<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
Commission File Number 0-26135
PRISM FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-4279417
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
440 North Orleans, Chicago, Illinois 60610
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (312) 494-0020
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
----------------
Common Stock, par value $0.01 per share
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of March 27, 2000, the aggregate market value of the voting and non-voting
common equity, consisting of common stock, held by non-affiliates of the
registrant, computed by reference to the closing sales price of the common stock
on that date, was $36,655,696.
As of March 27, 2000, there were outstanding 14,674,413 shares of Common
Stock, par value $0.01, of the registrant.
================================================================================
<PAGE>
ITEM 1. BUSINESS
The discussion below contains certain forward-looking statements (as such term
is defined in Section 21E of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")), that reflect the current views of the management of Prism
Financial Corporation and its subsidiaries (collectively, "Prism Financial" or
the "Company"), as well as assumptions made by, and information currently
available to, the Company's management, with respect to future events and
financial performance. The Company's actual growth, results, performance and
business prospects and opportunities in 2000 and beyond could differ materially
from those expressed in, or implied by, such forward-looking statements. See
"Item 1. Business - Risk Factors" beginning on page 14 and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Special Note Regarding Forward-Looking Statements" on page 38
for a discussion of risks, uncertainties and other factors that could cause or
contribute to such material differences.
Company Overview
Prism Financial is a financial services company engaged primarily in
the business of originating, selling and brokering mortgage loans. The Company
operates 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. The Company uses its direct consumer access to sell mortgage-related
products, including credit reports, flood certifications, appraisals, mortgage
insurance and title insurance policies. The Company also engages in the
affordable housing and historic rehabilitation tax credit syndication business.
The Company originated $7.7 billion in residential mortgage loans in 1999
through its network of approximately 1,200 commission-only loan originators
operating out of 159 retail branches in 27 states, as of December 31, 1999.
Through the Company's network of retail branches, as well as its affinity
partnerships and relationships with operators of leading Internet mortgage web
sites, the Company offers a broad array of residential mortgage products
targeted primarily to high-credit-quality borrowers.
Since commencing operations in 1992, the Company has focused on growing its
origination volume by building a retail origination network through internal
growth and selective acquisitions. In addition, the Company has leveraged its
state-of-the-art private label mortgage center to target affinity partners on
the Internet and has established relationships with operators of Internet
mortgage web sites to position the Company to take advantage of growth
opportunities provided by this origination channel. Most recently, the Company
has diversified its business through the expansion of its bundled and ancillary
services business, Lender's Mortgage Services, L.L.C. ("LMS"), and through the
acquisition of Apollo Housing Capital, L.L.C. ("Apollo") in September 1999.
Through the Company's 80% interest in Apollo, the Company has expanded its
business to include affordable housing and historic rehabilitation tax credit
syndication.
Industry Overview
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 that 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 payments 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.
2
<PAGE>
The industry totaled approximately $1.3 trillion in mortgage originations in
1999, down from approximately $1.5 trillion in 1998. Industry analysts estimate
mortgage originations for 2000 will be approximately $985 billion.
The Internet provides a growing medium for delivering mortgage services
directly to customers. Industry analysts estimate the on-line mortgage market
will increase from approximately $18.7 billion originated in 1999 to over $91.2
billion by 2003.
Business Strategy
Prism Financial's business objective is to be a leading retail originator of
high-credit-quality mortgages. The principal business strategy elements to
support this objective are:
Focus primarily on retail channels. The Company's retail focus has two
principal benefits: control over the loan origination process and direct access
to the consumer. By controlling the origination channel, the Company does not
rely on third parties for loan production volume. Direct access to consumers
allows the Company's 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, the
Company is able to develop alliances with consumers, real estate agents and
brokers, homebuilders, corporations, developers and professionals which creates
referral business. In addition, the Company believes that loan servicers will
purchase servicing rights from retail originations at more favorable prices than
servicing rights from wholesale originations.
Leverage banker/broker structure to offer low prices on a broad array of
products. The Company's banker/broker structure provides its loan originators
access to the products and pricing of over 100 lenders throughout the U.S.,
including the Company's own mortgage bank. As a high-volume mortgage banker, the
Company is 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. The Company's mortgage bank also provides its loan
originators with in-house underwriting capabilities, better execution, fast loan
approvals and reliable service. The Company believes that its brokering
relationships in combination with its mortgage banking capabilities generally
enable it to offer a larger variety of competitively priced products with a
higher level of customer service than is possible for many larger banks and
small brokers. Many large banks typically offer only their own products, and
small brokers typically rely on a limited number of local brokering
arrangements.
Increase loan volume funded by the Company's mortgage bank. The value of loans
and servicing rights in the secondary market is volume dependent. As a result,
the large loan volume financed by the Company's mortgage bank has led to better
pricing in the secondary mortgage market. The Company intends to leverage the
benefit of these economies by increasing origination volume through its mortgage
bank on existing products and by introducing additional mortgage products.
Provide superior customer service. The Company believes that providing
superior customer service is a key to product differentiation in today's price-
sensitive market. The Company believes it delivers differentiated service
through a team of highly-skilled management, loan originators and operating
staff with many years of industry-related experience. The Company also strives
to deliver differentiated customer service by continually streamlining the
mortgage process to make obtaining a mortgage loan more convenient and
dependable. Unlike many of the Company's competitors, it operates a
decentralized processing structure that enables it to enhance its customer
service and provide fast decisions. Additionally, during August 1999, the
Company implemented a program that helps loan officers create and maintain
interactive customized web sites to promote efficient and responsive customer
service.
Provide a "one-stop" source of mortgage-related products. The Company uses its
direct consumer access to sell mortgage-related products that are required in
connection with obtaining a loan. The Company's mortgage-related products
include credit reports, flood certifications, appraisals, mortgage
3
<PAGE>
insurance and title insurance policies. The Company also intends to continue
marketing additional mortgage-related products and services to its retail
customers.
Utilize a commission and incentive-based compensation system. The Company has
a compensation system designed to motivate its employees to maximize loan
volume, productivity and profitability. The Company's compensation system
creates a largely variable cost structure that is adaptable over time to changes
in retail origination volume. The Company's net branch structure also helps to
limit the degree to which it incurs overhead costs associated with branches.
Each of the Company's 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, the Company's
loan originators essentially operate their own businesses and have the incentive
to maximize revenue, which the Company shares. Additionally, the Company offers
incentive programs to loan officers and branch managers who close loans through
its mortgage bank, which the Company believes will increase its mortgage banking
volume. In addition, the Company's 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.
Maintain efficient operations. Since the Company's inception, it has focused
on being a low-cost provider by controlling operating costs and increasing
efficiency. In addition to implementing the Company's incentive-based structure,
the Company continues to invest in process enabling technologies. The Company
widely uses Fannie Mae's Desktop Underwriter system. This system allows the
Company to process loan applications and receive approval/rejection decisions
directly from Fannie Mae within a minute. This capability increases the
Company's productivity and lowers its costs in processing and selling loans to
Fannie Mae. The Company has also implemented laptop origination. This allows the
Company's loan officers to take customers' application anywhere utilizing a
laptop computer. The originator can print out disclosures during the application
process, receive a quick approval of the loan through a link with Desktop
Underwriter, and electronically transmit the application back to a processor to
begin the processing of the loan. The Company is also investing in a web-based
origination system to improve its efficiency and increase its productivity. In
November 1999, the Company upgraded its web-based mortgage centers by adding
automated underwriting and real-time loan status capabilities. The Company's
web-based mortgage centers now enable some borrowers to receive loan approvals
within minutes of submitting their on-line application.
Growth Strategy
The Company's growth strategy is to continue to increase its loan origination
volume through expanding its presence in existing markets, selectively entering
new geographic markets and increasing the Company's presence on the Internet.
The Company is executing this strategy by growing internally, pursuing selective
acquisitions and developing new Internet relationships.
Grow internally. Since 1992, the Company has opened 22 company-owned branches
as well as 40 net branches and recruited over 450 new loan originators. The
Company intends to continue to generate internal growth through the recruitment
of additional loan originators in existing branches, expansion of company-owned
branches and expansion of its "net branch" network.
The Company believes that its attractive compensation system, together with
its broad product offerings of competitively priced products, will continue to
enable it to recruit additional, highly-qualified loan originators and establish
new net branch relationships.
Pursue selective acquisitions. The Company intends to continue to capitalize
on consolidation opportunities in the mortgage banking industry by selectively
pursuing acquisitions of independent, high-quality mortgage brokers and mortgage
banks. Since 1996, the Company has completed nine acquisitions of mortgage
companies, including Pacific Guarantee Mortgage Corporation ("Pacific
Guarantee") and Mortgage Market, Inc. ("Mortgage Market") in 1998 and First City
Financial Corp. ("First City"), Mortgage Express, Inc. ("Mortgage Express") and
Valley Financial Corporation ("Valley Financial") in 1999. As of their
acquisition dates, these nine acquisitions resulted in the addition of over 800
loan
4
<PAGE>
originators and 111 branches in 16 states.
In September 1999, the Company acquired an 80 percent interest in Apollo.
Through this transaction, the Company sought to diversify its revenue and growth
channels. Apollo structures and sells interests in investment portfolios
comprised of affordable housing and historic tax credits. See "Business-Tax
Credit Syndication." The Company believes Apollo's attractive margins, low
operating cost capital structure and earnings cycle complements the Company's
existing retail mortgage origination operations. In addition, the Company
believes there are significant operational and business synergies that can be
achieved. For example, Apollo and Prism Financial share relationships with key
investors, including Fannie Mae, Bank of America and Citibank, N.A. This
acquisition should allow both companies to strengthen these relationships. In
addition, Apollo should benefit from the Company's lower cost of capital.
Apollo's operations, which were immediately accretive, made a significant
contribution to the Company's overall results in the second half of 1999.
Enhance and expand Internet relationships. The Company believes that the
Internet provides a unique medium to deliver mortgage services. The Company's
objective is to become a leading provider of mortgage products through the
Internet. The Company believes its broad range of competitively priced products
and its strategic relationships with leading Internet mortgage web sites
position it to capitalize on the on-line mortgage origination growth.
International Data Corporation estimates the on-line mortgage market will
increase from approximately $18.7 billion originated in 1999 to over $91.2
billion by 2003. The Company originated approximately $336 million of loans over
the Internet in 1999. The Company's Internet mortgage strategy has three primary
components: (1) strategic relationships with operators of leading Internet
mortgage web sites; (2) affinity relationships with financial institutions,
national corporations, Internet companies, and university and alumni groups to
provide mortgage center technology and back-end fulfillment services; and (3)
interactive mortgage web sites offered to loan officers of the Company.
Origination Channels
Prism Financial operates primarily as a retail mortgage originator, with two
small wholesale divisions operating in California and Texas.
Retail origination. In 1999, approximately 98% of the Company's mortgage
originations were generated through its approximately 1,200 loan originators and
Internet mortgage consultants who respond to mortgage inquiries over the
Internet. As of December 31, 1999, the Company's loan originators operated out
of approximately 159 branches, including 85 company-owned branches and 74 net
branches, collectively, located in 27 states.
. Company-owned branches. The Company's primary source of business is its
network of loan originators who cultivate relationships with consumers,
real estate agents and brokers, homebuilders, corporations, developers
and professionals in order to generate referrals. The Company generally
does not engage in advertising, direct marketing or telemarketing
techniques to generate leads. The Company believes that the direct
customer contact of retail origination creates the opportunity for
repeat business and customer referrals and provides it with greater
control over the lending process. In addition, direct customer contact
enables the Company to sell mortgage-related products and services to
its customers. Each loan originator is responsible for most of his or
her own expenses, excluding office space and office services. In 1999,
originations generated from company-owned branches represented
approximately 73% of the Company's 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
5
<PAGE>
in a company-owned branch. The net branch arrangement shifts to the
branch manager or branch operating company much of the financial risk
normally associated with retail expansion. In addition, net branches
create significant incentives for the branch manager to operate the net
branch profitably and efficiently. Net branches reduce the Company's
financial risk and provide easier access to diverse and remote markets.
The Company targets branch operators with established referral sources
and familiarity with local lending practices, pricing and
regulatory/compliance requirements. Net branches also allow easy market
entry and exit, which gives the Company flexibility in addressing
changes in the origination market. In addition, net branches offer real
estate brokers/owners interested in conducting an in-house lending
operation the ability to provide their customers with high quality
mortgage products and services without the intensive capital and time
investments normally associated with establishing a mortgage company. In
1999, originations generated from net branches represented approximately
23% of the Company's total retail originations.
. Internet. The Company believes that the Internet provides a unique
medium to deliver mortgage services. In connection with originating on-
line mortgages, the Company opened an Internet call center that is
staffed by its own Internet service representatives. The Company's
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. The Company also offers its
proprietary mortgage center technology and back-end fulfillment services
through affinity relationships with financial institutions, national
corporations, Internet companies and university and alumni groups. In
1999, originations generated over the Internet represented approximately
4% of the Company's total retail originations.
Wholesale origination. A small percentage of the Company's business is
generated through its wholesale operations conducted primarily by its wholly-
owned subsidiary, PointSource Financial, L.L.C. 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 the Company, which makes
an underwriting determination and funds qualified loans. In 1999, approximately
2% of the Company's originations were generated through its wholesale channels.
The Company does not intend to commit significant resources to increase its
wholesale originations.
Mortgage Bank
The mortgage loans that the Company originates are funded through its mortgage
bank or are brokered to the lender providing the mortgage product. The Company
closed 46% of its loans through its mortgage bank in 1999, as compared to 47% in
1998. The Company's mortgage bank currently offers a full range of single-family
mortgage loan products. Mortgage loan applicants can choose from several
products, including fixed-rate mortgage loans with several different term
options and "balloon" mortgage loans with relatively shorter terms, such as five
or seven years, and longer amortization schedules. An array of adjustable rate
mortgage loans with rates tied to various indices is also available. The Company
offers a wide variety of combinations of interest rates and origination fees
("points") on many of its mortgage loan products. These options enable borrowers
to elect to pay higher points at closing and lower interest over the life of the
mortgage loan, or pay a higher interest rate and reduce or eliminate points
payable at closing. In addition, the Company offers buydown-type mortgage loans.
This type of loan allows a borrower to make lower monthly payments for the first
one, two or three years of the loan.
Mortgage Loan Products
The Company's mortgage bank offers a variety of mortgage products at
competitive rates. These products can be classified as follows:
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, Freddie Mac, or Ginnie Mae. 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
6
<PAGE>
insurance from the Veterans Administration. Approximately 76% of the number of
loans originated by the Company in 1999 were conforming and government insured
loans.
Jumbo mortgage loans. These mortgage loans do not satisfy the criteria to be
conforming or government insured mortgage loans solely because they exceed the
maximum loan size. The maximum loan size is currently $252,700 for single-
family, one-unit mortgage loans in the continental United States. The Company
sells all jumbo mortgage loans to a number of national privately sponsored
mortgage conduits. Approximately 17% of the number of loans originated by the
Company in 1999 were jumbo mortgage loans.
Alternative A mortgage loans. These mortgage loans may fail to satisfy other
elements of the loan underwriting criteria, including those relating to
documentation, employment history, income verification, loan-to-value ratios,
qualifying ratios or required borrower net worth. The Company originates
mortgage loans that do 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, present a comparable risk profile. The Company refers to this
category of mortgage loans generally as "alternative A" mortgage loans. The
Company sells all alternative A mortgage loans it originates to national
conduits that pool these loans for securitization. To reduce the risk of sale,
the Company underwrites these loans to the standards of the investor to whom the
loan will be sold. Approximately 4% of the number of loans originated by the
Company in 1999 were alternative A mortgage loans.
Home equity and second mortgage loans. Home equity and second mortgage loans
are generally secured by second liens on the related property. Home equity
mortgage loans can take the form of a home equity line of credit. Second
mortgage loans are closed-end loans. Both types of loans are designed primarily
for high credit quality borrowers and are underwritten according to the
standards of the investor to whom the loans will be sold. Home equity lines have
a draw period during which the borrower may make cash withdrawals. The draws are
required to be repaid during the repayment period that follows the draw period.
Only interest payments are made during the draw period. Second mortgage loans
are fixed in amount at the time of origination and typically amortize over 30
years with a balloon payment due after 15 years. Home equity lines generally
bear adjustable interest rates while closed-end loans typically bear fixed
interest rates. Both types are frequently originated in conjunction with first-
lien mortgage loans on the related property. Home equity lines and second
mortgage loans represented approximately 2% of the number of loans originated by
the Company in 1999.
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. The Company categorizes these mortgage loans based on the borrower's
credit profile as "A-", "B" or "C" loans that are generally considered "non-
prime" mortgage loans in the secondary mortgage market. The Company does not
originate mortgage loans that it would categorize as "D" loans. Non-prime loans
are underwritten to the standards of investors to whom the loans will be sold.
During 1999, the Company discontinued the operations of its subsidiary, Infiniti
Mortgage, L.L.C. ("Infiniti"). Infiniti was created to originate and sell non-
prime mortgages. As a result of the discontinuance of Infiniti's operations, the
Company no longer originates loans from specialized retail branches focusing
primarily on non-prime mortgages, but continues to originate non-prime loans on
a limited basis through its traditional retail channels. These loans,
represented approximately 1% of the number of loans originated by the Company in
1999.
Mortgage-Related Loan Products
The Company generates revenue from appraisals, credit reports, flood
certifications, mortgage insurance and title insurance policies sold in
connection with the loans it originates. In 1999, the Company generated revenue
of over $2.8 million from the sale of these products. The Company intends to use
its loan originators to offer additional mortgage-related products and services
to its retail customers.
Sales of Loans and Servicing Rights
7
<PAGE>
Loan sales. The Company 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 the
Company's business strategy is to seek the most efficient method of selling its
mortgage loans. The Company evaluates the sale of each mortgage loan type and
compares 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. The Company currently sells
its 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, Freddie Mac or Ginnie Mae 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, Freddie Mac or Ginnie Mae 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. The Company sells its non-prime loans and home equity lines and second
mortgage loans through whole-loan sales, bulk sales or flow sales in order to
avoid the credit risk associated with these types of mortgage loans. Bulk sales
are sales of loans underwritten to the Company's underwriting standards that are
pooled and then sold to third parties for cash by the Company. Flow sales are
sales of loans that are underwritten by a third party who commits to purchase
each individual loan its underwriters approve. While the Company currently does
not securitize its loans, if the prices offered for its loans decrease
significantly relative to the value it believes that it could receive by
securitizing such loans, the Company's management would consider securitizing
its loans. In 1999, the Company sold approximately 85% of its loan production
to three entities.
The sale of mortgage loans may generate a gain or loss to the Company. Gains
or losses result primarily from two factors. First, the Company may originate a
loan at a price (i.e., interest rate and discount) that may be higher or lower
than it would receive if it immediately sold the loan. These pricing differences
occur principally as a result of competitive pricing conditions in the loan
origination market. Second, gains or losses upon the sale of loans may result
from changes in interest rates that cause changes in the market value of the
loans from the time the price commitment is given to the customer until the time
that the loan is sold by the Company to the investor. The Company applies
interest rate risk management techniques to reduce the net effect of interest-
rate changes on the gain and loss on loan sales.
The Company sells some of its loans on a forward commitment or other deferred
delivery and payment basis and has 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
the Company's counterparties is currently secured or subject to margin
requirements. However, the Company attempts to limit its credit exposure on
forward sales arrangements by entering into forward sales contracts solely with
institutions that the Company believes 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. The Company's current strategy
is to realize the value of this right by selling its 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, the Company minimizes risk associated
with defaults and early prepayments of those loans. However, the Company
services the loans it closes between the date of funding the loan and the date
it sells the loan and the related servicing. This period averages approximately
30 days. The Company has developed an in-house proprietary system to provide its
loan servicing computing services. The Company will consider selling its loans
and retaining the servicing rights if it believes that the value of the
servicing rights is or may become significantly greater than buyers are then
willing to pay for them. The loss of this servicer or any significant reduction
in the price this buyer is willing to pay for the Company's servicing rights
could have an adverse effect on its business and results of operations.
