<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 23, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C>
Common Stock, par value $0.01 per share......................... $43,125,000 $11,989
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) under the Securities Act of 1933.
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 MARCH 23, 1999
PROSPECTUS
SHARES
[LOGO]
COMMON STOCK
Prism Financial Corporation is offering shares of its common
stock.
This is our initial public offering, and no public market currently exists
for our shares. We anticipate that the initial public offering price will be
between $ and $ per share. We intend to apply for quotation of the common
stock on the Nasdaq National Market under the symbol "PRFN."
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN 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 this prospectus up to an additional 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>
[Graphic depiction of Prism Financial's role in the lending process. Shows
relationship between customers, originations, our hybrid banker/broker structure
and sales of loans and servicing rights.]
[LOGO]
<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, on a pro forma basis after giving effect to our 1998 acquisitions.
Through our network of approximately 775 commission-only loan originators
operating out of 119 retail branches in 17 states as of February 28, 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 55 branches in 12 states, including 45 branches opened
since the beginning of January 1998.
- GROWTH THROUGH SELECTIVE ACQUISITIONS. Since 1996, we have completed six
acquisitions. As of their acquisition dates, these acquisitions have added
to our existing network over 400 loan originators operating out of 63
branches in 9 states. In March 1999, we entered into a definitive
agreement to acquire First City Financial Corp., a Denver-based mortgage
banking company with approximately $1.7 billion in 1998 mortgage
originations.
- 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, HomeShark,
Intuit's QuickenMortgage, iQualify, Keystroke, Lending Tree, 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
$85 million of loans over the Internet in the first two 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 motivates 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 technologies
and process improvements that streamline the origination process to ensure the
continuous delivery of superior customer service.
3
<PAGE>
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.
* * *
Unless otherwise indicated, all share and per share data and information in
this prospectus (1) assumes that the underwriters will not exercise their
over-allotment option and (2) reflects the exchange of all of the issued and
outstanding shares of common stock of Prism Mortgage Company ("Prism Mortgage")
for million shares of Prism Financial Corporation ("Prism Financial"),
which will be completed immediately prior to the closing of this offering.
References in this prospectus to mortgage originations include only mortgage
originations that were closed. Unless the context otherwise requires, all
references to "we," "us" or "our" refer to Prism Financial and its subsidiaries,
including Prism Mortgage, and all references to Prism Mortgage refer to Prism
Mortgage and its subsidiaries. For more information, please refer to
"Description of Capital Stock" on page 67 and "Underwriting" on page 70.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered.................................... shares
Common stock to be outstanding after the offering....... shares(1)(2)(3)
Use of proceeds......................................... The net proceeds of the offering will be used (1) to
repay outstanding indebtedness, including indebtedness
incurred to fund an S corporation distribution to
existing stockholders and (2) 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 "Termination of S Corporation
Status" 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, assuming an initial public
offering price of $ per share, (A) shares of common stock issuable
by us pursuant to the purchase agreement relating to our acquisition of
Pacific Guarantee Mortgage Corporation, including shares of common
stock issuable to the incentive plan established for employees of Pacific
Guarantee Mortgage Corporation and (B) shares of common stock issuable
by us to the incentive plan established for employees of Mortgage Market,
Inc.
(2) Excludes (A) shares of common stock reserved for issuance under our
1999 Omnibus Stock Incentive Plan, including the 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) shares of common stock reserved for issuance under
our 1999 Employee Stock Purchase Plan; (C) up to $3.2 million of common
stock that may be issuable by us under the Prism2000 Profit Sharing Plan;
and (D) shares of common stock issuable by us pursuant to a stock
purchase right.
(3) Excludes shares of common stock that may be issuable by us to certain
individuals pursuant to the purchase agreement relating to our acquisition
of Mortgage Market, Inc. For a more detailed description of this purchase
agreement, please refer to "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Developments in the past 12
months" on page 36.
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 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,
--------------------------------------------
PRO FORMA
1996 1997 1998 1998(1)
--------- --------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues
Loan origination income............................. $ 9,494 $ 20,984 $ 66,514 $ 104,039
Net premium income.................................. 422 1,726 12,243 22,304
Loan-related fees and other......................... 2,387 4,252 10,085 17,155
Net interest income (expense)....................... (102) 392 2,000 1,125
--------- --------- --------- -----------
Total revenues.................................... 12,201 27,354 90,842 144,623
--------- --------- --------- -----------
Expenses
Commissions......................................... 4,350 10,361 37,502 66,860
Loan-related expenses............................... 2,026 3,823 9,346 11,620
Salaries and benefits............................... 2,829 6,421 18,325 27,153
General and administrative expenses and other....... 1,871 3,919 13,101 21,315
Depreciation and amortization....................... 105 327 1,473 1,774
--------- --------- --------- -----------
Total expenses.................................... 11,181 24,851 79,747 128,722
--------- --------- --------- -----------
Net income...................................... 1,020 2,503 11,095 15,901
Pro forma data (unaudited):
Pro forma provision for income taxes (2).............. 410 995 4,343 6,105
--------- --------- --------- -----------
Net income adjusted for pro forma income tax
provision......................................... $ 610 $ 1,508 $ 6,752 $ 9,796
--------- --------- --------- -----------
--------- --------- --------- -----------
Pro forma net income per share:
Basic............................................... $ $
--------- -----------
--------- -----------
Diluted............................................. $ $
--------- -----------
--------- -----------
Pro forma weighted average number of shares
outstanding:
Basic...............................................
Diluted.............................................
</TABLE>
- ------------------------
(FOOTNOTES ON FOLLOWING PAGE)
6
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------
<S> <C> <C>
AS ADJUSTED
1998 1998(3)
---------- ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................................................. $ 12,124 $
Loans held for sale.................................................................... 467,254
Total assets........................................................................... 503,622
Loans sold under agreements to repurchase.............................................. 292,627
Warehouse lines of credit.............................................................. 170,217
Total debt............................................................................. 5,027
Total stockholders' equity............................................................. 16,203
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
<S> <C> <C> <C> <C>
PRO FORMA
1996 1997 1998 1998(1)
--------- --------- --------- -----------
OPERATING DATA (UNAUDITED):
Total mortgage originations (in millions)............................ $ 857 $ 1,469 $ 5,025 $ 8,305
Internet mortgage originations (in millions)......................... $ -- $ -- $ 122 $ 180
Number of loans originated........................................... 5,460 10,086 31,943 49,176
Loan originators at period end....................................... 126 255 749 749
Number of branches at period end..................................... 11 17 95 95
</TABLE>
- ------------------------
(1) Gives effect to the formation of the holding company, the acquisitions of
Pacific Guarantee Mortgage Corporation and Mortgage Market, Inc. 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) Pro forma income taxes 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 the years ended December 31, 1996, 1997, 1998 and Pro
Forma 1998.
(3) As adjusted to give effect to (A) an assumed S corporation distribution of
$13.3 million as of December 31, 1998, which amount is expected to increase
as a result of additional S corporation income from January 1, 1999 to the
closing of this offering, (B) the recording by us of a one-time non-cash
credit to earnings in the amount of $636,000 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 January 1, 1999 through the date of the
closing of this offering and (C) the issuance and sale of the common stock
offered by us in this offering at an assumed offering price of $ per
share and application of the net proceeds therefrom as described in "Use of
Proceeds."
CREATION OF A HOLDING COMPANY. 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 million 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.
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.
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.
WE MUST BE ABLE TO MANAGE OUR GROWTH EFFECTIVELY; 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, and 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. There can be no assurance that our systems, procedures
and controls will be adequate to support our operations as they expand. Future
growth will also impose significant added responsibilities on members of
management, including the need to identify, recruit, maintain and integrate
additional employees, including management. 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,
in 1999 demand for mortgages is expected to decrease from 1998.
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.
WE DEPEND ON OUR ABILITY TO SELL LOANS AND SERVICING RIGHTS IN THE SECONDARY
MARKET TO A LIMITED NUMBER OF INVESTORS
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 generated from these sales represents a
primary source of our revenues and earnings. Further, we are
8
<PAGE>
dependent on the cash generated from sales of mortgages and servicing rights to
fund our future loan closings and repay borrowings under our warehouse credit
facilities. 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;
- conditions in the secondary market;
- 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 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.
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 of these purchasers (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) changes the material
terms by which it currently makes purchases, our business and results of
operations could be materially adversely affected.
WE DEPEND ON OUR WAREHOUSE FINANCING FACILITIES IN ORDER TO FUND LOANS
We fund substantially all of our loans through borrowings under our
warehouse financing facilities and, to a lesser extent, through internally
generated funds and other short-term borrowings. We repay our borrowings with
the proceeds received from sales of loans and servicing rights. Our warehouse
financing facilities provide us with an aggregate of $171.5 million of credit,
are renewable annually and expire between March 31, 1999 and June 30, 1999. If
we are unable to renew or replace our warehouse financing facilities on adequate
terms or are unable to increase our warehouse financing facilities, our business
and results of operations could be materially adversely affected. If we cannot
successfully maintain our existing warehouse financing facilities or replace
them with a comparable financing source, we may be required to curtail our loan
origination activities, which would have a material adverse effect on our
business and results of operations. In addition, if our profit on sales of
mortgage loans and servicing rights fails to cover our cost of borrowing, we may
experience net losses.
