty or
premium, all outstanding Eurodollar Advances or, in integral multiples of
$100,000, any portion of the outstanding Eurodollar Advances, upon three
Business Days' prior written notice to the Agent. Fed Funds Advances and
Swingline Advances may be paid on any Business Day provided that the Borrower
or any Borrowing Subsidiary has given the Agent written notice of such
repayment on the date of such intended payment by (i) 11:00 a.m. (Chicago
time) for Fed Funds Advances and (ii) 4:00 p.m. (Chicago time) for
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Swingline Advances. All optional principal payments shall be applied to the
Type of Advance designated by the Borrower or any Borrowing Subsidiary when
making such payment, provided that any payments received during the
continuance of a Default and after the provisions of Section 2.6 have been
invoked and are in continued effect shall be applied on a pro rata basis to
all Advances then outstanding. Payments so allocated to an Advance shall be
distributed to the Lenders holding the Loans comprising such Advance on a pro
rata basis in accordance with the respective unpaid principal balances of
such Loans.
2.11.2. REQUIRED PAYMENTS RELATED TO BORROWING BASE. On any
date that the Coverage Requirement is in excess of the then-current Borrowing
Base, the Borrower shall, prior to the close of business on such date, either
deliver sufficient Eligible Collateral to eliminate such excess and/or make a
mandatory payment to the Agent for the benefit of the Lenders in the amount
of such excess. Any such payment shall be allocated as directed by the
Borrower unless a Default then exists and Section 2.6 has been invoked in
which case such payment shall be allocated in accordance with the Lenders'
respective outstanding Loans and in conjunction with the procedures described
in Section 2.6, with such payments applied first to accrued interest and
thereafter to principal.
2.11.3. SETTLEMENT ACCOUNT PAYMENTS. Upon the sale of any
Pledged Item (or repayment of any principal of any HELOC Loan constituting a
Pledged Item (a "Pledged HELOC Loan")), the Borrower shall give the Agent
documentation identifying the Pledged Item sold (or the Pledged HELOC Loan
being fully or partially repaid), the purchaser thereof and the related net
sales proceeds (or net principal repayment on a Pledged HELOC Loan) in a
manner sufficient to allow the Agent to match each Settlement Account deposit
("Sale Deposit") with the applicable Pledged Item sold (or HELOC Loan
repaid). Prior to the occurrence of a Default, upon the Agent's receipt of
the documentation described in the preceding sentence with respect to any
Pledged Item and the receipt of the related Sale Deposit in the Settlement
Account, an amount equal to the lesser of such Sale Deposit and the
Collateral Value of the related Pledged Item shall be applied to then
outstanding Loans in the order and in the amounts directed by Borrower or,
absent such direction, in the following order: (i) first, to Swingline Loans
(other than those constituting Post-Default Swingline Advances) until paid in
full, (ii) second, to Fed Funds Loans until paid in full, (iii) third, to
Alternate Base Rate Loans until paid in full, (iv) fourth, to Eurodollar
Loans (and with respect to Eurodollar Loans only, to interest thereon) until
paid in full, and (v) fifth, to Post-Default Swingline Advances until paid in
full. With respect to Eurodollar Loans, such amounts (1) shall be applied to
such Loans in the order in which their Interest Periods expire (i.e. the
Eurodollar Loans first maturing shall be the first repaid), and (2) shall be
applied to interest on Loans which have been repaid before being applied to
principal of Loans having a different Interest Period. The applications
described in the preceding sentence shall occur on the Business Day on which
the Sale Deposit is received in the Settlement Account if both the Sale
Deposit and the related required documentation are received by noon (Chicago
time) and shall occur on the next succeeding Business Day after both have
been received if either the Sale Deposit or the documentation is received
after noon. Prior to the occurrence of a Default, the Borrower may withdraw
or otherwise direct the application of any portion of the Sale Deposit for a
particular Pledged Item which remains in the Settlement Account after the
applications described above so long as (after accounting for any such
withdrawal or application) the Borrowing Base exceeds the Coverage
Requirement. Any such disbursement shall be made within one Business Day
after the later of Borrower's request or Agent's receipt of the applicable
Sale Deposit. During the continuance of a Default, any amounts held or
deposited in the Settlement Account may be withdrawn by the Agent and shall
be applied to the Obligations in accordance with Section 8.8.
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2.11.4. FINAL PAYMENT ON TERMINATION DATE. Any outstanding
Advances and all other unpaid Obligations, unless required to be paid earlier
pursuant to the terms hereof, shall be paid in full by the Borrower on the
Termination Date.
2.12. CHANGES IN INTEREST RATE, ETC. Each Alternate Base Rate
Advance shall bear interest on the outstanding principal amount thereof, for
each day from and including the date such Advance is made or is converted
from another Type of Advance into an Alternate Base Rate Advance pursuant to
Section 2.9 to but excluding the date it is paid or is converted into another
Type of Advance pursuant to Section 2.9 hereof, at a rate per annum equal to
the Alternate Base Rate for such day. Changes in the rate of interest on
that portion of any Advance maintained as an Alternate Base Rate Advance will
take effect simultaneously with each change in the Alternate Base Rate. The
interest rate on each Swingline Advance or Fed Funds Advance shall be
recalculated daily for each day that such Swingline Advance or Fed Funds
Advance is continued under Section 2.9. Each Eurodollar Advance shall bear
interest on the outstanding principal amount thereof from and including the
first day of the Interest Period applicable thereto to (but not including)
the last day of such Interest Period at the interest rate determined as
applicable to such Eurodollar Advance. No more than seven (7) Interest
Periods may be in effect at one time, and no Interest Period may end after
the Termination Date.
2.13. RATES APPLICABLE AFTER DEFAULT. Notwithstanding anything to
the contrary contained in Section 2.8 or 2.9, during the continuance of a
Default or Unmatured Default the Required Lenders may, at their option, by
notice to the Borrower (which notice may be revoked at the option of the
Required Lenders notwithstanding any provision of Section 9.1 requiring
unanimous consent of the Lenders to reductions in interest rates), declare
that no Advance may be made as, converted into or continued as a Fixed Rate
Advance. During the continuance of a Default the Required Lenders may, at
their option, by notice to the Borrower (which notice may be revoked at the
option of the Required Lenders notwithstanding any provision of Section 9.1
requiring unanimous consent of the Lenders to reductions in interest rates),
declare that (i) each Eurodollar Advance (unless such Advances have been
reallocated pursuant to Section 2.6) shall bear interest for the remainder of
the applicable Interest Period at the rate otherwise applicable to such
Interest Period plus 2% per annum and (ii) each Advance (other than those
under clause (i) above) shall bear interest at a rate per annum equal to the
Alternate Base Rate plus 2% per annum; provided that, during the continuance
of a Default under Section 7.6 or 7.7, the interest rates set forth in
clauses (i) and (ii) above shall be applicable to all Advances without any
election or action on the part of the Agent or any Lender.
2.14. METHOD OF PAYMENT. All payments of the Obligations hereunder
shall be made, without setoff, deduction, or counterclaim, in immediately
available funds to the Agent at the Agent's address specified pursuant to
Article XIII, or at any other Lending Installation of the Agent specified in
writing by the Agent to the Borrower, on the date when due by (i) noon
(Chicago time) with respect to all Advances other than Swingline Advances,
and (ii) 4:00 p.m. (Chicago time) with respect to Swingline Advances, and all
such payments shall be applied in accordance with Section 2.11.1.
Notwithstanding the foregoing, if the Borrower fails to give the Agent notice
of repayment of a Fed Funds Advance before 11:00 a.m. (Chicago time) on the
Business Day that the Borrower or any Borrowing Subsidiary intends to repay
such Fed Funds Advance, any payment of such Fed Funds Advance received by the
Agent on such Business Day shall be deemed to have been received by the Agent
at the opening of business on the following Business Day. Each payment
delivered to the Agent for the account of any Lender shall be delivered
promptly by the Agent to such Lender in the same type of funds that the Agent
received at its address specified pursuant to Article XIII or at any Lending
Installation specified in a notice received by the Agent from such Lender.
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The Agent is hereby authorized to charge the account of the Borrower and any
Borrowing Subsidiary maintained with First Chicago for each payment of
principal, interest and fees as it becomes due hereunder (and such charges
shall be reflected in the Borrower's monthly account statement).
2.15. NOTELESS AGREEMENT; EVIDENCE OF INDEBTEDNESS. (i) Each Lender
shall maintain in accordance with its usual practice an account or accounts
evidencing the indebtedness of the Borrower and the Borrowing Subsidiaries to
such Lender resulting from each Loan made by such Lender from time to time,
including the amounts of principal and interest payable and paid to such
Lender from time to time hereunder.
(ii) The Agent shall also maintain accounts in which it will record
(a) the amount of each Loan made hereunder, the Type thereof and the Interest
Period with respect thereto, (b) the amount of any principal or interest due
and payable or to become due and payable from the Borrower or any Borrowing
Subsidiary to each Lender hereunder and (c) the amount of any sum received by
the Agent hereunder from the Borrower or any Borrowing Subsidiary and each
Lender's share thereof.
(iii) The entries maintained in the accounts maintained pursuant to
paragraphs (i) and (ii) above shall, absent manifest error, be PRIMA FACIE
evidence of the existence and amounts of the Obligations therein recorded;
PROVIDED, HOWEVER, that the failure of the Agent or any Lender to maintain
such accounts or any error therein shall not in any manner affect the
obligations of the Borrower or the Borrowing Subsidiaries to repay the
Obligations in accordance with their terms. In the event of a conflict
between the accounts maintained pursuant to paragraphs (i) and (ii) above,
the entries made in the account maintained pursuant to paragraph (ii) shall,
absent manifest error, be conclusive.
(iv) Any Lender may request that its Loans be evidenced by a Note.
In such event, the Borrower and the Borrowing Subsidiaries shall prepare,
execute and deliver to such Lender a Note payable to the order of such
Lender. Thereafter, the Loans evidenced by such Note and interest thereon
shall at all times (including after any assignment pursuant to Section 12.3)
be represented by one or more Notes payable to the order of the payee named
therein or any assignee pursuant to Section 12.3, except to the extent that
any such Lender or assignee subsequently returns any such Note for
cancellation and requests that such Loans once again be evidenced as
described in paragraphs (i) and (ii) above.
2.16. TELEPHONIC NOTICES. The Borrower and each Borrowing Subsidiary
hereby authorize the Lenders and the Agent to extend, convert or continue
Advances, to effect selections of Types of Advances and to transfer funds
based on telephonic notices made by any person or persons the Agent or any
Lender in good faith believes to be acting on behalf of the Borrower, it
being understood that the foregoing authorization is specifically intended to
allow Borrowing Notices and Conversion/Continuation Notices to be given
telephonically. The Borrower agrees to deliver promptly to the Agent a
written confirmation, if such confirmation is requested by the Agent or any
Lender, of each telephonic notice signed by an Authorized Officer. If the
written confirmation differs in any material respect from the action taken by
the Agent and the Lenders, the records of the Agent and the Lenders shall
govern absent manifest error.
2.17. INTEREST PAYMENT DATES; INTEREST AND FEE BASIS. Interest
accrued on each Advance other than a Eurodollar Advance shall be payable on
each Payment Date, commencing with the first such date to occur after the
date hereof and at maturity. Interest accrued on each Eurodollar Advance
shall be payable on the last day of its applicable Interest Period, on any
date on which such Eurodollar Advance is prepaid, whether by acceleration or
otherwise, and at maturity. Interest and Fees shall be calculated for
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actual days elapsed on the basis of a 360-day year. Interest shall be
payable for the day an Advance is made but not for the day of any payment on
the amount paid if payment is received at the place of payment prior to the
time required for payment as set forth in Section 2.14. If any payment of
principal of or interest on an Advance shall become due on a day which is not
a Business Day, such payment shall be made on the next succeeding Business
Day and, in the case of a principal payment, such extension of time shall be
included in computing interest in connection with such payment.
2.18. NOTIFICATION BY THE AGENT. Promptly after receipt thereof, the
Agent will notify each Lender of the contents of each Aggregate Commitment
reduction notice, Borrowing Notice, Conversion/Continuation Notice, and
repayment notice received by it hereunder. Promptly upon determination
thereof, the Agent will notify each Lender and the Borrower of the interest
rate applicable to each Eurodollar Advance. When any Fed Funds Advances or
Alternate Base Rate Advances are outstanding or have been requested, the
Agent will give each Lender and the Borrower prompt notice of each change in
such rates.
2.19. LENDING INSTALLATIONS. Each Lender may book its Loans at any
Lending Installation selected by such Lender and may change its Lending
Installation from time to time. All terms of this Agreement shall apply to
any such Lending Installation and the Loans and any Notes shall be deemed
held by each Lender for the benefit of such Lending Installation. Each
Lender may, by written notice to the Agent and the Borrower in accordance
with Article XIII, designate replacement or additional Lending Installations
through which Loans will be made by it and for whose account Loan payments
are to be made.
2.20. NON-RECEIPT OF FUNDS BY THE AGENT. Unless the Borrower or any
Borrowing Subsidiary or a Lender, as the case may be, notifies the Agent
prior to the date on which it is scheduled to make payment to the Agent of
(i) in the case of a Lender, the proceeds of a Loan or Advance or (ii) in the
case of the Borrower or any Borrowing Subsidiary, a payment of principal,
interest or Fees to the Agent for the account of the Lenders, that it does
not intend to make such payment, the Agent may assume that such payment has
been made. The Agent may, but shall not be obligated to, make the amount of
such payment available to the intended recipient in reliance upon such
assumption. If such Lender or the Borrower or any Borrowing Subsidiary, as
the case may be, has not in fact made such payment to the Agent, the
recipient of such payment shall, on demand by the Agent, repay to the Agent
the amount so made available together with interest thereon in respect of
each day during the period commencing on the date such amount was so made
available by the Agent until the date the Agent recovers such amount at a
rate per annum equal to (i) in the case of payment due from a Lender, the
Federal Funds Effective Rate for such day for the first three days and,
thereafter, at the interest rate applicable to the relevant Loan, or (ii) in
the case of payment due from the Borrower or any Borrowing Subsidiary, the
interest rate applicable to the relevant Loan.
ARTICLE III
CHANGE IN CIRCUMSTANCES
3.1. YIELD PROTECTION. If, on or after the date of this Agreement,
the adoption of or any change in any law or any governmental or
quasi-governmental rule, regulation, policy, guideline or directive (whether
or not having the force of law), or any change in the interpretation or
administration thereof by any governmental or quasi-governmental authority,
central bank or comparable agency charged with the
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interpretation or administration thereof, or compliance by any Lender or
applicable Lending Installation with any request or directive (whether or not
having the force of law) of any such authority, central bank or comparable
agency:
(i) subjects any Lender or any applicable Lending Installation to any
Taxes or changes the basis of taxation of payments (other than
with respect to Excluded Taxes) to any Lender in respect of its
Fixed Rate Loans, or
(ii) imposes or increases or deems applicable any reserve, assessment,
insurance charge, special deposit or similar requirement against
assets of, deposits with or for the account of, or credit extended
by, any Lender or any applicable Lending Installation (other than
reserves and assessments taken into account in determining the
interest rate applicable to Fixed Rate Advances), or
(iii) imposes any other condition the result of which is to increase the
cost to any Lender or any applicable Lending Installation of
making, funding or maintaining its Fixed Rate Loans or to reduce
any amount receivable by any Lender or any applicable Lending
Installation in connection with its Fixed Rate Loans, or requires
any Lender or any applicable Lending Installation to make any
payment calculated by reference to the amount of its Fixed Rate
Loans held or interest received by it, by an amount deemed
material by such Lender,
and the result of any of the foregoing is to increase the cost to such Lender
or applicable Lending Installation of making or maintaining its Fixed Rate
Loans or Commitment or to reduce the return received by such Lender or
applicable Lending Installation in connection with such Fixed Rate Loans or
Commitment, then, within 15 days of demand by such Lender, the Borrower shall
pay such Lender such additional amount or amounts as will compensate such
Lender for such increased cost or reduction in an amount received.