Recourse. By selling all the loans the Company closes, it reduces its exposure
to default risk, except the risk of first-payment defaults by customers. These
loan sales also reduce most of the prepayment risk normally inherent in the
mortgage lending business. However, in connection with whole-loan sales and
8
<PAGE>
exchanges, the Company makes representations and warranties to the buyers
thereof which it believes are customary in the industry relating to, among other
things, compliance with laws, regulations and program standards and accuracy of
information. The borrower provides some of this information. In the event of a
breach of these representations and warranties, the Company may be required to
repurchase these mortgage loans and indemnify the investors for damages caused
by the breach. If a repurchase request is made, the Company 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. The Company has 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, the Company 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
The Company uses short-term mortgage loan warehouse facilities to fund
mortgage loan originations. The Company repays 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, such credit facilities
become available to fund additional loan closings. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" for further discussion.
The Company also makes regular use of Fannie Mae's "As soon as pooled/early
purchase Option" ("ASAP Plus") program, as well as uncommitted lines of credit
and purchase and sale agreements, to provide liquidity for the Company's
mortgage loans held for sale. These facilities permit the Company to diversify
its borrowing resources, while accelerating the turnover of mortgage loans in
inventory, reducing interest costs and permitting greater origination volume.
Under the ASAP Plus program, Fannie Mae funds the Company on the loans it
delivers to the Company 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, the Company agrees to deliver
mortgage loans to Fannie Mae and assigns any related trades. The Company 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 and other documentation.
The uncommitted lines of credit and purchase and sale agreements are provided
by major investment banks. These agreements are not committed facilities and may
be terminated at the discretion of the repurchase investor. Prism Financial
currently has two uncommitted whole-loan repurchase agreements with major
investment banks. Under the terms of these agreements, Prism Financial may
pledge mortgage loans originated to obtain additional liquidity while mortgage
loans are held until sold through whole-loan sales.
Interest Rate Risk Management
Prior to the sale of originated mortgage loans, the Company bears market risk
on the value of the loans. If prevailing interest rates rise between the time
the Company closes loans and the time it commits 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, the Company currently enters into hedges through a combination of
forward sales of mortgage-backed securities and forward whole-loan sales to fix
the sales price of its loans expected to be closed or to hedge the value of
those loans through periodic purchases of short-duration treasury-based options.
Before entering into forward sales, forward commitments or hedging, the Company
performs an analysis of its 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. The Company attempts to make forward commitments for, or hedge
substantially all of its estimated interest rate risk on, its loans. The Company
does not believe that hedging its interest rate risk with respect to its non-
prime loans is cost effective as a result of their generally
9
<PAGE>
higher interest spreads combined with their relative lack of sensitivity to
changes in market interest rates and considering the period during which the
Company intends to accumulate such loans for sale. The Company believes that it
has implemented a cost-effective hedging program to provide a level of
protection against changes in the market value of its 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 the Company against such interest rate
changes.
Operations
In order to offer a broad range of conventional and specialized mortgage loan
products, the Company must deliver mortgage loan products to the branches on a
timely basis and carefully monitor and track the origination process through
delivery of the loans to the ultimate investors. For this reason, the Company
continues to develop its operational and technological capabilities. The Company
has 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. The Company's enterprise-wide system
provides real-time access to the information used by each department in
operations, as well as the secondary marketing and treasury departments. The
Company's system provides a smooth flow of data from the origination process
until the investor purchases the mortgage loan. The Company's system also
improves data integrity since information is not re-keyed or transferred to
multiple mortgage loan-tracking systems.
The Company's processing is decentralized to provide fast and efficient
service. Unlike many regional and national banks, the processing of its
customers' loan files are performed in the local branches by processors who work
in teams with one or more loan originators. The Company's underwriting, unlike
that provided by many regional and national banks, is performed regionally at
five sites, including the Company's regional operational centers and certain
large branches. The Company's remaining mortgage banking functions, including
secondary marketing, corporate accounting, quality assurance, systems
programming and support, loan delivery, and servicing are centralized and
maintained at the Company's Chicago headquarters.
Underwriting
Mortgage loan applications must be approved by the Company'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, the Company generally evaluates 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 1998, the Company began
utilizing Fannie Mae's automated underwriting system, Desktop Underwriter. In
less than one minute, this system evaluates and makes a decision on whether a
borrower meets Fannie Mae's guidelines. There are a number of attractive
advantages of utilizing this system. First, it reduces operating costs by
reducing the amount of time an underwriter spends on a file. Second, it reduces
the typical liability associated with underwriting when selling a loan to Fannie
Mae because Fannie Mae will have already approved the loan. Finally, it improves
the Company's customer service by enabling it to approve loans more quickly. The
Company's goal, when not using Desktop Underwriter, is to make an underwriting
determination within 24 to 48 hours after all loan documentation is complete. In
the second quarter of 1999, the Company began utilizing Freddie Mac's Loan
Prospector, which is an automated underwriting system similar to Desktop
Underwriter.
To maintain the consistency of underwriting quality, the Company's loan
production personnel are not permitted to underwrite the mortgage loan packages
that they originate. Reviews and decisions for loans underwritten by the Company
are made by separate underwriters located at the Company's regional operational
centers and at some of its larger branches. The Company's underwriting manager
is located in
10
<PAGE>
the corporate headquarters in Chicago and is responsible for administering all
underwriting policies. The underwriting manager reports to the Company's senior
officers.
Compliance And Quality Control
The Company's legal/compliance team is responsible for compliance and quality
control. The Company's centralized compliance function allows it to control and
supervise regulatory compliance and offer consistency to its customers. The
legal/compliance team also helps the servicing team handle delinquencies and
foreclosures that occur before a loan is sold. Quality control personnel also
review loans to identify and communicate existing and potential underwriting and
loan file problems or areas of concern to the legal/compliance team and
management. The quality control personnel review a random, statistically
significant sample of closed loans to monitor, evaluate and improve the overall
quality of loan production. 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.
The Company evaluates its quality control reports on a regular basis and
addresses any deficiencies specified in the reports.
Information Technology and Systems
The information technology and systems 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 that can be used within the Company's
business to improve information flow and reduce operating costs. For example,
the information services department was responsible for implementing Desktop
Underwriter and Loan Prospector that have greatly improved the Company's
operating efficiency. The information services department also focuses on the
integration and support of hardware technologies including those established in
the branch offices. In addition, the information services department is
currently involved in (1) deploying laptops to the Company's loan originators,
which enables its loan officers to originate a loan anywhere, at any time,
including in a customer's home or office, (2) training loan offices on laptop
origination and (3) automating the Company's underwriting process.
Competition
Traditional channels. The mortgage lending industry is highly competitive and
fragmented. The Company faces intense competition, primarily from commercial
banks, savings and loan associations, credit unions, insurance companies,
mortgage brokers, mortgage bankers and other consumer finance companies. If the
Company expands into additional geographic markets, it may face competition from
consumer lenders with established positions in such markets. The Company cannot
provide any assurances that it 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. The Company believes that pricing, service and product breadth are the
most important competitive factors affecting its business. Many of the Company's
competitors in the mortgage lending industry are better established, larger and
have more capital and other resources than Prism Financial. Barriers to entry
into the mortgage lending industry are low, and the current level of gains
realized by the Company and its existing competitors on the sale of loans has
attracted additional competitors into the market. Increases in the number of
competitors seeking to originate consumer loans could lower the rates of
interest or reduce the amount of origination points and fees the Company can
charge customers, thereby reducing the potential profitability of such loans.
Competition might also reduce the Company's loan origination volume. In
addition, interest rate increases since the second quarter of 1999 have reduced
industry-wide origination volume, particularly refinancing volume. Lower overall
origination volume has significantly increased the level of competition.
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
11
<PAGE>
web sites. Currently, competition is generally based on interest rates and fees
charged and on visibility over the Internet. Similarity of product offerings and
the vast amount of mortgage-related information available over the Internet may
lead to increasing price competition. Industry analysts predict that nearly $100
billion of mortgage originations will be generated over the Internet by 2003.
Tax Credit Syndication
With the acquisition of Apollo in the third quarter of 1999, the Company is
now a national syndicator of indirect interests in residential real estate
projects qualifying under federal tax laws for low-income housing tax credits
("LIHTCs") and historic rehabilitation tax credits ("HRTCs"). This business is
commonly referred to as "tax credit syndication." In general, Apollo's tax
credit syndication entails the following:
. Apollo identifies real estate developers undertaking projects that
qualify for LIHTCs or HRTCs and contracts with the developers to acquire
in limited partnerships or limited liability companies that own the
projects ("Investee Partnerships"). By statute, there is a limited
supply of LIHTCs, and inherent limitations on the number of restoration
projects restrict the supply of HRTCs. Consequently, the competition to
acquire Investee Partnerships is intense. Currently, Apollo finances its
acquisitions of Investee Partnerships under a line of credit from a
commercial bank. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources"
for a further discussion.
. When Apollo has assembled an appropriate portfolio of Investee
Partnerships, it transfers them to an investment limited partnership or
limited liability company (an "Investment Entity"). Apollo serves as the
general partner or managing member of the Investment Entity, and one or
more institutional investors comprise the limited partners or non-
managing members of the Investment Entity.
Investors in the Investment Entities receive direct credits against their
federal income tax liability each year for a 10-year period.
Because Apollo generally acquires ownership of Investee Partnerships prior to
its syndication of interests in the Investment Entity, Apollo faces potential
loss of principal on its investment in the Investee Partnerships should it be
unable to effect syndication of the Investment Entity interests at the prices or
on the timetable anticipated when the investments in the Investee Partnerships
were made.
In addition to revenue generated by the spread between the cost of the
Investee Partnerships and the aggregate amount raised through syndication of
interests in the corresponding Investment Entity, the Company typically earns a
fee for providing asset management services to the Investment Entity. These
management services typically include reviewing draw requests and visiting the
properties during construction, monitoring leasing of the properties and
assisting property managers with leasing problems, monitoring financial
information for each Investee Partnership on a quarterly basis, making an annual
site visit to each property to which a Investee Partnership relates and dealing
with any material difficulties as they arise.
Employees
As of February 29, 2000, the Company had 1,974 full-time employees.
Approximately 300 of the Company's employees were employed at its headquarters
in Chicago, Illinois. The Company's employees are not represented by any
collective bargaining unit. The Company believes that it maintains good
relations with its employees.
Government Regulation
Mortgage Origination and Ancillary Services
12
<PAGE>
The Company'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 the Company is found
not to be in compliance with TILA, aggrieved customers could have the right to
rescind their loan transactions with the Company and to demand the return of
finance charges paid to the Company, among other remedies. The Company is 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. The Company is also subject to RESPA and the Fair Debt
Collection Practices Act and is required to collect certain applicant
information and file an annual report with HUD pursuant to the Home Mortgage
Disclosure Act ("HMA"). The Company is also subject to the rules and regulations
of, and examinations by, HUD, the Veterans Administration, Fannie Mae, Freddie
Mac and state regulatory authorities with respect to originating, processing,
underwriting, selling and servicing mortgage loans and to various other federal
and state laws, rules and regulations governing among other things, the
licensing of, and procedures that must be followed by, consumer lenders and
servicers, and disclosures that must be made to customers. Various state laws
affect the Company's mortgage banking operations, including licensing
requirements and, in certain instances, state usury statutes.
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 the Company in connection with any litigation, it could have a material
adverse effect on the Company's business and results of operations.
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, because the Company's business is highly regulated, the laws,
rules and regulations applicable to it are subject to modification and change.
Any changes in such laws, rules and regulations could make compliance much more
difficult or expensive, restrict the Company's ability to originate or sell
loans, limit or restrict the amount of interest and other charges earned on
loans closed or sold by the Company, or otherwise adversely affect its business
or its prospects.
13
<PAGE>
Tax Syndication
Apollo, a tax credit syndication business, depends on provisions in the
Internal Revenue Code for the availability of LIHTCs and HRTCs for residential
properties. The LIHTC program is administered by the U.S. Department of the
Treasury and the Internal Revenue Service. To qualify for LIHTCs a project is
required to meet certain requirements for low income tenants and also a rent
restriction test. If a project fails to meet these tests, the owners of a
qualified low-income housing project will lose their entitlement to the LIHTCs
and are required to recapture a portion of the credits already taken. HRTCs are
available for any qualified project designated by the Secretary of the Interior
as a historic structure and meets certain Internal Revenue Code requirements.
HRTCs are subject to full or partial recapture if an investor transfers more
than one-third of its interest or the property is disposed of, in each case
within five years from the date the property is placed in service. If the laws
regarding tax credits are changed or tax credits become more limited or
unavailable, the Company's business and financial condition could be materially
and adversely affected.
Risk Factors
In addition to the risks discussed elsewhere in this Annual Report on Form
10-K, the following risks, uncertainties and other factors could affect the
Company's future business, financial condition and results of operations and
could cause future results to differ materially from historical results or those
anticipated.
If the Company does not manage the Company's growth effectively, the Company's
financial performance could be adversely affected; the Company's historical
growth rates are not likely to reflect the Company's future growth
The Company has experienced rapid growth since the Company's formation in
1992. The Company's revenues have grown from approximately $200,000 in 1992 to
$151.1 million in 1999. The Company's workforce has grown from five employees to
approximately 2,000 employees during the same period. The Company intends to
continue to grow by adding new loan originators, opening new branches, making
strategic acquisitions and building the Company's Internet origination
capabilities. Future growth will impose significant added responsibilities on
members of management, including the need to identify, recruit, maintain and
integrate additional employees, including management. There can be no assurance
that the Company's systems, procedures and controls will be adequate to support
the Company's operations as they expand. The Company's failure to manage growth
effectively, or the Company's inability to recruit, maintain and integrate
additional qualified employees, could have a material adverse effect on the
Company's business and results of operations. In addition, due to the Company's
rapid growth and recent acquisitions, the Company's historical growth rates are
not likely to accurately reflect the Company's future growth rates or the
Company's growth potential. The Company cannot assure you that the Company's
future revenues will increase or that the Company will continue to be
profitable.
Poor economic conditions affecting the mortgage industry or rising interest
rates could reduce the demand for mortgages and refinancings
Demand for mortgages will be adversely affected by (i) 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 and (ii)
changes in interest rates generally. 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 it 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
the Company's business and results of operations. While demand for mortgages in
the U.S. increased approximately 80% from 1997 to 1998 demand for mortgages in
1999 decreased approximately 15% from 1998 levels. In addition, demand for
mortgages in 2000 is expected to decline by approximately 24% from 1999 levels.
14
<PAGE>
Rising interest rates 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 the Company in particular. If
interest rates stabilize or rise even moderately, the Company's refinance loan
origination volume is likely to be adversely affected. Since December 31, 1998,
the average interest rate on a new 30-year fixed-rate home mortgage has
increased from 6.7% to 7.8%. The Company estimates that refinancing originations
as a percentage of the Company's total loan origination volume have decreased
from 54% for the year ended December 31, 1998 to 36% for the year ended December
31, 1999. Any material decline in the demand for mortgages or refinancings would
adversely affect the Company's business, financial condition and results of
operations.
The loss of key purchasers of the Company's loans or servicing rights or a
reduction in prices paid could adversely affect the Company's ability to
profitably sell the Company's loans and servicing rights
The Company currently sells substantially all of the loans the Company funds
to independent whole loan or bulk loan buyers and sells the accompanying
servicing rights to approved servicers. The premium income generated from these
sales represents a primary source of the Company's revenues and earnings.
Further, the Company is dependent on the cash generated from sales of mortgages
and servicing rights to fund the Company's future loan closings, to repay
borrowings under the Company's credit facilities and to fund the Company's other
obligations. In 1999, the Company sold over 85% of the loans funded by the
Company's mortgage bank to three large, national companies. In the event that
any purchasers of a significant amount of loans and/or servicing rights (1)
ceases to buy the Company's loans and/or servicing rights and equivalent
purchasers could not be identified on a timely basis, (2) lowers the price it
pays to the Company or (3) adversely changes the material terms by which it
currently makes purchases, the Company's business and results of operations
would be materially adversely affected.
The prices for which the Company is able to sell the Company's 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 the Company's
loans;
. any increase in the amount of similar loans available for sale;
. increased prepayments of, or defaults under, loans in general;
. the types and volume of loans being sold by the Company;
. the level and volatility of interest rates; and
. the quality of loans previously sold by the Company.
The prices for which the Company is able to sell the Company's mortgage
servicing rights vary from time to time and may be materially adversely affected
by a number of factors, including the general supply of and demand for mortgage
servicing rights and changes in interest rates. Servicing rights for a
particular loan category originated with higher interest rates tend to have a
lower value than those originated with comparatively lower interest rates.
A reduction in the size of the secondary market for the types of loans funded
by the Company may adversely affect the Company's ability to sell loans and
servicing rights in the secondary market, and accordingly adversely impact the
Company's profitability and ability to fund future loan closings. Any decrease
in the prices paid to the Company upon the sale of the Company's loans or
servicing rights could materially adversely affect the Company's business and
results of operations.
If the Company is unable to maintain adequate credit facilities or access to
funds, the Company's ability to make loans will be limited
The Company funds substantially all of the Company's loans through borrowings
under the Prism Mortgage warehouse credit facility and through repurchase
agreements and, to a lesser extent, through internally generated funds. The
Company repays borrowings under the warehouse credit facility with the proceeds
received from sales of loans and servicing rights. If the Company is unable to
renew or replace the warehouse facility or repurchase agreements on adequate
terms, are unable to comply with the terms of
15
<PAGE>
the warehouse facility or repurchase agreements, including the financial and
other covenants, or are unable to increase the warehouse facility or expand the
Company's repurchase agreements if required for future growth, the Company's
business and results of operations would be materially adversely affected. If
the Company cannot successfully maintain its existing warehouse facility or
replace it with comparable financing sources, the Company would be required to
curtail the Company's loan origination activities, which would have a material
adverse effect on the Company's business and results of operations. The
Company's principal credit facility provides it with an aggregate borrowing
amount of $250 million, which amount may be increased to $400.0 million, is
renewable annually and expires on March 31, 2000. On March 21, 2000, the Company
extended this credit facility through April 28, 2000. Pursuant to the agreement,
the maximum borrowing base has been reduced from $250 million to $200 million.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
The profitability of the Company's loans held for sale could be negatively
affected by an increase in interest rates
The value of the Company's loans is based, in part, on market interest rates,
and the Company may experience losses on loan sales if interest rates change
rapidly or unexpectedly and the Company is not properly hedged. If interest
rates rise after the Company fixes a price for a loan but before the Company
sells the loan in the secondary market, the value of that loan will decrease. If
the amount the Company receives from originating and selling the loan is less
than the Company's cost of borrowing to finance the loan, the Company could
incur net losses and the Company's business and operating results could be
adversely affected. Although the Company typically knows approximately how long
the Company will keep a loan after funding, there may be unexpected delays that
could increase the Company's interest rate exposure. While the Company uses
various hedging strategies to provide some protection against interest rate
risks, no hedging strategy can completely protect it. The nature and timing of
hedging transactions may influence the effectiveness of hedging strategies and
poorly designed strategies or improperly executed transactions may increase
rather than decrease risk and losses. In addition, hedging strategies involve
transaction and other costs. The Company cannot assure you that the Company's
hedging strategy and the hedges that the Company makes will adequately offset
the risks of interest rate volatility or that the Company's hedges will not
result in losses.