VOLATILE INTEREST RATES MAY AFFECT THE VALUE OF OUR LOANS HELD FOR SALE
The value of our loans is based, in part, on market interest rates, and we
may be adversely affected if interest rates change rapidly or unexpectedly. If
interest rates rise after we fix a price for a
9
<PAGE>
loan but before we sell the loan in the secondary market, the value of that loan
will decrease. 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. 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.
WE FACE RISKS RELATED TO OUR ACQUISITION STRATEGY
A key element of our growth strategy is to expand our operations through
selective acquisitions of independent mortgage brokers and bankers. Since
substantial competition exists for acquisition opportunities in the mortgage
industry which could result in an increase in the price of, and a decrease in
the number of, attractive acquisition targets, 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 and unanticipated legal liabilities.
We cannot assure you that we will be able to overcome these acquisition risks.
WE DEPEND ON OUR KEY PERSONNEL
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 D. Francis, our Chairman and Chief
Executive Officer, President, President of Prism Illinois, President of Pacific
Guarantee Mortgage Corporation ("Pacific Guarantee") and President of Mortgage
Market Inc. ("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.
THERE IS COMPETITION FOR QUALIFIED LOAN ORIGINATORS
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.
WE FACE EVOLVING COMPETITION IN THE MORTGAGE INDUSTRY
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
10
<PAGE>
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 as
well as 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 ("Freddie Mac"). 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.
A PORTION OF OUR GROWTH IS DEPENDENT UPON THE INTERNET
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. 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, some 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.
WE RELY SIGNIFICANTLY ON GOVERNMENT SPONSORED AND FEDERAL MORTGAGE PROGRAMS
Our ability to generate revenue through the sale of mortgages is largely
dependent upon the continuation of programs administered by Fannie Mae, Freddie
Mac 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
operations.
THERE ARE ADDITIONAL RISKS ASSOCIATED WITH OUR NON-PRIME MORTGAGE 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. While for 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, 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 IN CERTAIN CIRCUMSTANCES TO RETURN PROCEEDS OBTAINED FROM THE
SALE OF LOANS
When we sell a loan to an investor, we are required to make certain
representations and warranties regarding the loan, the borrower and the
property. If any of these representations or warranties are not 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
11
<PAGE>
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.
WE ARE NOT GEOGRAPHICALLY DIVERSIFIED
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, on a pro forma
basis after giving effect to our 1998 acquisitions. 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, foreclosure,
bankruptcy and loss 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 in the secondary market. 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.
WE MAY EXPERIENCE QUARTERLY FLUCTUATIONS IN EARNINGS
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; and
- the volume of mortgage loan originations.
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 warehouse 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, which could result in lower net earnings or a loss
reported for that period. In addition, our quarterly earnings will be affected
by (1) the timing of acquisitions and the recognition of costs associated with
those acquisitions, (2) the generally lower initial profitability of newly
opened branches compared to mature branches and (3) 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, 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.
12
<PAGE>
THE MORTGAGE INDUSTRY IS HIGHLY REGULATED
Our business is subject to extensive regulation, supervision and licensing
by federal, state and local governmental authorities which impose numerous
requirements and restrictions on our operations. Some of the laws which regulate
our consumer lending activities are the:
- Truth-in-Lending Act;
- Equal Credit Opportunity Act;
- Fair Credit Reporting Act of 1970;
- Real Estate Settlement Procedures Act;
- Fair Debt Collection Practices Act;
- federal and state statutes and regulations of, and examinations by, the
Department of Housing and Urban Development ("HUD") pursuant to the Home
Mortgage Disclosure Act;
- state usury laws; and
- state licensing laws.
These rules and regulations, among other things, impose licensing
obligations on us; establish eligibility criteria for mortgage loans; prohibit
discrimination; require credit reports on loan applicants; regulate assessment;
regulate collection, foreclosure and claims handlings, investment and interest
payments on escrow balances and payment features; mandate various disclosures
and notices to borrowers; and may fix maximum interest rates, fees and mortgage
loan amounts.
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 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 52.
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
13
<PAGE>
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.
We also do not retain the servicing rights to the loans we originate (except for
a short period of time before the loan is sold in the secondary market), but
rather 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,
it could have a material adverse effect on our business and results of
operations.
THE PRACTICE OF HAVING LENDERS PAY MORTGAGE BROKERS IS CURRENTLY BEING LITIGATED
Numerous lawsuits seeking class certification have been filed against
mortgage lenders alleging that certain direct and indirect payments to mortgage
brokers by those lenders violate the Real Estate Settlement Procedures Act
("RESPA"). 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 RESPA. The case was remanded to the district court
for further proceedings. HUD, 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
14
<PAGE>
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 "--The mortgage industry is highly regulated" on page 13.
THERE IS NO PRIOR TRADING MARKET FOR OUR COMMON STOCK; THE TRADING PRICE OF OUR
COMMON STOCK MAY BE VOLATILE
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 the initial offering price. 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.
OUR EXISTING OFFICERS AND DIRECTORS WILL CONTINUE TO CONTROL PRISM FINANCIAL
Upon the closing of this offering, our officers and directors, together with
entities affiliated with them, will beneficially own approximately % of our
outstanding common stock ( % 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 55 and "Principal and Selling Stockholders" on page 66.
15
<PAGE>
ADDITIONAL SHARES MAY BE SOLD IN THE FUTURE
After this offering, we will have outstanding shares of common stock
and we will have reserved an additional shares of common stock for
issuance pursuant to our benefit plans. 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," as that term is defined in Rule 144 under the Securities Act of
1933, as amended (the "Securities Act"). The remaining shares of outstanding
common stock, representing approximately 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
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
shares of common stock reserved for issuance under our benefit plans. The Form
S-8 will automatically become effective upon filing. 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.
We cannot predict if future sales of our common stock, or the availability
of our common stock for sale, will adversely affect the market price for our
common stock or our ability to raise capital by offering equity securities. 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 69 and "Underwriting"
on page 70.
YOU WILL BE INVESTING IN A HOLDING COMPANY
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 future loan agreements of Prism Mortgage or its subsidiaries, or
provisions of the laws of the states where Prism Mortgage or its 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.
OUR ANTI-TAKEOVER PROVISIONS COULD HAVE ADVERSE EFFECTS
Our amended and restated certificate of incorporation (the "Amended
Certificate") and amended and restated bylaws (the "Amended Bylaws") contain
anti-takeover provisions that could have the effect of delaying or preventing
changes in our management, even if such changes would benefit our public
stockholders. Our charter documents provide for (1) a classified board of
directors pursuant to which our directors are divided into three classes, with
three-year staggered terms, (2) the ability of our board of directors to issue
up to additional shares of common stock and additional shares of
preferred stock and to determine the price and the terms (including preferences
and voting rights) of
16
<PAGE>
those shares without stockholder approval, (3) stockholder action to be taken
only at a special or regular meeting and (4) 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.
INVESTORS WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION
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 $ 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.
THERE ARE RESTRICTIONS ON OUR ABILITY TO PAY DIVIDENDS
We currently do not intend to pay dividends. In addition, since we are a
holding company, our ability to pay dividends is dependent upon the earnings and
cash flow of Prism Mortgage and its subsidiaries. Additionally, under our
warehouse financing facilities, our ability to pay cash dividends is limited by
requirements that we maintain a minimum net worth and a maximum leverage ratio.
For a more detailed discussion on our limitations on paying dividends, please
refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on page 27.
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.
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.
17
<PAGE>
TERMINATION OF S CORPORATION STATUS
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 of
1986, as amended (the "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 (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 the S Corporation Distribution
occurred on December 31, 1998, the amount of the S Corporation Distribution
would have been approximately $13.3 million, which amount is expected to
increase as a result of additional S corporation income from January 1, 1999 to
the closing of this offering. The S Corporation Distribution will consist of
promissory notes bearing interest at the rate payable by Prism Financial on its
warehouse financing 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 December 31, 1998, the
amount credited to earnings would have been approximately $636,000. This amount
may change by the amount of net deferred tax assets or liabilities related to
our operations from January 1, 1999 through the date of the closing of this
offering. For more information, please refer to "Capitalization" on page 20.
RECENT DEVELOPMENTS
In March 1999, Prism Financial signed a definitive agreement to acquire
First City Financial Corp., a Denver-based mortgage banking company ("First
City"). The purchase price, payable in cash or our common stock, is based on,
among other factors, the book value of First City as of the date of closing and
also includes a contingent payment over the following five years that is based
upon First City's net income. First City originated approximately $1.7 billion
in loans in 1998 and has 38 branches in 13 states. First City employed 258 loan
originators as of December 31, 1998.
18
<PAGE>
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 $ million, assuming an initial public offering price of
$ per share and after deducting estimated offering expenses of $ 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 $13.3 million aggregate
principal and interest outstanding under the S Corporation Distribution Notes as
of December 31, 1998 (which amount is expected to increase as a result of
additional S corporation income from January 1, 1999 to the closing of this
offering). Of the remaining net proceeds, approximately $3.4 million will be
used to repay outstanding indebtedness, including interest, owed to a senior
lender as of February 28, 1999. This indebtedness was used to partially finance
our acquisition of Pacific Guarantee and bears interest at rates between the
senior lender's prime rate plus 1% per annum and the senior lender's prime rate
minus 1/2% per annum (7.25% as of February 28, 1999) and matures on July 15,
2003. In addition, approximately $1.3 million of the proceeds will be used to
repay outstanding subordinated indebtedness, including interest, owed to certain
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 "Recent Developments" on page 18,
"Termination of S Corporation Status" on page 18 and "Certain Transactions" on
page 64.