3.2. CHANGES IN CAPITAL ADEQUACY REGULATIONS. If a Lender
determines the amount of capital required or expected to be maintained by
such Lender, any Lending Installation of such Lender or any corporation
controlling such Lender is increased as a result of a Change, then, within 15
days of demand by such Lender, the Borrower shall pay such Lender the amount
necessary to compensate for any shortfall in the rate of return on the
portion of such increased capital which such Lender determines is
attributable to this Agreement, its Loans or its obligation to make Loans
hereunder (after taking into account such Lender's policies as to capital
adequacy). "Change" means (i) any change after the date of this Agreement in
the Risk-Based Capital Guidelines or (ii) any adoption of or change in any
other law, governmental or quasi-governmental rule, regulation, policy,
guideline, interpretation, or directive (whether or not having the force of
law) after the date of this Agreement which affects the amount of capital
required or expected to be maintained by any Lender or any Lending
Installation or any corporation controlling any Lender. "Risk-Based Capital
Guidelines" means (i) the risk-based capital guidelines in effect in the
United States on the date of this Agreement, including transition rules, and
(ii) the corresponding capital regulations promulgated by regulatory
authorities outside the United States implementing the July 1988 report of
the Basle Committee on Banking Regulation and Supervisory Practices Entitled
"International Convergence of Capital Measurements and Capital Standards,"
including transition rules, and any amendments to such regulations adopted
prior to the date of this Agreement.
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3.3. AVAILABILITY OF TYPES OF ADVANCES. If any Lender determines
that maintenance of its Fixed Rate Loans at a suitable Lending Installation
would violate any applicable law, rule, regulation, or directive, whether or
not having the force of law, or if the Required Lenders determine that (i)
deposits of a type and maturity appropriate to match fund Fixed Rate Advances
or Fed Funds Advances are not available or (ii) the interest rate applicable
to a Type of Advance does not accurately reflect the cost of making or
maintaining such Advance, then the Agent shall suspend the availability of
the affected Type of Advance and require any Advances of the affected Type to
be repaid or converted to Alternate Base Rate Advances, subject to the
payment of any funding indemnification amounts required by Section 3.4.
3.4. FUNDING INDEMNIFICATION. If any payment or conversion of a
Fixed Rate Advance occurs on a date which is not the last day of the
applicable Interest Period, whether because of acceleration, prepayment
(including pursuant to Settlement Account applications pursuant to Section
2.11.3) or otherwise, or a Fixed Rate Advance is not made, continued or
converted on the date specified by the Borrower for any reason other than
default by the Lenders, the Borrower will indemnify each Lender for any loss
or cost incurred by it resulting therefrom, including, without limitation,
any loss or cost in liquidating or employing deposits acquired to fund or
maintain such Fixed Rate Advance.
3.5. TAXES. (i) All payments by the Borrower or any Borrowing
Subsidiary to or for the account of any Lender or the Agent hereunder or
under any Note shall be made free and clear of and without deduction for any
and all Taxes. If the Borrower or any Borrowing Subsidiary shall be required
by law to deduct any Taxes from or in respect of any sum payable hereunder to
any Lender or the Agent, (a) the sum payable shall be increased as necessary
so that after making all required deductions (including deductions applicable
to additional sums payable under this Section 3.5) such Lender or the Agent
(as the case may be) receives an amount equal to the sum it would have
received had no such deductions been made, (b) the Borrower or applicable
Borrowing Subsidiary shall make such deductions, (c) the Borrower or
applicable Borrowing Subsidiary shall pay the full amount deducted to the
relevant authority in accordance with applicable law and (d) the Borrower or
applicable Borrowing Subsidiary shall furnish to the Agent the original copy
of a receipt evidencing payment thereof within 30 days after such payment is
made.
(ii) In addition, the Borrower hereby agrees to pay any present or
future stamp or documentary taxes and any other excise or property taxes,
charges or similar levies (other than Excluded Taxes) which arise from any
payment made hereunder or under any Note or from the execution or delivery
of, or otherwise with respect to, this Agreement or any Note ("Other Taxes").
(iii) The Borrower hereby agrees to indemnify the Agent and each
Lender for the full amount of Taxes or Other Taxes (including, without
limitation, any Taxes or Other Taxes imposed on amounts payable under this
Section 3.5) paid by the Agent or such Lender and any liability (including
penalties, interest and expenses) arising therefrom or with respect thereto.
Payments due under this indemnification shall be made within 30 days of the
date the Agent or such Lender makes demand therefor pursuant to Section 3.6.
(iv) Each Lender that is not incorporated under the laws of the
United States of America or a state thereof (each a "Non-U.S. Lender") agrees
that it will, not less than ten Business Days after the date of this
Agreement, (i) deliver to each of the Borrower and the Agent two duly
completed copies of United States Internal Revenue Service Form 1001 or 4224,
certifying in either case that such Lender is entitled to receive payments
under this Agreement without deduction or withholding of any United States
federal
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income taxes, and (ii) deliver to each of the Borrower and the Agent a United
States Internal Revenue Service Form W-8 or W-9, as the case may be, and
certify that it is entitled to an exemption from United States backup
withholding tax. Each Non-U.S. Lender further undertakes to deliver to each
of the Borrower and the Agent (x) renewals or additional copies of such form
(or any successor form) on or before the date that such form expires or
becomes obsolete, and (y) after the occurrence of any event requiring a
change in the most recent forms so delivered by it, such additional forms or
amendments thereto as may be reasonably requested by the Borrower or the
Agent. All forms or amendments described in the preceding sentence shall
certify that such Lender is entitled to receive payments under this Agreement
without deduction or withholding of any United States federal income taxes,
UNLESS an event (including without limitation any change in treaty, law or
regulation) has occurred prior to the date on which any such delivery would
otherwise be required which renders all such forms inapplicable or which
would prevent such Lender from duly completing and delivering any such form
or amendment with respect to it and such Lender advises the Borrower and the
Agent that it is not capable of receiving payments without any deduction or
withholding of United States federal income tax.
(v) For any period during which a Non-U.S. Lender has failed to
provide the Borrower with an appropriate form pursuant to clause (iv), above
(unless such failure is due to a change in treaty, law or regulation, or any
change in the interpretation or administration thereof by any governmental
authority, occurring subsequent to the date on which a form originally was
required to be provided), such Non-U.S. Lender shall not be entitled to
indemnification under this Section 3.5 with respect to Taxes imposed by the
United States; PROVIDED that, should a Non-U.S. Lender which is otherwise
exempt from or subject to a reduced rate of withholding tax become subject to
Taxes because of its failure to deliver a form required under clause (iv),
above, the Borrower shall take such steps as such Non-U.S. Lender shall
reasonably request to assist such Non-U.S. Lender to recover such Taxes.
(vi) Any Non-U.S. Lender that is entitled to an exemption from or
reduction of withholding tax with respect to payments under this Agreement or
any Note pursuant to the law of any relevant jurisdiction or any treaty shall
deliver to the Borrower (with a copy to the Agent), at the time or times
prescribed by applicable law, such properly completed and executed
documentation prescribed by applicable law as will permit such payments to be
made without withholding or at a reduced rate.
(vii) If the U.S. Internal Revenue Service or any other governmental
authority of the United States or any other country or any political
subdivision thereof asserts a claim that the Agent did not properly withhold
tax from amounts paid to or for the account of any Non-U.S. Lender (because
the appropriate form was not delivered or properly completed, because such
Lender failed to notify the Agent of a change in circumstances which rendered
its exemption from withholding ineffective, or for any other reason), such
Lender shall indemnify the Agent fully for all amounts paid, directly or
indirectly, by the Agent as tax, withholding therefor, or otherwise,
including penalties and interest, and including taxes imposed by any
jurisdiction on amounts payable to the Agent under this subsection, together
with all costs and expenses related thereto (including attorneys fees and
time charges of attorneys for the Agent, which attorneys may be employees of
the Agent). The obligations of the Lenders under this Section 3.5(vii) shall
survive the payment of the Obligations and termination of this Agreement.
3.6. LENDER STATEMENTS; SURVIVAL OF INDEMNITY. If, with respect to
any Lender, circumstances arise which would result in an increase in the
liability of the Borrower to such Lender under Sections 3.1, 3.2 or 3.5 or
would result in the unavailability of a Type of Advance under Section 3.3,
then such Lender shall notify the Agent thereof and such Lender shall, in
consultation with the Agent and the Borrower and
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to the extent it can do so without materially disadvantaging itself, take
such reasonable steps as may reasonably be open to such Lender to mitigate
the effects of such circumstances (including designating an alternate Lending
Installation with respect to its Fixed Rate Loans). If and so long as a
Lender has been unable to take, or has not taken, steps reasonably acceptable
to the Borrower to mitigate the effect of such circumstances, then (so long
as no Default is continuing) at the Borrower's request such Lender shall
assign all of its rights and obligations hereunder to another Person
nominated by the Borrower with the approval of the Agent and willing to
participate in this facility in place of such Lender; provided that such
Person satisfies all of the requirements of this Agreement including, but not
limited to, providing the forms required by Sections 3.5(iv) and 12.3. The
Borrower shall pay the assignment fee due to the Agent under Section 12.3.2
in the event of any assignment made at the Borrower's request pursuant to the
terms of this Section. Notwithstanding any such assignment, the obligations
of the Borrower under Sections 3.1, 3.2, 3.5 and 9.7 shall survive any such
assignment and shall be enforceable by such assigning Lender. Each Lender
shall deliver a written statement of such Lender to the Borrower (with a copy
to the Agent) as to the amount due, if any, under Section 3.1, 3.2, 3.4 or
3.5. Such written statement shall set forth in reasonable detail the
calculations upon which such Lender determined such amount and shall be
final, conclusive and binding on the Borrower in the absence of manifest
error. Determination of amounts payable under such Sections in connection
with a Fixed Rate Loan shall be calculated as though each Lender funded its
Fixed Rate Loan through the purchase of a deposit of the type and maturity
corresponding to the deposit used as a reference in determining the
Eurodollar Rate applicable to such Loan, whether in fact that is the case or
not. Unless otherwise provided herein, the amount specified in the written
statement of any Lender shall be payable within 15 days of demand after
receipt by the Borrower of such written statement. The obligations of the
Borrower under Sections 3.1, 3.2, 3.4 and 3.5 shall survive payment of the
Obligations and termination of this Agreement.
ARTICLE IV
CONDITIONS PRECEDENT
4.1. EFFECTIVENESS. This Agreement shall not be effective and no
Lender shall be required to make the initial Advance hereunder until a date
(the "Effective Date") upon which the Borrower has furnished or caused to be
furnished to the Agent (with sufficient copies for the Lenders) the following:
(i) Copies of the articles of incorporation or articles of
organization, as applicable, of the Borrower and each Borrowing
Subsidiary, together with all amendments, and a certificate of
good standing or analogous certificate of status in its State of
formation and (if different from its State of formation) in the
State in which its principal place of business is located, each
certified by the appropriate governmental officer.
(ii) Copies, certified by the Secretary or Assistant Secretary of the
Borrower and each Borrowing Subsidiary, of its by-laws or
operating agreement and of its Board of Directors' or Members'
resolutions (and resolutions of other bodies, if any are deemed
necessary by counsel for any Lender) authorizing the execution,
delivery and performance of the Loan Documents.
(iii) An incumbency certificate, executed by the Secretary or Assistant
Secretary of the Borrower and each Borrowing Subsidiary, which
shall identify by name and title and bear
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the signature of the officers of the Borrower and each
Borrowing Subsidiary authorized to sign the Loan Documents and
to make borrowings hereunder, upon which certificate the Agent
and the Lenders shall be entitled to rely until informed of any
change in writing by the Borrower.
(iv) A certificate, signed by the chief financial officer or controller
of the Borrower, (x) stating that on the initial Borrowing Date no
Default or Unmatured Default has occurred and is continuing, and
(y) showing the calculations necessary to determine that all of
the financial covenants set forth in this Agreement were satisfied
as of January 1, 1999 and as of February 28, 1999.
(v) Written opinions of the Borrower's in-house and outside counsel,
addressed to the Agent and the Lenders in substantially the form
of Exhibits "B-1" and "B-2" hereto.
(vi) Any Notes requested by a Lender pursuant to Section 2.15 payable
to the order of each such requesting Lender.
(vii) A fully executed Security Agreement, together with such executed
UCC-1 financing statements as the Agent may reasonably request.
(viii) Written money transfer instructions, in substantially the form of
Exhibit "J" hereto, addressed to the Agent and signed by an
Authorized Officer, together with such other related money
transfer authorizations as the Agent may have reasonably
requested.
(ix) Payment of all Fees due and payable on or before the Effective
Date.
(x) Establishment of the Settlement Account.
(xi) Information satisfactory to the Agent regarding the Borrower's
Year 2000 Program.
(xii) Such other documents as any Lender or its counsel may have
reasonably requested in writing.
4.2. EACH ADVANCE. The Lenders shall not be required to make any
Advance (other than an Advance that, after giving effect thereto and to the
application of the proceeds thereof, does not increase the aggregate amount of
outstanding Advances), unless on the applicable Borrowing Date:
(i) There exists no Default or Unmatured Default.
(ii) The representations and warranties contained in Article V and in
the other Loan Documents are true and correct as of such Borrowing
Date except to the extent any such representation or warranty is
stated to relate solely to an earlier date, in which case such
representation or warranty shall be true and correct on and as of
such earlier date.
(iii) All legal matters incident to the making of such Advance shall be
satisfactory to the Lenders and their counsel.
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Each Borrowing Notice with respect to each Advance shall constitute a
representation and warranty by the Borrower and each Borrowing Subsidiary
that, after giving effect to the amount of the Advance being requested, (a)
the conditions contained in Sections 4.2(i) and (ii) have been satisfied, (b)
the then current Borrowing Base is equal to or greater than the Coverage
Requirement, (c) any principal amount of any HELOC Loan which has repaid
since the Pledge Date thereof has been deducted in calculating the
then-current Borrowing Base, and (d) no Lending Sublimit has been exceeded.
Any Lender may, if such Lender reasonably suspects that a Default or
Unmatured Default may exist or would exist upon the funding of any requested
Advance, require a duly completed compliance certificate in substantially the
form of Exhibit "E" hereto as a condition to making an Advance.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
The Borrower and each Borrowing Subsidiary represents and warrants to
the Lenders that:
5.1. EXISTENCE AND STANDING. Each of the Borrower and each of its
Subsidiaries is a corporation duly incorporated (or a limited liability
company duly organized, as applicable), validly existing and in good standing
under the laws of its jurisdiction of formation and has all requisite
authority to own or lease its Property and to conduct its business in each
jurisdiction in which its business is conducted if failure to have such
authority could reasonably be expected to result in a Material Adverse Effect.
5.2. AUTHORIZATION AND VALIDITY. Each of the Borrower and each
Borrowing Subsidiary has the power and authority and legal right to execute
and deliver the Loan Documents to which it is a party, to consummate the
transactions therein contemplated and to perform its obligations thereunder.
The execution and delivery by the Borrower and each Borrowing Subsidiary of
the Loan Documents to which it is a party, the consummation of the
transactions therein contemplated and the performance of its obligations
thereunder have been duly authorized by proper proceedings, and the Loan
Documents constitute legal, valid and binding obligations of the Borrower and
each Borrowing Subsidiary enforceable against the Borrower and each Borrowing
Subsidiary in accordance with their terms, except as enforceability may be
limited by bankruptcy, insolvency or similar laws affecting the enforcement
of creditors' rights generally.
5.3. NO CONFLICT; GOVERNMENT CONSENT. Neither the execution and
delivery by the Borrower and the Borrowing Subsidiaries of the Loan
Documents, nor the consummation of the transactions therein contemplated, nor
compliance with the provisions thereof will violate any law, rule,
regulation, order, writ, judgment, injunction, decree or award binding on the
Borrower or any of its Subsidiaries or the Borrower's or any Subsidiary's
organizational documents or any material provision of any indenture,
instrument or agreement to which the Borrower or any of its Subsidiaries is a
party or is subject, or by which it, or its Property, is bound, or conflict
with or constitute a default thereunder, or result in the creation or
imposition of any Lien in, of or on any of the Property of the Borrower or a
Subsidiary pursuant to the terms of any such indenture, instrument or
agreement. No order, consent, approval, license, authorization, or
validation of, or filing, recording or registration with, or exemption by, or
other action in respect of any governmental or public body or authority, or
any subdivision thereof, is required to authorize, or is required in
connection with the execution, delivery and performance of, or the legality,
validity, binding effect or enforceability of, or the consummation of the
transactions contemplated in, any of the Loan Documents (other than filings
to perfect the Liens granted pursuant to the Security Agreement).