If the Company does not properly execute the Company's acquisition strategy,
including successfully integrating the Company's acquired companies, the
Company's business may suffer
An element of the Company's growth strategy is to expand the Company's
operations through selective acquisitions of independent mortgage brokers and
bankers. Substantial competition exists for acquisition opportunities in the
mortgage industry. This competition could result in an increase in the price of,
and a decrease in the number of, attractive acquisition targets. As a result the
Company may not be able to successfully acquire attractive targets on terms that
the Company deems acceptable. In addition, there can be no assurance that the
Company will be able to obtain the additional financing the Company will need
for the Company's acquisition program on terms that it deems acceptable and
therefore, its growth through acquisitions would be limited. Acquisitions may
also involve a number of special risks, including adverse short-term effects on
the Company's results of operations, dilution resulting from issuances of the
Company's common stock, diversion of management's time, strain on the Company's
financial and administrative infrastructure, difficulties in integrating
acquired businesses and personnel, loss of personnel and unanticipated legal
liabilities. The Company cannot assure you that the Company will be able to
overcome these acquisition risks or that they will not adversely affect the
Company's business and results of operations.
The Company's recently-acquired tax credit syndication business is subject to a
number of risks that could decrease the Company's profitability
The Company acquired Apollo, an affordable housing and historic rehabilitation
tax credit syndication business, in September 1999. For the year ended December
31 1999, approximately 26% of the Company's income from continuing operations
before income taxes were attributable to Apollo. The Company expects that Apollo
will continue to be an important source of income for the foreseeable future. A
number of factors, however, including the following, could cause Apollo's
contribution to the Company's earnings to be less than anticipated or even
negative:
16
<PAGE>
. Apollo has a limited operating history;
. competition to acquire interests in properties eligible for tax
credits is intense, and there can be no assurance that Apollo will
continue to be able to acquire such interests on terms allowing for
profitable syndication;
. Apollo's business depends on provisions in the Internal Revenue Code
of 1986, as amended, for low-income housing tax credits and historic
rehabilitation tax credits for residential properties. Adverse
legislative developments could jeopardize Apollo's business;
. Apollo's competitive position in the tax credit syndication market
hinges in part on its relationships with developers of eligible
properties and with the institutional investors to whom syndicated
tax credits are marketed. The termination of key relationships could
have an adverse ability on Apollo's ability to compete;
. Apollo's competitive position depends on its ability to retain its
key employees; and
. Appollo's ability to acquire Investee Partnerships and syndicate
interests is dependent on Appollo's ability to maintain adequate credit
facilities on acceptable terms.
If any of these factors were to negatively affect Apollo, or if Apollo's
performance were otherwise to deteriorate, the Company's overall business,
financial condition and results of operations could be materially adversely
affected. In addition, because Apollo generally acquires ownership of interests
in real estate projects prior to their syndication, the Company faces potential
loss of principal on the investment in such interests should Apollo be unable to
effect syndication at the prices or on the timetable anticipated when the
investment is made.
If the Company loses the Company's key personnel, the Company may not be able to
replace them with highly experienced personnel
The Company's future success depends to a significant extent on the continued
services of the Company's senior management, particularly Mark A. Filler,
President and Chief Executive Officer, Terry A. Markus, President of Prism
Illinois, William D. Osenton, President of Pacific Guarantee and Martin E.
Francis, President of Mortgage Market and other senior management at the
Company's key operating subsidiaries. The loss of the services of Mr. Filler,
Mr. Markus, Mr. Osenton, Mr. Francis or other key employees, could have a
material adverse effect on the Company's business and results of operations. The
Company does not maintain "key person" life insurance for any of the Company's
personnel.
If the Company cannot attract or retain qualified loan originators, the
Company's ability to maintain and increase the Company's origination volume will
be adversely affected
The Company depends on the Company's 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, the Company must be able to attract, motivate
and retain skilled loan originators. In addition, the Company's 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 the Company is unable to attract or retain a
sufficient number of skilled loan originators or even if the Company is able to
retain loan originators but the Company's costs increase, the Company's business
and results of operations could be adversely affected.
Intense competition could reduce the Company's market share and harm the
Company's financial performance
The Company faces 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
17
<PAGE>
the Internet. Mortgage companies must be able to offer a broad range of
attractively priced products to remain competitive. The Company competes with a
wide range of other mortgage lenders, including:
. other mortgage banks;
. commercial banks, savings and loan associations;
. credit unions;
. insurance companies and other finance companies; and
. Internet mortgage web sites.
Many of these competitors or potential competitors are better established,
substantially larger and have more capital and other resources than the Company
does. If the Company expands into additional geographical markets, it will face
competition from consumer lenders with established positions in those markets.
In the future, the Company may also face competition from government-sponsored
entities, such as Fannie Mae and Freddie Mac. Competition may lower the rates
the Company 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 the Company's loan originations and
loan sales. There can be no assurance that the Company will be able to compete
successfully in this evolving market.
If the Company is unable to implement the Company's Internet strategy
successfully, the Company's ability to grow the Company's overall origination
volume may be negatively affected
A portion of the Company's growth is dependent on the Company's ability to
originate loans on the Internet. The Company's Internet success will depend, in
part, on the development and maintenance of the Internet's infrastructure and
consumer acceptance of it as a distribution channel for mortgages. There can be
no assurance that consumers will increase their use of the Internet for
obtaining mortgage loans. In order to grow the Company's loan volume on the
Internet, it is dependent on affinity relationships with operators of Internet
mortgage web sites to capture some of the on-line mortgage growth. However, the
Company's ability to significantly increase the number of loans it originates
over the Internet and to continue to originate loans profitably through the
Internet remains uncertain. In addition, many of the Company's agreements with
Internet mortgage web sites and affinity relationships can be terminated with
notice by either party. The Company's business and results of operations may be
materially, adversely affected by the termination of these agreements.
Changes in existing government sponsored and federal mortgage programs could
make selling the Company's loans in the secondary market more difficult
The Company's 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 that facilitate the issuance of mortgage-backed
securities. A portion of the Company's 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 the Company's business and results of operations.
The Company's non-prime mortgage business subjects it to greater risks than the
Company's prime business
Lenders in the non-prime mortgage banking industry make loans to borrowers who
have impaired or limited credit histories or higher debt-to-income ratios than
traditional mortgage lenders allow. For the year ended December 31, 1999, only
approximately 1% of the dollar amount of the Company's loans originated was
categorized as non-prime. 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. The Company's failure to adequately address
these and other related risks could have a material adverse effect on the
Company's business and results of operations.
18
<PAGE>
The Company may be required to return proceeds obtained from the sale of loans
When the Company sells a loan to an investor, it is required to make
unqualified representations and warranties regarding the loan, the borrower and
the property. These representations are made based in part on the Company's due
diligence and information provided to it by borrowers and others. If any of
these representations or warranties are later determined not to be true, the
Company may be required to repurchase the loan from the investor or indemnify
the investor for any damages caused by the breach of such representation or
warranty. In connection with some non-prime loan sales, the Company 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, the Company is required to repurchase loans, indemnify investors or
return loan premiums, it could have a material adverse effect on the Company's
business and results of operations.
Because the Company's origination volume is geographically concentrated, the
Company's business may be adversely affected by developments in individual
markets
In 1999, approximately 33%, 27% and 17% of the Company's mortgage loan
originations, as measured by principal balances, were secured by property
located in California, Illinois and the Pacific Northwest, respectively. Should
these states or their surrounding regions experience adverse economic, political
or business developments or suffer natural disasters, the Company's ability to
originate loans would be reduced, and the rates of delinquency and foreclosure
on loans it originates would be higher, than if it has greater geographic
diversification. Moreover, if any of these states' or if the region's real
estate markets should experience an overall decline in property values, the
rates of delinquency, foreclosures, bankruptcies and losses on the loans the
Company originates may be expected to increase substantially, which could
negatively affect the Company's ability to originate loans or to sell the
Company's loans and servicing rights. Unless and until the Company achieves
greater geographic diversification, any disproportionate economic downturn in
these areas could have a material adverse effect on the Company's business and
results of operations.
The Company may not attain investors' expectations due to adverse factors
The Company's quarterly revenues and net earnings and losses 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, as a delay in a
loan sale from one quarter to the subsequent quarter may lower revenues
in the quarter from which the sale was delayed;
. size and timing of acquisitions and internal expansion, as the timing
will impact the future amount of revenues, goodwill and other expenses
recorded by the Company;
. the volatility of interest rates, as volatile interest rates could
impact the Company's ability to profitably originate and sell loans,
particularly if the Company's hedging strategy is ineffective;
. the level of interest rates, as origination volume, particularly with
respect to refinancings, is interest rate sensitive;
. the relative volume of mortgage loan originations, as a decrease in the
relative volume of originations from one quarter compared to a
subsequent quarter could negatively affect the revenues in the quarter
with the lower origination volume;
. the Company's ability to offer competitive rates, as the Company's
failure to offer competitive rates may lower the Company's origination
volume for a particular quarter;
19
<PAGE>
. changes in market rates for origination and processing fees, as a
decrease in these fees would lower the Company's quarterly revenue from
these sources; and
. the timing of transactions closed by Apollo, which may fluctuate greatly
between quarters.
In addition, a delay in closing a sale of loans or servicing rights would
postpone recognition of premium income on these sales to a subsequent quarter.
Unanticipated delays in closing a sale of loans or servicing rights could also
increase the Company's exposure to interest rate fluctuations by lengthening the
period during which the Company's variable rate borrowings under the Company's
credit facilities are outstanding. If the Company were unable to profitably sell
a sufficient number of loans or servicing rights in a particular reporting
period, the Company's revenues for that period would decline. The Company's
quarterly earnings will also be affected by:
. the timing of acquisitions and the recognition of costs associated with
those acquisitions;
. the generally lower initial profitability of newly opened branches
compared to mature branches; and
. the success of the Company's hedging strategy.
Mortgage brokerage regulations or other government regulations could adversely
affect the method by which the Company conducts the Company's business or reduce
the number of loans it originates
Most states have laws and regulations governing the registration or licensing
and conduct of persons providing mortgage brokerage services. Such laws and
regulations also typically require certain consumer protection disclosures and
compliance with loan solicitation procedures and a variety of other practices,
throughout the various stages of the mortgage solicitation, application and
approval process.
In addition to state law, mortgage brokerage services are heavily regulated by
federal law. For example, the Real Estate Settlement Procedures Act, prohibits
the payment and receipt of mortgage loan referral fees. The act, however, does
permit persons to be compensated for the fair market value of non-referral
services actually rendered.
Failure to comply with these requirements can lead to civil and/or criminal
liability, loss of approved status, demands for indemnification or loan
repurchases from buyers in the secondary market, rights of rescission for
mortgage loans, class action lawsuits and administrative and enforcement
actions.
In addition, members of Congress, government officials and political
candidates from time to time have suggested the elimination of or further
limitation on the mortgage interest deduction for federal income tax purposes
based on borrower income, type of loan or principal amount. Some of the
Company's loans are made to borrowers for the purpose of consolidating consumer
debt or financing other consumer needs. The competitive advantages of tax
deductible interest, when compared with alternative sources of financing, could
be eliminated or seriously impaired by this government action.
Although the Company believes that it is currently in compliance in all
material respects with applicable federal, state and local laws, rules and
regulations, it cannot assure you that the Company is, 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 the Company is unable to comply with those laws or regulations or
if new laws limit or eliminate some of the benefits of purchasing a mortgage,
the Company's business and results of operations may be materially adversely
affected.
If in the future the Company decides to securitize and/or retain the servicing
rights of the Company's loans, the Company would be subject to additional risks
that it does not currently face
20
<PAGE>
The Company currently does not securitize the loans that it originates, but
rather sells them to the secondary market. However, in the future if the prices
offered in the secondary market for the Company's loans are significantly lower
than what it could receive through securitization, it would consider
securitizing the Company's loans. If the Company began securitizing the its
loans, it 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;
. the potential of having to write down the value of retained residual
interests as a result of inaccurate projections regarding the fair value
of the residual interest; and
. increased potential for earnings fluctuations.
Except during the short period of time before a loan is sold, the Company also
does not retain the servicing rights to the loans it originates. The Company
sells the servicing rights at the same time it sells the loan. However, the
Company would consider retaining the servicing rights to the Company's loans if
it believed that their value was significantly greater than secondary market
buyers were then willing to pay. If the Company started retaining the servicing
rights to the Company's loans, it 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.
Pending industry-wide litigation could change the manner in which the Company
does business and subject it to potential liability
Numerous lawsuits seeking class certification have been filed against mortgage
lenders alleging that a type of direct and indirect payments to mortgage brokers
by those lenders violate the Real Estate Settlement Procedures Act. These
lawsuits have generally been filed on behalf of a purported nationwide class of
borrowers and allege that various forms of direct and indirect payments to
mortgage brokers are referral fees or unearned fees prohibited under RESPA, or
that consumers were not informed of the brokers' compensation, in violation of
law. Several federal district courts construing RESPA in these cases have
reached conflicting results. In the only appellate decision addressing the
issue to date, the United States Court of Appeals for the Eleventh Circuit in
Culpepper v. Inland Mortgage Corporation reversed the lower court's summary
judgment in favor of the lender defendant on the grounds that the lender had
failed to establish that the indirect payment in the form of a "yield spread
premium" made to a broker in a particular transaction was not a referral fee
prohibited by RESPA. The case was remanded to the district court for further
proceedings. The Department of Housing and Urban Development, acting upon
Congress' direction, issued a policy statement in January 1999 setting forth its
position that the legality of lender payments to mortgage brokers depends on a
case-by-case analysis that takes into consideration all direct and indirect
compensation received by the mortgage broker to determine whether (1) goods or
facilities have been actually furnished or services performed for the
compensation paid, and (2) the compensation is reasonably related to the value
of the goods or facilities actually furnished or services actually performed.
The Company receives various forms of direct and indirect payments from
lenders for loans it brokers. 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
the Company to change its broker compensation programs or subject it to material
monetary judgments or other penalties. Any changes or penalties may have a
material adverse effect on the Company's business and results of operations.
The market price of the Company's common stock is highly volatile
21
<PAGE>
The market price of the Company's common stock is highly volatile and subject
to wide fluctuations in response to numerous factors, including the following:
. actual or anticipated fluctuations in the Company's operating results;
. changes in expectations as to the Company's future financial
performance, including financial estimates by securities analysts and
investors;
. the operating and stock performance of the Company's competitors;
. announcements by the Company or its 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 the Company's common stock.
In addition, the stock market from time to time experiences 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 the Company's common stock, regardless of the Company's actual
operating performance. Although an active public market for the Company's common
stock exists, it may not be sustained in the future and trading in the Company's
common stock may be limited.
In the past, security holders have often brought securities class action
litigation against a company following periods of volatility in the market price
of their securities. The Company may in the future be the target of similar
litigation. Securities litigation could result in substantial costs and divert
management's attention and resources.
The Company's officers elect all of the Company's directors and control
stockholder votes; your interests may not be the same as those of the Company's
officers
The Company's officers and directors, together with entities related to them,
beneficially own approximately 66% of the Company's outstanding common stock. As
a result, if acting together, these stockholders have the ability to control the
outcome of all matters requiring stockholder approval including:
. the election and removal of directors;
. amendments to the Company's charter; and
. any merger, sale of all or substantially all of the Company's 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 the Company's common stock could be adversely affected.
Anti-takeover provisions affecting the Company could prevent its stockholders
from obtaining a change of control premium for their shares of the Company's
common stock
The Company's amended and restated certificate of incorporation and amended
and restated bylaws and Delaware law contain anti-takeover provisions that could
have the effect of delaying or preventing changes in control. The provisions in
the Company's charter documents include the following:
. a classified board of directors pursuant to which the Company's
directors are divided into three classes, with three-year staggered
terms;
. the ability of the Company's board of directors to issue shares of
preferred stock and to determine the price and other terms, including
preferences and voting rights, of those shares without stockholder
approval;
. stockholder action to be taken only at a special or regular meeting; and
22
<PAGE>
. advance notice procedures for nominating candidates to the Company's
board of directors.
. In addition, the Company adopted a stockholder rights plan in January
2000, pursuant to which the Company distributed one right for each
outstanding share of Common Stock. These rights will cause substantial
dilution to the ownership of a person or group that attempts to acquire
the Company or a substantial ownership position in the Company on terms
not approved by the Board of Directors of the Company.
The foregoing provisions could have the effect of delaying, deferring or
preventing a change in control of Prism Financial; discourage bids for the
Company's 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, the
Company's common stock. The Company is subject to certain Delaware laws that
could have similar effects. One of these laws prohibits the Company from
engaging in a business combination with any interested stockholder for a period
of three years from the date the person became an interested stockholder unless
certain conditions are met.
23
<PAGE>
ITEM 2. 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. The Company leases the following
properties for the Company's regional operations:
<TABLE>
<CAPTION>
Approximate
Location Square Footage
- -------- --------------
<S> <C>
Pt. Richmond, California...................................... 15,000
Englewood, Colorado........................................... 13,990
Lake Oswego, Oregon........................................... 5,189
Cleveland, Ohio............................................... 3,226
</TABLE>
In addition, The Company leases 155 additional locations in connection with
the Company's branch offices, for lease terms expiring at various dates from
2000 through 2006. The Company does not own any real estate except for the
Company's mortgagee's interests in the ordinary course of business. The Company
intends to lease additional office space in connection with the expansion of its
branch office system.
ITEM 3. LEGAL PROCEEDINGS
Prism Financial is involved from time to time in litigation incidental to its
business. The Company is not aware of any pending or threatened claims against
the Company that might materially adversely affect its operating or financial
results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, $0.01 par value per share (the "Common Stock"), is
traded on the Nasdaq National Market under the symbol "PRFN." The following
table sets forth, for the quarters indicated, the range of high and low closing
sale prices per share for the Common Stock on the Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
---------- ----------
Year Ended December 31, 1999:
<S> <C> <C>
Second Quarter................................. 21 3/4 18 1/4
Third Quarter.................................. 28 15/16 9 7/8
Fourth Quarter................................. 13 1/8 4 9/16
</TABLE>
As of March 27, 1999, the Common Stock was held by 33 holders of record.
The Company has never declared any cash dividends or distributions on its
capital stock. The Company currently intends to retain its earnings to finance
future growth and therefore does not anticipate paying any cash dividends in the
foreseeable future.
24
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the years ended December 31, 1999
and 1998 and as of December 31, 1999 and 1998 have been derived from Prism
Financial's consolidated financial statements, included elsewhere herein, which
have been audited by PricewaterhouseCoopers LLP, independent accountants. The
following selected financial data for the year ended December 31, 1997 has been
derived from Prism Financial's consolidated financial statements, included
elsewhere herein, which have been audited by McGladrey & Pullen, LLP,
independent public accountants. The following selected financial data for the
years ended December 31, 1996 and 1995 and as of December 31, 1997, 1996 and
1995 have been derived from the audited financial statements of Prism Financial
not included elsewhere herein. 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, Prism Financial's financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(in thousands, except per share data)
Statement of Income Data:
Total revenues............................ $150,659 $85,666 $26,763 $12,201 $7,577
Total expenses............................ 142,176 73,570 23,927 11,181 7,354
-------- ------- ------- ------- ------
Income from continuing operations
before income taxes..................... 8,483 12,096 2,836 1,020 223
Income tax benefit........................ (1,467) - - - -
-------- ------- ------- ------- ------
Income from continuing operations......... 9,950 12,096 2,836 1,020 223
Loss from discontinued operations, net (1) (1,097) (1,001) (333) - -
-------- ------- ------- ------- ------
Net income................................ $ 8,853 $11,095 $ 2,503 $ 1,020 $ 223
======== ======= ======= ======= ======
Earnings per share from continuing
operations (diluted)..................... $ 0.74 $ 1.14 $ 0.28
======== ======= =======
$ 0.66 $ 1.05 $ 0.24
Net earnings per share (diluted).......... ======== ======= =======
Shares used in computing earnings per
share (diluted).......................... 13,454 10,611 10,269
======== ======= =======
Pro forma data (unaudited) (2):
Income from continuing operations, net
of pro forma income taxes................ $ 5,175 $ 7,504 $ 1,708
======== ======= =======
Pro forma earnings per share (diluted).... $ 0.35
Pro forma shares used in computing pro ========
forma earnings per share (diluted)....... 14,689
========
</TABLE>
___________
(Footnotes on following page)
25
<PAGE>
<TABLE>
<CAPTION>
As of
December 31,
--------------------------------------------
1999 1998 1997 1996 1995
-------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
(in thousands)
Balance Sheet Data:
Cash and cash equivalents............................ $ 6,915 $ 12,124 $ 1,164 $ 1,144 $ 597
Loans held for sale.................................. 198,294 467,254 60,901 17,769 6,016
Properties held for sale............................. 74,070 - - - -
Total assets......................................... 331,603 503,622 65,332 20,100 7,409
Loans sold under agreements to repurchase............ 11,934 292,627 - - -
Warehouse lines of credit............................ 191,603 170,217 59,634 17,595 6,016
Capital contributions payable........................ 61,674 - - - -
Total debt........................................... 221 5,027 - - -
Total stockholders' equity........................... 42,035 16,203 3,076 1,523 503
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1999 1998 1997 1996
------- ------- ------- ------
<S> <C> <C> <C> <C>
(in thousands)
Operating Data:
Total mortgage originations (in millions)............................ $ 7,669 $ 5,025 $ 1,469 $ 857
Internet mortgage originations (in millions)......................... $ 336 $ 122 $ - $ -
Number of loans originated........................................... 46,532 31,943 10,086 5,460
Loan originators at period end....................................... 1,223 749 203 126
Number of branches at period end..................................... 159 95 17 11
</TABLE>
___________
(1) In July 1999, the Company discontinued the operations of a business segment
that originated and sold sub-prime mortgages. See Note 8-Discontinued
Operations in the Notes to the Consolidated Financial Statements included
elsewhere herein for a more detailed discussion of this transaction.