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 warehouse financing facilities
impose limitations on 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 32
and note 6 to our financial statements on page F-17.
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.
19
<PAGE>
CAPITALIZATION
The following table sets forth Prism Financial's capitalization as of
December 31, 1998 (1) on an actual basis (assuming the Incorporation
Transactions had occurred on December 31, 1998) and (2) as adjusted to reflect
(A) the sale of shares of common stock offered by us in this offering
at an assumed initial public offering price of per share, (B) an assumed S
Corporation Distribution of $13.3 million as of December 31, 1998 (which amount
is expected to increase as a result of additional S corporation income from the
period from January 1, 1999 to the closing of this offering), (C) the creation
of a deferred tax asset in the amount of $636,000 (which amount may change by
the amount of deferred tax assets or liabilities from January 1, 1999 to the
closing of this offering), and (D) 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 financial statements and related notes
included elsewhere in this prospectus. For more information, please refer to
"Termination of S Corporation Status" on page 18.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------
(IN THOUSANDS)
AS
ACTUAL ADJUSTED(1)(2)(3)
--------- ----------------
<S> <C> <C>
Long-term debt....................................................................... $ 5,027 $
--------- -------
Stockholders' equity:
Preferred stock, $ par value per share, shares authorized; no shares
issued and outstanding........................................................... --
Common stock, $0.01 par value per share, shares authorized; and
shares issued and outstanding actual, and as adjusted, respectively.....
Additional paid-in capital........................................................... 4,118
Retained earnings.................................................................... 12,085
---------
Total stockholders' equity......................................................... 16,203
--------- -------
Total capitalization............................................................. $ 21,230 $
--------- -------
--------- -------
</TABLE>
- ------------------------
(1) Includes, upon the closing of this offering, assuming an initial public
offering price of $ per share, (A) shares of common stock
issuable by us pursuant to the purchase agreement relating to our
acquisition of Pacific Guarantee, including shares of common stock
issuable to the incentive plan (the "Pacific Equity Value Plan") established
for employees of Pacific Guarantee and (B) shares of common stock
issuable by us to the incentive plan (the "Mortgage Market Equity Value
Plan") established for employees of Mortgage Market.
(2) Excludes (A) shares of common stock reserved for issuance under our
1999 Omnibus Stock Incentive Plan, including the 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) shares of common stock reserved for issuance
under our 1999 Employee Stock Purchase Plan; (C) up to $3.2 million of
common stock that may be issuable by us under the Prism2000 Profit Sharing
Plan; and (D) shares of common stock issuable by us pursuant to a
stock purchase right.
(3) Excludes shares of common stock that may be issuable by us to certain
individuals pursuant to the purchase agreement relating to our acquisition
of Mortgage Market. For a more detailed description of this purchase
agreement, please refer to "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Developments in the past 12
months" on page 36.
20
<PAGE>
DILUTION
Prism Financial's net tangible book value as of December 31, 1998 was $13.3
million, or $ per share, based on shares of common stock outstanding
(assuming the Incorporation Transactions had occurred on December 31, 1998). 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 (1) the sale of shares of common
stock offered by us in this offering at an assumed initial public offering price
of per share, (2) an assumed S Corporation Distribution of $13.3 million as
of December 31, 1998 (which amount is expected to increase as a result of
additional S corporation income from January 1, 1999 to the closing of this
offering), (3) the creation of a deferred tax asset in the amount of $636,000
(which amount may change by the amount of deferred tax assets or liabilities
from January 1, 1999 to the closing of this offering), and (4) the application
of the remainder of the estimated net proceeds as described under "Use of
Proceeds," our pro forma net tangible book value at December 31, 1998 would have
been $ , or $ per share. This represents an immediate increase in pro
forma net tangible book value of $
per share to the existing stockholders and an immediate dilution of $ 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......... $
Net tangible book value per share as of
December 31, 1998................................. $
Decrease due to payment of the S Corporation
Distribution......................................
Increase due to deferred tax asset..................
Increase per share attributable to new investors....
Pro forma net tangible book value per share after this
offering..............................................
---------
Dilution per share to new investors..................... $
---------
---------
</TABLE>
The following table summarizes on a pro forma basis as of December 31, 1998,
the differences between the existing stockholders and new investors, before
deducting underwriting discounts and commissions and estimated offering
expenses, with respect to the number of shares of common stock purchased from us
in this offering, the total consideration paid and the average price per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- -------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders.....................% $% $
New investors.............................
----------- --------- --------- ---------
Total...............................% $%
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>
The information in the tables above includes (A) shares of common
stock issuable by us pursuant to the purchase agreement relating to our
acquisition of Pacific Guarantee, including shares of common stock
issuable to the Pacific Equity Value Plan established for employees of Pacific
Guarantee and (B) shares of common stock issuable by us to the Mortgage
Market Equity Value Plan established for employees of Mortgage Market. The
tables above exclude (A) shares of common stock reserved for issuance
under our 1999 Omnibus Stock Incentive Plan, including the 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) shares of common stock reserved for issuance under
our 1999 Employee Stock Purchase Plan; (C) up to $3.2 million of common stock
that may be issuable by us under the Prism2000 Profit Sharing Plan; and (D)
shares 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 to
21
<PAGE>
certain individuals pursuant to the purchase agreement relating to our
acquisition of Mortgage Market. For a more detailed description of this purchase
agreement, please refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Developments in the past 12 months" on page
36.
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 , or %, and will increase the number of
shares to be purchased by the new investors to , or %. For a more
detailed description of shares being sold by the selling stockholders, please
refer to "Principal and Selling Stockholders" on page 66.
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 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 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 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,
------------------------------------------------------------------
PRO FORMA
1994 1995 1996 1997 1998 1998(1)
--------- --------- --------- --------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues
Loan origination income..................... $ 1,779 $ 5,709 $ 9,494 $ 20,984 $ 66,514 $ 104,039
Net premium income.......................... -- -- 422 1,726 12,243 22,304
Loan-related fees........................... 450 1,554 1,929 3,704 8,269 14,846
Net interest income (expense)............... 3 (168) (102) 392 2,000 1,125
Other....................................... 37 482 458 548 1,816 2,309
--------- --------- --------- --------- --------- -----------
Total revenues............................ 2,269 7,577 12,201 27,354 90,842 144,623
--------- --------- --------- --------- --------- -----------
Expenses
Commissions................................. 970 2,964 4,350 10,361 37,502 66,860
Loan-related expenses....................... 379 1,085 2,026 3,823 9,346 11,620
Salaries and benefits....................... 478 1,767 2,829 6,421 18,325 27,153
General and administrative expenses......... 299 1,336 1,851 3,770 12,900 21,052
Depreciation and amortization............... 36 50 105 327 1,473 1,774
Other(2).................................... 36 152 20 149 201 263
--------- --------- --------- --------- --------- -----------
Total expenses............................ 2,198 7,354 11,181 24,851 79,747 128,722
--------- --------- --------- --------- --------- -----------
Net income.............................. $ 71 $ 223 $ 1,020 $ 2,503 $ 11,095 $ 15,901
--------- ---------
--------- ---------
Pro forma data (unaudited):
Pro forma provision for income taxes(3)....... 410 995 4,343 6,105
--------- --------- --------- -----------
Net income adjusted for pro forma income tax
provision................................. $ 610 $ 1,508 $ 6,752 $ 9,796
--------- --------- --------- -----------
--------- --------- --------- -----------
Pro forma net income per share:
Basic....................................... $ $
--------- -----------
--------- -----------
Diluted..................................... $ $
--------- -----------
--------- -----------
Pro forma weighted average number of shares
outstanding:
Basic.......................................
--------- -----------
--------- -----------
Diluted.....................................
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(FOOTNOTES ON FOLLOWING PAGE)
23
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS ADJUSTED
1994 1995 1996 1997 1998 1998(4)
--------- --------- --------- --------- ---------- ------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 75 $ 597 $ 1,144 $ 1,164 $ 12,124 $
Loans held for sale...................................... -- 6,016 17,769 60,901 467,254
Total assets............................................. 338 7,409 20,100 65,332 503,622
Loans sold under agreements to repurchase................ -- -- -- -- 292,627
Warehouse lines of credit................................ -- 6,016 17,595 59,634 170,217
Total debt............................................... -- -- -- -- 5,027
Total stockholders' equity............................... 280 503 1,523 3,076 16,203
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
<S> <C> <C> <C> <C>
PRO FORMA
1996 1997 1998 1998(1)
--------- --------- --------- -----------
OPERATING DATA (UNAUDITED):
Total mortgage originations (in millions)............................ $ 857 $ 1,469 $ 5,025 $ 8,305
Internet mortgage originations (in millions)......................... $ -- $ -- $ 122 $ 180
Number of loans originated........................................... 5,460 10,086 31,943 49,176
Loan originators at period end....................................... 126 255 749 749
Number of branches at period end..................................... 11 17 95 95
</TABLE>
- ------------------------
(1) Gives effect to the formation of the holding company, 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) 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.
(3) For the years ended December 31, 1996, 1997 and 1998, 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 and Pro Forma 1998 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.