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5.4. FINANCIAL STATEMENTS. The December 31, 1997 and the December
31, 1998 consolidated financial statements of the Borrower and its
Subsidiaries heretofore delivered to the Lenders were prepared in accordance
with GAAP in effect on the date such statements were prepared and fairly
present the consolidated financial condition and operations of the Borrower
and its Subsidiaries at such date and the consolidated results of their
operations for the period then ended.
5.5. MATERIAL ADVERSE CHANGE. Since December 31, 1998, there has
been no change in the business, financial condition or results of operations
of the Borrower and its Subsidiaries which could have a Material Adverse
Effect.
5.6. TAXES. The Borrower and its Subsidiaries have filed all United
States federal tax returns and all other tax returns which are required to be
filed and have paid all taxes due pursuant to said returns or pursuant to any
assessment received by the Borrower or any of its Subsidiaries, except such
taxes, if any, as are being contested in good faith by appropriate
proceedings and as to which adequate reserves have been provided in
accordance with Agreement Accounting Principles and as to which no Lien
exists. No tax liens have been filed and no claims are being asserted with
respect to any such taxes. The charges, accruals and reserves on the books of
the Borrower and its Subsidiaries in respect of any taxes or other
governmental charges are adequate in accordance with GAAP. If the Borrower
or any of its Subsidiaries is a limited liability company, each such limited
liability company qualifies for partnership tax treatment under United States
federal tax law.
5.7. LITIGATION AND CONTINGENT OBLIGATIONS. Except as set forth on
Schedule "5" hereto, there is no litigation, arbitration, governmental
investigation, proceeding or inquiry pending or, to the knowledge of any of
their officers, threatened against or affecting the Borrower or any of its
Subsidiaries which could reasonably be expected to have a Material Adverse
Effect or which seeks to prevent, enjoin or delay the making of the Loans or
Advances. Other than any liability incident to such litigation, arbitration
or proceedings, the Borrower has no material contingent obligations not
provided for or disclosed in the financial statements referred to in Section
5.4.
5.8. SUBSIDIARIES. Schedule "3" hereto contains an accurate list of
all Subsidiaries of the Borrower as of the date of this Agreement, setting
forth their respective jurisdictions of organization and the percentage of
their respective capital stock or other ownership interests owned by the
Borrower or other Subsidiaries. All of the issued and outstanding shares of
capital stock or other ownership interests of such Subsidiaries have been (to
the extent such concepts are relevant with respect to such ownership
interests) duly authorized and issued and are fully paid and non-assessable.
5.9. ERISA. The Unfunded Liabilities of all Single Employer Plans
do not in the aggregate exceed $500,000. Neither the Borrower nor any other
member of the Controlled Group has incurred, or is reasonably expected to
incur, any withdrawal liability to Multiemployer Plans. Each Plan complies
in all material respects with all applicable requirements of law and
regulations, no Reportable Event has occurred with respect to any Plan,
neither the Borrower nor any other member of the Controlled Group has
withdrawn from any Plan or initiated steps to do so, and no steps have been
taken to reorganize or terminate any Plan.
5.10. ACCURACY OF INFORMATION. No information, exhibit or report
furnished by the Borrower or any of its Subsidiaries to the Agent or to any
Lender in connection with the negotiation of, or compliance with, or pursuant
to, the Loan Documents contained any material misstatement of fact or
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omitted to state a material fact or any fact necessary to make the statements
contained therein not misleading.
5.11. REGULATION U. Margin stock (as defined in Regulation U)
constitutes less than 25% of those assets of the Borrower and its
Subsidiaries which are subject to any limitation on sale, pledge, or other
restriction hereunder.
5.12. MATERIAL AGREEMENTS. Neither the Borrower nor any Subsidiary
is a party to any agreement or instrument or subject to any charter or other
corporate restriction which could reasonably be expected to have a Material
Adverse Effect. Neither the Borrower nor any Subsidiary is in default in the
performance, observance or fulfillment of any of the obligations, covenants
or conditions contained in (i) any agreement to which it is a party, which
default could have a Material Adverse Effect, or (ii) any agreement or
instrument evidencing or governing Indebtedness in excess of $500,000.
5.13. COMPLIANCE WITH LAWS. The Borrower and its Subsidiaries have
complied with all applicable statutes, rules, regulations, orders and
restrictions of any domestic or foreign government or any instrumentality or
agency thereof, having jurisdiction over the conduct of their respective
businesses or the ownership of their respective Property to the extent
failure to so comply could reasonably be expected to have a Material Adverse
Effect.
5.14. OWNERSHIP OF PROPERTIES. Except as set forth on Schedule "4"
hereto, on the date of this Agreement, the Borrower and its Subsidiaries will
have good title, free of all Liens other than those permitted by Section
6.13, to all of the Property and assets reflected in the financial statements
provided to the Agent and the Lenders as owned by the Borrower and its
Subsidiaries.
5.15. PLAN ASSETS; PROHIBITED TRANSACTIONS. The Borrower is not an
entity deemed to hold "plan assets" within the meaning of 29 C.F.R. Section
2510.3-101 of an employee benefit plan (as defined in Section 3(3) of ERISA)
which is subject to Title I of ERISA or any plan (within the meaning of
Section 4975 of the Code); and neither the execution of this Agreement nor
the making of Loans hereunder gives rise to a prohibited transaction within
the meaning of Section 406 of ERISA or Section 4975 of the Code.
5.16. INVESTMENT COMPANY ACT. Neither the Borrower nor any
Subsidiary is an "investment company" or a company "controlled" by an
"investment company", within the meaning of the Investment Company Act of
1940, as amended.
5.17. PUBLIC UTILITY HOLDING COMPANY ACT. Neither the Borrower nor
any Subsidiary is a "holding company" or a "subsidiary company" of a "holding
company", or an "affiliate" of a "holding company" or of a "subsidiary
company" of a "holding company", within the meaning of the Public Utility
Holding Company Act of 1935, as amended.
5.18. GNMA, FHA, VA, FNMA, AND FHLMC ELIGIBILITY. Each of the
Borrower and each Borrowing Subsidiary is: (i) an FHA-Approved Mortgagee in
good standing, a VA-Approved Lender, a FHLMC-Approved Lender and a
FNMA-Approved Lender and meets all eligible requirements of law and
governmental regulation so as to be eligible to originate, purchase, hold and
service Mortgage Loans insured by FHA or supporting any Security; (ii) an
approved seller and servicer in good standing of Mortgage Loans to each
Federal Agency; and (iii) an approved issuer and servicer in good standing of
Securities for FHLMC, FNMA and GNMA and meets all FHLMC, FNMA and GNMA
requirements,
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requirements of law and governmental regulations so as to be able to issue
Securities and to originate and service the Mortgage Loans that secure such
Securities.
5.19. YEAR 2000 COMPLIANCE. The Borrower has made a full and
complete assessment of the Year 2000 Issues and has a realistic and
achievable program for remediating the Year 2000 Issues on a timely basis
(the "Year 2000 Program"). Based on such assessment and on the Year 2000
Program the Borrower does not reasonably anticipate that Year 2000 Issues
will have a Material Adverse Effect.
5.20. SUBORDINATED INDEBTEDNESS. The Obligations constitute senior
indebtedness which is entitled to the benefits of the subordination
provisions of the Subordinated Indebtedness, including the subordination
provisions set forth in the applicable subordination agreements entered into
among the Agent, Pacific Guarantee Mortgage Corporation and the applicable
subordinated lenders.
ARTICLE VI
COVENANTS
During the term of this Agreement, unless the Required Lenders shall
otherwise consent in writing:
6.1. FINANCIAL REPORTING. The Borrower will maintain, for itself
and each Subsidiary, a system of accounting established and administered in
accordance with generally accepted accounting principles, and furnish to the
Lenders:
(i) Within 90 days after the close of each of its fiscal years, an
unqualified audit report certified by independent certified public
accountants, reasonably acceptable to the Required Lenders,
prepared in accordance with Agreement Accounting Principles on a
consolidated basis for itself and the Subsidiaries, including a
balance sheet as of the end of such period and related profit and
loss and changes in shareholders' equity statements, accompanied
by any management letter prepared by said accountants.
(ii) Within 30 days after the end of each month which is not the last
month of a fiscal quarter, and within 45 days after the close of
the first three quarterly periods of each of its fiscal years, for
itself and the Subsidiaries, consolidated and consolidating
unaudited balance sheets as at the close of each such period and
consolidated and consolidating profit and loss statements (showing
a breakout of servicing sales gains attributed to servicing
originated in prior periods), and a changes in shareholders'
equity statement for the period from the beginning of such fiscal
year to the end of such period, all certified (subject to normal
year-end adjustments) as to fairness of presentation by its chief
financial officer, controller or assistant controller.
(iii) Together with the financial statements required under Sections
6.1(i) and (ii), a compliance certificate in substantially the
form of Exhibit "E" hereto signed by its chief financial officer,
controller or assistant controller showing the calculations
necessary to determine compliance with this Agreement and that no
Default or Unmatured Default exists, or if any Default or
Unmatured Default exists, stating the nature and status thereof.
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(iv) As soon as available but in any event within twenty (20) days
after the end of each month, a certificate executed by the chief
financial officer or controller of the Borrower (or other
employees of the Borrower so authorized in writing, an original of
which authorization shall be delivered to the Agent, by the chief
financial officer or controller) setting forth the Leverage Ratio
as of last day of the preceding month, along with such supporting
documentation as the Agent may request relating to the calculation
of the Leverage Ratio.
(v) As soon as available but in any event within thirty (30) days
after the end of each month, a production report, a pipeline
report and a commitment report for such month reasonably
satisfactory to the Agent.
(vi) Within 45 days after the close of each quarterly period of each of
its fiscal years, for itself and the Subsidiaries, a statement of
cash flows for the period from the beginning of such fiscal year
to the end of such period, certified as to fairness of
presentation by its chief financial officer, controller or
assistant controller.
(vii) As soon as available and in any event within ten (10) days after
the end of each calendar month (and within three Business Days
after any request therefor by the Agent, which requests shall be
made only when the Agent reasonably determines such a delivery is
necessary), a Borrowing Base Certificate (which shall include the
Borrower's reconciliation of any discrepancies from the Collateral
Agent's reports on the status of Eligible Collateral at the end of
such month (or the end of the Business Day prior to the date of
the request, if requested by the Agent as set forth above)). An
authorized officer of each Borrowing Subsidiary shall certify as
to the accuracy of each Borrowing Base Certificate with respect to
Collateral reflected therein which is owned by such Borrowing
Subsidiary.
(viii) Within ten (10) Business Days of receipt thereof by the Borrower
or any of its Subsidiaries, copies of all compliance and audit
reports received from any of FNMA, FHLMC or GNMA; within five (5)
Business Days of submission thereof by the Borrower or any of its
Subsidiaries, copies of all responses to any requests from any of
FNMA, FHLMC or GNMA in connection with audit reports; and promptly
upon receipt, a copy of any notice from (i) any Federal Agency to
the effect that it is or is contemplating withdrawing its approval
of the Borrower or any of its Subsidiaries as a FHA-Approved
Mortgagee, FHLMC-Approved Lender, FNMA-Approved Lender or
VA-Approved Lender or as an approved seller and servicer for FNMA,
FHLMC or GNMA or (ii) any private mortgage insurer which insures
any of the Collateral to the effect that it is contemplating
withdrawing its approval of the Borrower or any of its
Subsidiaries as an approved originator of insured Mortgage Loans.
(ix) Within 270 days after the close of each fiscal year, a statement
of the Unfunded Liabilities of each Single Employer Plan,
certified as correct by an actuary enrolled under ERISA.
(x) Promptly, and in any event within 10 days after the Borrower knows
that any Reportable Event has occurred with respect to any Plan, a
statement, signed by the chief financial officer or controller of
the Borrower, describing said Reportable Event and the action
which the Borrower proposes to take with respect thereto.
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(xi) Promptly, and in any event within 10 days after receipt by the
Borrower, a copy of (a) any notice or claim to the effect that the
Borrower or any of its Subsidiaries is or may be liable to any
Person as a result of the release by the Borrower, any of its
Subsidiaries, or any other Person of any toxic or hazardous waste
or substance into the environment, and (b) any notice alleging any
violation of any federal, state or local environmental, health or
safety law or regulation by the Borrower or any of its
Subsidiaries, which, in either case, could have a Material Adverse
Effect.
(xii) Promptly, and in any event within 10 days after the furnishing
thereof to the shareholders of the Borrower, copies of all
financial statements, reports and proxy statements so furnished.
(xiii) Promptly, and in any event within 10 days after the filing
thereof, copies of all registration statements and annual,
quarterly, monthly or other regular reports which the Borrower or
any of its Subsidiaries files with the Securities and Exchange
Commission.
(xiv) On or before the first Business Day of each calendar month, the
weighted average purchase price for each type of Eligible
Collateral as of the last day of the preceding calendar month and
showing the basis for the calculation thereof in detail reasonably
satisfactory to the Agent.
(xv) Promptly, and in any event within 10 days after receipt of notice
by the Borrower, a description of any litigation, arbitration,
governmental investigation, proceeding or inquiry commenced
against or, to the knowledge of any of their officers, threatened
against or affecting the Borrower or any of its Subsidiaries which
could reasonably be expected to have a Material Adverse Effect or
which seeks to prevent, enjoin or delay the making of the Loans or
Advances.
(xvi) Such other information (including non-financial information) as
the Agent or any Lender may from time to time reasonably request.
6.2. USE OF PROCEEDS. The Borrower will, and will cause each
Subsidiary to, only use the proceeds of the Advances for the purposes
described in the recitals hereto, to pay interest, Fees, expenses and other
Obligations, to pay Indebtedness of the Borrower existing on the date hereof,
and to repay outstanding Advances. The Borrower will not, nor will it permit
any Subsidiary to, use any of the proceeds of the Advances to purchase or
carry any "margin stock" (as defined in Regulation U).
6.3. NOTICE OF DEFAULT. The Borrower will, and will cause each
Subsidiary to, give prompt notice in writing to the Lenders of the occurrence
of any Default or Unmatured Default and of any other development, financial
or otherwise, (including, without limitation, developments with respect to
Year 2000 Issues), which could have a Material Adverse Effect, which notice
shall describe the actions being taken with respect thereto.
6.4. CONDUCT OF BUSINESS. The Borrower will, and will cause each
Material Subsidiary to, carry on and conduct its business in substantially
the same manner and in substantially the same fields of enterprise as it is
presently conducted (and related fields and such other fields as may be
permitted in connection with Investments permitted under Section 6.12) and to
do all things necessary to remain duly
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incorporated or organized, validly existing and (to the extent such concept
applies to such entity) in good standing as a domestic corporation,
partnership or limited liability company in its jurisdiction of incorporation
or organization, as the case may be, and maintain all requisite authority to
conduct its business in each jurisdiction in which its business is conducted.
The Borrower and each Borrowing Subsidiary will adhere in all material
respects to customary practices and standards in the industry insofar as
adherence to such practices and standards would require the Borrower and each
Borrowing Subsidiary to cause obligors whose indebtedness is secured by
Pledged Mortgages to comply with their obligations under such Pledged
Mortgages with respect to the real estate securing such indebtedness,
including without limitation, the payment of all taxes and insurance premiums
related thereto and maintenance of such real estate in compliance with all
laws.
6.5. TAXES. The Borrower will, and will cause each Subsidiary to,
timely file complete and correct United States federal and applicable
foreign, state and local tax returns required by law and pay when due all
taxes, assessments and governmental charges and levies upon it or its income,
profits or Property, except those which are being contested in good faith by
appropriate proceedings and with respect to which adequate reserves have been
set aside in accordance with Agreement Accounting Principles. At any time
that the Borrower or any of its Subsidiaries is organized as a limited
liability company, each such limited liability company will qualify for
partnership tax treatment under United States federal tax law.
6.6. INSURANCE. The Borrower will, and will cause each Subsidiary
to, maintain with financially sound and reputable insurance companies
insurance on all their Property in such amounts and covering such risks as is
consistent with sound business practice, and the Borrower will furnish to any
Lender upon request full information as to the insurance carried. The
Borrower will at all times, upon request of the Agent, furnish to the Agent
copies of its, and each of its Subsidiaries', current Mortgage Bankers
Blanket Bond and of its, and each of its Subsidiaries', insurance policies
containing errors and omissions coverage or mortgage impairment coverage, and
such Bonds and policies, to the extent possible, shall each provide that it
is not cancelable without thirty (30) days prior written notice to the Agent.