(2) Pro forma information is presented to reflect the results of operations as
if the Company had been taxed as a C corporation since the beginning of
each period presented and to reflect the pro forma weighted average number
of shares outstanding as if the shares issued in the initial public
offering had been issued on January 1, 1999.
26
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion and analysis below contains certain forward-looking statements
(as such term is defined in Section 21E of the Exchange Act) that reflect the
current views of the management of Prism Financial Corporation and subsidiaries
(collectively, "Prism Financial" or the "Company"), as well as assumptions made
by, and information currently available to, the Company's management, with
respect to future events and financial performance. The Company's actual growth,
results, performance and business prospects and opportunities in 2000 and beyond
could differ materially from those expressed in, or implied by, such forward-
looking statements. See "-Special Note Regarding Forward-Looking Statements" on
page 38 and Item 1. Business - Risk Factors beginning on page 14 for a
discussion of risks, uncertainties and other factors that could cause or
contribute to such material differences.
General
Prism Financial is a leading retail mortgage banking company primarily engaged
in the business of originating, selling and brokering residential mortgage
loans. The Company originated $7.7 billion in loans in 1999. Through the
Company's network of approximately 1,200 commission-only loan originators
operating out of 159 retail branches in 27 states as of December 31, 1999, and
the Company's relationships with operators of leading Internet mortgage web
sites, the Company offers a broad array of residential mortgage products
targeted primarily to high-credit-quality borrowers. The Company operates 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, the Company has focused on growing its
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 1999, the Company opened seven
company-owned branches, closed 20 unprofitable branches, opened 28 net branches
and added approximately 70 new loan originators.
During 1999, the Company continued to selectively pursue acquisitions of
independent, high-quality mortgage brokers and mortgage banks. Since 1996, the
Company has completed nine acquisitions of mortgage companies, including Pacific
Guarantee Mortgage Corporation ("Pacific Guarantee") and Mortgage Market, Inc.
("Mortgage Market") in 1998 and First City Financial Corporation ("First City"),
Mortgage Express, Inc. ("Mortgage Express") and Valley Financial Corporation
("Valley Financial") in 1999. As of the respective acquisition dates, these nine
acquisitions resulted in the addition of over 800 loan originators and 111
branches in 16 states.
In September 1999, the Company acquired an 80 percent interest in Apollo
Housing Capital, L.L.C. ("Apollo"). Through this transaction, the Company sought
to diversify its revenue and growth channels. Apollo structures and sells
interests in investment portfolios comprised of affordable housing and historic
tax credits.
The Company believes that the Internet provides a unique medium to deliver
mortgage services. The Company's objective is to become a leading provider of
mortgage products through the Internet. The Company believes its broad range of
competitively priced products, its offering of private label online mortgage
centers to corporations and other organizations, and its strategic relationships
with leading Internet mortgage web sites position it to capitalize on the
anticipated growth in on-line mortgage originations. International Data
Corporation estimates the on-line mortgage market will increase from
approximately $18.7 billion originated in 1999 to over $90 billion by 2003. The
Company originated approximately $336 million of loans over the Internet in
1999.
Beginning in September 1999, the Company began to see a decline in its
origination volumes. This decline was caused by a combination of rising interest
rates, which led to a sharp decrease in refinance volume, and seasonal factors,
which typically cause a slowdown in purchase volume in the first and fourth
quarters of each year. The result of this decrease in volume was a sharp
reduction in the profitability of the Company beginning in the third quarter of
1999 and increasing in the fourth quarter. The Company responded to this
slowdown by reducing non-loan officer workforce by 24% and 15% in the third and
fourth quarters, respectively.
27
<PAGE>
Termination of S corporation status and income taxes
Income Taxes and Termination of S Corporation Status. Effective January 1,
1996, Prism Mortgage Company ("Prism Mortgage"), the predecessor to Prism
Financial, with the consent of its stockholders, elected to be treated as an S
corporation for federal and certain state income tax purposes. Accordingly, in
lieu of corporate income taxes, the stockholders separately accounted for their
pro rata share of Prism Mortgage's items of taxable income, deductions, losses
and credits. Therefore, the financial statements for the periods covered by the
S corporation election do 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.
Since the completion of the Company's initial public offering (the
"Offering") on May 28, 1999, the Company has been treated as a C corporation and
has been subject to corporate income taxation. The Company recorded an income
tax benefit of $1,228,000 due to the S corporation conversion. Additionally, a
pro forma income tax provision has been presented as if Prism Financial had been
taxable as a C corporation for federal and state income tax purposes for the
entire year of 1999 and for 1998 and 1997.
28
<PAGE>
Results of operations
The following table sets forth, for the periods indicated, information derived
from the Company's statement of income expressed as a percentage of total
revenues. 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 the stable and decreasing interest rate environments during
1997, 1998 and the first half of 1999, the Company's historical performance
may not be indicative of results in a rising interest rate environment. In
addition, the Company's recent and rapid growth may distort some of its ratios
and financial statistics and may make period-to-period comparisons difficult. As
a result, the Company's historical earnings performance may be of little
relevance in predicting future performance. Furthermore, the Company's financial
statistics may not be indicative of its results in future periods.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Revenues:
Loan origination income.............................................. 66.7% 73.1% 76.9%
Net premium income................................................... 9.9 13.8 6.1
Loan-related fees.................................................... 13.3 8.9 13.6
Net interest income.................................................. 3.4 2.1 1.4
Net syndication income............................................... 2.3 - -
Other................................................................ 4.4 2.1 2.0
----- ----- -----
100.0 100.0 100.0
----- ----- -----
Expenses:
Commissions.......................................................... 40.2 41.7 37.6
Loan-related expenses................................................ 7.6 9.8 14.1
Salaries and benefits................................................ 27.6 20.9 22.9
General and administrative expenses.................................. 16.7 11.6 13.1
Depreciation and amortization........................................ 2.2 1.7 1.2
Other................................................................ 0.1 0.2 0.5
----- ----- -----
94.4 85.9 89.4
----- ----- -----
Income from continuing operations before income taxes.............. 5.6 14.1 10.6
----- ----- -----
Income tax benefit from operations and conversion of "S" corporation. (1.0) - -
----- ----- -----
Income from continuing operations................................. 6.6 14.1 10.6
----- ----- -----
Discontinued Operations:
Loss from discontinued operations, net of income taxes............... (0.1) (1.1) (1.2)
----- ----- -----
Loss on disposal, net of income taxes................................ (0.6) - -
----- ----- -----
Net income........................................................ 5.9% 13.0% 9.4%
===== ===== =====
Pro Forma Information (1):
Income from continuing operations before income taxes............. 5.6% 14.1% 10.6%
Pro forma provision for income taxes.............................. 2.2 5.3 4.2
----- ----- -----
Income from continuing operations adjusted for pro forma income
taxes............................................................ 3.4% 8.8% 6.4%
===== ===== =====
</TABLE>
(1) Pro forma information is presented to reflect the results of operations had
the Company been taxed as a C corporation since the beginning of each
period presented.
Revenues
The Company earns revenues from the following sources: retail origination of
loans; mortgage banking activities; the sale of mortgage-related ancillary
services; and tax credit syndication fees. As a retail originator of loans, the
Company generates loan origination income and loan-related fees through funded
and brokered loans. Loan origination income consists of origination points paid
by borrowers or discount points paid by wholesale lenders. Loan-related fees
consist of application, documentation and processing fees paid by borrowers. On
the loans closed through the Company's mortgage bank, the Company generates
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
29
<PAGE>
loans and servicing rights sold. Net interest income consists of the net
difference between interest received on the Company's mortgage loans held for
sale and interest expense paid under the Company's warehouse credit facilities.
The Company also generates other revenue from the sale of mortgage-related
services, including mortgage and title insurance policies, appraisals, credit
reports and flood zone determination. Through the acquisition of an 80% interest
in Apollo during the third quarter of 1999, the Company has entered the
affordable housing and historic rehabilitation tax credit syndication business.
Apollo packages interests in investment portfolios comprised of affordable
housing and historic rehabilitation tax credits. Interests in these funds are
then sold to outside investors. Net syndication income represents the revenue
Apollo receives from selling interests in the funds, net of (1) the costs paid
by Apollo to acquire the interests that are syndicated and (2) the direct
expenses associated with the syndication. Apollo also receives fees from the
ongoing management of the investment funds.
The Company's total revenues increased to $150.7 million in 1999, an increase
of $65.0 million, or 76%, over 1998 total revenues of $85.7 million. Total
revenues in 1998 increased $58.9 million, or 220%, over 1997 revenues of $26.8
million. The increases in total revenues were due primarily to higher loan
origination volume and increased mortgage banking activity during these years.
Additionally, the Company's entrance into the tax syndication business, as well
as the formation of a bundled services business, during 1999 contributed to the
increase in total revenues for 1999, as compared to 1998. The tax credit
syndication business contributed $3.5 million to total revenues in 1999, and the
newly-formed bundled services business contributed $1.9 million to total
revenues in 1999.
Loan origination volume increased to $7.7 billion in 1999, an increase of $2.7
billion, or 54%, over 1998 loan origination volume of $5.0 billion. Loan
origination volume in 1998 increased $3.5 billion, or 233%, over 1997 loan
origination volume of $1.5 billion. The increases in loan origination volume
during 1999, as compared to 1998, resulted primarily from the full year impact
during 1999 of the Pacific Guarantee and Mortgage Market acquisitions, which
were completed at the end of the third quarter of 1998. To a lesser extent, the
acquisitions of First City in April 1999, Valley Financial in September 1999 and
Mortgage Express also in September 1999, as well as new branch expansion and
recruitment of additional loan originators, also contributed to the growth of
loan origination volume during 1999. This increase was offset partially by a
decrease in loan origination volume during the fourth quarter of 1999 as a
result of the slowdown in the mortgage industry, as discussed above. The
increase in loan origination volume during 1998, as compared to 1997, was due
primarily to the acquisitions of Pacific Guarantee and Mortgage Market, as well
as the overall expansion of new branches and the hiring of additional loan
originators. The Company had 159 retail branches and over 1,200 loan originators
as of December 31, 1999, as compared to 95 retail branches and approximately 750
loan originators as of December 31, 1998 and 17 retail branches and
approximately 200 loan originators as of December 31, 1997. Refinancing activity
accounted for approximately 36% of the Company's origination volume in 1999, as
compared to 54% in 1998 and 31% in 1997. The reduction in refinancing
origination volume during 1999, which is interest-rate sensitive, was
attributable to increasing interest rates during the second half of the year.
The increase in refinancing origination volume during 1998, as compared to 1997,
was attributable to decreasing interest rates during 1998.
Loan origination income. Loan origination income increased to $100.5 million
in 1999 from $62.6 million in 1998, an increase of $37.9 million, or 61%. Loan
origination income increased $42.0 million, or 204%, over 1997 loan origination
income of $20.6 million. These increases were attributable to the growth in loan
origination volume during these periods, as discussed above.
Net premium income. Net premium income increased to $14.9 million in 1999
from $11.8 million in 1998, an increase of $3.1 million, or 26%. Net premium
income in 1998 increased $10.2 million, or 638%, over 1997 net premium income of
$1.6 million. As a percentage of total loan origination volume, the Company's
mortgage bank funded 46% of the Company's loan originations in 1999, as compared
to 47% in 1998 and 37% in 1997. The increase in net premium income during 1999,
as compared to 1998, resulted primarily from the higher volume, on an absolute
basis, of loan originations funded through the Company's mortgage bank. Mortgage
loans sold during 1999 increased to $3.8 billion, an increase of $1.8 billion,
or 90%, over mortgage loans sold of $2.0 billion in 1998. This increase was
offset in part by the Company's lower margins realized on mortgage loans sold
during the second half of 1999 due to increasing interest rates. The increase in
net premium income in 1998, as compared to 1997, resulted primarily from the
higher volume of loan originations funded through the Company's mortgage bank,
both on an absolute and percentage basis, and the improved pricing on the
Company's sales of servicing rights resulting from improved market conditions
and larger volume during 1998. Mortgage loans sold in 1998 increased by $1.5
billion, or 303%, over 1997 mortgage loans sold of $495 million. In addition,
the Company increased net premium income in 1998
30
<PAGE>
through improved execution of its loan sales, as it sold a majority of its loans
through bulk sales, assignment of trades and co-issue transactions, rather than
flow sales, which was the principal method used in 1997.
Loan-related fees. Loan-related fees increased to $20.1 million in 1999 from
$7.7 million in 1998, an increase of $12.4 million, or 161%. The increase in
loan-related fees was due primarily to the increase in loan origination volume.
Additionally, because application and processing fees are often waived on
refinancing transactions, the smaller percentage of refinancing volume during
1999, as compared to 1998, resulted in higher loan-related fees during 1999.
Loan-related fees increased in 1998 by $4.1 million, or 114%, over 1997 loan-
related fees of $3.6 million. Loan-related fees increased in 1998 due to
increased loan origination volume.
Net interest income. Net interest income in 1999 increased to $5.0 million
from $1.8 million in 1998, an increase of $3.2 million, or 177%. Net interest
income in 1998 increased by $1.4 million, or 386%, over 1997 net interest income
of $363,000. The increases in net interest income during these periods were due
primarily to the following factors: the increase in loans funded by the
Company's mortgage bank; a higher average balance of mortgage loans held for
sale; reduction in the effective rate of interest paid by the Company to finance
loans held for sale attributable to increased usage of repurchase agreements and
other credit lines, including Fannie Mae's "As Soon as Pooled/Early Purchase
Option" (the "ASAP Plus" program); and the increased use of bulk sales and co-
issue transactions, which resulted in an increase in the length of time loans
were held for sale and allowed the Company to further benefit from its positive
net interest margin. Additionally, the Company obtained a new warehouse credit
facility in the first half of 1999, which contributed to the reduction in the
effective rate of interest paid by the Company during 1999.
Net syndication income. Net syndication income was $3.5 million for 1999.
Because the Company first entered the tax credit syndication business in the
third quarter of 1999 with the acquisition of its 80% interest in Apollo, the
Company did not earn net syndication income during 1998 or 1997.
Other income. Other income increased to $6.6 million in 1999 from $1.8 million
in 1998, an increase of $4.8 million, or 267%. Other income in 1998 increased by
$1.3 million, or 238%, over other income of $547,000 in 1997. The increase in
other income during 1999 was due primarily to the Company's formation of
Lender's Mortgage Services, L.L.C. ("LMS"), a bundled services business, in the
second quarter of 1999, an increase in fees earned from the Company's risk-
sharing relationships with certain mortgage insurance companies, and an increase
in volume bonuses on loans brokered to specific institutions. To a lesser
extent, the revenues earned in a full year of operations by Illinois Guaranty
Title, L.L.C. ("IGT"), a title insurance business contributed to the Company by
its principal shareholders in April 1998, contributed to the increase of other
income during 1999. The increase in other income during 1998 was attributable
primarily to income generated by IGT during 1998.
Expenses
The Company's 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, travel
expenses and professional services fees; and (5) depreciation and amortization
expenses related principally to the Company's facilities, computers and
intangible assets associated with acquisitions.
The Company's total expenses increased to $142.2 million in 1999, an increase
of $68.6 million, or 93%, over 1998 total expenses of $73.6 million. Total
expenses in 1998 increased $49.7 million, or 208%, over 1997 expenses of $23.9
million.
Commissions. Commissions expense increased to $60.5 million in 1999, an
increase of $24.8 million, or 69%, over 1998 commissions expense of $35.7
million. Commissions expense in 1998 increased $25.6 million, or 253%, over 1997
commissions expense of $10.1 million. The increases in commissions expense were
due primarily to higher loan origination volume in each of the periods.
Commissions expense represented 40% of total revenues in 1999, as compared to
42% in 1998 and 38% in 1997. The slight decrease in commission expense
31
<PAGE>
as a percentage of total revenues during 1999, as compared to 1998, was
primarily due to the addition of revenues from the Company's ancillary services
and tax credit syndication segments, which increased the overall revenue base
during 1999. The increase in commissions expense as a percentage of revenues in
1998, as compared to 1997, was primarily 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 $11.5 million in
1999, an increase of $3.1 million, or 37%, over 1998 loan-related expenses of
$8.4 million. This increase in loan-related expenses was due primarily to
increased loan origination volume. Loan-related expenses represented 8% of total
revenues in 1999, as compared to 10% in 1998. As a percentage of total revenues,
loan-related expenses decreased primarily due to the addition of revenues from
the Company's ancillary services and tax credit syndication segments, as well as
the positive margins earned from LMS.
Loan-related expenses in 1998 increased $4.6 million, or 121%, over 1997 loan-
related expenses of $3.8 million. The increase in loan-related expenses resulted
primarily from the increased volume of loan closings and additional reserves
established for potential loan repurchase, substitution and premium recapture
obligations during 1998, as compared to 1997. Loan-related expenses represented
10% of total revenues in 1998, as compared to 14% in 1997. This decrease in
loan-related expenses as a percentage of total revenues resulted primarily from
the timing of loan sales at the end of the respective periods. Loans held for
sale were $467.3 million at December 31, 1998, as compared to $60.9 million at
December 31, 1997, an increase of 667%. Because the Company must defer the
revenues and expenses associated with loans closed, but not yet sold, the
greater balance in loans held for sale at December 31, 1998 resulted in a higher
expense deferral in 1998, as compared to 1997.
Salaries and benefits. Salaries and benefits increased to $41.6 million in
1999, an increase of $23.7 million, or 132%, over 1998 salaries and benefits of
$17.9 million. Salaries and benefits represented 28% of total revenues in 1999,
as compared to 21% in 1998. The increase in personnel expenses, on an absolute
basis and as a percentage of total revenues, related primarily to the full year
impact of the Pacific Guarantee and Mortgage Market acquisitions, which were
consummated in late 1998, and the First City acquisition, which was consummated
in early 1999 and, to a lesser extent, the acquisitions of Valley Financial,
Mortgage Express and Apollo, which were consummated in late 1999. Additionally,
the hiring associated with building the infrastructure to support a
significantly larger, newly-public company contributed to the increases in
salaries and benefits during 1999. This increase in salaries and benefits was
offset partially by the Company's 24% and 15% reductions in its non-loan officer
workforce during the third quarter and fourth quarter, respectively, of 1999.