(4) As adjusted to give effect to (A) an assumed S Corporation Distribution of
$13.3 million as of December 31, 1998, which amount is expected to increase
as a result of additional S corporation income from January 1, 1999 to the
closing of this offering, (B) the recording by us of a one-time non-cash
credit to earnings in the amount of $636,000 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 January 1, 1999 through the date of the
closing of this offering and (C) the issuance and sale of the common stock
offered by us in this offering at an assumed offering price of $ per
share and application of the net proceeds therefrom as described in "Use of
Proceeds."
24
<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 Title, L.L.C. ("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.
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. 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(1) 1998(2) 1998(3) ADJUSTMENTS
------------- ------------- ----------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Loan origination income.................. $ 66,514 $ 21,893 $ 15,632 $ -- $ --
Net premium income....................... 12,243 3,130 6,931 -- --
Loan-related fees........................ 8,269 5,184 1,393 -- --
Net interest income (expense)............ 2,000 (354) (361) -- (160)(4)
Other.................................... 1,816 72 1 420 --
------------- ------------- ------- ------ -----------
Total revenues......................... 90,842 29,925 23,596 420 (160)
------------- ------------- ------- ------ -----------
Expenses:
Commissions.............................. 37,502 17,727 11,631 -- --
Loan-related expenses.................... 9,346 -- 2,274 -- --
Salaries and benefits.................... 18,325 4,799 3,959 70 --
General and administrative expenses...... 12,900 4,565 3,558 29 --
Depreciation and amortization............ 1,473 54 153 -- 94(5)
Other.................................... 201 62 -- -- --
------------- ------------- ------- ------ -----------
Total expenses......................... 79,747 27,207 21,575 99 94
------------- ------------- ------- ------ -----------
Net income........................... $ 11,095 $ 2,718 $ 2,021 $ 321 $ (254)
------------- ------- ------ -----------
------------- ------- ------ -----------
Pro forma provision for income
taxes(6)............................... 4,343
-------------
Pro forma net income................... $ 6,752
-------------
-------------
<CAPTION>
PRISM
FINANCIAL
PRO FORMA
YEAR ENDED
DECEMBER 31,
1998
-------------
<S> <C>
Revenues:
Loan origination income.................. $ 104,039
Net premium income....................... 22,304
Loan-related fees........................ 14,846
Net interest income (expense)............ 1,125
Other.................................... 2,309
-------------
Total revenues......................... 144,623
-------------
Expenses:
Commissions.............................. 66,860
Loan-related expenses.................... 11,620
Salaries and benefits.................... 27,153
General and administrative expenses...... 21,052
Depreciation and amortization............ 1,774
Other.................................... 263
-------------
Total expenses......................... 128,722
-------------
Net income........................... $ 15,901
Pro forma provision for income
taxes(6)............................... 6,105
-------------
Pro forma net income................... $ 9,796
-------------
-------------
</TABLE>
25
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINING STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(1) On September 1, 1998, Prism Financial acquired all of the outstanding shares
of Pacific Guarantee. Pacific Guarantee is engaged primarily in residential
mortgage origination as a broker and mortgage banker.
(2) On September 30, 1998, Prism Financial acquired all of the outstanding
shares of Mortgage Market. Mortgage Market is engaged primarily in
residential mortgage origination as a broker and mortgage banker.
(3) On April 30, 1998, Illinois Guaranty became a wholly-owned subsidiary of
Prism Financial as a result of the transfer of stockholders' interests in
Illinois Guaranty to Prism Financial. Prior to this transaction, Illinois
Guaranty stock was fully held by Prism Financial's principal stockholders.
Illinois Guaranty is a full-service provider of residential title services
to in-house and third party customers.
(4) 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>
(5) 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>
(6) Pro forma provision for income taxes 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.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE 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 775 commission-only loan originators
operating out of 119 retail branches in 17 states as of February 28, 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, in
September 1998 we acquired both Pacific Guarantee and Mortgage Market which
added approximately 350 loan originators operating out of 57 branches and
expanded our operations into California and the Pacific Northwest. At closing,
we paid a total of $4.8 million in cash and issued shares of common stock
in connection with these acquisitions. Also, the Pacific Guarantee and Mortgage
Market acquisitions were structured so that a significant portion of the total
consideration paid is dependent on the future performance of the acquired
businesses. The additional amounts paid for Pacific Guarantee or Mortgage Market
will be added to the purchase price and amortized as goodwill.
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 warehouse credit facilities. We also generate other revenue from the sale of
mortgage-related services, including mortgage insurance and title insurance
policies.
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
27
<PAGE>
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 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 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 December 31, 1998, the amount
would have been approximately $13.3 million, which amount is expected to
increase as a result of additional S corporation income from January 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 December
31, 1998, the amount of the deferred tax credit to earnings would have been
approximately $636,000, and this amount is expected to change by the amount of
net deferred tax assets or liabilities related to our operations from January 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.
28
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the years ended December 31, 1996, 1997
and 1998, 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>
AS A PERCENTAGE
OF TOTAL REVENUES
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
RESULTS OF OPERATIONS:
Loan origination income..................................... 77.8% 76.7% 73.2%
Net premium income.......................................... 3.4 6.3 13.5
Loan-related fees........................................... 15.8 13.6 9.1
Net interest income (expense)............................... (0.8) 1.4 2.2
Other....................................................... 3.8 2.0 2.0
--------- --------- ---------
Total revenues............................................ 100.0 100.0 100.0
--------- --------- ---------
Commissions................................................. 35.6 37.9 41.3
Loan-related expenses....................................... 16.6 14.0 10.3
Salaries and benefits....................................... 23.2 23.4 20.2
General and administrative expenses......................... 15.2 13.8 14.2
Depreciation and amortization............................... 0.9 1.2 1.6
Other....................................................... 0.1 0.5 0.2
--------- --------- ---------
Total expenses............................................ 91.6 90.8 87.8
--------- --------- ---------
Net income.............................................. 8.4% 9.2% 12.2%
--------- --------- ---------
--------- --------- ---------
Net income adjusted for pro forma income tax provision
(unaudited)........................................... 5.0% 5.5% 7.4%
--------- --------- ---------
--------- --------- ---------
</TABLE>
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 145 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.
29
<PAGE>
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. These methods of loan sales generate higher
premiums than flow sales. 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 "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 $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 $18.3 million in
1998 from $6.4 million in 1997, an increase of $11.9 million, or 185.9%. 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 262 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 $12.9 million in 1998 from $3.8 million in 1997, an increase of
$9.1 million, or 239.5%. 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
30
<PAGE>
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, recruitment of additional loan originators and three
acquisitions completed in 1997. During 1997, we opened one new branch and added
approximately 75 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.
31
<PAGE>
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 262 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 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 $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 $10.9 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 December 31, 1998, we had six warehouse financing
facilities which provided us with up to $171.5 million of demand loans secured
by loans held for sale. Loans under the warehouse financing facilities bear
interest at rates that vary depending on the type of underlying loan, and the
warehouse loans are subject to sublimits, advance rates and warehouse 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
line account, compared with 7.15%
32
<PAGE>
in 1997. These warehouse financing facilities require us to comply with various
operating and financial covenants. Such covenants include restrictions on the
following:
- changes in our business that would materially and adversely affect our
ability to perform our obligations under the facility;
- selling any asset other than in the ordinary course of business; and
- maximum debt and distributions allowed.
Such covenants also contain requirements for minimum net worth balances and
maximum leverage ratios. The existing warehouse financing facilities expire on
dates through June 1999.
As of December 31, 1998, our borrowings under our existing warehouse
financing facilities increased to $170.2 million from $59.6 million as of
December 31, 1997. We had a maximum of $1.3 million available for additional
borrowings as of December 31, 1998. At December 31, 1998, our loans held for
sale were $467.3 million compared to $60.9 million at December 31, 1997. The
percentage increase in the borrowings under warehouse financing facilities was
less than the percentage increase in the mortgage loans held for sale due to our
practice of using available cash to reduce debt outstanding under the warehouse
financing facilities to reduce interest expense, increased usage of repurchase
lines and the use of Fannie Mae's ASAP Plus program.
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 December 31, 1998, we 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%. 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 warehouse lenders 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 also make regular use of certain 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 December 31, 1998 and 1997 were $29.6 million and $32.0 million,
respectively.
On January 15, 1999, we entered into a $35.0 million revolving credit
agreement with two lenders. This line of credit expires on July 15, 1999. For
more information regarding this line of credit, please refer to "Underwriting"
on page 70.
We have a $1.0 million 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 the warehouse financing
facilities. This operating line of credit is renewable from time to time and
expires on July 15, 2003.
33
<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
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 December 31, 1998 and 1997, we had open forward
commitments with a total notional amount of approximately $670 million and $34
million, respectively, to sell mortgage loans with varying settlement dates up
to March 1999. On December 31, 1997, options to sell treasuries through February
1998, with a total notional amount of approximately $14 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 $28.4 million and $53.9 million at December 31, 1998 and 1997,
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. These entities include Wall Street
firms having primary dealer status, money center banks and permanent 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.
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
34
<PAGE>
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
and surveys of significant vendors, suppliers, service providers and customers.
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 future 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. These third party risks include
possible interruptions in our ability to fund loans utilizing our warehouse
financing facilities, our ability to sell loans to Fannie Mae and other
investors 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. In addition, we are in the process of
developing contingency plans in the event these third aprties experience year
2000 issues.
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 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.