6.7. COMPLIANCE WITH LAWS. The Borrower will, and will cause each
Subsidiary to, comply with all laws, rules, regulations, orders, writs,
judgments, injunctions, decrees or awards to which it may be subject to the
extent non-compliance could reasonably be expected to result in a Material
Adverse Effect.
6.8. MAINTENANCE OF PROPERTIES. The Borrower will, and will cause
each Subsidiary to, do all things necessary to maintain, preserve, protect
and keep its Property in good repair, working order and condition, and make
all necessary and proper repairs, renewals and replacements so that its
business carried on in connection therewith may be properly conducted at all
times to the extent failure to do so could reasonably be expected to result
in a Material Adverse Effect.
6.9. INSPECTION. The Borrower will, and will cause each Subsidiary
to, permit the Agent, the Collateral Agent and the Lenders, by their
respective representatives and agents, to inspect any of the Property,
corporate books and financial records of the Borrower and each Subsidiary, to
examine and make copies of the books of accounts and other financial records
of the Borrower and each Subsidiary, and to discuss the affairs, finances and
accounts of the Borrower and each Subsidiary with, and to be advised as to
the same by, their respective officers upon reasonable prior notice at such
reasonable times and intervals as the Agent, the Collateral Agent or any
Lender may designate.
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6.10. MERGER. The Borrower will not, nor will it permit any
Subsidiary to, merge or consolidate with or into any other Person, except
that (i) a Subsidiary may merge into the Borrower or a Wholly-Owned
Subsidiary, and (ii) so long as such a merger does not result in a Change in
Control or otherwise violate any provision of this Agreement, the Borrower or
any Subsidiary may merge with another Person so long as the Borrower or the
applicable Subsidiary is the surviving entity.
6.11. SALE OF ASSETS. The Borrower will not sell any of its
interests in any of its Subsidiaries, and the Borrower will not, nor will it
permit any Subsidiary to, lease, sell or otherwise dispose of its Property,
to any other Person, except:
(i) Sales of Mortgage Loans and Securities in the ordinary course of
business.
(ii) Leases, sales or other dispositions of its Property that, together
with all other Property of the Borrower and its Subsidiaries
previously leased, sold or disposed of (other than Mortgage Loans
and Securities in the ordinary course of business) as permitted by
this Section during the twelve-month period ending with the month
in which any such lease, sale or other disposition occurs, do not
constitute a Substantial Portion of the Property of the Borrower
and its Subsidiaries.
6.12. INVESTMENTS AND ACQUISITIONS. The Borrower will not, nor will
it permit any Subsidiary to, make or suffer to exist any Investments
(including, without limitation, loans and advances to, and other Investments
in, Subsidiaries), or commitments therefor, or to create any Subsidiary or to
become or remain a partner in any partnership or joint venture, except:
(i) Cash Equivalent Investments.
(ii) Existing Investments in Subsidiaries and other Investments in
existence on the date hereof and described in Schedule "5" hereto.
(iii) Investments in the ordinary course of the Borrower's mortgage
banking business to purchase: (a) Mortgage Loans, collateralized
mortgage obligations and Securities (and in connection with
commitments to purchase the same); (b) servicing rights and
mortgage servicing contracts of another Person engaged in
mortgage-related businesses; and (c) real estate acquired by
foreclosure.
(iv) Investments in the ordinary course of the Borrower's mortgage
banking business to enter into Rate Hedging Agreements.
(v) Investments in the Borrowing Subsidiaries and in new Subsidiaries
in which the Borrower shall own at least 80% of the equity
interests and which are engaged primarily in the mortgage banking
business.
(vi) Other Investments in an aggregate amount (as to Borrower and all
Subsidiaries) not at any time exceeding ten percent (10%) of
Tangible Net Worth.
6.13. LIENS. The Borrower will not, nor will it permit any Material
Subsidiary to, create, incur, or suffer to exist any Lien in, of or on the
Property of the Borrower or any of its Subsidiaries, except:
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(i) Liens for taxes, assessments or governmental charges or levies on
its Property if the same shall not at the time be delinquent or
thereafter can be paid without penalty, or are being contested in
good faith and by appropriate proceedings and for which adequate
reserves in accordance with generally accepted principles of
accounting shall have been set aside on its books.
(ii) Liens imposed by law, such as carriers', warehousemen's and
mechanics' liens and other similar liens arising in the ordinary
course of business which secure payment of obligations not more
than 60 days past due or which are being contested in good faith
by appropriate proceedings and for which adequate reserves shall
have been set aside on its books.
(iii) Liens arising out of pledges or deposits under worker's
compensation laws, unemployment insurance, old age pensions, or
other social security or retirement benefits, or similar
legislation.
(iv) Utility easements, building restrictions and such other
encumbrances or charges against real property as are of a nature
generally existing with respect to properties of a similar
character and which do not in any material way affect the
marketability of the same or interfere with the use thereof in the
business of the Borrower or the Subsidiaries.
(v) Liens existing on the date hereof and described in Schedule "4"
hereto.
(vi) Liens in favor of the Agent and the Collateral Agent, for the
benefit of the Lenders, granted pursuant to the Security
Agreement.
(vii) Liens incidental to the conduct of the Borrower's or its
Subsidiaries' mortgage-related businesses or the ownership of
their property or arising out of transactions entered in the
ordinary course of their mortgage-related businesses which do not
secure Indebtedness and do not, in the aggregate, materially
detract from the value of their properties in the aggregate or
materially impair the use thereof in the ordinary course of their
businesses.
(viii) Subject to the requirements of Section 6.16, Liens on Mortgage
Loans and Securities owned by the Borrower or its Subsidiaries
(other than Mortgage Loans or Securities constituting Collateral)
to secure Indebtedness incurred from sources other than the
Lenders for the purpose of originating or purchasing such Mortgage
Loans or Securities.
(ix) Liens upon real and/or tangible personal property, which property
was acquired after December 31, 1998 (by purchase, construction or
otherwise) by the Borrower or its Subsidiaries, each of which
Liens either (A) existed on such property before the time of its
acquisition and was not created in anticipation thereof at the
request or direction of the Borrower, or (B) was created solely
for the purpose of securing debt representing, or incurred to
finance, refinance or refund, the cost (including the cost of
construction) of the respective property; PROVIDED, that no such
Lien shall extend to or cover any property of the Borrower or such
Subsidiary other than the respective property so acquired and
improvements thereon.
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(x) Liens of landlords, arising solely by operation of law and which
are not avoidable as a matter of law, on fixtures and moveable
property located on premises leased in the ordinary course of
business, PROVIDED, that the rental payments secured thereby are
not yet due.
(xi) Liens (not otherwise permitted hereunder) which secure obligations
not exceeding (as to the Borrower and all Subsidiaries) $1,000,000
in an aggregate principal amount at any one time outstanding.
6.14. AFFILIATES. The Borrower will not, and will not permit any
Subsidiary to, enter into any transaction (including, without limitation, the
purchase or sale of any Property or service) with, or make any payment or
transfer to, any Affiliate except in the ordinary course of business and
pursuant to the reasonable requirements of the Borrower's or such
Subsidiary's business and upon fair and reasonable terms no less favorable to
the Borrower or such Subsidiary than the Borrower or such Subsidiary would
obtain in a comparable arms-length transaction.
6.15. FINANCIAL COVENANTS.
6.15.1. LEVERAGE RATIO. The Borrower will not permit the
Leverage Ratio to exceed (i) 15.0 to 1.0 at any time prior to September
30, 1999, or (ii) 12.0 to 1.0 at any time thereafter.
6.15.2. NET WORTH. The Borrower will not, at any time, permit
Tangible Net Worth to be less than (i) $13,000,000, plus (ii) the sum of
the Applicable Equity Retention Amounts (as defined below) for each
Equity Infusion (as defined below), plus (iii) seventy-five percent (75%)
of the sum of the Borrower's positive net income (determined in
accordance with Agreement Accounting Principles) earned after December
31, 1998, less (iv) an amount equal to the dividends paid to the
Borrower's shareholders with respect to fiscal quarters ending after
December 31, 1998 solely for purposes of providing the Borrower's
shareholders with dividends in an amount sufficient to allow them to pay
their state and federal income taxes on all taxable income allocated to
them as shareholders of the Borrower for such periods, provided that
Borrower was a corporation qualifying under subchapter S of the Code at
the time of such dividends. The "Applicable Equity Retention Amount"
shall mean (1) with respect to any Equity Infusion made at any time at
which the Leverage Ratio is (after accounting for the receipt of such
Equity Infusion) less than or equal to 12.0 to 1.0, fifty percent (50%)
of the amount of such Equity Infusion, and (2) with respect to any Equity
Infusion made at any time at which the Leverage Ratio is (after
accounting for the receipt of such Equity Infusion) more than 12.0 to
1.0, seventy-five percent (75%) of the amount of such Equity Infusion.
"Equity Infusion" shall mean the sum of the net proceeds of any sale or
issuance of the Borrower's stock by the Borrower and any other equity
contributions made to the capital of the Borrower after December 31,
1998.
6.16. COMPLIANCE WITH SECURITY AGREEMENT. The Borrower will not fail
to perform in any material respect any of its obligations under the Security
Agreement. The Borrower will direct the Collateral Agent to ship Collateral
only to Approved Investors or otherwise consistent with the provisions of the
Loan Documents. The Borrower will not enter into or remain a party to, or
allow any of its Subsidiaries to enter into or remain a party to, any other
similar security agreements for Mortgage Loans not included in Collateral
with any Person other than the Collateral Agent; provided that the Borrower
and
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the Borrowing Subsidiaries may remain parties to the security agreements
securing the Existing Warehouse Facilities until the date which is sixty days
after the first Advance made under this Agreement.
6.17. RECOURSE SERVICING. Neither the Borrower nor any Borrowing
Subsidiary will at any time have any Recourse Servicing.
6.18. FEDERAL AGENCY APPROVALS. The Borrower and each Borrowing
Subsidiary (i) will maintain its status as a FHA-Approved Mortgagee, remain
eligible to obtain VA guaranties of Mortgage Loans and remain approved by
each Federal Agency as a seller/servicer and (ii) will not permit any Federal
Agency to withdraw its approval of the Borrower or any Borrowing Subsidiary.
6.19. APPROVED INVESTOR COMMITMENTS. The Borrower and the Borrowing
Subsidiaries shall maintain Approved Investor Commitments which cover all
Pledged Mortgages and Pledged Securities and each shall perform all of their
respective obligations in connection with such Approved Investor Commitments.
6.20. NEGATIVE PLEDGES. Neither the Borrower nor any Borrowing
Subsidiary shall enter into any agreement pursuant to which it agrees (i) not
to grant a lien to third parties unless such provision allows for the lien of
the Agent, the Collateral Agent and the Lenders contemplated under the Loan
Documents or (ii) to grant another creditor a pari passu security interest in
and to the Collateral when a security interest is granted to the Agent, the
Collateral Agent and the Lenders pursuant to the Loan Documents.
6.21. YEAR 2000. The Borrower shall take and shall cause each of its
Subsidiaries to take all such actions as are reasonably necessary to
successfully implement the Year 2000 Program and to assure that Year 2000
Issues could not reasonably be expected to have a Material Adverse Effect.
At the request of the Agent, the Borrower shall provide a description of the
Year 2000 Program, together with any updates or progress reports with respect
thereto.
6.22. BORROWING SUBSIDIARY DEBT. No Borrowing Subsidiary shall incur
any Indebtedness other than (i) the Loans, (ii) subject to the terms of
Section 6.25, the Indebtedness existing on the date hereof and described on
Schedule "4" hereto, and (iii) other Indebtedness, OTHER THAN Indebtedness
for borrowed money, not to exceed $100,000 with respect to any individual
Borrowing Subsidiary.
6.23. FUNDING OF BORROWING SUBSIDIARY PLEDGED MORTGAGES. The
Borrower and each Borrowing Subsidiary agrees that each Pledged Mortgage
pledged by a Borrowing Subsidiary shall be funded with funds distributed to
such Borrowing Subsidiary by the Borrower (either from the proceeds of an
Advance or from other funds distributed to such Borrowing Subsidiary by the
Borrower), so that in all cases each Borrowing Subsidiary shall have received
reasonably equivalent value for the pledge of its Pledged Items.
6.24. SUBORDINATED INDEBTEDNESS. Pacific Guarantee Mortgage
Corporation will not (i) directly or indirectly voluntarily prepay, defease,
purchase, redeem, retire or otherwise acquire any Subordinated Indebtedness
unless no Default or Unmatured Default exists or would exist after giving
effect to the applicable prepayment, defeasance, purchase, redemption,
retirement or other acquisition, or (ii) make or permit any amendment or
modification to the notes or any other agreements evidencing or governing any
Subordinated Indebtedness.
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6.25. EXISTING WAREHOUSE FACILITIES. From and after the date of the
initial Advance hereunder, neither the Borrower nor any Borrowing Subsidiary
shall make any further borrowings under the Existing Warehouse Facilities.
The Borrower and the Borrowing Subsidiaries shall pay in full all amounts
then outstanding under the Existing Warehouse Facilities, and shall terminate
the Existing Warehouse Facilities, on or before the date which is sixty days
after the first Advance made under this Agreement. Promptly following the
termination of the Existing Warehouse Facilities, the Borrower shall provide
the Agent with evidence of such termination along with executed termination
statements for the existing UCC financing statements filed in connection with
the Existing Warehouse Facilities.
ARTICLE VII
DEFAULTS
The occurrence of any one or more of the following events shall
constitute a Default:
7.1. Any representation or warranty made or deemed made by or on
behalf of the Borrower or any of its Subsidiaries to the Lenders or the Agent
under or in connection with this Agreement, any other Loan Documents, any
Loan, or any certificate or information delivered in connection with this
Agreement or any other Loan Document shall be materially false on the date as
of which made or deemed made (it being understood that if any of the
representations and warranties made pursuant to the definition of "Borrowing
Base" are not true and correct as of any date with respect to any Pledged
Item, such Pledged Item shall be removed from Eligible Collateral as the sole
remedy for such failure).
7.2. Nonpayment of principal of any Loan when due (including but not
limited to payments required pursuant to Section 2.11.2), or nonpayment of
interest upon any Loan or of any Fee or other obligations under any of the
Loan Documents within five days after the same becomes due.
7.3. The breach by the Borrower or any Borrowing Subsidiary of any
of the terms or provisions of Section 6.2, 6.10, 6.11, 6.15, 6.17, 6.18 or
6.20.
7.4. The breach by the Borrower or any Borrowing Subsidiary (other
than a breach which constitutes a Default under any other Section of this
Article VII) of any of the terms or provisions of this Agreement which is not
remedied within thirty (30) days after the earlier to occur of (i) receipt of
written notice from the Agent or any Lender of such breach or (ii) the date
that the Borrower obtains knowledge of such breach.
7.5. Failure of the Borrower or any of its Material Subsidiaries to
pay when due any Indebtedness aggregating in excess of $2,000,000 ("Material
Indebtedness"); or the default by the Borrower or any of its Subsidiaries in
the performance of any term, provision or condition contained in any
agreement under which any such Material Indebtedness was created or is
governed, or any other event shall occur or condition exist, the effect of
which is to cause, or to permit the holder or holders of such Material
Indebtedness to cause, such Material Indebtedness to become due prior to its
stated maturity; or any Material Indebtedness of the Borrower or any of its
Subsidiaries shall be declared to be due and payable or required to be
prepaid or repurchased (other than by a regularly scheduled payment) prior to
the stated maturity thereof; or the Borrower or any of its Material
Subsidiaries shall not pay, or shall admit in writing its inability to pay,
its debts generally as they become due.
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7.6. The Borrower or any of its Material Subsidiaries shall (i) have
an order for relief entered with respect to it under the Federal bankruptcy
laws as now or hereafter in effect, (ii) make an assignment for the benefit
of creditors, (iii) apply for, seek, consent to, or acquiesce in, the
appointment of a receiver, custodian, trustee, examiner, liquidator or
similar official for it or any Substantial Portion of its Property, (iv)
institute any proceeding seeking an order for relief under the Federal
bankruptcy laws as now or hereafter in effect or seeking to adjudicate it a
bankrupt or insolvent, or seeking dissolution, winding up, liquidation,
reorganization, arrangement, adjustment or composition of it or its debts
under any law relating to bankruptcy, insolvency or reorganization or relief
of debtors or fail to file an answer or other pleading denying, or consent to
or acquiesce in, the material allegations of any such proceeding filed
against it, (v) take any corporate action to authorize or effect any of the
foregoing actions set forth in this Section 7.6 or (vi) fail to contest in
good faith any appointment or proceeding described in Section 7.7.