The Company made these reductions to its non-loan officer workforce in response
to sharp declines in origination volume in the third and fourth quarters of 1999
caused by rising interest rates and typical seasonal factors. As of December 31,
1999, excluding loan originators, the Company employed 878 people, as compared
to 713 people as of December 31, 1998.
Salaries and benefits in 1998 increased $11.8 million, or 193%, over 1997
salaries and benefits of $6.1 million. Salaries and benefits represented 21% of
total revenues in 1998, as compared to 23% in 1997. The increase in personnel
expenses, on an absolute basis, related primarily to increased staffing at new
branches, as well as the Pacific Guarantee and Mortgage Market acquisitions. As
a percentage of total revenues, salaries and benefits decreased due primarily to
the growth of revenues exceeding the pace of hiring during 1998. As of December
31, 1998, excluding loan originators, the Company employed 713 people compared
to 262 people at December 31, 1997.
General and administrative expenses. General and administrative expenses
increased to $25.1 million in 1999, an increase of $15.2, or 154%, over 1998
general and administrative expenses of $9.9 million. General and administrative
expenses represented 17% of total revenues in 1999, as compared to 12% in 1998.
The increase in general and administrative expenses, on an absolute basis and as
a percentage of total revenues, was due primarily to the following factors: an
increase in occupancy costs as a result of the opening of new branches during
1999; an increase in general and administrative expenses associated with the
acquisitions completed since the end of the third quarter of 1998, including
Pacific Guarantee, Mortgage Market, First City, Valley Financial, Mortgage
Express and Apollo; and expenses that fluctuate with increases in loan volume,
such as office supplies, telephone and delivery charges. These increases were
offset partially by the Company's closing of unprofitable branches during the
third and fourth quarters of 1999.
32
<PAGE>
General and administrative expenses in 1998 increased by $6.4 million, or
183%, over 1997 general and administrative expenses of $3.5 million. General and
administrative expenses represented 12% and 13% of total revenues in 1998 and
1997, respectively. The increase in general and administrative expenses, on an
absolute basis, was due primarily to an increase in occupancy costs as a result
of the opening of the Company's new corporate headquarters in Chicago and nine
new company-owned branches in 1998, the Pacific Guarantee and Mortgage Market
acquisitions and expenses that fluctuate with increases in loan volume.
Depreciation and amortization. Depreciation and amortization increased to
$3.3 million in 1999, an increase of $1.9 million, or 136%, over 1998
depreciation and amortization of $1.4 million. Depreciation and amortization
represented 2% of total revenues in both 1999 and 1998. The increase in
depreciation and amortization was primarily attributable to the following
factors: purchases of additional equipment and leasehold improvements for new
branches opened during 1999; the continued development of the Company's
proprietary in-house mortgage banking system and internet technology; and
additions to fixed assets, as well as goodwill and other intangible assets,
attributable primarily to the Pacific Guarantee, Mortgage Market and First City
acquisitions, and to a lesser extent, to the Mortgage Express, Valley and Apollo
acquisitions. The increase was offset partially by the Company's closing of
unprofitable branches during the third and fourth quarters of 1999.
Depreciation and amortization in 1998 increased by $1.1 million, or 342%,
over 1997 depreciation and amortization of $322,000. Depreciation and
amortization represented 2% of total revenues in 1998, as compared to 1% in
1997. The increase in depreciation expense was primarily attributable to
purchases of additional equipment and leasehold improvements for new branches
and the Company's new corporate headquarters, the continued development of the
Company's proprietary in-house mortgage banking system, and goodwill
amortization attributed to the 1998 acquisitions.
Income taxes. The Company recorded an income tax benefit of $239,000 during
1999, representing the tax benefit for the Company's pre-tax loss for the period
from May 28, 1999 (termination of S corporation status) through December 31,
1999. The Company also recorded an income tax benefit of $1.2 million in 1999
due to its conversion from an S corporation to a C corporation.
Discontinued operations. On July 1, 1999, the Company adopted a plan to
discontinue the operations relating to its subsidiary, Infiniti Mortgage, L.L.C.
("Infiniti"). Infiniti was created to originate and sell non-prime mortgages. As
a result of the discontinuance of Infiniti's operations, the Company no longer
originates loans from specialized retail branches focusing primarily on non-
prime mortgages. The Company has accounted for this business as a discontinued
operation in the accompanying consolidated financial statements for all periods
presented, with a measurement date of July 1, 1999. For 1999, the Company
reported a loss from discontinued operations, net of taxes, of $244,000 and a
loss on disposal of this business, net of income taxes, of $853,000. The Company
reported a loss from discontinued operations, net of income taxes, of $1.0
million for 1998 and $333,000 for 1997. The Company does not anticipate that the
discontinuance of this business will have a material impact on its future
operations.
Net income. Net income decreased to $8.9 million in 1999, a decrease of $2.2
million, or 20%, as compared to net income of $11.1 million in 1998. Net income
as a percentage of loan origination volume in 1999 dropped to 12 basis points,
as compared to 22 basis points in 1998. The decrease in net income during 1999
was primarily due to interest rate increases in the second half of 1999, which
lowered profit margins realized on loans sold in the secondary market and slowed
origination growth in the second half of 1999. This decrease in net income
during 1999 was offset in part by approximately $1.4 million of net income
contributed by the tax credit syndication business. Net income increased $8.6
million, or 344%, in 1998, from $2.5 million in 1997. Net income as a percentage
of loan origination volume grew to 22 basis points in 1998 from 17 basis points
in 1997 due primarily to the significant increase in the number of loans funded
through the Company's mortgage bank, which generate higher margins than brokered
loans.
Recent Developments
33
<PAGE>
On March 10, 2000, the Company entered into a merger agreement (the "Merger
Agreement") with Royal Bank of Canada ("RBC") and Prism Acquisition Subsidiary,
Inc., a wholly-owned subsidiary of RBC ("Purchaser"). Pursuant to the Merger
Agreement, Purchaser commenced a tender offer on March 22, 2000 to purchase all
of the issued and outstanding Common Stock of the Company, together with the
associated preferred stock purchase rights, for $7.50 per share in cash.
Consummation of the tender offer is subject to the condition that at least a
majority of the outstanding shares of the Company's Common Stock be validly
tendered and not withdrawn. In connection with the Merger Agreement,
stockholders holding approximately 62% of the issued and outstanding Common
Stock have entered into an agreement with RBC and Purchaser to tender their
shares. Consummation of the tender offer is also subject to the expiration or
termination of any applicable antitrust waiting period and to certain regulatory
approvals and other conditions. Following completion of the tender offer and
subject to certain conditions, Purchaser would be merged with and into the
Company, and the Company would thereby become a wholly-owned, indirect
subsidiary of RBC. Any shares not tendered in the offer would be converted
through the merger into the right to receive the offer price in cash, without
interest. The transaction is expected to be completed in mid-2000.
Liquidity and capital resources
Cash and cash equivalents decreased to $6.9 million at December 31, 1999, from
$12.1 million at December 31, 1998. Cash provided by operating activities for
1999 was $304.2 million. Cash used in financing and investing activities was
$295.7 million and $13.8 million, respectively.
The Company's primary uses of cash and cash equivalents during 1999 were as
follows: (1) $306.3 million net repayment of borrowings on the warehouse line of
credit; (2) cash outlay for properties held for sale of $39.5 million in
connection with the acquisition of Apollo; (3) a $21.4 million distribution to S
corporation shareholders; (4) $7.4 million paid in connection with the Company's
acquisitions; (5) $7.3 million repayment of accrued expenses; (6) $6.4 million
paid for purchases of furniture, fixtures and equipment; and (7) $4.8 million
repayment of long-term debt.
The Company's primary sources of cash and cash equivalents during 1999 were as
follows: (1) $306.5 million net proceeds from the sales of loans; (2) $30.8
million net proceeds from the Offering; (3) increase in capital contributions
payable of $31.6 million; (4) net income of $8.9 million; (5) borrowings of $5.9
million on the Company's operating line of credit; and (6) collection of loan
fees and other receivables of $5.5 million.
Cash and cash equivalents increased to $12.1 million at December 31, 1998,
from $1.2 million at December 31, 1997. The Company's primary sources of cash
and cash equivalents during 1998 were net borrowings of $336.9 million on
warehouse lines of credit and net income of $11.1 million. The Company's primary
uses of cash and cash equivalents during 1998 were $339.4 million cash outlay
for loans originated, net of loans sold during 1998, and a $10.4 million
increase in loan fees and other receivables.
Adequate credit facilities and other sources of funding, which permit the
Company to fund the loans it originates, are essential to the Company's ability
to close loans through its mortgage bank. Net working capital was $7.7 million
at December 31, 1999, as compared to $11.8 million at December 31, 1998. After
using available working capital, the Company borrows money to fund the Company's
loan closings and repays these borrowings as the loans and accompanying
servicing rights are sold.
As of December 31, 1999, the Company utilized one warehouse credit facility
(the "Mortgage Origination Warehouse Facility") with a maximum borrowing amount
of $250 million to fund loan closings through its mortgage bank. Loans under the
Mortgage Origination Warehouse Facility bear interest at rates that vary
depending on the type of underlying loan, and the loans are subject to
sublimits, advance rates and terms that vary depending on the type of underlying
loan and the ratio of the Company's liabilities to the Company's tangible net
worth. The weighted average interest rate on the Mortgage Origination Warehouse
Facility during 1999 was 6.29%, as compared to 7.10% in 1998. The Company is
required to comply with various operating and financial covenants under the
Mortgage Origination Warehouse Facility. As of December 31, 1999, the Company
was in compliance with all operating and financial covenants.
As of December 31, 1999, the Company's borrowings under its Mortgage
Origination Warehouse Facility increased to $176.1 million, from $170.2 million
as of December 31, 1998. The Company had a maximum of $73.9 million available
for additional borrowings as of December 31, 1999 under its Mortgage Origination
Warehouse Facility. At December 31, 1999, the Company's loans held for sale were
$198.3 million, as compared to $467.3 million at December 31, 1998.
The Company's Mortgage Origination Warehouse Facility agreement contains a
number of covenants that, among other things, require certain subsidiaries of
the Company to maintain a minimum ratio of total liabilities to tangible net
worth and maintain a minimum level of tangible net worth. This agreement also
contains covenants that limit the Company's ability to (1) transfer or sell
assets; (2) create liens; (3) pay dividends; (4) enter into transactions with
the Company's affiliates; or (5) enter into a merger, consolidation or sale of
substantially all of the Company's assets.
34
<PAGE>
On March 21, 2000, the Company extended its Mortgage Origination Warehouse
Facility through April 28, 2000. Pursuant to the agreement, the maximum
borrowing base has been reduced from $250 million to $200 million. In the event
that the Company cannot renew the Mortgage Origination Warehouse Facility or
obtain a comparable facility on or before the expiration of the Mortgage
Origination Warehouse Facility, the Company's operations would be materially and
adversely affected.
Under the ASAP Plus program, Fannie Mae funded the Company on the loans it
delivered to Fannie Mae on a continual, whole-loan basis upon receipt of the
appropriate mortgage collateral. The funding price was determined by the daily
Fannie Mae 30-day cash window price. At such time, the Company agrees to deliver
mortgage loans to Fannie Mae and assign any related trades. The Company then
redelivered all loans in the ASAP Plus program to reflect related forward
pricing on a monthly basis. Fannie Mae purchased the mortgage loans for cash
upon receipt of complete and accurate mortgage pool and other documentation. On
December 31, 1999, the Company had an outstanding balance of approximately $11.9
million on the ASAP Plus line in repurchase agreements with Fannie Mae, with
interest accruing at 5.11%.
In January 2000, the Company changed the way it sells its loans to Fannie Mae.
Previously, the Company used the ASAP Plus program. Currently, the Company uses
the As Soon As Pooled Sale program ("ASAP Sale"). In accordance with generally
accepted accounting principles, the Company accounted for transactions under the
ASAP Plus program as financing activities. Accordingly, the related assets and
liabilities remained on the Company's balance sheet until the loans were
redelivered on a semi-monthly basis to Fannie Mae, at which point the
corresponding gain or loss was recognized. Transactions under the ASAP Sale
program, however, are considered sales and thus, the related assets and
liabilities are reduced, and the gain or loss is recognized, at the time of the
transactions. Under the ASAP Sale program, Fannie Mae does not fund the
prospective loans to be bought, and therefore the Company no longer records
loans sold under agreements to repurchase.
The Company also makes regular use of uncommitted lines of credit and purchase
and sale agreements, such as repurchase agreements, provided by major investment
banks. These facilities permit the Company to diversify its 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. The Company currently has two uncommitted, whole-loan
repurchase agreements with major investment banks. Under the terms of these
agreements, the Company 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, 1999 and
December 31, 1998 were $10.4 million and $29.6 million, respectively.
Apollo has a warehouse facility to fund its tax credit syndication
business (the "Tax Syndication Warehouse Facility"). The Tax Syndication
Warehouse Facility provides Apollo with a maximum borrowing limit of $30
million, which is secured by investee partnerships of Apollo. The weighted
average interest rate on the Tax Syndication Warehouse Facility during 1999 was
7.55%. The Tax Syndication Warehouse Facility requires Apollo to comply
with various operating and financial covenants. As of December 31, 1999, Apollo
was in compliance with all operating and financial covenants.
As of December 31, 1999, Apollo's borrowings under its Tax Syndication
Warehouse Facility were $15.5 million. Apollo had a maximum of $5.2 million
available for additional borrowings as of December 31, 1999 under the Tax
Syndication Warehouse Facility. Apollo had irrevocable letters of credit
totaling $9.3 million as of December 31, 1999. In addition, the Tax Syndication
Warehouse Facility has a monthly commitment fee equal to 0.375% of the average
daily unused portion of the facility.
35
<PAGE>
Apollo's Tax Syndication Warehouse Facility agreement contains a number
of covenants that, among other things, require Apollo to maintain a minimum
ratio of total liabilities to tangible net worth and maintain a minimum level of
tangible net worth. Additionally, Apollo must maintain profitability and a
positive net worth. The credit agreement also contains covenants that limit
Apollo's ability to (1) enter into transactions with Apollo's affiliates
or (2) enter into a merger, consolidation or sale of substantially all of
Apollo's assets.
The Company has a $10 million operating line of credit, on a revolving basis,
for working capital requirements from a commercial bank. This revolving line of
credit is secured by a pledge of the Company's assets, other than loans securing
the Company's warehouse facilities. As of December 31, 1999, the Company had
approximately $5.9 million outstanding under this revolving line of credit,
which expires on October 5, 2000. In the event that the Company cannot renew the
operating line of credit or obtain a comparable line of credit on or before the
expiration date of the operating line of credit, the Company's operations would
be materially and adversely affected.
The Company's expected cash flows from operations, existing cash balances, and
funds available under its working capital and warehouse credit facilities are
expected to be sufficient to meet the Company's liquidity requirements during
2000. However, the Company's actual cash needs will depend upon, among other
things, (i) the results of operations, (ii) the level and timing of the
Company's acquisition activity, and (iii) the level and timing of the Company's
investment in its e-commerce and internet-related technology and other systems.
If the Company (i) experiences losses from operations or experiences unforeseen
operational difficulty or obligations, (ii) elects to make acquisitions for cash
or Internet or systems investments which require significant cash outlays, or
(iii) cannot renew or replace its existing warehouse and working capital credit
facilities prior to their expiration on comparable terms, the Company will be
required to arrange for additional sources of capital through the issuance of
debt or equity or additional bank borrowings. If the Company is not able to
obtain any such additional financing at the times required and on terms and
conditions acceptable to the Company, the Company's growth would slow and its
operations and financial condition would be materially and adversely affected.
Any equity issuances by the Company could result in dilution to stockholders.
Year 2000 compliance
The Company believes that it has successfully rendered its business-critical
computerized applications relating to, among others, loan origination,
servicing, pipeline management, hedging, payroll, financing and financial
accounting and reporting, to be year 2000 compliant. In addition, the Company
has rendered its non business-critical systems and services to be year 2000
compliant. Further, the Company has surveyed the vendors of the third-party
technologies it incorporates into its products and services and applied updates
or arrangements to correct potential year 2000 compliance problems. Since
January 1, 2000, the Company has experienced no disruptions in its business
operations as a result of year 2000 compliance problems or otherwise, and it has
received no reports of any year 2000 compliance problems with its products and
services. The Company is continuing to monitor third-party vendors of
incorporated technologies for additional recommended year 2000 upgrades, which
it will apply as soon as they become available. To date, the total cost of the
Company's efforts to address year 2000 compliance has not been material.
Nonetheless, some problems related to year 2000 risks may not appear until
several months after January 1, 2000. Year 2000 issues could include problems
with the Company's own products and services or with third-party products or
technologies that the Company uses. Any problems that are not identified and
corrected successfully and completely could adversely affect the Company's
business.
New accounting pronouncements
In June 1998, the Financial Accounting Standards Board 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, 2000 and cannot be applied
retroactively.
36
<PAGE>
The Company believes that the adoption of this statement will not have a
material effect on the Company's financial position or results of operations.
Quarterly Comparisons
The following tables set forth an unaudited summary of quarterly financial
data. This quarterly information has been prepared on the same basis as the
annual consolidated financial statements and, in management's opinion, reflect
all adjustments necessary for a fair presentation of the information for the
periods presented. The operating results for any quarter are not necessarily
indicative of results for any future period.
The mortgage banking industry is generally subject to seasonal trends. These
trends reflect the general national pattern of sales and resales of homes,
although refinancings tend to be less seasonal and more closely related to
changes in interest rates. Sales and resales of homes typically peak during the
spring and summer seasons and decline to lower levels from mid-November through
February.
<TABLE>
<CAPTION>
1999
----
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- ------- ------- -------
(in thousands, except per share amounts)
(unaudited)
<S> <C> <C> <C> <C>
Total revenues, as previously reported (1)...................... $39,948 $42,024 $42,276 $28,707
Adjustments (2)................................................. (1,120) (1,176) -- --
Total revenues.............................................. 38,828 40,848 42,276 28,707
Income (loss) from continuing operations, as previously
reported (1)................................................ 4,896 5,938 3,618 (4,746)
Adjustments (2)................................................. 64 180 -- --
Income (loss) from continuing operations.................... 4,960 6,118 3,618 (4,746)
Net income (loss)........................................... 4,896 5,938 3,156 (5,137)
Earnings (loss) per share from continuing operations (diluted),
as previously reported (1)................................... $ 0.42 $ 0.46 $ 0.25 $ (0.32)
Earnings (loss) per share from continuing operations
(diluted).................................................... $ 0.43 $ 0.47 $ 0.25 $ (0.32)
Net earnings (loss) per share................................ $ 0.42 $ 0.46 $ 0.22 $ (0.35)
Shares used in computing earnings (loss) per share (diluted)... 11,556 12,948 14,696 14,625
</TABLE>
<TABLE>
<CAPTION>
1998
----
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- ------- ------- -------
(in thousands, except per share amounts)
(unaudited)
<S> <C> <C> <C> <C>
Total revenues, as previously reported (1)...................... $13,883 $13,817 $20,066 $40,422
Adjustments (2)................................................. (1,106) (1,416) -- --
Total revenues.............................................. 12,777 12,401 20,066 40,422
Income from continuing operations, as previously reported (1)... 1,650 2,093 3,028 5,093
Adjustments (2)................................................. 145 87 -- --
Income from continuing operations........................... 1,795 2,180 3,028 5,093
Net income.................................................. 1,650 2,093 3,244 4,107
Earnings per share from continuing operations (diluted), as
previously reported (1).................................... $ 0.16 $ 0.20 $ 0.29 $ 0.46
Earnings per share from continuing operations (diluted)..... $ 0.17 $ 0.21 $ 0.29 $ 0.46
Net earnings per share...................................... $ 0.16 $ 0.20 $ 0.31 $ 0.37
Shares used in computing earnings per share (diluted)....... 10,352 10,410 10,620 10,980
</TABLE>
37
<PAGE>
(1) As reported under the following for the quarters of 1999 and 1998:
Consolidated Statements of Income in the Company's Quarterly Reports on
Form 10-Q for the three months ended September 30, 1999 and 1998 and June
30, 1999 and 1998 and Consolidated Statements of Income in the Company's
Registration Statement on Form S-1 for the three months ended March 31,
1999 and 1998.