35
<PAGE>
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
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
shares of common stock. Mr. Osenton received approximately $1.5 million
in cash, subject to adjustment, plus 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 following
the closing of the acquisition, upon the closing of this
36
<PAGE>
offering, Mr. Osenton will receive additional shares of common stock equal to
$ divided by the initial offering price, and Mr. Barbera will receive
additional shares of common stock equal to $ divided by the initial
offering price. In addition, upon the closing of this offering, the Pacific
Equity Value Plan will be funded with shares of our common stock, based
on an assumed initial public offering price of $ per share. For more
information, please refer to "Management--Stock-based plans--Pacific Equity
Value Plan" on page 62.
On September 30, 1998, we paid Mr. Martin D. 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 their 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,
the Mortgage Market Equity Value Plan will be funded with shares of our
common stock, based on an assumed initial public offering price of $ 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 62.
In March 1999, Prism Financial signed a definitive agreement to acquire
First City. The purchase price, payable in cash or our common stock, is based
on, among other factors, the book value of First City as of the date of closing
and also includes a contingent payment over the following 5 years that is based
on First City's net income.
37
<PAGE>
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, on a pro forma
basis after giving effect to our 1998 acquisitions. Through our network of
approximately 775 commission-only loan originators operating out of 119 retail
branches in 17 states as of February 28, 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. We believe that our large loan origination volume and hybrid
banker/broker structure enable us to consistently offer our customers favorable
pricing on a broad 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 and
selective acquisitions and, recently, through relationships with operators of
Internet mortgage web sites. We believe that our hybrid banker/broker operating
structure provides an effective platform to continue to grow our origination
volume.
- INTERNAL GROWTH. Excluding acquisitions, our origination volume has grown
from $15.7 million in 1992 to $3.2 billion in 1998. Since 1992, we have
opened 19 new company-owned branches in 8 states, including 9
company-owned branches opened since the beginning of 1998. Since September
1998, we have opened 36 net branches. Over 400 of our existing loan
originators were directly recruited and hired by us.
- GROWTH THROUGH SELECTIVE ACQUISITIONS. Since 1996, we have completed six
acquisitions. The largest two, Pacific Guarantee and Mortgage Market,
collectively originated $5.1 billion in loans in 1998. As of their
acquisition dates, these two acquisitions added approximately 350 loan
originators operating out of 57 branches in 6 states to our existing
network. In March 1999, we entered into an agreement to acquire First
City, a Denver-based mortgage banking company with approximately $1.7
billion in loan originations in 1998 and 258 loan originators operating
out of 38 branches in 13 states.
- 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, HomeShark,
Intuit's QuickenMortgage, iQualify, Keystroke, Lending Tree, Loanz.com and
Microsoft's HomeAdvisor. In 1998, we profitably originated over $122
million of the over $4.0 billion of loans generated over the Internet. We
have originated over $85 million of loans over the Internet in the first
two months of 1999.
As a retail originator of loans, we earn our revenues from origination and
discount points and fees charged to our customers. As a mortgage banker, we earn
revenues from the sale of loans and related servicing rights in the secondary
market for cash payments and interest earned and servicing fees received on
loans held prior to their sale. We currently do not securitize or maintain the
servicing rights on our loans. We also generate revenue from mortgage-related
services, such as mortgage insurance and the issuance of title insurance
policies and intend to begin marketing other mortgage-related products and
services.
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
38
<PAGE>
$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,
although 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 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 consistently
providing 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.
39
<PAGE>
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,
as well as provide our loan originators with in-house underwriting capabilities,
better execution and reliable service, including fast loan approvals. 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, which typically offer only their own products, and for small
brokers, which typically rely on a limited number of local brokering
arrangements.
INCREASE PROFITS THROUGH LOAN SALES CLOSED BY OUR MORTGAGE BANK. Because
the value of loans and servicing rights in the secondary market is volume
dependent, the large loan volume financed by our mortgage bank has resulted in
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 received
commitments for a new $250 million warehouse credit facility in March 1999.
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, including 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. This 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
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 (in
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
which 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, on a pro forma
basis after giving effect to our 1998 acquisitions.
PROVIDE SUPERIOR CUSTOMER SERVICE. We believe that providing superior
customer service is and will continue to be a key to product differentiation in
today's price sensitive market. We deliver this differentiated service through a
team of highly-skilled management, loan originators and operating staff
40
<PAGE>
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 to allow them 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 deliver superior customer
service by operating a decentralized processing structure that enables us to
provide efficient customer service and fast decision making to our customers.
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, on a pro forma basis
after giving effect to its 1998 acquisitions. 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 Internet relationships.
GROW INTERNALLY. Since 1992, we have opened 19 company-owned branches in 8
states as well as 36 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
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
target loan originators who we believe can immediately increase our
origination volume. Since January 1998, we added approximately 170 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 have opened 19 branches
in 8 new states, increasing our total to 51 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 but, in return, 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, which are
both borne by the branch manager. We currently have 68 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 for our existing retail
branches and additional company-owned branches, as well as 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 six acquisitions, including Pacific
Guarantee and Mortgage Market in 1998. As of their acquisition dates, these six
acquisitions resulted in the addition of over 400 loan originators and 63
branches in 9 states. In March 1999, we agreed to acquire First City, a mortgage
banking company with operations in 13 states. First City originated
approximately $1.7 billion of loans in 1998 and currently has over 258 loan
originators operating out of 38 branches. We are able to quickly capture
origination volume from acquired companies, allowing us
41
<PAGE>
to capitalize on the lower cost of funds and better pricing we receive in the
secondary market on these loans. As a result, the additional volume created by
acquisitions provides an effective 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 (1)
the mortgage products and pricing of over 100 lenders throughout the U.S.,
(2) the broad range of mortgage products, competitive rates, dependable
customer service and execution of our mortgage bank and (3) 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 can further 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. Since we operate with a
decentralized management structure, former owners are provided with
significant autonomy to utilize their experience and relationships to
generate origination volume. In addition, we assume certain burdensome
administrative and operational functions which allows the former owners to
become increasingly focused 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 over
$85 million of loans over the Internet in the first two months of 1999. We
believe our broad range of competitively priced products and our strategic
relationships with leading Internet mortgage web sites 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>
GetSmart A leading on-line provider of financial products and services. January 1999
We have a contract to broker, bank and process loans for us and
a number of other mortgage lenders.
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.
Consumer Financial Network We have a contract to provide mortgage products to corporate December 1998
employees using Consumer Financial Network's web site.
Lending Tree A leading on-line marketplace of home listing and home financing December 1998
services. We are a wholesale lender on this web site.
Loanz.com An on-line marketplace for mortgage services. We have an November 1998
agreement to provide mortgage product and processing services.
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
RELATIONSHIP
COMPANY DESCRIPTION OF CONTRACT COMMENCED
- --------------------------- ---------------------------------------------------------------- ------------------
<S> <C> <C>
HomeAdvisor Microsoft's on-line service for mortgage products which is a October 1998
leading on-line marketplace of home listing and home financing
services. We are a wholesale lender on this web site.
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.
HomeShark 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 leading provider of April 1998
on-line mortgage services.
</TABLE>
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.
ORIGINATION CHANNELS
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 operating at
approximately 95 branches, including 51 company-owned branches and 44 net
branches, collectively, located in 17 states and Internet service
representatives who respond to mortgage inquiries over the Internet.
- 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.
- 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
43
<PAGE>
operating company much of the financial risk normally associated with
retail expansion. In addition, it creates significant incentive for the
branch manager to operate the net branch profitably and efficiently. In
addition to reduced financial risk, net branches provide easier access to
diverse and remote markets via branch operators with established referral
sources and familiarity with local lending practices, pricing and
regulatory/compliance requirements. They also allow easy market entry and
exit, providing 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 Prism Financial originates are funded through its
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 so that
borrowers may 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
which allow a borrower to make lower monthly payments for the first one, two or
three years of the loan.
44
<PAGE>
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.
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
45
<PAGE>
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 (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, such as 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 in the secondary
market, 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 ("Home Equity
Line") while 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 generally provide for either a 5-year or 15-year draw period,
during which the borrower may make cash withdrawals, and a 10-year repayment
period during which the amount outstanding at the end of the draw period is
repaid. 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.
46
<PAGE>
MORTGAGE-RELATED LOAN PRODUCTS
In addition to mortgage loan products, Prism Financial generates revenue
from mortgage insurance and title insurance policies in connection with the
loans it originates. In 1998, after the contribution of Illinois Guaranty to us
by our stockholders, 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 in the secondary market 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
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 closed-end home
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. The loss of either of these buyers or any significant reduction in
the prices these buyers are willing to pay for our loans could have an adverse
effect on our business and results of operations.
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 in the secondary market. These
pricing differences occur principally as a result of competitive pricing
conditions in the primary 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
47
<PAGE>
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 49.
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, although
we 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.
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 in the secondary market, a period averaging 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 secondary market 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.
RECOURSE. By selling all the loans we close, we reduce our exposure to
default risk (other than first-payment defaults by customers) and 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. 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 warehouse financing facilities and
repurchase agreements under its in-house mortgage bank to fund mortgage loan
originations. In March 1999, we received commitments for a new mortgage loan
warehousing agreement which we expect to establish prior to the closing of this
offering (the "Warehouse Facility"). Under the proposed terms of this Warehouse
Facility, we will have available a $250 million warehouse line of credit secured
by the mortgage loans we originate. We will be required to comply with various
operating and financial covenants as defined in the agreements governing the
Warehouse Facility. In accordance with industry practice, the Warehouse Facility
will be renewable by the lenders annually. At February 28, 1999, the outstanding
balance under our warehouse facilities was $158.4 million. For a more detailed
description of the
48
<PAGE>
Warehouse Facility, please refer to "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and capital resources"
on page 32.