7.7. Without the application, approval or consent of the Borrower or
any of its Material Subsidiaries, a receiver, trustee, examiner, liquidator
or similar official shall be appointed for the Borrower or any of its
Material Subsidiaries or any Substantial Portion of its Property, or a
proceeding described in Section 7.6(iv) shall be instituted against the
Borrower or any of its Material Subsidiaries and such appointment continues
undischarged or such proceeding continues undismissed or unstayed for a
period of 60 consecutive days.
7.8. Any court, government or governmental agency shall condemn,
seize or otherwise appropriate, or take custody or control of all or any
portion of the Property of the Borrower and its Subsidiaries which, when
taken together with all other Property of the Borrower and its Subsidiaries
so condemned, seized, appropriated, or taken custody or control of, during
the twelve-month period ending with the month in which any such action
occurs, constitutes a Substantial Portion.
7.9. The Borrower or any of its Subsidiaries shall fail within 30
days to pay, bond or otherwise discharge one or more (i) judgments or orders
for the payment of money in excess of $1,000,000 in the aggregate, or (ii)
nonmonetary judgments or orders which, individually or in the aggregate,
could reasonably be expected to have a Material Adverse Effect, which
judgments, in any case, is/are not stayed on appeal or otherwise being
appropriately contested in good faith.
7.10. Any Change in Control shall occur.
7.11. The occurrence of any "default", as defined in any Loan
Document (other than this Agreement) or the breach of any of the terms or
provisions of any Loan Document (other than this Agreement), which default or
breach continues beyond any period of grace therein provided.
7.12. The Security Agreement shall for any reason fail to create a
valid and perfected first priority security interest in any material portion
of the collateral purported to be covered thereby, except as permitted by the
terms of the Security Agreement, or the Security Agreement shall fail to
remain in full force or effect or any action shall be taken to discontinue or
to assert the invalidity or unenforceability of the Security Agreement, or
the Borrower or any Borrowing Subsidiary shall fail to comply with any of the
terms or provisions of the Security Agreement.
7.13. The Unfunded Liabilities of all Single Employer Plans shall
exceed in the aggregate $1,000,000 or any Reportable Event shall occur in
connection with any Plan.
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7.14. The Borrower or any other member of the Controlled Group shall
have been notified by the sponsor of a Multiemployer Plan that it has
incurred withdrawal liability to such Multiemployer Plan in an amount which,
when aggregated with all other amounts required to be paid to Multiemployer
Plans by the Borrower or any other member of the Controlled Group as
withdrawal liability (determined as of the date of such notification),
exceeds $1,000,000 or requires payments exceeding $250,000 per annum.
7.15. The Borrower or any other member of the Controlled Group shall
have been notified by the sponsor of a Multiemployer Plan that such
Multiemployer Plan is in reorganization or is being terminated, within the
meaning of Title IV of ERISA, if as a result of such reorganization or
termination the aggregate annual contributions of the Borrower and the other
members of the Controlled Group (taken as a whole) to all Multiemployer Plans
which are then in reorganization or being terminated have been or will be
increased over the amounts contributed to such Multiemployer Plans for the
respective plan years of each such Multiemployer Plan immediately preceding
the plan year in which the reorganization or termination occurs by an amount
exceeding $250,000.
7.16. The Borrower or any of its Subsidiaries shall be the subject of
any proceeding or investigation pertaining to the release by the Borrower or
any of its Subsidiaries, or any other Person of any toxic or hazardous waste
or substance into the environment, or any violation of any federal, state or
local environmental, health or safety law or regulation, which, in either
case, could have a Material Adverse Effect.
7.17. The representations and warranties set forth in "Section 5.15
Plan Assets; Prohibited Transactions" shall at any time not be true and
correct.
ARTICLE VIII
COLLATERAL, ACCELERATION AND OTHER REMEDIES
8.1. SECURITY AND COLLATERAL AGENCY AGREEMENT. Pursuant to the
Security Agreement, a security interest in and a continuing lien upon the
Collateral has been created in favor of the Collateral Agent for the benefit
of the Lenders.
8.2. AP MORTGAGES. Each of the Borrower and each Borrowing
Subsidiary agrees that while it is in possession of any Required Mortgage
Documents for an AP Mortgage, it will hold the same in trust and as agent and
bailee for the Collateral Agent and the Lenders, without authority to make
any other disposition thereof, or of the proceeds thereof, except as may be
otherwise permitted in writing by the Collateral Agent. The Borrower assumes
the responsibility for loss or destruction of any such Required Mortgage
Documents until the same are delivered to the Collateral Agent.
8.3. RELEASE OF COLLATERAL. Upon the request of the Borrower
delivered from time to time to the Agent and the Collateral Agent in
connection with the proposed sale of any Collateral, the Agent shall promptly
authorize the Collateral Agent to release Collateral specified in such notice
from the lien of the Security Agreement, if, but only if, (i) at the time of
such release no Default shall have occurred and then be continuing, (ii) the
Borrowing Base, after giving effect to such release, is at least equal to the
Coverage Requirement or any payment under Section 2.11 which may be required
as a result of such release has been made, and (iii) the release of such
Collateral will not create a violation of any Lending Sublimit or Borrowing
Base Sublimit.
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8.4. SETTLEMENT ACCOUNT AND FUNDING ACCOUNT. There is hereby
established with the Agent, for the benefit of the Lenders, a "cash
collateral" account of the Borrower, Account #19-16319 ("Settlement
Account"), into which shall be deposited all cash proceeds from the sale of
any Pledged Item. Only the Agent shall have access to the Settlement
Account. All amounts in the Settlement Account shall be applied as described
in Section 2.11.3. There is also hereby established with the Agent, for the
benefit of the Lenders, a second "cash collateral" account of the Borrower,
Account #10-00090 ("Funding Account"), from which all AP Mortgages shall be
funded (either by check drawn on such Funding Account or by wire transfer
from such Funding Account). Only the Agent and (for purposes of authorizing
wire transfers) the Collateral Agent shall have access to the Funding Account.
8.5. TERMINATION. If all Commitments under this Agreement shall
have expired or been terminated pursuant to the express terms hereof and no
Obligations shall be outstanding, the Agent shall promptly deliver or cause
to be delivered all cash standing to the credit of the Settlement Account and
Pledged Items to the Borrower. The receipt by the Borrower of any cash in
the Settlement Account and of all Pledged Items returned or delivered to the
Borrower pursuant to any provision of this Agreement, together with UCC-3
termination statements executed by the Agent, shall be a complete and full
acquittance for the Pledged Items so delivered.
8.6. ACCELERATION. If any Default described in Section 7.6 or 7.7
occurs, the obligations of the Lenders to make Loans hereunder shall
automatically terminate and the Obligations shall immediately become due and
payable without presentment, demand, protest or notice of any kind, all of
which the Borrower and each Borrowing Subsidiary hereby waive, and without
any election or action on the part of the Agent or any Lender. If any other
Default exists, the Required Lenders (or the Agent with the consent of the
Required Lenders) may upon written notice to the Borrower (which may be
delivered by concurrent facsimile) (i) terminate or suspend the obligations
of the Lenders to make Loans hereunder and they shall, upon notice to the
Borrower, terminate or be suspended, and/or (ii) declare the Obligations to
be due and payable, whereupon the Obligations shall become immediately due
and payable, without presentment, demand, protest or notice of any kind, all
of which the Borrower and each Borrowing Subsidiary hereby expressly waive.
If, within thirty (30) days after acceleration of the maturity of the
Obligations or termination of the obligations of the Lenders to make Loans
hereunder as a result of any Default (other than any Default as described in
Section 7.6 or 7.7) and before any judgment or decree for the payment of the
Obligations due shall have been obtained or entered, the Required Lenders (in
their sole discretion) shall so direct, the Agent shall, by notice to the
Borrower, rescind and annul such acceleration and/or termination.
8.7. OTHER REMEDIES.
(i) Unless a Default shall have occurred and then be
continuing, the Borrower shall be entitled to receive and collect
directly all sums payable to the Borrower in respect of the Collateral
except proceeds from the sale thereof.
(ii) During the continuance of a Default, the Agent and the
Collateral Agent, on behalf of the Lenders, shall be entitled to all the
rights and remedies hereunder and in the Security Agreement, subject to
the limitations and requirements of Paragraph 16 thereof, and all other
rights or remedies at law or in equity existing or conferred upon the
Lenders by other jurisdictions or other applicable law.
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(iii) Following the occurrence and during the continuance of a
Default or an Unmatured Default, no Lender shall be obligated to fund any
Loan hereunder.
(iv) Following the occurrence and during the continuance of a
Default, each of the Borrower and each Borrowing Subsidiary agrees that
the Borrower, each Borrowing Subsidiary and the Agent shall, if the Agent
shall request, implement certain procedures with respect to the
Borrower's and each Borrowing Subsidiary's funding of AP Mortgages, all
at the Borrower's sole expense. Such procedures may include, but are not
limited to: (i) reducing the advance rate against AP Mortgages for
purposes of determining the Collateral Value component of the Borrowing
Base; (ii) requiring the closing agents for such AP Mortgages to enter
into escrow or other agreements regarding the monies used to fund such AP
Mortgages; and (iii) requiring the Borrower and each Borrowing Subsidiary
to provide the Agent and the Lenders with such information regarding the
funding of such AP Mortgages as the Agent may reasonably request. The
Borrower and each Borrowing Subsidiary, at its expense, shall from time
to time execute and deliver to the Agent or the Collateral Agent all such
assignments, certificates, supplemental documents, and financing
statements, and shall do all other acts or things, as the Agent may
reasonably request in order to more fully implement such procedures.
(v) Each of the Borrower and each Borrowing Subsidiary waives,
to the extent permitted by law, any right to require the Agent or any
Lender to (i) proceed against any Person, (ii) proceed against or exhaust
any of the Collateral or pursue its rights and remedies as against the
Collateral in any particular order or (iii) pursue any other remedy in
its power.
(vi) The Agent on behalf of the Lenders may, but shall not be
obligated to, advance any sums or do any act or thing necessary to uphold
and enforce the lien and priority of, or the security intended to be
afforded by, any Pledged Item, including, without limitation, payment of
delinquent taxes or assessments and insurance premiums. The Borrower and
each Borrowing Subsidiary shall provide any and all information
reasonably required by the Agent to administer this Agreement or collect
on the Collateral. All advances, charges, costs and expenses, including
reasonable attorneys fees, incurred or paid by the Agent in exercising
any right, power or remedy conferred by this Agreement, or in the
enforcement hereof (or by any Lender acting on instruction of the
Required Lenders in the enforcement hereof), together with interest
thereon at the rate per annum of 2% plus the Alternate Base Rate from the
time of payment until repaid, shall become a part of the Obligations.
(vii) Following the occurrence of a Default and the acceleration
of the Obligations the Agent shall be entitled to receive and collect all
sums payable to the Borrower or any Borrowing Subsidiary in respect of
the Collateral and (a) the Agent, at the request of the Required Lenders
and upon notice to the Borrower, may in its own name or in the name of
the Borrower or any Borrowing Subsidiary or otherwise, demand, sue for,
collect or receive any money or property at any time payable or
receivable on account of or in exchange for any of the Collateral, (b)
the Borrower and each Borrowing Subsidiary shall receive and hold in
trust for the Lenders any amounts thereafter received by the Borrower or
any Borrowing Subsidiary upon or in respect of any of the Collateral,
advising the Agent as to the source of such funds and, if the Agent so
requests at the direction of the Required Lenders, forthwith paying such
amounts to the Agent, and (c) any and all amounts so received and
collected by the Agent either directly or from the Borrower shall be
deposited in the Settlement Account.
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8.8. APPLICATION OF PROCEEDS. After a Default and acceleration of
the Obligations, the proceeds of any sale or enforcement of all or any part
of the Collateral pursuant to the Security Agreement and the balance of any
moneys in the Settlement Account shall be applied by the Agent:
FIRST, to the payment of all costs and expenses of such sale or
enforcement, including reasonable compensation to the Agent's agents and
counsel, and all expenses, liabilities and advances made or incurred by
the Agent or any Lender acting on instructions of the Required Lenders in
connection therewith;
SECOND, to the payment of all costs and expenses incurred by the
Collateral Agent under the Security Agreement;
THIRD, to the payment of all Fees and the outstanding principal
balance of, and all accrued and unpaid interest on, all Loans under this
Agreement, ratably according to the amount so due to each Lender until
such amounts are paid in full;
FOURTH, to the extent proceeds remain after application under the
preceding subparagraphs, to the payment of all remaining Obligations
until such amounts are paid in full; and
FIFTH, to the payment to the Borrower, or to its successors or
assigns, or as a court of competent jurisdiction may direct, of any
surplus then remaining from such proceeds.
The Agent shall have absolute discretion as to the time of application
of any such proceeds, moneys or balances in accordance with this Agreement.
If the proceeds of any such sale are insufficient to cover the costs and
expenses of such sale, as aforesaid, and the payment in full of the
Obligations, the Borrower and the Borrowing Subsidiaries shall remain liable
for any deficiency.
8.9. PRESERVATION OF RIGHTS. No delay or omission of the Lenders or
the Agent to exercise any right under the Loan Documents shall impair such
right or be construed to be a waiver of any Default or an acquiescence
therein, and the making of a Loan notwithstanding the existence of a Default
or Unmatured Default or the inability of the Borrower to satisfy the
conditions precedent to such Loan shall not constitute any waiver or
acquiescence. Any single or partial exercise of any such right shall not
preclude any other or further exercise thereof or the exercise of any other
right, and no waiver, amendment or other variation of the terms, conditions
or provisions of the Loan Documents whatsoever shall be valid unless in
writing signed by the Lenders required pursuant to Section 9.1, and then only
to the extent in such writing specifically set forth. All remedies contained
in the Loan Documents or by law afforded shall be cumulative and all shall be
available to the Agent and the Lenders until the Obligations have been paid
in full.
8.10. LIMITATION ON RECOURSE TO BORROWING SUBSIDIARIES. Each
Borrowing Subsidiary and the Borrower shall be jointly and severally liable
for the payment of the Obligations; provided, however, that recourse to any
particular Borrowing Subsidiary hereunder shall be limited to the greater of
(i) such Borrowing Subsidiary's interest in the Collateral pledged by such
Borrowing Subsidiary, or (ii) the maximum amount not subject (but for the
provisions of this Section) to avoidance under Title 11 of the United States
Code, as the same may be amended from time to time, or any analogous
applicable state law. Each Borrowing Subsidiary's liability hereunder shall
in no way be affected, impaired, reduced or released by any of the following
(any or all of which may be done or omitted by Lenders in their sole
discretion),
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namely, any compromise, settlement, surrender, release, discharge or
extension with respect to the Obligations or with respect to any Collateral,
or any other disposition of, or substitution for, or indulgence with respect
to, or failure, neglect or omission to realize upon, or to enforce or
exercise any liens or rights of appropriation or other rights with respect
to, any Obligations or any security or collateral therefor or any claims
against any person or persons primarily or secondarily liable thereon
(including the Borrower or any other Borrowing Subsidiary). Each Borrowing
Subsidiary hereby waives any and all defenses to which it might be entitled
as a guarantor in the event such Borrowing Subsidiary is deemed to be a
guarantor of the Obligations rather than a co-borrower.
ARTICLE IX
AMENDMENTS; WAIVERS; GENERAL PROVISIONS
9.1. AMENDMENTS AND WAIVERS. Other than (a) Commitment increases
pursuant to Section 12.4 (which may be accomplished solely by the Borrower,
the Agent and the subject Lender) and (b) temporary waivers of Collateral
eligibility permitted pursuant to the definition of "Borrowing Base" (which
may be accomplished solely by the Agent), the Required Lenders (or the Agent
with the consent in writing of the Required Lenders) and the Borrower and the
Borrowing Subsidiaries may enter into agreements supplemental hereto for the
purpose of admitting new Borrowing Subsidiaries, adding or modifying any
provisions to the Loan Documents, changing in any manner the rights of the
Lenders or the Borrower or the Borrowing Subsidiaries hereunder, or waiving
any Default hereunder; provided, however, that no such supplemental agreement
shall, without the consent of each Lender directly or indirectly affected
thereby:
(i) Extend the final maturity of any Loan or forgive all or any
portion of the principal amount thereof, or reduce the rate or
extend the time of payment of interest thereon or fees.