(2) Adjustments reflect the effect of a discontinued operation, which occurred
in the third quarter of 1999. See Note 8-Discontinued Operations of the
Notes to the Consolidated Financial Statements included elsewhere herein
for a more detailed discussion of this transaction.
Special Note Regarding Forward-Looking Statements
This Form 10-K contains certain statements that are based upon the current
expectations and projections of Prism Financial concerning current events. These
statements are not historical facts and may constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and are intended to be
covered by the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Readers can identify these statements from the use of the
words "estimate," "project," "believe," "intend," "anticipate," "expect" and
similar expressions. These forward-looking statements include: statements of the
Company's goals, intentions and expectations; statements regarding the Company's
business plans and growth strategies; statements regarding the asset quality of
the Company's loan and investment portfolios; and estimates of the Company's
risks and future costs and benefits. These forward-looking statements are
subject to certain risks and uncertainties, including the following, which could
cause future results to differ materially from historical results or those
anticipated: (1) the level of demand for mortgage credit and ancillary services,
which is affected by such external factors as the level of interest rates; (2)
the direction of interest rates; (3) the relationship between mortgage interest
rates and the cost of funds; (4) federal and state regulation of mortgage
banking, the Company's ancillary service operations, and affordable housing and
historic tax credits; and (5) competition within the mortgage banking,
affordable housing and historic tax credits and various ancillary service
industries. See also "Business--Risk Factors" above. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk that unfavorable changes in net income and in the
value of certain assets and liabilities will result from adverse fluctuations in
market rates and prices. Interest rate volatility is the largest market risk
affecting Prism Financial. The Company utilizes a risk management program to
mitigate exposure resulting from interest rate fluctuations. Accordingly, the
Company continuously hedges the value of mortgage loans held for sale and in its
pipeline, except for non-prime loans.
In the normal course of business, derivative financial instruments, such as
forward contracts and options, are used to manage interest rate exposure and
resale pricing risk. The Company's management evaluates, on an initial and on-
going basis, the effectiveness of each hedge contract's correlation with an
existing asset. Hedge gains or losses are deferred and recognized as a component
of the gain or loss on the 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 option contracts are expensed over the term of the option contract.
The Company's hedging policies generally require that it hedges the projected
portion of its committed pipeline with forward contracts or with options on
treasury securities. The mortgage loans that are to be delivered under these
contracts are fixed- or adjustable-rate loans, corresponding with the
composition of the Company's inventory and committed pipeline. The Company
hedges its closed loans held for sale by using whole-loan sale commitments to
ultimate investors and forward contracts. The Company does not purchase hedging
instruments for trading purposes nor does it speculate on the direction of
interest rates in its risk management procedures. The Company tests its hedges
on a daily basis to ensure that its maximum exposure does not exceed the limits
set by its senior management.
38
<PAGE>
While the Company does not anticipate nonperformance by any counterparty, the
Company is exposed to potential credit losses in the event of nonperformance by
the counterparties to the various instruments. The Company manages credit risk
with respect to forward contracts and whole-loan sales commitments through the
following policies: by entering into agreements with entities approved by senior
management; by attempting to limit the Company's credit exposure on forward
sales arrangements through entering into forward sales contracts solely with
institutions that the Company believes are sound credit risks; and by limiting
exposure to any single counterparty by selling to a number of investors. The
Company'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
the Company only purchases options that allow it, at its option, to purchase or
sell a financial instrument, the Company's exposure at any time is limited to
the premium paid to purchase the option.
The Company evaluates its prescribed risk limits against a +/- two hundred
basis point change in the price of a benchmark mortgage-backed security, which
price moves inversely with market interest rates. On a daily basis, the Company
performs a sensitivity analysis, evaluating its current hedged position of
closed loans and mortgage loans in the pipeline and assessing the net exposure
of these loans against a spectrum of price change scenarios for the benchmark
mortgage-backed security. This modeling technique measures net changes in the
fair value of the loans, as determined by the net exposure of the aggregate face
value of closed loans and loans in the pipeline.
As of December 31, 1999, the Company used a 7% Fannie Mae, 30-year security as
its benchmark for performing the sensitivity analysis. The Company assessed its
exposure for loans in the pipeline, which are off-balance sheet, as well as
mortgage loans held for sale, using the price change spectrum discussed above. A
two hundred basis point decrease in the benchmark security would have decreased
the total anticipated gains on loans in the pipeline and loans held for sale by
approximately $182,000, or 9.26 basis points, as of December 31, 1999. A two
hundred basis point increase in the benchmark security would have increased the
total anticipated gains on loans in the pipeline and loans held for sale by
approximately $120,000, or 6.10 basis points, as of December 31, 1999. The
Company does not believe that a swing in interest rates at December 31, 1999
would have materially affected the net fair values recorded for loans held for
sale, or any other financial instruments recorded at that date. This analysis is
limited by the fact that it was performed at a certain point in time and does
not incorporate other market factors at that time.
At December 31, 1999 and 1998, the Company had open forward commitments with a
total notional amount of approximately $151.4 million and $670.0 million,
respectively, to sell mortgage loans with varying settlement dates up to
February 2000. On December 31, 1999, the Company had two options to buy
treasuries through February 2000, with a total notional amount of approximately
$40.0 million. No options were outstanding at December 31, 1998. The Company
also hedges its loans held for sale by using whole-loan sale commitments to
ultimate investors, which totaled $152.1 million and $28.4 million at December
31, 1999 and 1998, respectively.
ITEM 8. FINANCIAL STATEMENT SUPPLEMENTARY DATA
The information in response to this item is included in the Company's
consolidated financial statements, together with the reports thereon of
PricewaterhouseCoopers LLP and McGladrey & Pullen, LLP, appearing on pages F-1
through F-31 of this Form 10-K, and in Item 7 under the heading "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Comparisons."
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISLCOSURE
None.
39
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The table below lists the current Directors and Executive Officers of the
Company:
<TABLE>
<CAPTION>
Position with Term
Name Age Company Director Since Expiration
---- --- ------------------------ -------------- ----------
<C> <C> <S> <C> <C>
Richard L. Wellek(1)(2).. 61 Chairman of the Board 1999 2001
Mark A. Filler........... 39 President and Chief 1999 2002
Executive Officer
Terry A. Markus.......... 38 President of Prism 1999 2002
Illinois
Andrew S. Hochberg(1)(2). 37 Director 1999 2001
Michael P. Krasny........ 46 Director 1999 2000
William D. Osenton....... 55 President of Pacific
Guarantee Mortgage
Corporation ("Pacific
Guarantee"), a wholly
owned indirect
subsidiary of Prism
Martin D. Francis........ 39 President of Mortgage
Market, Inc. ("Mortgage
Market"), a wholly owned
indirect subsidiary of
Prism
David A Fisher........... 30 Senior Vice President,
Chief Financial Officer
and Secretary
Edward C. Ahern.......... 36 Senior Vice President of
Secondary Marketing
Kevin N. Christopher..... 34 Senior Vice President of
Production
James P. Hayes........... 30 Senior Vice President,
Treasurer and Controller
Laurence E Katz.......... 30 Vice President of
Electronic Commerce
</TABLE>
- --------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
Richard L. Wellek. Mr. Wellek was elected as a director in May 1999 and was
elected to the position of Chairman of the Board in December 1999. Mr. Wellek
was Chairman of Varlen Corporation, a leading manufacturer of precision-
engineered transportation products and petroleum analyzers, from May 1997
until August 1999 when Varlen was acquired by Amsted Industries. 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.
Mark A. Filler. Mr. Filler has served as Chief Executive Officer since
December 1999, as President since January 1999 and as a director since
February 1999, when the Company was formed. From June 1994 to January 1999, he
was an Executive Vice President of Prism Mortgage. From mid-1992 to May 1994,
Mr. Filler served as Chief Operating Officer of Uresil Corp., a medical device
business. Prior to 1992, he was employed by The Equity Group, a company
engaged primarily in mergers and acquisitions and associated with Mr. Sam
Zell. 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 the Company and has served
as a director since February 1999, when the Company was formed. He has been
President of Prism Illinois, an operating division of Prism Mortgage, since
January 1999. Previously, Mr. Markus served as an Executive Vice President of
Prism Mortgage 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 the Company, Mr. Markus was an attorney at
the Chicago law firm Bell, Boyd & Lloyd.
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.
40
<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.
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 Prism's 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.
41
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act ("Section 16(a)") requires Prism's
executive officers and directors and persons who own more than ten percent of
a registered class of Prism's equity securities ("10% Stockholders") to file
reports of ownership on a Form 3 and changes in ownership on a Form 4 or a
Form 5 with the SEC. Such executive officers, directors and 10% Stockholders
are also required by SEC rules to furnish the Company with copies of all
Section 16(a) forms that they file. To the best of Prism's knowledge and
belief, during fiscal 1999, its executive officers, directors and 10%
Stockholders complied with all applicable Section 16(a) filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following summary compensation table sets forth certain information
concerning the compensation of Prism's chief executive officer and four most
highly compensated executive officers other than the chief executive officer
as of the end of fiscal 1999 (the "Named Executive Officers") for each of the
two fiscal years during the period ended December 31, 1999.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation(1) Awards
-------------------- ----------------
Number of Shares
Underlying
Name and Principal Position Year Salary ($) Bonus ($) Options (#)(2)
- --------------------------- ---- ---------- --------- ----------------
<S> <C> <C> <C> <C>
Mark A. Filler*.................... 1999 175,000 50,000 --
President and Chief Executive
Officer 1998 150,000 25,000 --
Bruce C. Abrams*................... 1999 154,167 -- --
Chairman of the Board of Directors
and Chief Executive Officer 1998 75,000 -- --
Martin E. Francis.................. 1999 150,000 50,000 8,000
President of Mortgage Market 1998 37,500 50,000 --
Kevin N. Christopher............... 1999 110,000 80,000 50,000
Senior Vice President of Production 1998 93,500 66,500 --
David A. Fisher.................... 1999 107,545 80,000 75,000
Senior Vice President, Chief
Financial Officer and Secretary 1998 90,000 60,000 --
Terry A. Markus.................... 1999 177,308 -- --
President of Prism Illinois 1998 150,000 -- --
</TABLE>
- --------
* Mr. Filler became Chief Executive Officer of Prism after the death of Mr.
Abrams on December 12, 1999.
(1) The aggregate amount of perquisites and other personal benefits for each
of the Named Executive Officers did not equal or exceed the lesser of
either $50,000 or 10% of the total of such individual's base salary and
bonus, as reported herein for the applicable fiscal years, and is not
reflected in the table.
(2) Stock options granted under the 1999 Stock Plan.
Option Grants Table
The following table provides certain summary information concerning
individual grants of stock options made to Named Executive Officers during the
fiscal year ended December 31, 1999 under the 1999 Stock Plan. Prism had no
stock appreciation rights ("SARs") outstanding and granted no SARs during the
fiscal year ended December 31, 1999. Except as set forth in the table below,
during fiscal year 1999, Prism did not grant any stock options under the 1999
Stock Plan to any of the Named Executive Officers.
42
<PAGE>
<TABLE>
<CAPTION>
Individual Rights Potential
------------------------------------------------ Realizable Value
Number of Percent of Total at Assumed Rates
Shares Options Granted of Stock Price
Underlying to Employees in Exercise Expiration Appreciation for
Grant (#) Fiscal Year (%) Price ($) Date Option Term(1)
---------- ---------------- --------- ---------- -----------------
5% ($) 10% ($)
------- ---------
<S> <C> <C> <C> <C> <C> <C>
Martin E. Francis....... 8,000 1.2 14 5/24/09 70,436 178,500
Kevin N. Christopher.... 50,000 7.2 14 5/24/09 440,226 1,115,620
David A. Fisher......... 75,000 10.8 14 5/24/09 660,339 1,673,430
</TABLE>
- --------
(1) Amounts represent hypothetical gains that could be achieved from the
exercise of the respective stock options and the subsequent sale of the
Shares underlying such options if the options were exercised at the end of
the option terms. The gains are based upon assumed rates of stock price
appreciation of 5% and 10% compounded annually from the date the
respective options were granted. The rates of appreciation are mandated by
the rules of the Exchange Act and do not represent Prism's estimate or
projection of the future Share price.
(2) The stock options reported were awarded pursuant to the 1999 Stock Plan at
exercise prices equal to the fair market value of the Shares on the date
of grant. The options vest in specified installments over a four- or five-
year period after the grant date and terminate ten years after the grant
date.
Fiscal Year-end Option Values
No stock options with respect to Shares were exercised by the Named
Executive Officers in 1999. The following table provides certain summary
information concerning the number of unexercised stock options held by the
Named Executive Officers as of December 31, 1999. No information is included
below as to the value of Named Executive Officers' unexercised options because
the closing price per share of Prism common stock on December 31, 1999 was
less than the exercise price per Share of all such unexercised options.
<TABLE>
<CAPTION>
Number of Unexercised
Options at Fiscal Year
End (#)(1)
-------------------------
Name Exercisable Unexercisable
---- ----------- -------------
<S> <C> <C>
Martin E. Francis............................... -- 8,000
Kevin N. Christopher............................ -- 50,000
David A. Fisher................................. -- 75,000
</TABLE>
- --------
(1) Represents the aggregate number of stock options held as of December 31,
1999 which could and could not be exercised on that date pursuant to the
terms of the stock option agreements related thereto and the 1999 Stock
Plan.
Director Compensation
Under the 1999 Omnibus Stock Incentive Plan (the "1999 Stock Plan"), an
option to acquire 5,000 Shares is granted to each non-employee director upon
his initial election to the Prism Board and an option to purchase 2,500 Shares
is awarded to each non-employee director serving on the Prism Board on the day
immediately following Prism's annual meeting of stockholders, provided that
the non-employee director has served in such capacity for at least the
preceding six months. Directors who are employees of Prism or its affiliates
do not receive additional compensation for services as a director of Prism.
All directors are reimbursed for actual expenses incurred in connection with
attending meetings.
Employment and Consulting Agreements with Prism
The following is a summary of certain employment and consulting agreements
to which Prism or a subsidiary of Prism is a party. Such summary does not
include any of the arrangements entered into by Prism employees in connection
with Purchaser's acquisition of Prism pursuant to the Offer and the Merger.
For a discussion of these arrangements, see Item 3 under "Arrangements with
Executive Officers, Directors or Affiliates of Prism" in the Schedule 14D-9 of
which this Information Statement forms a part.
43
<PAGE>
Prism's subsidiary 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.
Prism's subsidiary 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 of Mortgage Market, 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.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee currently consists of Messrs. Hochberg and
Wellek. No member of Prism's Compensation Committee is a current or former
officer or employee of Prism or any of its subsidiaries. There are no
compensation committee interlocks between Prism and any other entities
involving any of the executive officers or directors of such other entities.
During fiscal year 1999, Bruce C. Abrams was a member of the Compensation
Committee while serving as Chairman of the Board and Chief Executive Officer
of Prism.
44
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
According to information furnished to Prism as of March 15, 2000, the
directors of Prism, Prism's "named executive officers" (the "Named Executive
Officers") within the meaning of Item 402(a)(3) of Regulation S-K, and all
directors and executive officers as a group, beneficially owned shares of
Prism common stock as set forth below. Beneficial ownership has been
determined for purposes herein in accordance with Rule 13d-3 of the Exchange
Act under which a person is deemed to be the beneficial owner of securities if
such person has or shares voting power or investment power in respect of such
securities or has the right to acquire beneficial ownership within 60 days of
March 15, 2000.
<TABLE>
<CAPTION>
Number of Common Approximate Percentage of
Name Shares and Share Equivalents Outstanding Common Shares
- ---- ---------------------------- -------------------------
<S> <C> <C>
Mark A. Filler(1)....... 1,966,671 13.2
Terry A. Markus(2)...... 1,673,150 11.3
Martin E. Francis....... 0 *
David A. Fisher(3)...... 86,813 *
Kevin N. Christopher.... 2,000 *
Andrew S. Hochberg(4)... 10,000 *
Michael P. Krasny....... 20,000 *
Richard L. Wellek....... 13,147 *
All directors and
executive officers as a
group (12 persons)(1)(2)
(3)(4)................. 4,426,190 29.3
</TABLE>
- --------
* Represents less than 1%
(1) Includes 100,000 Shares which may be acquired upon the exercise of stock
options held by Mr. Filler which vest upon a change of control of the
Company. Also includes 466,669 shares held by the Filler Growth and
Retention Fund I LP, a family limited partnership, of which Mr. Filler is
the sole general partner.
(2) Includes 836,575 Shares held by the Markus Growth and Retention Fund I LP,
a family limited partnership, of which Mr. Markus is the sole general
partner.
(3) Includes 83,333 Shares which may be acquired upon the exercise of stock
options held by Mr. Fisher which vest on April 30, 2000.
(4) Excludes 317,529 Shares owned by Abrams Capital Trust, a trust established
by Mr. Abrams for the benefit of his wife and all of his children, over
which Mr. Hochberg, as trustee, has investment and voting control. Mr.
Hochberg disclaims beneficial ownership of these shares. See "Security
Ownership of Certain Beneficial Owners," Footnote (1).
Security Ownership of Certain Beneficial Owners
The following table sets forth information with respect to the persons
other than Named Executive Officers or directors known to Prism to
beneficially own more than five percent (5%) of the Shares, as of March 15,
2000:
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of
Beneficial Owner Beneficial Ownership Percentage of Class
- ------------------- -------------------- -------------------
<S> <C> <C>
Nancy C. Abrams, as executor of the
estate of Bruce C. Abrams(1)......... 5,503,745 37.2
c/o Mayer Brown & Platt
190 S. LaSalle
Chicago, Illinois 60603
Markus Growth and Retention Fund I
LP(2)................................ 836,575 5.7
3448 Dauphine Avenue
Northbrook, Illinois 60062-2264
</TABLE>
45
<PAGE>
- --------
(1) Does not include 317,529 shares held by the Abrams Capital Trust.
According to a Schedule 13D filed February 2, 2000, Nancy C. Abrams,
individually, is a beneficiary of the Abrams Capital Trust, which holds
317,529 Shares. The Schedule 13D states that Ms. Abrams does not have
voting or investment power with respect to such Shares and, accordingly,
disclaims beneficial ownership of such Shares.
(2) Mr. Markus, as the sole general partner of Markus Growth and Retention
Fund I LP, has sole voting and investment power with respect to all such
shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1996, the Company loaned $100,000 each to Mr. Filler and Mr.
Markus to purchase outstanding common shares of the Company from another
stockholder. From January 1, 1997, the loans accrued interest at 8.25%
annually. The principal was payable in five annual installments of $20,000,
plus interest, beginning December 31, 1997. Each stockholder repaid the
remaining principal and accrued interest balance of the loans to the Company
in May 1999.
The Company paid management fees for shared services of approximately
$115,000 to LR Development Company in 1999. LR Development Company was
controlled by Bruce C. Abrams, Chief Executive Officer and Chairman of the
Board of Directors of Prism, until his death in December 1999.
The estate of Bruce C. 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 the lease of an
office building in Chicago, Illinois that is subleased by Prism. Mr. Hochberg
is also on the board of directors of the company from which Prism subleases
the office space. The Company made sublease payments of approximately $422,000
to the sublessor during 1999. The sublease, which extends through August 30,
2004, was negotiated on an arm's-length basis.