In addition to our warehouse financing facilities, we make regular use of
certain uncommitted lines of credit, short-term credit facilities and purchase,
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
liquidity on our mortgage loan portfolio. Amounts outstanding under these
agreements at February 28, 1999 were $41.0 million and $9.3 million. The amount
outstanding pursuant to the ASAP Plus program at February 28, 1999 was $194.3
million.
We also have a $1.0 million 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 facilities. This operating line
of credit is renewable from time to time and expires on July 15, 2003. At
February 28, 1999, we had $640,000 available under this line of credit.
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 as described above.
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--Volatile
interest rates may affect the value of our loans held for sale" on page 9.
OPERATIONS
Prism Financial's offering of a broad range of conventional and specialized
mortgage loan products requires the timely delivery of such mortgage loan
products to the branches and careful monitoring and tracking of the origination
of such mortgage loan products through delivery to the ultimate investor.
49
<PAGE>
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. This system provides
real-time access to the information used by each department in operations as
well as the secondary marketing and treasury departments. This company-wide
system provides a smooth flow of data from the origination process until the
investor purchases the mortgage loan. These integrated systems also improve 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 many regional and
national banks, is performed regionally at five sites, including our 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: (1) it reduces operating costs by reducing the amount of time an
underwriter spends on a file, (2) it reduces the typical liability associated
with underwriting when selling a loan to Fannie Mae because Fannie Mae will have
already approved the loan and (3) 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, such as branch managers and loan originators and Internet service
representatives, 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 certain large 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. This 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 (1) to monitor, evaluate and improve
the overall quality of loan production and (2) 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
50
<PAGE>
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 provider
("QC"). Each month QC 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 QC 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, QC is required to include loans of all product types,
all states of operation and all loans with high-risk characteristics. QC'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.
We evaluate our internal and our QC reports on a regular basis and address
any deficiencies specified in the reports. To date, neither internal nor QC
reviews 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) the deployment of 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) the
requisite training of the loan originators on laptop origination and (3)
automated underwriting. By utilizing these technologies, our loan originators
will have the ability to take a customer's application anywhere there is an
available phone line and provide them with a decision within one minute on the
approval of their loan if such loan meets the standards of government sponsored
mortgage entities.
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
51
<PAGE>
the current level of gains realized by us and our existing competitors on the
sale of loans could attract additional competitors into the market.
Consequently, there are many recent market entrants seeking these relatively
attractive profit margins. 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
closing 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 rate 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 February 28, 1999, Prism Financial had 1,563 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 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
52
<PAGE>
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--The practice of having lenders pay mortgage brokers is
currently being litigated" 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.
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>
Pt. Richmond, California...................................................... 15,000
Lake Oswego, Oregon........................................................... 8,224
Lee Summit, Missouri.......................................................... 3,448
Libertyville, Illinois........................................................ 6,410
</TABLE>
In addition, we lease 46 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 64.
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.
53
<PAGE>
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.
54
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information regarding our directors and executive
officers as of the date of this prospectus.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------- --- ----------------------------------------------------------------
<S> <C> <C>
Bruce C. Abrams (2)............. 37 Chairman of the Board and Chief Executive Officer
Mark A. Filler.................. 38 President and Director
Terry A. Markus................. 37 President of Prism Illinois and Director
William D. Osenton.............. 54 President of Pacific Guarantee
Martin D. Francis............... 38 President of Mortgage Market
David A. Fisher................. 29 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................ 29 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 audit committee.
(2) Member of our compensation 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.
55
<PAGE>
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 D. 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.
56
<PAGE>
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 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;
57
<PAGE>
- 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 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 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 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.
58
<PAGE>
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) --
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 D. 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 approved
by our stockholders on , for the benefit of our officers, directors, key
employees, advisors and consultants. An aggregate of 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 plan and may
prescribe, amend and rescind rules and make all other determinations necessary
or
59
<PAGE>
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.
In connection with this offering, each non-employee director will receive an
initial grant of options to purchase 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 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 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.
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.
60
<PAGE>
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.
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 our stockholders approved 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 shares of common stock has
been reserved for issuance under the Purchase Plan.
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, 1999 and August 1, 1999 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 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.
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 . 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.
61
<PAGE>
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 of Pacific
Guarantee to remain with Pacific Guarantee following the acquisition of Pacific
Guarantee 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 to the Pacific Equity Value Plan
shares of common stock, assuming an initial public offering price of .
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 of
Mortgage Market to remain with Mortgage Market following the acquisition of
Mortgage Market and to maximize Mortgage Market's profitability. Upon the
closing of this offering, Prism Financial will be obligated to contribute to the
Mortgage Market Equity Value Plan shares of common stock (or an equivalent
amount of cash), assuming an initial public offering price of . 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 agrees 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, (2) 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 and (3) Mr. Osenton agrees, 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 (1)
Mortgage Market agrees 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,
(2) 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 and
(3) Mr. Francis agrees, 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.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Section 145 of the General Corporation Law of Delaware ("Delaware Law")
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 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;
62
<PAGE>
(3) under section 174 of Delaware 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 Bylaws provide 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, 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 Delaware Law, subject to very limited exceptions and (4) the
rights conferred in the Amended Bylaws 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.
63
<PAGE>
CERTAIN TRANSACTIONS
On March 6, 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 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 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 36.
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
36.
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 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 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.
On December 31, 1998, several trusts, each of which Ms. Pritzker is an
affiliate of, purchased an aggregate of shares of our common stock for
an aggregate purchase price of $2.5 million.
In 1998 and 1997 Mr. Abrams, Mr. Markus and Mr. Filler received
distributions from Prism Financial to enable them to pay taxes on Prism
Financial's earnings which were attributable to them. In 1998, Mr. Abrams, Mr.
Markus and Mr. Filler received $1.8 million, $397,000 and $463,000,
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.
64
<PAGE>
Immediately prior to this offering, Prism Mortgage will issue S Corporation
Distribution Notes to each of Mr. Abrams, Mr. Filler, Mr. Markus and Mr.
Osenton. Had our S corporation status been terminated as of December 31, 1998,
the amounts of the S Corporation Distribution Notes would have been $7.1
million, $2.4 million, $2.4 million and $356,000, respectively. The amount of
the S Corporation Distribution Notes is expected to increase from January 1,
1999 to the date 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 "Termination of S
Corporation Status" 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.
65
<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 December 31, 1998 by
(1) each stockholder known by Prism Financial to be the beneficial owner of more
than 5% of our common stock; (2) each director and nominee for director of Prism
Financial; (3) the Named Executive Officers; and (4) all executive officers,
directors and nominees for director as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
SHARES BENEFICIALLY
OWNED AFTER OFFERING
OWNED PRIOR TO
OFFERING(1) (1)(2)(3)(4)
------------------------ ------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- ------------------------------------------------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Bruce C. Abrams(5).......................................... (6)
Mark A. Filler(7)........................................... (6)
Terry A. Markus(8).......................................... (6)
David A. Fisher.............................................
William D. Osenton.......................................... (6)(9)
Martin D. Francis...........................................
Andrew S. Hochberg..........................................
Michael P. Krasny...........................................
Penny S. Pritzker...........................................
Richard L. Wellek...........................................
All executive officers, directors and nominees for directors
as a group (10 persons)(5)(7)(8).......................... (6)(9)
</TABLE>
- ------------------------
(1) Beneficial ownership is determined in accordance with Rule 13d-3 of the
Securities Exchange Act of 1934 and generally includes voting and investment
power with respect to securities, subject to community property laws, where
applicable.
(2) Includes shares of common stock issuable by us pursuant to the purchase
agreement relating to our acquisition of Pacific Guarantee upon the closing
of this offering including shares of common stock issuable to the
Pacific Equity Value Plan, assuming an initial public offering price of
$ per share.
(3) Includes shares of our common stock issuable by us 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 $ per share.
(4) Excludes shares of our common stock issuable by us to certain individuals
pursuant to the purchase agreement relating to our acquisition of Mortgage
Market.
(5) Excludes 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) The Underwriters' over-allotment consists of shares of common stock to
be sold by Mr. Abrams, shares of common stock to be sold by Mr. Filler,
shares of common stock to be sold by Mr. Markus, shares of common
stock to be sold by Mr. Osenton and shares of common stock to be sold
by other stockholders.
(7) Excludes 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 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 shares of common stock which will be issued 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 $ per share.
66
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Immediately following the closing of this offering, the authorized capital
stock will consist of shares of common stock, par value $.01 per share,
and shares of preferred stock, par value $0.01 per share. Upon completion
of this offering, there will be outstanding shares of common stock and
options to purchase 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 the Amended Certificate, 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 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.
The Amended Certificate 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. The Amended
Certificate and the 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 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.
67
<PAGE>
Certain provisions contained in the Amended Certificate, 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, may only be amended by the affirmative vote of the holders of
at least two-thirds of our total outstanding voting stock. In addition, the
Amended Certificate will provide that the 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.