(ii) Reduce the percentage specified in the definition of Required
Lenders.
(iii) Extend the Termination Date, or reduce the amount of or extend the
payment date for the mandatory payments required under Section
2.11, or increase the amount of the Aggregate Commitment or of the
Commitment of any Lender hereunder (other than in accordance with
Section 12.4).
(iv) Amend this Section 9.1.
(v) Release any guarantor of any Obligation or, except as provided
herein or in the Security Agreement, release any Collateral.
(vi) Amend the definition of "Borrowing Base", "Collateral Value",
"Eligible Conforming Mortgage Loan", "Eligible HELOC Loan",
"Eligible Jumbo Mortgage Loan", "Eligible Non-Agency Mortgage
Loan", "Eligible Sub-Prime Mortgage Loan" or "Eligible Security".
(vii) Permit the Borrower or any Borrowing Subsidiary to assign its
rights under this Agreement or amend or waive any restriction on
the Borrower's or any Borrowing Subsidiary's ability to assign its
rights or obligations under any of the Loan Documents.
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(viii) Amend or waive any Lending Sublimits or Borrowing Base Sublimits
(other than the waivers expressly permitted pursuant to the
definition of Borrowing Base).
(ix) Amend or waive any provision herein regarding the indemnification
of the Agent, the Collateral Agent or any Lender.
(x) Amend or waive any provision herein regarding the allocation among
the Lenders of any payments or proceeds received by the Agent
hereunder.
(xi) Amend or waive any provision herein which, by its terms, requires
the consent, approval or satisfaction of all Lenders.
No amendment of any provision of this Agreement relating to the Agent or the
Collateral Agent shall be effective without the written consent of the Agent
or the Collateral Agent, as the case may be. In addition, the consent of the
Collateral Agent shall be required for the effectiveness of any amendment
referred to in Section 9.1 (iv), (v), (vi), (viii) and/or (ix) above. The
Agent may waive payment of the fee required under Section 12.3.2 without
obtaining the consent of any other party to this Agreement.
9.2. SURVIVAL OF REPRESENTATIONS. All representations and
warranties of the Borrower and/or the Borrowing Subsidiaries contained in
this Agreement shall survive the making of the Loans herein contemplated.
9.3. GOVERNMENTAL REGULATION. Anything contained in this Agreement
to the contrary notwithstanding, no Lender shall be obligated to extend
credit to the Borrower in violation of any limitation or prohibition provided
by any applicable statute or regulation.
9.4. HEADINGS. Section headings in the Loan Documents are for
convenience of reference only, and shall not govern the interpretation of any
of the provisions of the Loan Documents.
9.5. ENTIRE AGREEMENT. The Loan Documents embody the entire
agreement and understanding among the Borrower, the Borrowing Subsidiaries,
the Agent, the Collateral Agent and the Lenders and supersede all prior
agreements and understandings among the Borrower, the Borrowing Subsidiaries,
the Agent and the Lenders relating to the subject matter thereof, other than
the fee letter described in Section 2.7.6 and any other agreement entered
into in connection with the fees described in Section 2.7.7.
9.6. SEVERAL OBLIGATIONS; BENEFITS OF THIS AGREEMENT. The
respective obligations of the Lenders hereunder are several and not joint and
no Lender shall be the partner or agent of any other (except to the extent to
which the Agent is authorized to act as such). The failure of any Lender to
perform any of its obligations hereunder shall not relieve any other Lender
from any of its obligations hereunder. This Agreement shall not be construed
so as to confer any right or benefit upon any Person other than the parties
to this Agreement and their respective successors and assigns, PROVIDED,
HOWEVER, that the parties hereto expressly agree that the Arranger shall
enjoy the benefits of the provisions of Sections 9.7, 9.8 and 10.11 to the
extent specifically set forth therein and shall have the right to enforce
such provisions on its own behalf and in its own name to the same extent as
if it were a party to this Agreement.
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9.7. EXPENSES; INDEMNIFICATION. (i) The Borrower shall reimburse
the Agent, the Arranger and the Collateral Agent for any actual costs and
out-of-pocket expenses (including reasonable attorneys' fees and time charges
of attorneys for the Agent, the Arranger and the Collateral Agent, which
attorneys may be employees of the Agent, the Arranger or the Collateral
Agent) paid or incurred by the Agent, the Arranger or the Collateral Agent in
connection with the preparation, negotiation, execution, delivery,
syndication, review, amendment, modification, and administration of the Loan
Documents. The Borrower also agrees to reimburse the Agent, the Arranger,
the Collateral Agent and the Lenders for any actual costs and out-of-pocket
expenses (including reasonable attorneys' fees and time charges of attorneys
for the Agent, the Arranger, the Collateral Agent and the Lenders, which
attorneys may be employees of the Agent, the Arranger, the Collateral Agent
or the Lenders) paid or incurred by the Agent, the Arranger, the Collateral
Agent or any Lender in connection with the collection and enforcement of the
Loan Documents.
(ii) The Borrower hereby further agrees to indemnify the Agent, the
Arranger, the Collateral Agent and each Lender, its directors, officers and
employees against all losses, claims, damages, penalties, judgments,
liabilities and expenses (including, without limitation, all expenses of
litigation or preparation therefor whether or not the Agent, the Arranger,
the Collateral Agent or any Lender is a party thereto) which any of them may
pay or incur arising out of or relating to this Agreement, the other Loan
Documents, the transactions contemplated hereby or the direct or indirect
application or proposed application of the proceeds of any Loan hereunder
except to the extent that they are determined in a final and non-appealable
judgment by a court of competent jurisdiction to have resulted from the gross
negligence or willful misconduct of the party seeking indemnification.
(iii) The obligations of the Borrower under this Section shall
survive the termination of this Agreement.
9.8. NONLIABILITY OF LENDERS. The relationship between the Borrower
and the Borrowing Subsidiaries on the one hand and the Lenders, the Agent and
the Collateral Agent on the other hand shall be solely that of borrower and
lender. Neither the Agent, the Arranger, the Collateral Agent nor any Lender
shall have any fiduciary responsibilities to the Borrower or any Borrowing
Subsidiary. Neither the Agent, the Arranger, the Collateral Agent nor any
Lender undertakes any responsibility to the Borrower or any Borrowing
Subsidiary to review or inform the Borrower or any Borrowing Subsidiary of
any matter in connection with any phase of the Borrower's or any Borrowing
Subsidiary's business or operations. Each of the Borrower and each Borrowing
Subsidiary agrees that neither the Agent, the Arranger, the Collateral Agent
nor any Lender shall have liability to the Borrower or any Borrowing
Subsidiary (whether sounding in tort, contract or otherwise) for losses
suffered by the Borrower or any Borrowing Subsidiary in connection with,
arising out of, or in any way related to, the transactions contemplated and
the relationship established by the Loan Documents, or any act, omission or
event occurring in connection therewith, unless it is determined in a final
and non-appealable judgment by a court of competent jurisdiction that such
losses resulted from the gross negligence or willful misconduct of the party
from which recovery is sought. Neither the Agent, the Arranger, the
Collateral Agent nor any Lender shall have any liability with respect to, and
each of the Borrower and each Borrowing Subsidiary hereby waives, releases
and agrees not to sue for any special, indirect or consequential damages
suffered by the Borrower or any Borrowing Subsidiary in connection with,
arising out of, or in any way related to the Loan Documents or the
transactions contemplated thereby.
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9.9. SEVERABILITY OF PROVISIONS. Any provision in any Loan Document
that is held to be inoperative, unenforceable, or invalid in any jurisdiction
shall, as to that jurisdiction, be inoperative, unenforceable, or invalid
without affecting the remaining provisions in that jurisdiction or the
operation, enforceability, or validity of that provision in any other
jurisdiction, and to this end the provisions of all Loan Documents are
declared to be severable.
9.10. NUMBERS OF DOCUMENTS. All statements, notices, closing
documents, and requests hereunder shall be furnished to the Agent with
sufficient counterparts so that the Agent may furnish one to each of the
Lenders.
9.11. ACCOUNTING. Except as provided to the contrary herein, all
accounting terms used herein shall be interpreted and all accounting
determinations hereunder shall be made in accordance with Agreement
Accounting Principles.
9.12. CONFIDENTIALITY. Each Lender agrees to hold any confidential
information which it may receive from the Borrower pursuant to this Agreement
in confidence, except for disclosure (i) to its Affiliates and to other
Lenders and their respective Affiliates, (ii) to legal counsel, accountants,
and other professional advisors to such Lender or to a Transferee, (iii) to
regulatory officials, (iv) to any Person as required by law, regulation, or
legal process, (v) to any Person in connection with any legal proceeding to
which such Lender is a party, (vi) to such Lender's direct or indirect
contractual counterparties in swap agreements or to legal counsel,
accountants and other professional advisors to such counterparties, and (vii)
permitted by Section 12.5.
9.13. NONRELIANCE. Each Lender hereby represents that it is not
relying on or looking to any margin stock (as defined in Regulation U of the
Board of Governors of the Federal Reserve System) for the repayment of the
Loans provided for herein.
ARTICLE X
THE AGENT AND THE COLLATERAL AGENT
10.1. APPOINTMENT; NATURE OF RELATIONSHIP. The First National Bank
of Chicago is hereby appointed by each of the Lenders as its contractual
representative hereunder and under each other Loan Document, and each of the
Lenders irrevocably authorizes the Agent to act as the contractual
representative of such Lender with the rights and duties expressly set forth
herein and in the other Loan Documents. BANK ONE, Texas, N.A. is hereby
appointed by each of the Lenders as its contractual representative hereunder
and under the Security Agreement, and each of the Lenders irrevocably
authorizes the Collateral Agent to act as the contractual representative of
such Lender with the rights and duties expressly set forth herein and in the
Security Agreement. The Agent and the Collateral Agent are hereby authorized
to enter into the Security Agreement on behalf of the Lenders and all
obligations of the Lenders thereunder shall be binding upon each Lender as if
such Lender had executed the Security Agreement. FOR PURPOSES OF THIS
ARTICLE X (OTHER THAN SECTION 10.12), EACH REFERENCE TO THE TERM "AGENT"
SHALL BE DEEMED TO BE A COLLECTIVE REFERENCE TO THE AGENT AND THE COLLATERAL
AGENT. The Agent agrees to act as such contractual representative upon the
express conditions contained in this Article X. Notwithstanding the use of
the defined terms "Agent" and "Collateral Agent" throughout this Agreement,
it is expressly understood and agreed that the Agent shall have not have any
fiduciary responsibilities to any Lender by reason of this Agreement or any
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other Loan Document and that the Agent is merely acting as the representative
of the Lenders with only those duties as are expressly set forth in this
Agreement and the other Loan Documents. In its capacity as the Lenders'
contractual representative, the Agent (i) does not hereby assume any
fiduciary duties to any of the Lenders, (ii) is a "representative" of the
Lenders within the meaning of Section 9-105 of the Uniform Commercial Code
and (iii) is acting as an independent contractor, the rights and duties of
which are limited to those expressly set forth in this Agreement and the
other Loan Documents. Each of the Lenders hereby agrees to assert no claim
against the Agent on any agency theory or any other theory of liability for
breach of fiduciary duty, all of which claims each Lender hereby waives.
10.2. POWERS. The Agent shall have and may exercise such powers
under the Loan Documents as are specifically delegated to the Agent by the
terms of each thereof, together with such powers as are reasonably incidental
thereto. The Agent shall have no implied duties to the Lenders, or any
obligation to the Lenders to take any action thereunder except any action
specifically provided by the Loan Documents to be taken by the Agent.
10.3. GENERAL IMMUNITY. Neither the Agent nor any of its directors,
officers, agents or employees shall be liable to the Borrower, any Borrowing
Subsidiary, the Lenders or any Lender for any action taken or omitted to be
taken by it or them hereunder or under any other Loan Document or in
connection herewith or therewith except to the extent such action or inaction
is determined in a final non-appealable judgment by a court of competent
jurisdiction to have arisen from the gross negligence or willful misconduct
of such Person.
10.4. NO RESPONSIBILITY FOR LOANS, RECITALS, ETC. Neither the Agent
nor any of its directors, officers, agents or employees shall be responsible
for or have any duty to ascertain, inquire into, or verify (i) any statement,
warranty or representation made in connection with any Loan Document or any
borrowing hereunder; (ii) the performance or observance of any of the
covenants or agreements of any obligor under any Loan Document, including,
without limitation, any agreement by an obligor to furnish information
directly to each Lender; (iii) the satisfaction of any condition specified in
Article IV, except receipt of items required to be delivered solely to the
Agent; (iv) the existence or possible existence of any Default or Unmatured
Default; (v) the value, sufficiency, creation, perfection or priority of any
Lien on any collateral security; or (vii) the financial condition of the
Borrower or any guarantor of any of the Obligations or of any of the
Borrower's or any such guarantor's respective Subsidiaries. The Agent shall
have no duty to disclose to the Lenders information that is not required to
be furnished by the Borrower to the Agent at such time, but is voluntarily
furnished by the Borrower to the Agent (either in its capacity as Agent or in
its individual capacity).
10.5. ACTION ON INSTRUCTIONS OF LENDERS. The Agent shall in all
cases be fully protected in acting, or in refraining from acting, hereunder
and under any other Loan Document in accordance with written instructions
signed by the Required Lenders (or, to the extent required by Section 9.1,
all of the Lenders), and such instructions and any action taken or failure to
act pursuant thereto shall be binding on all of the Lenders. The Lenders
hereby acknowledge that the Agent shall be under no duty to take any
discretionary action permitted to be taken by it pursuant to the provisions
of this Agreement or any other Loan Document unless it shall be requested in
writing to do so by the Required Lenders. The Agent shall be fully justified
in failing or refusing to take any action hereunder and under any other Loan
Document unless it shall first be indemnified to its satisfaction by the
Lenders pro rata against any and all liability, cost and expense (except any
liability, cost or expense resulting from the Agent's gross negligence or
willful misconduct) that it may incur by reason of taking or continuing to
take any such action.
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10.6. EMPLOYMENT OF AGENTS AND COUNSEL. The Agent may execute any of
its duties as Agent hereunder and under any other Loan Document by or through
employees, agents, and attorneys-in-fact and shall not be answerable to the
Lenders, except as to money or securities received by it or its authorized
agents, for the default or misconduct of any such agents or attorneys-in-fact
selected by it with reasonable care. The Agent shall be entitled to advice
of counsel concerning the contractual arrangement between the Agent and the
Lenders and all matters pertaining to the Agent's duties hereunder and under
any other Loan Document.
10.7. RELIANCE ON DOCUMENTS; COUNSEL. The Agent shall be entitled to
rely upon any Note, notice, consent, certificate, affidavit, letter,
telegram, statement, paper or document reasonably believed by it to be
genuine and correct and to have been signed or sent by the proper person or
persons, and, in respect of legal matters, upon the opinion of counsel
selected by the Agent, which counsel may be employees of the Agent.
10.8. AGENT'S REIMBURSEMENT AND INDEMNIFICATION. The Lenders agree
to reimburse and indemnify the Agent ratably in proportion to their
respective Commitments (or, if the Commitments have been terminated, in
proportion to their Commitments immediately prior to such termination) (i)
for any amounts not reimbursed by the Borrower for which the Agent is
entitled to reimbursement by the Borrower under the Loan Documents, (ii) for
any other expenses incurred by the Agent on behalf of the Lenders, in
connection with the preparation, execution, delivery, administration and
enforcement of the Loan Documents (including, without limitation, for any
expenses incurred by the Agent in connection with any dispute between the
Agent and any Lender or between two or more of the Lenders) and (iii) for any
liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses or disbursements of any kind and nature whatsoever
which may be imposed on, incurred by or asserted against the Agent in any way
relating to or arising out of the Loan Documents or any other document
delivered in connection therewith or the transactions contemplated thereby
(including, without limitation, for any such amounts incurred by or asserted
against the Agent in connection with any dispute between the Agent and any
Lender or between two or more of the Lenders), or the enforcement of any of
the terms of the Loan Documents or of any such other documents, provided that
(i) no Lender shall be liable for any of the foregoing to the extent any of
the foregoing is found in a final non-appealable judgment by a court of
competent jurisdiction to have resulted from the gross negligence or willful
misconduct of the Agent and (ii) any indemnification required pursuant to
Section 3.5(vii) shall, notwithstanding the provisions of this Section 10.8,
be paid by the relevant Lender in accordance with the provisions thereof.