Prism acquired 80 percent of the membership interests of Apollo Housing
Capital, L.L.C. ("Apollo"), a tax credit syndication business, in September
1999 for approximately $1.64 million in cash, net of cash acquired in the
acquisition. Fifty percent of the interests in Apollo were owned by Vision
AHC, L.L.C. ("Vision"), an entity formerly controlled by the late Mr. Abrams
and now controlled by Mr. Abrams' estate. Vision did not receive any cash from
the Company upon the closing of the transaction. However, Vision is entitled
to receive initial consideration of up to $3.25 million in cash only if Apollo
satisfies conditions relating to available cash flows of Apollo following the
closing. In addition, Vision will receive a percentage of Apollo's 1999 net
cash flow following the acquisition and contingent consideration equal to a
percentage of Apollo's pre-tax net income in each of the years 2000 through
2007.
At the time of the closing of Prism Financial's acquisition of Apollo,
Apollo had outstanding obligations of $500,000 under a promissory note payable
to Vision. The note was paid in full in the third quarter of 1999.
As of December 31, 1999, the Company, through Apollo, owned limited
partnership interests valued at $18.7 million in two investee partnerships
that were purchased in 1999 from LR Development Company, formerly controlled
by the late Bruce C. Abrams. Additionally, the Company owed capital
contribution notes totaling $17.1 million as of December 31, 1999 in
connection with its acquisition of such limited partnership interest.
46
<PAGE>
On March 6, 1998, prior to its acquisition by Prism, Pacific Guarantee
issued a subordinated promissory note to Mr. Osenton in the amount of $200,000
which, together with interest of 10% per annum, was due on or before March 31,
2000. Interest-only payments were payable monthly on unpaid principal and were
due on the first day of each month beginning on April 30, 1998. This note was
repaid in 1999.
On June 30, 1997, prior to its acquisition by Prism, 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, was due on
or before June 30, 2002. Interest-only payments were payable monthly on unpaid
principal and were due on the first day of each month beginning August 1,
1997. This note was repaid in 1999.
Mr. Abrams, Mr. Filler, Mr. Markus, Mr. Osenton, an affiliate of Mr.
Abrams, and affiliates of Penny S. Pritzker, a Prism Board member from May
1999 until January 2000, entered into a registration rights agreement with
Prism in May 1999 pursuant to which they received shelf, demand and piggyback
rights to register their restricted Shares. The registration rights agreement
has been filed as Exhibit 18 to this Schedule 14D-9 and is incorporated herein
by reference.
CDW Computer Centers, Inc., of which Mr. Krasny is Chairman of the Board
and Chief Executive Officer, sold $140,778 worth of computer equipment to
Prism in 1999. These purchases were negotiated on an arm's-length basis.
In connection with the termination of the Company's S corporation status
for federal and certain state income tax purposes in conjunction with the
Company's initial public offering, the Company issued promissory notes (the "S
Corporation Distribution Notes") to all of the Company's stockholders prior to
the initial public offering, including Mr. Abrams, an affiliate of Mr. Abrams,
Messrs. Filler and Markus, affiliates of Ms. Penny S. Pritzker and Mr.
Osenton, in the amount of their respective undistributed accumulated S
corporation earnings for the period ending on the termination date. In
accordance with the Company's S Corporation status, all earnings of the
Company during this period were taxed directly to these stockholders rather
than to the Company. The initial amount owed under the S Corporation
Distribution Notes upon issuance was $20.8 million including $10.7 million,
$3.6 million, $3.6 million, $942,842, $944,309 and $564,551 to Mr. Abrams, Mr.
Markus, Mr. Filler, an affiliate of Mr. Abrams, affiliates of Ms. Pritzker and
Mr. Osenton, respectively. As of December 31, 1999, the respective amounts
outstanding under the S Corporation Distribution Notes were $675,574,
$245,663, $245,663, $61,415, $68,708 and $36,771 plus accrued but unpaid
interest.
47
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) 1. The following consolidated financial statements and notes thereto, and
the related independent auditors' report, are included on pages F-1 through
F-31 of this Form 10-K:
Report of Independent Accountants
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income for the Years Ended December 31, 1999,
1998 and 1997
Consolidated Statements of Changes In Stockholders' Equity for the Years
Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
2. The following financial statement schedule of the Company and the related
report of independent auditors are included on pages S-1 and S-2 of this
Form 10-K:
Independent Auditors' Report
Schedule II - Valuation and Qualifying Accounts
All other financial statement schedules are omitted because such schedules
are not required or the information required has been presented in the
aforementioned financial statements.
48
<PAGE>
3. The following exhibits are filed with this Form 10-K or incorporated by
reference as set forth below:
Exhibit 2.1 Share Exchange Agreement (incorporated herein by reference to
Exhibit 3 to the Company's Registration Statement on Form 8-A/A
filed with the Securities and Exchange Commission (the "SEC") on
March 24, 2000 (the "Registration Statement" on Form 8-A/A)).
Exhibit 2.2 Merger Agreement, dated as of March 10, 2000, among Royal Bank of
Canada, Prism Acquisition Subsidiary, Inc., formerly known as
Rainbow Acquisition Subsidiary, Inc., and the Company
(incorporated herein by reference to Exhibit 1 to the Company's
Schedule 14D-9 filed with the SEC on March 22, 2000, as filed
with Amendment No. 1 to such Schedule 14D-9 on March 27, 2000).
Exhibit 3.1 Amended and Restated Certificate of Incorporation of the
Registrant (incorporated herein by reference to Exhibit 4 to the
Registration Statement on Form 8-A/A).
Exhibit 3.2 Second Amended and Restated Bylaws of the Registrant
(incorporated herein by reference to Exhibit 5 to the
Registration Statement on Form 8-A/A).
Exhibit 4.1 Specimen Certificate for the Registrant's Common Stock
(incorporated herein by reference to Exhibit 6 to the
Registration Statement on Form 8-A/A).
Exhibit 4.2 Registration Rights Agreement (incorporated by reference to
Exhibit 4.3 to the Company's Registration Statement on Form S-1,
as amended (Registration No. 333-74883)).
Exhibit 4.3 Rights Agreement, dated as of January 27, 2000, between the
Company and LaSalle Bank National Association, as Rights Agent,
which includes as Exhibit A the Certificate of Designations,
Preferences and Rights of Series A Junior Participating Preferred
Stock and as Exhibit B the Form of Rights Certificate
(incorporated by reference to Exhibit 4.3 to the Company's
Current Report on Form 8-K filed with the SEC on February 8,
2000).
Exhibit 4.4 First Amendment to Rights Agreement, dated as of March 10, 2000,
between Prism Financial Corporation and LaSalle Bank National
Association, as Rights Agent (incorporated herein by reference to
Exhibit 2 to the Company's Registration Statement on Form 8-A/A).
Exhibit 4.5 Share Exchange Agreement (see Exhibit 2.1).
Exhibit 10.1 1999 Omnibus Stock Incentive Plan (incorporated herein by
reference to Exhibit 16 to the Company's Schedule 14D-9 filed
with the SEC on March 22, 2000, as filed with Amendment No. 1 to
such Schedule 14D-9 on March 27, 2000).**
Exhibit 10.2* Agreement for the Purchase and Sale of the Capital Stock of
Pacific Guarantee Mortgage Corporation, dated as of July 31,
1998, by and between Prism Mortgage Company and William D.
Osenton and Bruce P. Barbera (incorporated herein by reference to
Exhibit 10.2 to the Company's Registration Statement on Form S-1,
as amended (Registration No. 333-74883)).
Exhibit 10.3* Agreement for the Purchase and Sale of the Capital Stock of
Mortgage Market, Inc., dated as of September 30, 1998, by and
among Prism Mortgage Company and Martin E. Francis, Kenneth
Bartley, Melissa Stashin and Curt Vanderzanden (incorporated
herein by reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-1, as amended (Registration No. 333-74883)).
Exhibit 10.4* Prism Equity Value Plan, effective as of August 31, 1998, by
Prism Mortgage Company and by personnel of Pacific Guarantee
Mortgage Corporation (incorporated herein by reference to Exhibit
10.4 to the Company's Registration Statement on Form S-1, as
amended (Registration No. 333-74883)).**
Exhibit 10.5* Executive Employment Agreement, dated as of July 31, 1998, by and
between Pacific Guarantee Mortgage Corporation and William D.
Osenton (incorporated herein by reference to Exhibit 10.5 to the
Company's Registration Statement on Form S-1, as amended
(Registration No. 333-74883)).**
Exhibit 10.6* Executive Employment Agreement, dated as of September 30, 1998,
by and between Mortgage Market, Inc. and Martin E. Francis
(incorporated herein by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-1, as amended
(Registration No. 333-74883)).**
Exhibit 10.7 Prism 2000 Profit Sharing Plan (incorporated herein by reference
to Exhibit 10.7 to the Company's Registration Statement on Form
S-1, as amended (Registration No. 333-74883)).**
49
<PAGE>
Exhibit 10.8 Credit Agreement, dated as of March 31, 1999, among Prism
Mortgage Company and its subsidiaries, the lending institutions
listed on the signature pages thereto and The First National Bank
of Chicago, as Agent (the "First National Bank of Chicago Credit
Agreement") (incorporated herein by reference to Exhibit 10.8 to
the Company's Registration Statement on Form S-1, as amended
(Registration No. 333-74883)).
Exhibit 10.9* First Amendment to Purchase and Sale Agreement, entered into on
April 25, 1999, by and among Bruce Barbera and William Osenton
and Prism Mortgage Company (incorporated herein by reference to
Exhibit 10.9 to the Company's Registration Statement on Form S-1,
as amended (Registration No. 333-74883)).
Exhibit 10.10 Second Amendment to Purchase and Sale Agreement, entered into on
April 27, 1999, by and among Bruce Barbera and William Osenton
and Prism Mortgage Company (incorporated herein by reference to
Exhibit 10.10 to the Company's Registration Statement on Form
S-1, as amended (Registration No. 333-74883 )).
Exhibit 10.11 Third Amendment to Purchase and Sale Agreement, entered into as
of May 11, 1999, by and among Bruce Barbera and William Osenton
and Prism Mortgage Company (incorporated herein by reference to
Exhibit 10.11 to the Company's Registration Statement on Form
S-1, as amended (Registration No. 333-74883)).
Exhibit 10.12 Fourth Amendment to Purchase and Sale Agreement, entered into as
of May 19, 1999, by and among Bruce Barbera and William Osenton
and Prism Mortgage Company (incorporated herein by reference to
Exhibit 10.12 to the Company's Registration Statement on Form
S-1, as amended (Registration No. 333-74883)).
Exhibit 10.13 Prism Financial Corporation Amended and Restated 1999 Employee
Stock Purchase Plan (incorporated herein by reference to Exhibit
99.3 to the Company's Registration Statement on Form S-8
(Registration No. 333-81889)).**
Exhibit 10.14 Loan and Security Agreement, dated as of October 7, 1999, by and
between Prism Financial Corporation and LaSalle Bank National
Association (incorporated herein by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999 (the "September 1999 10-Q").
Exhibit 10.15 First Amendment, dated as of May 24, 1999, to the First National
Bank of Chicago Credit Agreement (incorporated herein by
reference to Exhibit 10.2 to the September 1999 10-Q).
Exhibit 10.16 Second Amendment, dated as of October 7, 1999, to the First
National Bank of Chicago Credit Agreement (incorporated by
reference to Exhibit 10.3 to September 1999 10-Q).
Exhibit 10.17 Credit Agreement, dated as of September 30, 1999, among Apollo
Housing Capital, L.L.C., LaSalle Bank National Association and
Bank of America, National Association.
Exhibit 10.18 2000 Stock Option Plan (incorporated herein by reference to
Exhibit 17 to the Company's Schedule 14D-9 filed with the SEC on
March 22, 2000 as filed with Amendment No. 1 to such Schedule
14D-9 on March 27, 2000).**
Exhibit 10.19 Third Amendment, dated as of February 11, 2000, to the Bank One,
N.A. Credit Agreement (f/k/a First National Bank of Chicago
Credit Agreement) (the "Bank One Credit Agreement").
Exhibit 10.20 Fourth Amendment, dated as of March 21, 2000, to the Bank One
Credit Agreement.
Exhibit 11 Statement Regarding Computation of Per Share Earnings.
Exhibit 16 Letter Regarding Change in Certified Independent Auditors
(incorporated herein by reference to Exhibit 16.1 to the
Company's Registration Statement on Form S-1, as amended
(Registration No. 333-74883)).
Exhibit 21 Subsidiaries of Prism Financial Corporation.
Exhibit 23.1 Consent of PricewaterhouseCoopers LLP.
Exhibit 23.2 Consent of McGladrey & Pullen, LLP.
Exhibit 27 Financial Data Schedule.
* Portions of this exhibit have been omitted pursuant to a confidential
treatment request filed with, and granted by, the Securities and Exchange
Commission.
** Management contract or compensatory plan or arrangement required to be
included as an exhibit to this Annual Report on Form 10-K.
50
<PAGE>
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated December 12, 1999 to report
the death of the Company's Chairman and Chief Executive Officer, Bruce C.
Abrams.
51
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders
of Prism Financial Corporation
In our opinion, the accompanying consolidated balance sheets 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 its subsidiaries (the "Company")
at December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the two years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in accordance
with auditing standards generally accepted in the United States, 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 audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 21, 2000, except for
Note 27, as to which the date
is March 21, 2000
F-1
<PAGE>
Independent Auditors' Report
To the Board of Directors
Prism Financial Corporation
Chicago, Illinois
We have audited the accompanying consolidated statement of income,
stockholders' equity and cash flows of Prism Financial Corporation and
subsidiaries for the year ended December 31, 1997. 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 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 consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Prism Financial Corporation and subsidiaries for the year ended
December 31, 1997 in conformity with generally accepted accounting principles.
McGladrey & Pullen, LLP
Schaumburg, Illinois
March 27, 1998
F-2
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
ASSETS
------
<S> <C> <C>
Cash and cash equivalents........................... $ 6,914,661 $ 12,123,893
Loans held for sale, at lower of cost or market..... 198,293,952 467,254,128
Loan fees and other receivables, net of allowance of
$1,280,000 and $350,000 14,316,347 14,206,790
Furniture, fixtures and equipment, net.............. 11,185,212 4,284,214
Intangible assets, net.............................. 15,131,073 2,920,336
Investments in and advances to affiliates........... -- 67,419
Properties held for sale............................ 74,069,713 --
Other assets........................................ 9,918,354 2,765,314
Net assets of discontinued operations............... 1,773,410 --
------------ ------------
Total assets.................................... $331,602,722 $503,622,094
============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Loans sold under agreements to repurchase......... $ 11,933,790 $292,626,673
Warehouse lines of credit......................... 191,602,770 170,217,137
Operating line of credit.......................... 5,922,742 --
Current portion of long-term debt................. 145,567 729,249
Commissions payable............................... 3,184,193 4,290,899
Accounts payable.................................. 2,674,328 2,548,732
Accrued interest payable.......................... 2,701,051 2,153,402
Payable to affiliates............................. -- 148,562
Capital contribution notes payable................ 61,674,051 --
Accrued expenses and other liabilities............ 8,213,732 10,406,306
S corporation distribution notes.................. 1,375,000
Long-term debt.................................... 75,675 4,297,836
Minority interest................................. 65,012 --
------------ ------------
Total liabilities............................... 289,567,911 487,418,796
------------ ------------
Commitments and contingencies....................... -- --
Stockholders' equity:
Preferred stock, $0.01 par value per share,
10,000,000 shares authorized, no shares issued
and outstanding.................................. -- --
Common stock, $0.01 par value; 100,000,000 shares
authorized; 14,625,171 and 11,495,297 shares
issued and outstanding........................... 146,252 114,953
Additional paid-in capital........................ 41,956,374 4,002,779
Accumulated (deficit) retained earnings........... (67,815) 12,085,566
------------ ------------
Total stockholders' equity...................... 42,034,811 16,203,298
------------ ------------
Total liabilities and stockholders' equity...... $331,602,722 $503,622,094
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Revenues:
Loan origination income.............. $100,514,238 $62,615,836 $20,573,280
Net premium income................... 14,915,116 11,805,047 1,640,078
Loan-related fees.................... 20,097,986 7,661,829 3,639,867
Net interest income.................. 5,037,978 1,783,734 362,626
Net syndication income............... 3,518,601 -- --
Other................................ 6,574,636 1,799,469 547,459
------------ ----------- -----------
150,658,555 85,665,915 26,763,310
------------ ----------- -----------
Expenses:
Commissions.......................... 60,489,612 35,722,206 10,070,864
Loan-related expenses................ 11,508,863 8,391,163 3,763,578
Salaries and benefits................ 41,620,586 17,884,170 6,121,136
General and administrative expenses.. 25,124,450 9,939,096 3,500,736
Depreciation and amortization........ 3,262,728 1,432,985 321,908
Other................................ 169,321 200,154 148,499
------------ ----------- -----------
142,175,560 73,569,774 23,926,721
------------ ----------- -----------
Income from continuing operations
before income taxes............... 8,482,995 12,096,141 2,836,589
------------ ----------- -----------
Income tax benefit..................... (238,599) -- --
Income tax benefit due to conversion of
"S" corporation....................... (1,228,381) -- --
------------ ----------- -----------
Income from continuing operations.. 9,949,975 12,096,141 2,836,589
------------ ----------- -----------
Discontinued operations:
Loss from discontinued operations, net
of income taxes....................... (243,629) (1,001,563) (333,330)
Loss on disposal, net of income taxes.. (853,186) -- --
------------ ----------- -----------
Net income......................... $ 8,853,160 $11,094,578 $ 2,503,259
============ =========== ===========
Earning per share--Basic:
Earnings per share from continuing
operations.......................... $ 0.74 $ 1.14 $ 0.28
============ =========== ===========
Loss per share from discontinued
operations.......................... $ (0.08) $ (0.09) $ (0.04)
============ =========== ===========
Net earnings per share............... $ 0.66 $ 1.05 $ 0.24
============ =========== ===========
Earning per share--Diluted:
Earnings per share from continuing
operations.......................... $ 0.74 $ 1.14 $ 0.28
============ =========== ===========
Loss per share from discontinued
operations.......................... $ (0.08) $ (0.09) $ (0.04)
============ =========== ===========
Net earnings per share............... $ 0.66 $ 1.05 $ 0.24
============ =========== ===========
Weighted average number of shares
outstanding:
Basic................................ 13,390,371 10,567,995 10,269,000
============ =========== ===========
Diluted.............................. 13,453,826 10,610,714 10,269,000
============ =========== ===========
Pro forma data (unaudited):
Income from continuing operations
before income taxes................. $ 8,482,995 $12,096,141 $ 2,836,589
Pro forma provision for income taxes. 3,308,368 4,591,695 1,128,111
------------ ----------- -----------
Pro forma income from continuing
operations.......................... $ 5,174,627 $ 7,504,446 $ 1,708,478
============ =========== ===========
Pro forma earnings per share from
continuing operations
Basic................................ $ 0.35
============
Diluted.............................. $ 0.35
============
Pro forma weighted average number of
shares outstanding....................