The Amended Certificate and the 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
shares of common stock will be issued effective upon the closing of this
offering. A total of 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 59 and "Management--Executive
compensation" on page 59.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is
.
68
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, Prism Financial will have
outstanding shares of common stock, assuming no exercise of options issued
in conjunction with this offering. Of these shares, the shares of common
stock sold in this offering ( 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 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, an additional 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 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
shares of common stock reserved for issuance under our benefit plans.
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. For more
information, please refer to "Management--Executive compensation" on page 59 and
"Management--Stock-based plans" on page 59.
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: (1) 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; (2) 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 clause (1)
above or this clause (2) is to be settled by delivery of common stock or other
securities, in cash or otherwise; or (3) file a registration statement (in the
case of Prism Financial), other than a registration statement on Form S-8
covering shares of common stock subject to outstanding options under our
employee benefit plan. 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.
69
<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.......................................................................
-----------
-----------
</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
additional shares of common stock from the selling stockholders at the same
price they are paying for the 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.
70
<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 $ .
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 shares of common stock and options to
purchase 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 69.
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.
71
<PAGE>
The underwriters have reserved for sale, at the initial public offering
price, up to 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.
LaSalle National Bank, an affiliate of ABN AMRO Incorporated, entered into a
Revolving Credit and Security Agreement with us, dated as of January 15, 1999,
which provides for aggregate maximum borrowings of $35 million and bears
interest at a rate determined monthly by LaSalle National Bank. As of March 1,
1999, there were no amounts outstanding under this agreement.
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 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.
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
72
<PAGE>
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.
73
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEX PAGE
---------
<S> <C>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
Report of Independent Accountants........................................................................ F-2
Independent Auditor's Report............................................................................. F-3
Consolidated Balance Sheets as of December 31, 1997 and 1998............................................. F-4
Consolidated Statements of Income for the years ended
December 31, 1996, 1997 and 1998....................................................................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1996, 1997 and 1998....................................................................... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998....................................................................... F-7
Notes to Consolidated Financial Statements............................................................... F-8
MORTGAGE MARKET, INC.
Independent Auditors' Report............................................................................. F-26
Balance Sheet as of December 31, 1997.................................................................... F-27
Statement of Income for the year ended December 31, 1997................................................. F-29
Statement of Changes in Stockholder's Equity for the year
ended December 31, 1997................................................................................ F-30
Statement of Cash Flows for the year ended December 31, 1997............................................. F-31
Notes to The Financial Statements........................................................................ F-33
PACIFIC GUARANTEE MORTGAGE CORPORATION
Independent Auditor's Report............................................................................. F-40
Balance Sheet as of December 31, 1997.................................................................... F-41
Statement of Operations and Retained Earnings 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-44
PACIFIC GUARANTEE MORTGAGE CORPORATION
Independent Auditor's Report............................................................................. F-49
Balance Sheet as of December 31, 1996.................................................................... F-50
Statement of Operations and Retained Earnings for the year
ended December 31, 1996................................................................................ F-51
Statement of Cash Flows for the year ended December 31, 1996............................................. F-52
Statement of Stockholders' Equity for HUD Requirement Purposes........................................... F-53
Notes to Financial Statements............................................................................ F-54
</TABLE>
F-1
<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 March 23, 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-2
<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 March 22, 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-3
<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 14,020,144 14,020,144
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........................ 40,941 254,065 254,065
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.............................. -- 1,409,065 1,409,065
Long-term debt................................................. -- 3,618,020 3,618,020
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, $ par value per share, shares
authorized, no shares issued and outstanding.................
Common stock, no par value; 1,000,000 shares authorized;
100,000 and 111,942, respectively, shares issued and
outstanding.................................................. 100 -- --
Additional paid-in capital..................................... 49,900 4,117,732 2,880,113
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-4
<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 18,324,773
General and administrative expenses............................. 1,851,337 3,770,100 12,900,203
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........................................................... $
-------------
-------------
Diluted......................................................... $
-------------
-------------
Weighted average number of shares outstanding:
Basic...........................................................
-------------
-------------
Diluted.........................................................
-------------
-------------
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 4,342,202
------------- ------------- -------------
Net income adjusted for pro forma income tax provision.......... $ 609,801 $ 1,507,670 $ 6,752,376
------------- ------------- -------------
------------- ------------- -------------
Pro forma net income per common share:
Basic........................................................... $
-------------
-------------
Diluted......................................................... $
-------------
-------------
Pro forma weighted average number of shares outstanding:
Basic...........................................................
-------------
-------------
Diluted.........................................................
-------------
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<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.................... 100,000 $ 100 100,000 $ 100 100,000 $ 100
Transfer of par value to additional paid-in
capital....................................... -- -- -- -- -- (100)
Stock issued for acquisitions................... -- -- -- -- 5,345 --
Capital contribution............................ -- -- -- -- 5,597 --
Other issuance of common stock.................. -- -- -- -- 1,000 --
---------- ------------ --------- ------------ ---------- -------------
Balance at end of year...................... 100,000 100 100,000 100 111,942 --
---------- ------------ --------- ------------ ---------- -------------
---------- --------- ----------
Additional paid-in capital:
Balance at beginning of year.................... 49,900 49,900 49,900
Transfer of par value........................... -- -- 100
Stock issued for acquisitions................... -- -- 1,500,000
Capital contribution............................ -- -- 2,500,000
Other issuance of common stock.................. -- -- 67,732
------------ ------------ -------------
Balance at end of year...................... 49,900 49,900 4,117,732
------------ ------------ -------------
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-6
<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............................. 419,316 515,266 58,517
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) (10,035,244)
Other assets.......................................... (125,041) (115,859) (1,618,192)
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) (39,946,663) (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
Advances to affiliates.................................... -- (35,000) --
--------------- --------------- -----------------
Net cash used in investing activities............. (287,344) (1,122,004) (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-7
<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-8
<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 value of the expected
future benefits, 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. 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 considered to be adequate by management based upon Prism
Financial's evaluation of the potential
F-9
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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-10
<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-11
<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........................................ $ $
------------- -----------
------------- -----------
Effect of dilutive securities.........................................
-------------
Income per common share--diluted...................................... $ $
------------- ------------- -----------
------------- ------------- -----------
Pro forma: (Unaudited)
For the year ended December 31, 1998
Income per common share--basic $ $
------------- -----------
------------- -----------
Effect of dilutive securities.........................................
-------------
Income per common share--diluted...................................... $ $
------------- ------------- -----------
------------- ------------- -----------
</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. In
addition, the par value of Prism Financial's common stock was changed from $1 to
no par value per share, and authorized shares of common stock were increased
from one thousand to one 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.
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 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.
F-12
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 $ 494,568,715
Current liabilities.......................................... (62,177,376) (483,652,214)
-------------- --------------
Net working capital.......................................... $ 1,784,786 $ 10,916,501
-------------- --------------
-------------- --------------
</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 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.
F-13
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Total purchase price 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. These acquisitions include contingent consideration
clauses which could increase the overall respective purchase price for each
acquisition. 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.
In connection with each acquisition, an Equity Value Plan was created for
each subsidiary to cover designated key employees. This plan was 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.
F-14
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--ACQUISITIONS (CONTINUED)
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 $ 144,623,380
Net income.................................................... 3,286,401 15,900,989
Net income per share--diluted.................................
</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.
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>
F-15
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. 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.
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 March 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%, expiring March 31, 1999................................................. -- 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-16
<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 also has a $1 million 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-17
<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............................................ -- 1,409,065
--------- ------------
$ -- $ 3,618,020
--------- ------------
--------- ------------
</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............................................................................ $ 1,409,065
2000............................................................................ 1,227,167
2001............................................................................ 1,092,623
2002............................................................................ 916,439
2003............................................................................ 381,791
------------
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-18
<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
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-19
<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 $ 4,160,545
State................................................ 80,790 180,735 866,399
Deferred:
Federal.............................................. (1,473) (13,947) (560,630)
State................................................ (359) (3,030) (124,112)
---------- ---------- ------------
$ 410,144 $ 995,589 $ 4,342,202
---------- ---------- ------------
---------- ---------- ------------
</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 4.7 459,100 4.1
Other................................................... 10,279 1.0 2,163 0.1 -- --
---------- --- ---------- --- ------------ ---
Effective tax........................................... $ 410,144 40.2% $ 995,589 39.8% $ 4,342,202 39.1%
---------- --- ---------- --- ------------ ---
---------- --- ---------- --- ------------ ---
</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-20
<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 $636,000, as
follows:
<TABLE>
<CAPTION>
1998
----------
<S> <C>
Deferred tax assets:
Allowance for loan and servicing losses......................................... $ 502,000
Accrued expenses and other...................................................... 134,000
----------
Total deferred tax asset.......................................................... $ 636,000
----------
----------
</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-21
<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-22
<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 14,020 14,020
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............................... -- -- 1,409 1,409
Long-term debt, less current portion............................ -- -- 3,618 3,618
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-23
<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>
Unaffiliated 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-24
<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 million 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.
F-25
<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-26
<PAGE>
MORTGAGE MARKET, INC.
BALANCE SHEET
DECEMBER 31, 1997
(SEE INDEPENDENT AUDITORS' REPORT)
<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-27
<PAGE>
MORTGAGE MARKET, INC.
BALANCE SHEET
DECEMBER 31, 1997
(SEE INDEPENDENT AUDITORS' REPORT)
<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-28
<PAGE>
MORTGAGE MARKET, INC.