The obligations of the Lenders under this Section 10.8 shall survive payment
of the Obligations and termination of this Agreement.
10.9. NOTICE OF DEFAULT. The Agent shall not be deemed to have
knowledge or notice of the occurrence of any Default or Unmatured Default
hereunder unless the Agent has received written notice from a Lender or the
Borrower referring to this Agreement describing such Default or Unmatured
Default and stating that such notice is a "notice of default". In the event
that the Agent receives such a notice, the Agent shall give prompt notice
thereof to the Lenders.
10.10. RIGHTS AS A LENDER. In the event the entity which is the Agent
is a Lender, the entity which is the Agent shall have the same rights and
powers hereunder and under any other Loan Document with respect to its
Commitment and its Loans as any Lender and may exercise the same as though it
were not the Agent, and the term "Lender" or "Lenders" shall, at any time
when the entity which is the Agent is a Lender, unless the context otherwise
indicates, include the Agent in its individual capacity. The entity
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which is the Agent and its Affiliates may accept deposits from, lend money
to, and generally engage in any kind of trust, debt, equity or other
transaction, in addition to those contemplated by this Agreement or any other
Loan Document, with the Borrower or any of its Subsidiaries in which the
Borrower or such Subsidiary is not restricted hereby from engaging with any
other Person. The entity which is the Agent, in its individual capacity, is
not obligated to remain a Lender.
10.11. LENDER CREDIT DECISION. Each Lender acknowledges that it has,
independently and without reliance upon the Agent, the Arranger or any other
Lender and based on the financial statements prepared by the Borrower and
such other documents and information as it has deemed appropriate, made its
own credit analysis and decision to enter into this Agreement and the other
Loan Documents. Each Lender also acknowledges that it will, independently
and without reliance upon the Agent, the Arranger or any other Lender and
based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit decisions in taking or not taking
action under this Agreement and the other Loan Documents.
10.12. SUCCESSOR AGENT. The Agent may resign at any time by giving
written notice thereof to the Lenders and the Borrower, such resignation to
be effective upon the appointment of a successor Agent or, if no successor
Agent has been appointed, forty-five days after the retiring Agent gives
notice of its intention to resign. First Chicago agrees that it shall resign
as Agent upon the request of the Borrower given at any time that both (i) no
Default exists, and (ii) First Chicago's Commitment is less than the lesser
of $25,000,000 or 10% of the Aggregate Commitment. In addition, if (x) the
Agent fails to perform its obligations under this Agreement in any material
manner and fails to correct its performance within thirty days after written
notice given by not less than the Required Lenders, or (y) the Commitment of
the entity which is the Agent is less than the lesser of $25,000,000 or 10%
of the Aggregate Commitment, then the Agent may be removed upon thirty days
written notice given by not less than the Required Lenders. Upon any such
resignation or removal, the Required Lenders shall have the right to appoint,
on behalf of the Lenders, a successor Agent. If no successor Agent shall have
been so appointed by the Required Lenders by the removal date in the case of
removal or within thirty days after the resigning Agent's giving notice of
its intention to resign in the case of resignation, then the resigning or
removed Agent may appoint, on behalf of the Lenders, a successor Agent.
Notwithstanding the previous sentence, the Agent may at any time without the
consent of the Borrower or any Lender, appoint any of its Affiliates which is
a commercial bank having capital and retained earnings of at least
$100,000,000 as a successor Agent hereunder. If the Agent has resigned or
been removed and no successor Agent has been appointed, the Lenders may
perform all the duties of the Agent hereunder and the Borrower shall make all
payments in respect of the Obligations to the applicable Lender and for all
other purposes shall deal directly with the Lenders. No successor Agent
shall be deemed to be appointed hereunder until such successor Agent has
accepted the appointment. Any such successor Agent shall be a commercial
bank having capital and retained earnings of at least $100,000,000. Upon the
acceptance of any appointment as Agent hereunder by a successor Agent, such
successor Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the resigning Agent. Upon the
effectiveness of the resignation or removal of the Agent, the resigning or
removed Agent shall be discharged from its duties and obligations hereunder
and under the Loan Documents. After the effectiveness of the resignation or
removal of an Agent, the provisions of this Article X shall continue in
effect for the benefit of such Agent in respect of any actions taken or
omitted to be taken by it while it was acting as the Agent hereunder and
under the other Loan Documents. In the event that there is a successor to
the Agent by merger, or the Agent assigns its duties and obligations to an
Affiliate pursuant to this Section 10.12, then the term "Corporate Base Rate"
as used in this Agreement shall mean the prime rate, base rate or other
analogous rate of the new Agent.
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10.13. DELEGATION TO AFFILIATES. The Borrower and the Lenders agree
that the Agent may delegate any of its duties under this Agreement to any of
its Affiliates. Any such Affiliate (and such Affiliate's directors,
officers, agents and employees) which performs duties in connection with this
Agreement shall be entitled to the same benefits of the indemnification,
waiver and other protective provisions to which the Agent is entitled under
Articles IX and X.
10.14. REPORTS. Each of the Borrower and each Borrowing Subsidiary
acknowledges that from time to time First Chicago may prepare and may
distribute to the Lenders (but shall have no obligation or duty to prepare or
to distribute to the Lenders) certain audit reports (the "Reports")
pertaining to the Borrower's or any Borrowing Subsidiary's assets for
internal use by First Chicago from information furnished to it by or on
behalf of the Borrower or any Borrowing Subsidiary, after First Chicago has
exercised its rights of inspection pursuant to this Agreement. The Lenders
agree that (i) First Chicago has no duty to send its field auditors to the
Borrower or any Borrowing Subsidiary or to prepare and/or distribute a copy
of any internally prepared reports (including the Reports) to any Lender;
(ii) First Chicago makes no representation or warranty, express or implied,
as to the completeness or accuracy of the Reports or any of the information
contained therein, that First Chicago may in its sole discretion provide to
the Lenders, and First Chicago is not responsible for any statement made
therein; (iii) First Chicago undertakes no obligation to update, correct or
supplement the Reports; (iv) neither First Chicago nor any of its employees,
officers, directors or agents shall be liable to any Lender or any other
Person receiving a copy of the Reports for any inaccuracy or omission
contained in or relating thereto, even if said inaccuracy or omission is the
result of gross negligence; (v) the information in the Reports is
confidential and may not be disclosed to any Person (including the Borrower),
in whole or in part, other than as permitted by Section 9.12. Further, each
Lender agrees to indemnify First Chicago, its directors, officers, agents and
employees against all losses, claims, damages, penalties, judgments,
liabilities and expenses, as incurred, (including, without limitation, all
expenses of litigation and preparation therefor whether or not First Chicago
is a party thereto) which any of them may pay or incur arising out of such
Lender's receipt or use of any Report.
ARTICLE XI
SETOFF; RATABLE PAYMENTS
11.1. SETOFF. In addition to, and without limitation of, any rights
of the Lenders under applicable law, if the Borrower becomes insolvent,
however evidenced, or any Default occurs, any and all deposits (including all
account balances, whether provisional or final and whether or not collected
or available) and any other Indebtedness at any time held or owing by any
Lender or any Affiliate of any Lender to or for the credit or account of the
Borrower or any Borrowing Subsidiary may be offset and applied toward the
payment of the Obligations owing to such Lender, whether or not the
Obligations, or any part hereof, shall then be due.
11.2. RATABLE PAYMENTS. If any Lender, whether by setoff or
otherwise, has payment made to it upon its Loans (other than payments
received pursuant to Sections 3.1, 3.2, 3.4, 3.5 or 3.6 or Article XII) in a
greater proportion than that received by any other Lender, such Lender
agrees, promptly upon demand, to purchase a portion of the Loans held by the
other Lenders so that after such purchase each Lender will hold its ratable
proportion of Loans. If any Lender, whether in connection with setoff or
amounts which might be subject to setoff or otherwise, receives collateral or
other protection for its
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Obligations or such amounts which may be subject to setoff, such Lender
agrees, promptly upon demand, to take such action necessary such that all
Lenders share in the benefits of such collateral ratably in proportion to
their Loans. In case any such payment is disturbed by legal process, or
otherwise, appropriate further adjustments shall be made.
11.3. CUSTODIAL ACCOUNTS. The Borrower and each Borrowing Subsidiary
agrees that funds received and held by it as custodian for FNMA, GNMA or
other mortgage pools which are deposited into accounts with any Lender shall
be clearly identified as custodial accounts, and each Lender agrees that each
provision of the foregoing subsections of this Article XI shall not apply to
such custodial accounts. Neither the Borrower nor any Borrowing Subsidiary
shall deposit any of its general funds in any custodial accounts or otherwise
commingle funds in any custodial accounts.
ARTICLE XII
ASSIGNMENTS; PARTICIPATIONS; COMMITMENT INCREASES
12.1. SUCCESSORS AND ASSIGNS. The terms and provisions of the Loan
Documents shall be binding upon and inure to the benefit of the Borrower, the
Borrowing Subsidiaries and the Lenders and their respective successors and
assigns, except that (i) neither the Borrower nor any Borrowing Subsidiary
shall have the right to assign its rights or obligations under the Loan
Documents without the consent of all of the Lenders and (ii) any assignment
by any Lender must be made in compliance with Section 12.3. Notwithstanding
clause (ii) of this Section, any Lender may at any time, without the consent
of the Borrower, any Borrowing Subsidiary or the Agent, assign all or any
portion of its rights under this Agreement and any Note to a Federal Reserve
Bank; provided, however, that no such assignment to a Federal Reserve Bank
shall release the transferor Lender from its obligations hereunder. The
Agent may treat the Person which made any Loan or which holds any Note as the
owner thereof for all purposes hereof unless and until such Person complies
with Section 12.3 in the case of an assignment thereof or, in the case of any
other transfer, a written notice of the transfer is filed with the Agent.
Any assignee or transferee of the rights to any Loans or any Note agrees by
acceptance of such transfer or assignment to be bound by all the terms and
provisions of the Loan Documents. Any request, authority or consent of any
Person, who at the time of making such request or giving such authority or
consent is the owner of the rights to any Loan (whether or not a Note has
been issued in evidence thereof), shall be conclusive and binding on any
subsequent holder, transferee or assignee of the rights to such Loan.
12.2. PARTICIPATIONS.
12.2.1. PERMITTED PARTICIPANTS; EFFECT. Any Lender may, in
the ordinary course of its business and in accordance with applicable law, at
any time sell to one or more banks or other entities ("Participants")
participating interests in any Loan owing to such Lender, any Note held by
such Lender, any Commitment of such Lender or any other interest of such
Lender under the Loan Documents. In the event of any such sale by a Lender
of participating interests to a Participant, such Lender's obligations under
the Loan Documents shall remain unchanged, such Lender shall remain solely
responsible to the other parties hereto for the performance of such
obligations, such Lender shall remain the owner of its Loans and the holder
of any Note issued to it in evidence thereof for all purposes under the Loan
Documents, all amounts payable by the Borrower or any Borrowing Subsidiary
under this Agreement shall be determined as if such Lender had not sold such
participating interests, and the Borrower, each
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Borrowing Subsidiary, the other Lenders and the Agent shall continue to deal
solely and directly with such Lender in connection with such Lender's rights
and obligations under the Loan Documents.
12.2.2. VOTING RIGHTS. Each Lender shall retain the sole
right to approve, without the consent of any Participant, any amendment,
modification or waiver of any provision of the Loan Documents other than any
amendment, modification or waiver with respect to any Loan or Commitment in
which such Participant has an interest which forgives principal, interest or
fees or reduces the interest rate or fees payable with respect to any such
Loan or Commitment, extends the Termination Date, postpones any date fixed
for any regularly-scheduled payment of principal of, or interest or fees on,
any such Loan or Commitment, releases any guarantor of any such Loan or
releases all or substantially all of the Collateral (other than as expressly
permitted pursuant to the Loan Documents).
12.2.3. BENEFIT OF SETOFF. The Borrower and each Borrowing
Subsidiary agrees that each Participant shall be deemed to have the right of
setoff provided in Section 11.1 in respect of its participating interest in
amounts owing under the Loan Documents to the same extent as if the amount of
its participating interest were owing directly to it as a Lender under the
Loan Documents, provided that each Lender shall retain the right of setoff
provided in Section 11.1 with respect to the amount of participating
interests sold to each Participant. The Lenders agree to share with each
Participant, and each Participant, by exercising the right of setoff provided
in Section 11.1, agrees to share with each Lender, any amount received
pursuant to the exercise of its right of setoff, such amounts to be shared in
accordance with Section 11.2 as if each Participant were a Lender.
12.3. ASSIGNMENTS.
12.3.1. PERMITTED ASSIGNMENTS. Any Lender may, in the
ordinary course of its business and in accordance with applicable law, at any
time assign to one or more banks or other entities ("Purchasers") all or any
part of its rights and obligations under the Loan Documents. Such assignment
shall be substantially in the form of Exhibit "H" hereto or in such other
form as may be agreed to by the parties thereto. The consent of the Borrower
and the Agent shall be required prior to an assignment becoming effective
with respect to a Purchaser which is not a Lender or an Affiliate thereof;
provided, however, that if a Default has occurred and is continuing, the
consent of the Borrower shall not be required. Such consent shall not be
unreasonably withheld or delayed. Each such assignment shall be in an amount
such that, following such assignment, the assignee shall have a Commitment
not less than $10,000,000 and, unless the assigning Lender is assigning its
entire Commitment, the assigning Lender shall have a Commitment not less than
$10,000,000.
12.3.2. EFFECT; EFFECTIVE DATE. Upon (i) delivery to the
Agent of a notice of assignment, substantially in the form attached as Annex
"I" to Exhibit "H" hereto (a "Notice of Assignment"), together with any
consents required by Section 12.3.1, and (ii) payment of a $3,500 fee to the
Agent for processing such assignment, such assignment shall become effective
on the effective date specified in such Notice of Assignment. The Notice of
Assignment shall contain a representation by the Purchaser to the effect that
none of the consideration used to make the purchase of the Commitment and
Loans under the applicable assignment agreement are "plan assets" as defined
under ERISA and that the rights and interests of the Purchaser in and under
the Loan Documents will not be "plan assets" under ERISA. On and after the
effective date of such assignment, such Purchaser shall for all purposes be a
Lender party to this Agreement and any other Loan Document executed by or on
behalf of the Lenders and shall have all the rights and obligations of a
Lender under the Loan Documents, to the same extent as if it were an original
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<PAGE>
party hereto, and no further consent or action by the Borrower, the Lenders
or the Agent shall be required to release the transferor Lender with respect
to the percentage of the Aggregate Commitment and Loans assigned to such
Purchaser. Upon the consummation of any assignment to a Purchaser pursuant to
this Section 12.3.2, the transferor Lender, the Agent and the Borrower and
the Borrowing Subsidiaries shall, if the transferor Lender or the Purchaser
desires that its Loans be evidenced by a Note, make appropriate arrangements
so that a new Note or, as appropriate a replacement Note is issued to such
transferor Lender and a new Note or, as appropriate, a replacement Note, is
issued to such Purchaser, in each case in principal amounts reflecting their
respective Commitments, as adjusted pursuant to such assignment. In
addition, within a reasonable time after the effective date of any
assignment, the Agent shall, and is hereby authorized and directed to, revise
Schedule "1" reflecting the revised commitments and percentages of each of
the Lenders and shall distribute such revised Schedule "1" to each of the
Lenders and the Borrower, whereupon such revised Schedule shall replace the
old Schedule and become part of this Agreement.
12.4 COMMITMENT INCREASES.
12.4.1. INCREASES TO AGGREGATE COMMITMENT. The Borrower shall
have the right to increase the Aggregate Commitment by obtaining additional
Commitments, either from one or more of the Lenders or another lending
institution provided that (A) the Agent has approved the identity of any such
new Lender, such approval not to be unreasonably withheld, (B) any such new
Lender assumes all of the rights and obligations of a "Lender" hereunder, and
(C) the procedure described in Section 12.4.2 has been complied with,
provided further that the Aggregate Commitment shall not at any time exceed
$400,000,000 without the approval of the Agent and all of the Lenders.