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(SEE INDEPENDENT AUDITORS' REPORT)
<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-29
<PAGE>
MORTGAGE MARKET, INC.
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
(SEE INDEPENDENT AUDITORS' REPORT)
<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-30
<PAGE>
MORTGAGE MARKET, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
(SEE INDEPENDENT AUDITORS' REPORT)
<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
(Increase) decrease in:
Haircut receivable......................................................... 161,744
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 Provided by Operating Activities...................................... 998,719
---------
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:
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 Used by Financing Activities...................................... (423,162)
---------
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-31
<PAGE>
MORTGAGE MARKET, INC.
STATEMENT OF CASH FLOWS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
(SEE INDEPENDENT AUDITORS' REPORT)
<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-32
<PAGE>
MORTGAGE MARKET, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
(SEE INDEPENDENT AUDITOR'S REPORT)
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-33
<PAGE>
MORTGAGE MARKET, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
(SEE INDEPENDENT AUDITOR'S REPORT) (CONTINUED)
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-34
<PAGE>
MORTGAGE MARKET, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
(SEE INDEPENDENT AUDITOR'S REPORT) (CONTINUED)
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-35
<PAGE>
MORTGAGE MARKET, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
(SEE INDEPENDENT AUDITOR'S REPORT) (CONTINUED)
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-36
<PAGE>
MORTGAGE MARKET, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
(SEE INDEPENDENT AUDITOR'S REPORT) (CONTINUED)
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-37
<PAGE>
MORTGAGE MARKET, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
(SEE INDEPENDENT AUDITOR'S REPORT) (CONTINUED)
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
F-38
<PAGE>
MORTGAGE MARKET, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
(SEE INDEPENDENT AUDITOR'S REPORT) (CONTINUED)
13. INTERCOMPANY TRANSACTIONS (CONTINUED)
commissions paid by Mortgage Market Lending and Mortgage Market Funding. The
intercompany sales and expenses have been eliminated in the financial
statements.
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-39
<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-40
<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-41
<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-42
<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)
(Increase) in loans held for sale, net of change in advances under lines of
credit........................................................................ (639,878)
(Increase) in deposits.......................................................... (19,378)
Increase in accounts payable.................................................... 838,775
(Decrease) in deferred tax liability............................................ (33,818)
---------
Total adjustments............................................................... 64,309
---------
Net cash provided by operations................................................. 84,029
---------
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 operating line of credit.......................................... 150,000
Proceeds from issuance of common stock.......................................... 53,750
---------
Net cash provided by financing activities....................................... 1,044,861
---------
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-43
<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%.
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.
F-44
<PAGE>
PACIFIC GUARANTEE MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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-45
<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-46
<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>
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.
F-47
<PAGE>
PACIFIC GUARANTEE MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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
Termination of S Corporation Status............. 18
Recent Developments............................. 18
Use of Proceeds................................. 19
Dividend Policy................................. 19
Capitalization.................................. 20
Dilution........................................ 21
Selected Financial Data......................... 23
Unaudited Pro Forma Combining Statement of
Income........................................ 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 27
Business........................................ 38
Management...................................... 55
Certain Transactions............................ 64
Principal and Selling Stockholders.............. 66
Description of Capital Stock.................... 67
Shares Eligible for Future Sale................. 69
Underwriting.................................... 70
Legal Matters................................... 72
Experts......................................... 72
Where You Can Find More Information............. 72
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.
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............................... *
Printing and engraving expenses.................................. *
Legal fees and expenses.......................................... *
Accounting fees and expenses..................................... *
Blue sky fees and expenses....................................... *
Transfer agent and registrar fees and expenses................... *
Miscellaneous fees and expenses.................................. *
---------
Total...................................................... $ *
---------
---------
</TABLE>
- ------------------------
* To be filed by amendment.
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
II-1
<PAGE>
not affect a director's responsibilities under any other law, such as the
federal securities laws or state or federal environmental laws.
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 shares of its common stock to Ms.
Abby Reisler as consideration for services rendered to the registrant. The
transaction was intended to be 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 shares of its common stock to
Mr. William Osenton and 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
transaction was intended to be 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 shares of its common stock to CTC
Trust and 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 transaction was intended to be 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.
11.1* Statement Regarding Computation of Per Share Earnings.
21.1 Subsidiaries of Prism Financial Corporation.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of McGladrey & Pullen, LLP.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
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.
(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.
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-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chicago, State of
Illinois, on March 23, 1999.
PRISM FINANCIAL CORPORATION
By: /s/ BRUCE C. ABRAMS
-----------------------------------------
Name: Bruce C. Abrams
Title: Chairman and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints Bruce C. Abrams, Mark A. Filler and David A.
Fisher, and each of them, his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement (or any other
registration statement for the same offering that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act), and to file the same, with
all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof. This power of attorney may be executed
in counterparts.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
Chairman and Chief
/s/ BRUCE C. ABRAMS Executive Officer
- ------------------------------ (Principal Executive March 23, 1999
Bruce C. Abrams Officer)
Chief Financial Officer and
/s/ DAVID A. FISHER Senior Vice President
- ------------------------------ (Principal Financial March 23, 1999
David A. Fisher Officer)
/s/ JAMES P. HAYES Controller (Principal
- ------------------------------ Accounting Officer) March 23, 1999
James P. Hayes
/s/ MARK A. FILLER Director
- ------------------------------ March 23, 1999
Mark A. Filler
/s/ TERRY A. MARKUS Director
- ------------------------------ March 23, 1999
Terry A. Markus
II-4
<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.
11.1* Statement Regarding Computation of Per Share Earnings.
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.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF PRISM FINANCIAL CORPORATION
Prism Financial Corporation, a Delaware corporation, upon the closing of the
offering, will own all of the outstanding equity interests of Prism Mortgage
Company, an Illinois corporation, which owns all of the outstanding equity
interests of the following entities:
1. Pacific Guarantee Mortgage Corporation, a California corporation
2. Mortgage Market, Inc., an Oregon corporation
3. PointSource Financial, L.L.C., an Illinois limited liability company
4. Infiniti Mortgage, L.L.C., an Illinois limited liability company
5. Illinois Guaranty Title, L.L.C., an Illinois limited liability
company
6. Lenders Origination Services, L.L.C., an Illinois limited liability
company
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of 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
March 22, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the use in this Registration Statement on Form S-1 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 years in the two
year period then ended, and to the reference to our firm under the heading
"Experts" in the Registration Statement.
/s/ MCGLADREY & PULLEN, LLP
Schaumburg, Illinois
March 22, 1999
<PAGE>
EXHIBIT 23.3
March 22, 1999
Prism Mortgage Company
440 N. Orleans
Chicago, IL 60610
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of 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
March 22, 1999
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANT
I hereby consent to the use in the Prospectus constituting part of 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
March 22, 1999
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANT
I hereby consent to the use in the Prospectus constituting part of 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
March 22, 1999
<PAGE>
EXHIBIT 23.7
CONSENT
I hereby consent to the use of my name as a nominee for the Board of
Directors of Prism Financial Corporation in the Prospectus forming part of the
Registration Statement on Form S-1 (the "Registration Statement") and for use of
this consent for filing as an Exhibit to the Registration Statement.
/s/ ANDREW S. HOCHBERG
--------------------------------------
Name: Andrew S. Hochberg
Dated: March 17, 1999
<PAGE>
EXHIBIT 23.8
CONSENT
I hereby consent to the use of my name as a nominee for the Board of
Directors of Prism Financial Corporation in the Prospectus forming part of the
Registration Statement on Form S-1 (the "Registration Statement") and for use of
this consent for filing as an Exhibit to the Registration Statement.
/s/ MICHAEL P. KRASNY
--------------------------------------
Name: Michael P. Krasny
Dated: March 22, 1999
<PAGE>
EXHIBIT 23.9
CONSENT
I hereby consent to the use of my name as a nominee for the Board of
Directors of Prism Financial Corporation in the Prospectus forming part of the
Registration Statement on Form S-1 (the "Registration Statement") and for use of
this consent for filing as an Exhibit to the Registration Statement.
/s/ PENNY S. PRITZKER
--------------------------------------
Name: Penny S. Pritzker
Dated: March 19, 1999
<PAGE>
EXHIBIT 23.10
CONSENT
I hereby consent to the use of my name as a nominee for the Board of
Directors of Prism Financial Corporation in the Prospectus forming part of the
Registration Statement on Form S-1 (the "Registration Statement") and for use of
this consent for filing as an Exhibit to the Registration Statement.
/s/ RICHARD L. WELLEK
--------------------------------------
Name: Richard L. Wellek
Dated: March 17, 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 IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 12,124
<SECURITIES> 0
<RECEIVABLES> 14,370
<ALLOWANCES> 350
<INVENTORY> 467,254
<CURRENT-ASSETS> 494,569
<PP&E> 6,259
<DEPRECIATION> 1,975
<TOTAL-ASSETS> 503,622
<CURRENT-LIABILITIES> 483,652
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 16,203
<TOTAL-LIABILITY-AND-EQUITY> 503,622
<SALES> 0
<TOTAL-REVENUES> 90,842
<CGS> 0
<TOTAL-COSTS> 79,747
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 900
<INTEREST-EXPENSE> 12,496
<INCOME-PRETAX> 11,095
<INCOME-TAX> 0
<INCOME-CONTINUING> 11,095
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,095
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