12.4.2. PROCEDURE FOR INCREASES AND ADDITION OF NEW LENDERS.
This Agreement permits certain increases in a Lender's Commitment and the
admission of new Lenders providing new Commitments, neither of which require
any consents or approvals from the other Lenders. Any amendment hereto for
such an increase or addition shall be in the form attached hereto as Exhibit
"I" and shall only require the written signatures of the Agent, the Borrower,
the Borrowing Subsidiaries and the Lender(s) being added or increasing their
Commitment, subject only to the approval of all Lenders if any such increase
would cause the Aggregate Commitment to exceed $400,000,000. In addition,
within a reasonable time after the effective date of any increase, the Agent
shall, and is hereby authorized and directed to, revise Schedule "1"
reflecting such increase and shall distribute such revised Schedule to each
of the Lenders and the Borrower, whereupon such revised Schedule shall
replace the old Schedule and become part of this Agreement.
12.5. DISSEMINATION OF INFORMATION. The Borrower and each Borrowing
Subsidiary authorizes each Lender to disclose to any Participant or Purchaser
or any other Person acquiring an interest in the Loan Documents by operation
of law (each a "Transferee") and any prospective Transferee any and all
information in such Lender's possession concerning the creditworthiness of
the Borrower and its Subsidiaries; provided that each Transferee and
prospective Transferee agrees to be bound by the provisions of Section 9.12
of this Agreement.
12.6. TAX TREATMENT. If any interest in any Loan Document is
transferred to any Transferee which is organized under the laws of any
jurisdiction other than the United States or any State thereof, the
transferor Lender shall cause such Transferee, concurrently with the
effectiveness of such transfer, to comply with the provisions of Section
3.5(iv).
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<PAGE>
ARTICLE XIII
NOTICES
13.1. NOTICES. Except as otherwise permitted by Section 2.16 with
respect to borrowing notices, all notices, requests and other communications
to any party hereunder shall be in writing (including bank wire, facsimile
transmission or similar writing) and shall be given to such party: (a) in the
case of the Borrower or any Borrowing Subsidiary, at the address of the
Borrower or facsimile number for the Borrower set forth below its signature
on the signature pages hereof, (b) in the case of the Agent or any Lender, at
its address or facsimile number set forth on the signature pages hereof, (c)
in the case of the Collateral Agent, at its address or facsimile number set
forth on the signature pages of the Security Agreement or (d) in the case of
any party, such other address or facsimile number as such party may hereafter
specify for the purpose by notice to the Agent and the Borrower. Each such
notice, request or other communication shall be effective (i) if given by
facsimile transmission, when transmitted to the facsimile number specified in
this Section and confirmation of receipt is received, (ii) if given by mail,
72 hours after such communication is deposited in the mails with first class
postage prepaid, addressed as aforesaid or (iii) if given by any other means,
when delivered at the address specified in this Section; provided that
notices to the Agent under Article II shall not be effective until received.
13.2. CHANGE OF ADDRESS. The Borrower, any Borrowing Subsidiary, the
Agent and any Lender may each change the address for service of notice upon
it by a notice in writing to the other parties hereto.
ARTICLE XIV
COUNTERPARTS
This Agreement may be executed in any number of counterparts, all of
which taken together shall constitute one agreement, and any of the parties
hereto may execute this Agreement by signing any such counterpart. This
Agreement shall be effective when it has been executed by the Borrower, the
Borrowing Subsidiaries, the Agent and the Lenders and each party has notified
the Agent by facsimile transmission or telephone, that it has taken such
action.
ARTICLE XV
CHOICE OF LAW, CONSENT TO JURISDICTION, WAIVER OF JURY TRIAL
15.1. CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING
A CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE
WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF
ILLINOIS, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.
15.2. CONSENT TO JURISDICTION. EACH OF THE BORROWER AND EACH
BORROWING SUBSIDIARY HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE
JURISDICTION OF ANY UNITED STATES FEDERAL OR ILLINOIS STATE COURT SITTING IN
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<PAGE>
CHICAGO IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN
DOCUMENTS, AND EACH OF THE BORROWER AND EACH BORROWING SUBSIDIARY HEREBY
IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING
MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY
OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT,
ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN
INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE AGENT OR ANY
LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER OR ANY BORROWING SUBSIDIARY
IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE
BORROWER OR ANY BORROWING SUBSIDIARY AGAINST THE AGENT OR ANY AFFILIATE OF
THE AGENT INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING
OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY
IN A COURT IN CHICAGO, ILLINOIS.
15.3. WAIVER OF JURY TRIAL. THE BORROWER, EACH BORROWING SUBSIDIARY,
THE AGENT AND EACH LENDER HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL
PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN
TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR
CONNECTED WITH ANY LOAN DOCUMENT OR THE RELATIONSHIP ESTABLISHED THEREUNDER.
{REST OF PAGE INTENTIONALLY LEFT BLANK}
-70-
<PAGE>
IN WITNESS WHEREOF, the Borrower, the Borrowing Subsidiaries, the
Lenders and the Agent have executed this Agreement as of the date first above
written.
PRISM MORTGAGE COMPANY, an Illinois
corporation
By: ______________________
David A. Fisher, Secretary
Prism Center
440 North Orleans
Chicago, Illinois 60610
Phone: (312) 410-8488
Fax: (312) 494-0184
Attention: David Fisher
PACIFIC GUARANTEE MORTGAGE
CORPORATION, a California corporation
By: ______________________
David A. Fisher, Secretary
501 Canal Boulevard, Suite H
Point Richmond, California
MORTGAGE MARKET, INC., an Oregon
corporation
By: _______________________
David A. Fisher, Secretary
6 Centerpointe Drive, Suite 320
Lake Oswego, Oregon 97305
-71-
<PAGE>
POINTSOURCE FINANCIAL, L.L.C., an
Illinois limited liability company
By: Prism Mortgage Company, its Manager
By: _________________________
David A. Fisher, Secretary
Prism Center
440 North Orleans
Chicago, Illinois 60610
INFINITI MORTGAGE, L.L.C., an
Illinois limited liability company
By: Prism Mortgage Company, its Manager
By: __________________________
David A. Fisher, Secretary
Prism Center
440 North Orleans
Chicago, Illinois 60610
-72-
<PAGE>
THE FIRST NATIONAL BANK OF CHICAGO,
INDIVIDUALLY AND AS AGENT
By: ____________________________
Print Name: ____________________
Title: _________________________
One First National Plaza
Chicago, Illinois 60670
Phone: (312) 732-3225
Fax: (312) 732-6222
Attention: Thomas Connally
THE BANK OF NEW YORK
By: _____________________________
Print Name: _____________________
Title: __________________________
One Wall Street
17th Floor
New York, New York 10286
Phone: (212) 635-6467
Fax: (212) 635-6468
Attention: Patricia Dominus
COMERICA BANK
By: _____________________________
Print Name: _____________________
Title: __________________________
500 Woodward Avenue
MC 3256
Detroit, Michigan 48226
Phone: (313) 222-9285
Fax: (313) 222-9295
Attention: Von Ringger
-73-
<PAGE>
FIRST UNION NATIONAL BANK
By: _____________________________
Print Name: _____________________
Title: __________________________
301 S. College Street, 9th Floor
One First Union Center, TW-09
Charlotte, North Carolina 28288-0610
Phone: (704) 383-1946
Fax: (704) 383-8121
Attention: Peter Perna
GUARANTY FEDERAL BANK, F.S.B.
By: _____________________________
Print Name: _____________________
Title: __________________________
8333 Douglas Avenue
Dallas, Texas 75225
Phone: (214) 360-1968
Fax: (214) 360-1660
Attention: Brian Hilberth
HIBERNIA NATIONAL BANK
By: _____________________________
Print Name: _____________________
Title: __________________________
313 Carondelet Street
14th Floor
New Orleans, Louisiana 70161
Phone: (504) 533-3345
Fax: (504) 533-6242
Attention: Stephanie Freeman
-74-
<PAGE>
LASALLE NATIONAL BANK
By: _____________________________
Print Name: _____________________
Title: __________________________
135 South LaSalle Street
Chicago, Illinois 60603
Phone: (312) 904-2722
Fax: (312) 904-2903
Attention: David Scherer
MERCANTILE BANK
By: _____________________________
Print Name: _____________________
Title: __________________________
9900 W. 87th Street
Overland Park, Kansas 66212-4799
Phone: (913) 652-5115
Fax: (913) 652-5034
Attention: Mark Rieger
U.S. BANK NATIONAL ASSOCIATION
By: _____________________________
Print Name: _____________________
Title: __________________________
U.S. Bank Place
601 Second Avenue South
MPFP0508
Minneapolis, Minnesota 55402
Phone: (612) 973-0588
Fax: (612) 973-0826
Attention: Edwin D. Jenkins
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<PAGE>
Prism Financial Corporation and Subsidiaries
Basic and Diluted Earnings Per Share
(In thousands, except per share amounts) Exhibit 11.1
<TABLE>
<CAPTION>
Years Ended Three Months Ended
December 31, March 31,
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Historical:
Basic income per share:
Net income $ 1,020 $ 2,503 $ 11,095 $ 1,650 $ 4,896
-------- ------- -------- ------- -------
-------- ------- -------- ------- -------
Weighted-average common shares outstanding 10,269 10,269 10,568 10,269 11,495
-------- ------- -------- ------- -------
Per share amount $ 0.10 $ 0.24 $ 1.05 $ 0.16 $ 0.43
-------- ------- -------- ------- -------
-------- ------- -------- ------- -------
Diluted income per share:
Net income $ 1,020 $ 2,503 $ 11,095 $ 1,650 $ 4,896
-------- ------- -------- ------- -------
-------- ------- -------- ------- -------
Weighted-average common shares outstanding 10,269 10,269 10,568 10,269 11,495
Add: Stock options (1) - - 43 52 60
-------- ------- -------- ------- -------
Diluted weighted average common shares outstanding 10,269 10,269 10,611 10,321 11,555
-------- ------- -------- ------- -------
Per share amount $ 0.10 $ 0.24 $ 1.05 $ 0.16 $ 0.42
-------- ------- -------- ------- -------
-------- ------- -------- ------- -------
Pro forma (2):
Basic income per share:
Net income $ 610 $ 1,508 $ 6,883 $ 1,023 $ 2,987
-------- ------- -------- ------- -------
Weighted-average common shares outstanding 10,269 10,269 11,520(3) 10,269 12,791(4)
-------- ------- -------- ------- -------
Per share amount $ 0.06 $ 0.15 $ 0.60 $ 0.10 $ 0.23
-------- ------- -------- ------- -------
-------- ------- -------- ------- -------
Diluted income per share:
Net income $ 610 $ 1,508 $ 6,883 $ 1,023 $ 2,987
-------- ------- -------- ------- -------
-------- ------- -------- ------- -------
Weighted-average common shares outstanding 10,269 10,269 11,520(3) 10,269 12,791(4)
Add: Stock options (1) - - 43 52 60
-------- ------- -------- ------- -------
Diluted weighted average common shares outstanding 10,269 10,269 11,563(3) 10,321 12,851(4)
-------- ------- -------- ------- -------
Per share amount $ 0.06 $ 0.15 $ 0.60 $ 0.10 $ 0.23
-------- ------- -------- ------- -------
-------- ------- -------- ------- -------
</TABLE>
(1) Calculated using the treasury stock method.
(2) Pro forma to present as if Prism Financial was taxable as a C
corporation under the Internal Revenue Code for all periods presented.
(3) Includes the pro forma effect of the assumed issuance of 952 shares of
common stock to generate sufficient cash to pay the S corporation
distribution amount of $13,323 at December 31, 1998.
(4) Includes the pro forma effect of the assumed issuance of 1,295,463
shares of common stock to generate sufficient cash to pay the
S corporation distribution amount of $18,136 at March 31, 1999.
<PAGE>
EXHIBIT 16.1
Securities Exchange Commission
Washington, D.C. 20549
Gentlemen:
We were previously the independent accountants for Prism Financial
Corporation and on March 27, 1998, we reported on the consolidated balance
sheet of Prism Financial Corporation and subsidiaries as of December 31,
1997, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the two year
period then ended. In November 1998, we were dismissed as independent
accountants of Prism Financial Corporation. We have read the statements
included under the caption "Change In Independent Auditors" in the
Registration Statement on Form S-1 (No. 333-74883) filed by Prism Financial
Corporation, and we agree with such statements, except we are not in a
position to agree or disagree with the Company's statement that the
change was approved by the Board of Directors.
/s/ McGLADREY & PULLEN, LLP
Schaumburg, Illinois
April 27, 1999
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of the
Amendment No. 2 to this Registration Statement on Form S-1 of our report dated
March 10, 1999, relating to the financial statements of Prism Financial
Corporation, which appears in such Prospectus. We also consent to the references
to us under the headings "Experts" and "Selected Financial Data" in such
Prospectus. However, it should be noted that PricewaterhouseCoopers LLP has not
prepared or certified such "Selected Financial Data."
/s/ PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
April 27, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the use in the Amendment No. 2 to this Registration Statement
on Form S-1 (333-74883) filed by Prism Financial Corporation of our report dated
March 27, 1998, on our audit of the consolidated balance sheet of Prism
Financial Corporation and subsidiaries as of December 31, 1997, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the two years in the period then ended, and to the reference
to our firm under the heading "Experts and Selected Financial Data" in the
Registration Statement. However, it should be noted that McGladrey & Pullen, LLP
has not prepared or certified such "Selected Financial Data."
/s/ MCGLADREY & PULLEN, LLP
Schaumburg, Illinois
April 27, 1999
<PAGE>
EXHIBIT 23.3
April 27, 1999
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of the
Amendment No. 2 to this Registration Statement on Form S-1 of our report dated
April 3, 1998 relating to the financial statements of Mortgage Market, Inc.,
which appears on such Prospectus. We also consent to the reference to us under
the heading "Experts" in such Prospectus.
/s/ STEFANI & MATTHEWS, L.L.P.
Portland, Oregon
April 27, 1999
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANT
I hereby consent to the use in the Prospectus constituting part of the
Amendment No. 2 to this Registration Statement on Form S-1 of my report dated
March 6, 1998 relating to the financial statements of Pacific Guarantee Mortgage
Corporation as of December 31, 1997 and for the year then ended, which appear in
such Prospectus. I also consent to the reference to me under the heading
"Experts" in such Prospectus.
/s/ CLAY L. MILLER
--------------------------------------
Name: Clay L. Miller
Title: Certified Public Accountant
Healdsburg, California
April 27, 1999
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANT
I hereby consent to the use in the Prospectus constituting part of the
Amendment No. 2 to this Registration Statement on Form S-1 of my report dated
February 21, 1997 relating to the financial statements of Pacific Guarantee
Mortgage Corporation which appears in such Prospectus. I also consent to the
reference to me under the heading "Experts" in such Prospectus.
/s/ WILLIAM M. STOLL
--------------------------------------
Name: William M. Stoll
Title: Certified Public Accountant
Santa Rosa, California
April 27, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PRISM FINANCIAL CORPORATION AS OF, AND FOR THE YEAR
ENDED, DECEMBER 31, 1998 AND AS OF, AND FOR THE THREE MONTHS ENDED MARCH 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 MAR-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 MAR-31-1999
<CASH> 12,124 17,168
<SECURITIES> 0 0
<RECEIVABLES> 14,557 11,064
<ALLOWANCES> 350 807
<INVENTORY> 467,254 193,825
<CURRENT-ASSETS> 494,755 221,557
<PP&E> 6,259 7,068
<DEPRECIATION> 1,975 2,383
<TOTAL-ASSETS> 503,622 230,648
<CURRENT-LIABILITIES> 482,972 205,941
<BONDS> 0 0
0 0
0 0
<COMMON> 115 115
<OTHER-SE> 16,088 20,560
<TOTAL-LIABILITY-AND-EQUITY> 503,622 230,648
<SALES> 0 0
<TOTAL-REVENUES> 90,842 39,948
<CGS> 0 0
<TOTAL-COSTS> 79,747 35,052
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 900 457
<INTEREST-EXPENSE> 12,496 5,992
<INCOME-PRETAX> 11,095 4,896
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 11,095 4,896
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 11,095 4,896
<EPS-PRIMARY> 1.05 0.43
<EPS-DILUTED> 1.05 0.42
</TABLE>