Basic................................ 14,625,171
============
Diluted.............................. 14,688,625
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ---------------------- ---------------------
Shares Amount Shares Amount Shares Amount
---------- ----------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Common stock:
Balance at beginning
of period............ 11,495,297 $ 114,953 10,269,000 $ 102,690 10,269,000 $ 102,690
Stock issued for
initial public
offering............. 2,500,000 25,000 -- -- -- --
Stock issued for
acquisitions as
additional
consideration and
deferred
compensation......... 629,874 6,299 548,851 5,489 -- --
Capital contribution.. -- -- 574,756 5,748 -- --
Other issuance of
common stock......... -- -- 102,690 1,026 -- --
---------- ----------- ---------- ----------- ---------- ----------
Balance at end of
period............. 14,625,171 146,252 11,495,297 114,953 10,269,000 102,690
========== ----------- ========== ----------- ========== ----------
Additional paid-in
capital:
Balance at beginning
of period............ 4,002,779 (52,690) (52,690)
Stock issued for
initial public
offering, net of
underwriting
discounts............ 32,525,000 -- --
Stock issued for
acquisitions as
additional
consideration and
deferred
compensation......... 8,811,943 1,494,511 --
Capital contribution.. 99,998 2,494,252 --
Distribution notes
payable to
S corporation
stockholders in
connection with
conversion to a
C corporation........ (1,375,000) -- --
Cash distributions to
S corporation
stockholders......... (406,460) -- --
Initial public
offering costs....... (1,701,886) -- --
Other issuance of
common stock......... -- 66,706 --
----------- ----------- ----------
Balance at end of
period............. 41,956,374 4,002,779 (52,690)
----------- ----------- ----------
Accumulated (deficit)
retained earnings:
Balance at beginning
of period............ 12,085,566 3,025,707 1,473,443
Net income............ 8,853,160 11,094,578 2,503,259
Cash distributions to
S corporation
stockholders......... (21,006,541) (2,034,719) (950,995)
----------- ----------- ----------
Balance at end of
period............. (67,815) 12,085,566 3,025,707
----------- ----------- ----------
Total stockholders'
equity................. $42,034,811 $16,203,298 $3,075,707
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- -------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income................... $ 8,853,160 $ 11,094,578 $ 2,503,259
Adjustments to reconcile net
income to net cash provided
by (used in) operating
activities:
Depreciation and
amortization.............. 3,262,728 1,472,985 326,626
Provision for loan and
servicing losses.......... 606,504 900,000 --
Equity in net income of
affiliates................ (8,916) (269,481) (511,806)
Stock-based compensation... 368,877 67,732 --
Distributions from
affiliates.................. 76,335 245,163 480,266
Proceeds from sales of loans. 3,845,350,347 2,028,124,503 495,046,464
Loans originated............. (3,538,836,812) (2,367,554,285) (538,177,870)
Changes in assets and
liabilities, net of
acquisitions:
Loan fees and other
receivables............... 5,520,568 (10,435,890) (1,172,906)
Properties held for sale... (39,497,872) -- --
Other assets............... (2,501,268) (1,404,192) (115,859)
Commissions payable........ (1,973,343) 3,439,275 525,583
Accounts payable........... (1,357,383) 1,937,137 246,078
Accrued interest payable... 268,920 2,025,360 127,993
Payable to affiliates...... (148,562) 63,583 (34,198)
Capital contributions
payable................... 31,594,857 -- --
Accrued expenses and other
liabilities............... (7,342,621) 2,182,443 774,707
--------------- --------------- -------------
Net cash provided by
(used in) operating
activities.............. 304,235,519 (328,111,089) (39,981,663)
--------------- --------------- -------------
Cash flows from investing
activities:
Purchases of furniture,
fixtures and equipment, net. (6,354,910) (3,330,683) (1,087,004)
Net cash (paid) received for
acquisitions................ (7,435,092) 1,772,705 --
--------------- --------------- -------------
Net cash used in
investing activities.... (13,790,002) (1,557,978) (1,087,004)
--------------- --------------- -------------
Cash flows from financing
activities:
(Repayments of) borrowings on
warehouse lines of credit,
net......................... (306,300,728) 336,937,102 42,039,244
Borrowings on operating line
of credit, net.............. 5,922,742 -- --
Proceeds from issuance of
bridge notes................ -- 2,500,000 --
Repayments of bridge note.... -- (1,250,000) --
Proceeds from capital
contribution................ 99,998 1,250,000 --
Borrowings of long-term debt. -- 3,425,000 --
Repayments of long-term debt. (4,811,874) (198,394)
Proceeds from initial public
offering, net of issuance
costs....................... 30,848,114 -- --
Cash distributions to S
corporation stockholders.... (21,413,001) (2,034,719) (950,995)
--------------- --------------- -------------
Net cash (used in)
provided by financing
activities.............. (295,654,749) 340,628,989 41,088,249
--------------- --------------- -------------
Net (decrease) increase in
cash and cash equivalents... (5,209,232) 10,959,922 19,582
Cash and cash equivalents:
Beginning of period.......... 12,123,893 1,163,971 1,144,389
--------------- --------------- -------------
End of period................ $ 6,914,661 $ 12,123,893 $ 1,163,971
=============== =============== =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--NATURE OF BUSINESS
Prism Financial Corporation and its subsidiaries (collectively the
"Company" or "Prism Financial") is a retail mortgage banking company primarily
engaged in the business of originating, selling and brokering residential
mortgage loans. The Company operates 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. The Company uses its direct
consumer access to sell mortgage-related products, including credit reports,
flood certifications, appraisals, mortgage insurance and title insurance
policies. The Company also engages in the affordable housing and historic tax
credit syndication business. The Company currently operates under three
operating segments: mortgage origination, ancillary services and tax credit
syndication.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of the Company.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Basis of financial statement presentation
The accounting and reporting polices of the Company 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 periods. Actual results could differ from these
estimates.
Cash and cash equivalents
The Company considers all demand deposits and money market fund investments
with original maturities of 90 days or less to be cash equivalents. The
Company invests daily excess cash in money market funds through a sweep
mechanism.
Loans held for sale
The Company sells all of the loans it originates, generally 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, current market
prices for loans with similar characteristics. Fair value for purposes of
lower of cost or market analysis includes the valuation of all outstanding
purchase and sale commitments.
Loan fees receivable
Loan fees receivable represent fees on brokered loans which have closed,
but for which the Company has not yet received the loan origination fees due
from investors. An allowance is established for fees which may not be fully
collectible.
Furniture, fixtures and equipment, net
Furniture, fixtures and equipment are stated at cost less accumulated
depreciation. For fixed assets purchased since January 1, 1999, depreciation
is computed using the straight-line method based on the estimated useful
lives, generally five years. For fixed assets purchased prior to 1999, the
Company used the double-declining-balance method of depreciation. See Note 3--
Change in Accounting Method.
F-7
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangible assets, net
Intangible assets are primarily comprised of goodwill, representing the
excess of the purchase price over the fair value of the identifiable net
assets acquired at the date of acquisition. Goodwill is amortized from the
date of acquisition by systematic charges on a straight-line basis against
income over the expected period to be benefited, but not exceeding 20 years.
The measurement of possible impairment is based primarily on the ability to
recover the balance of the goodwill from expected future operating cash flows.
In management's opinion, no impairment exists at December 31, 1999.
Investments in and advances to affiliated business arrangements
During 1999, the Company terminated its participation in affiliated
business arrangements ("ABAs"), and thus no related balance is recorded at
December 31, 1999. For the years ended December 31, 1998 and 1997, the Company
accounted for its investments in ABAs using the equity method of accounting,
under which the Company's equity in the net income or loss of the affiliates
was recognized in its statement of income and added to or deducted from its
investment in the affiliates. Distributions received from affiliates were
treated as reductions of the investment in the ABAs.
Properties held for sale
The Company owns limited interests in various limited partnerships and
limited liability companies which were formed to acquire, develop, own,
construct, renovate, lease and operate property as qualified low income
housing or qualified historic tax credit structures ("investee partnerships")
within the meaning of Section 42 or Section 47 of the Internal Revenue Code,
respectively. The Company accounts for its investments in these investee
partnership interests using the equity method.
Capital contribution notes payable
Capital contributions payable represent obligations owed to the investee
partnerships in which the Company holds limited partnership interests. These
obligations will ultimately be assumed by the third party investors at the
time of syndication, and the Company's balance sheet will reflect a
corresponding reduction of capital contributions payable when syndication is
complete. These obligations are secured by their respective limited
partnership interests including, without limitation, the Company's rights to
profits, losses, tax credits and other items allocated by such investee
partnerships.
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
the Company, loan origination, processing and application fees received are
recorded as an adjustment to the cost basis of the loans and are recognized
when the mortgages are sold to investors.
Net premium income
Net premium income represents the difference between the sales price and
the allocated cost basis of the loans sold to investors, which is the par
value of the loan plus the premium paid to the origination source of the loan.
Loans and servicing rights are generally sold to investors within 10 to 45
days of initial losing.
Loan-related fees
Loan-related fees consist of application, documentation and processing fees
paid by borrowers.
F-8
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net interest income
Net interest income primarily consists of the net difference between
interest received on the Company's mortgage loans held for sale and the
interest expense paid under the Company's bank credit facilities.
Net syndication income
Net syndication income represents the revenue the Company receives from
selling interests in the investment funds, net of (1) the costs paid by the
Company to acquire the partnership interests that are syndicated and (2) the
direct expenses associated with the syndication.
Provisions for loan and servicing losses
The provision for loan losses relates 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 loan sale.
The provision for losses is charged to net premium income, and a reserve is
recorded in other liabilities. Management believes the reserve recorded at
December 31, 1999 is adequate based upon its evaluation of the potential
exposure related to actual activity and interpretations of the loan sale
agreements.
The provision for servicing losses relates to potential uncollectible
servicing payments. The provision for servicing losses is charged to net
interest income, and a credit is recorded to the allowance for loan fees and
other receivables. Management believes the allowance is adequate based upon
its evaluation of the potential uncollectible servicing payments.
Income taxes
Effective January 1, 1996, Prism Mortgage Company ("Prism Mortgage"), the
predecessor to Prism Financial, with the consent of its stockholders, elected
to be treated as an S corporation for federal and certain state income tax
purposes. Accordingly, in lieu of corporate income taxes, the stockholders
separately accounted for their pro rata share of Prism Mortgage's items of
taxable income, deductions, losses and credits. Therefore, the financial
statements for the periods covered by this election do 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.
Since the completion of its initial public offering (the "Offering") on May
28, 1999, the Company has been treated as a C corporation and has been subject
to corporate income taxation. Therefore, an income tax benefit has been
reflected in the accompanying financial statements relating to the pre-tax
losses incurred from the closing of the Offering through December 31, 1999, as
well as an income tax benefit due to the S corporation conversion. A pro forma
income tax provision has been presented as if Prism Financial had been taxable
as a C corporation for federal and state income tax purposes for the entire
year ended December 31, 1999 and for the years ended December 31, 1998 and
1997.
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequence attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rate is recognized in income in the period of enactment.
Discontinued operations
The Company adopted a plan to discontinue the operations relating to its
subsidiary, Infiniti Mortgage, L.L.C. ("Infiniti") on July 1, 1999. In
accordance with Accounting Principles Board Opinion ("APB") No. 30,
F-9
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," the Company's statements of income for the years
ended December 31, 1999, 1998 and 1997 reflect the results of operations, net
of taxes, for Infiniti under the caption "Discontinued Operations," thereby
excluding Infiniti's results of operations from continuing operations. The net
assets of Infiniti are segregated on the balance sheet as of December 31,
1999. The Company did not retroactively adjust the balance sheet as of
December 31, 1998 to segregate the net assets of Infiniti. The statements of
cash flows for the years ended December 31, 1999, 1998 and 1997 include
Infiniti's results of operations and changes in financial position. See Note
8--Discontinued Operations.
Derivative financial instruments
The Company utilizes a risk management program to mitigate the exposure
resulting from interest rate fluctuations. Accordingly, the Company
continuously hedges a percentage of the value of its mortgage loans held for
sale and in its pipeline, except for sub-prime loans. Derivative financial
instruments, such as forward contracts and options, are used to manage the
Company'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. Hedge gains or
losses are deferred and recognized as a component of the gain or loss on the
sale of the underlying mortgage loans or mortgage-backed securities. Hedge
losses are recognized immediately 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
amortized over the term of the option contract.
Impairment of long-lived assets
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of," establishes the accounting relating to the impairment of long-
lived assets. The Company has adopted SFAS 121 for all periods presented.
Management reviews long-lived assets and certain intangibles assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company determined
that the carrying values of these assets as of December 31, 1999 are
recoverable in future periods.
Accounting for transfers and servicing of financial assets and extinguishment
of liabilities
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. The Company's adoption of SFAS
No. 125 on January 1, 1997 has not had a material impact on its consolidated
financial statements as of and for the years ended December 31, 1999, 1998 and
1997.
F-10
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(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 common
stock equivalents. For the periods presented, common stock equivalents consist
of restricted stock granted to a key employee.
<TABLE>
<CAPTION>
Per
Share
Income Shares
(numerator) (denominator) Amounts
----------- ------------- -------
(in thousands, except per share
data)
<S> <C> <C> <C>
For the year ended December 31, 1999:
Net income per common share--basic.......... $ 8,853 13,390 $0.66
======= =====
Effect of dilutive securities............... 64
------
Net income per common share--diluted........ $ 8,853 13,454 $0.66
======= ====== =====
Pro forma: (Unaudited)
Income from continuing operations per
common share--basic......................... $ 5,175 14,625 $0.35
======= =====
Effect of dilutive securities............... 64
------
Income from continuing operations per
common share--diluted....................... $ 5,175 14,689 $0.35
======= ====== =====
For the year ended December 31, 1998:
Net income per common share--basic.......... $11,095 10,568 $1.05
======= =====
Effect of dilutive securities............... 43
------
Net income per common share--diluted........ $11,095 10,611 $1.05
======= ====== =====
For the year ended December 31, 1997:
Net income per common share--basic.......... $ 2,503 10,269 $0.24
======= =====
Effect of dilutive securities............... --
------
Net income per common share--diluted........ $ 2,503 10,269 $0.24
======= ====== =====
</TABLE>
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.
Immediately prior to the Offering, each stockholder of Prism Mortgage
exchanged all of his/her shares of common stock of Prism Mortgage for shares
of common stock of Prism Financial at an exchange ratio of one share of Prism
Mortgage common stock for 102.69 shares of common stock of Prism Financial. In
addition, the par value of Prism Financial's common stock was changed from no
par value per share to $0.01 per share, and authorized shares of common stock
were increased from one thousand to 100 million shares. All references in the
consolidated financial statements to shares and related prices, weighted
average number of shares and per share amounts have been adjusted to reflect
the split and the exchange.
The pro forma financial information has been presented to show the effect
on the historical results of operations of the Company had it been treated as
a C corporation for federal and state income tax purposes as of the beginning
of the earliest period presented. The pro forma earnings per share has been
presented as if the shares issued at the time of the Offering were outstanding
as of January 1, 1999.
F-11
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Segment Reporting
Effective January 1, 1998, the Company 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 the Company currently
operates in the following three segments: mortgage origination, ancillary
services and tax credit syndication. See Note 9--Segment Information.
Net Working Capital
The Company 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,
--------------------
1999 1998
--------- ---------
(in thousands)
<S> <C> <C>
Current assets...................................... $ 297,118 $ 494,755
Current liabilities................................. (289,427) (482,972)
--------- ---------
Net working capital................................. $ 7,691 $ 11,783
========= =========
</TABLE>
Stock-Based Compensation
In connection with the Offering, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits entities to recognize
the compensation expense associated with the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 allows entities to
continue to apply the provisions of APB No. 25, "Accounting for Stock Issued
to Employees," and to provide pro forma disclosures as if the fair value
method defined in SFAS No. 123 had been applied. The Company has elected to
apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosures of SFAS No. 123. See Note 19--Stock Options and Employee Stock
Purchase Plan.
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 became effective for
the calendar year 1999. On January 1, 1999, the Company adopted SOP 98-1,
which requires the capitalization of eligible costs of specified activities
related to computer software developed or obtained for internal use.
Prior year reclassifications
Certain items from prior years have been reclassified to conform with the
current year presentation.
F-12
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recently issued accounting pronouncements
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board 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, 2000 and cannot be
applied retroactively. The Company believes that the adoption of this
statement will not have a material effect on its financial position or results
of operations.
NOTE 3--CHANGE IN ACCOUNTING METHOD
For furniture, fixtures and equipment purchased since January 1, 1999, the
Company has changed from a double-declining-balance method of depreciation to
the straight-line method of depreciation. This change did not have a material
effect on net income for the year ended December 31, 1999. The Company changed
its depreciation method because management believes that the straight-line
method provides a better matching of costs and revenues, and the straight-line
method is consistent with the depreciation methods used by other companies in
the industry, including the Company's recently acquired businesses.
NOTE 4--INITIAL PUBLIC OFFERING AND RELATED MATTERS
On May 28, 1999, the Company completed the Offering of 2.5 million shares
of common stock, $0.01 par value ("Common Stock"), at a price of $14.00 per
share. The net proceeds from the Offering, after deducting the underwriting
discount and the expenses of the Offering, were approximately $30.8 million.
The Company's December 31, 1999 balance sheet reflects the following in
connection with the Offering: (1) the increase in the Common Stock and
additional paid-in capital in connection with the shares sold in the Offering,
net of underwriting discounts and Offering expenses; (2) the payment of a
$20.0 million distribution, with respect to the Company's retained earnings
through March 31, 1999, including approximately $12.8 million paid out of the
net proceeds from the Offering, to the stockholders of record prior to the
closing of the Offering; (3) the issuance of S corporation distribution notes
of approximately $2.8 million, and subsequent payment of approximately $1.4
million of the notes in the fourth quarter, with corresponding reductions of
retained earnings and additional paid-in capital of approximately $969,000 and
$1,781,000, respectively, relating to the distribution of the Company's
earnings from April 1, 1999 through the closing of the Offering; (4) the
establishment of a deferred tax asset of approximately $1,228,000 in
connection with the termination of the Company's S corporation status; and (5)
the repayment of long-term debt of $7.5 million and partial repayments of
obligations under the Company's then-outstanding warehouse credit facilities.
NOTE 5--ACQUISITIONS
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. See Note 7--Related Party Transactions for more
details of the transaction.
On September 1, 1998, Prism Financial acquired all of the outstanding
shares of Pacific Guarantee Mortgage Corporation ("Pacific Guarantee"), a
California-based mortgage banking company. The purchase price paid at closing
was approximately $4.9 million, net of approximately $3.6 million in cash
acquired in the transaction.
F-13
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On September 30, 1998, Prism Financial acquired all of the outstanding
shares of Mortgage Market, Inc. ("Mortgage Market"), a mortgage banking
company with offices in Oregon and Washington, for approximately $1.4 million
in cash, net of approximately $2.6 million in cash acquired in the
transaction.
At the time of the Offering, the Company issued 404,029 shares of Common
Stock, valued at approximately $5.7 million, as contingent consideration with
respect to the acquisition of Pacific Guarantee. This amount was recorded as
goodwill in the second quarter of 1999 and will be amortized over 20 years. In
addition, 44,892 shares of Common Stock, valued at approximately $628,000,
were issued and accounted for as deferred compensation with respect to the
acquisition of Pacific Guarantee. This amount will be amortized over five
years. The Company also issued 127,411 and 53,542 shares of Common Stock,
valued at approximately $1.8 million and $750,000, respectively, to the equity
value plans of Pacific Guarantee and Mortgage Market at the time of the
Offering. These amounts were accounted for as deferred compensation and will
be amortized over five years. The purchase agreements for Pacific Guarantee
and Mortgage Market provide for the payments of additional consideration and
compensation based on the future results of Pacific Guarantee, Mortgage Market
and the Company. The amount of future additional payments of consideration and
compensation cannot currently be determined.
In April 1999, the Company acquired First City Financial Corp. ("First
City"), a Denver-based mortgage banking company, for approximately $1.8
million in cash, net of approximately $950,000 in cash acquired in the
transaction. The purchase agreement provides for contingent consideration in
each of the five years following the acquisition based on First City's net
income, if any, in each of those five years. The contingent consideration is
payable in cash or Common Stock. The amount of contingent consideration, if
any, cannot currently be determined.
In May 1999, the Company acquired the Mid-Atlantic portion of the mortgage
banking business of a depository bank for approximately $515,000 in cash.
In September 1999, the Company acquired Valley Financial Corporation
("Valley Financial"), a leading mortgage banker and broker in northern
California, for approximately $600,000 in cash, net of approximately $650,000
in cash acquired in the transaction. The purchase agreement provides for
contingent consideration in each of the five years following the acquisition
based on Valley Financial's net income, if any, in each of those five years.
The Company has the option to pay up to 50 percent of the contingent
consideration in Common Stock. The amount of contingent consideration, if any,
cannot currently be determined.
In September 1999, a newly-formed subsidiary of the Company acquired
substantially all of the assets of Mortgage Express, Inc. ("Mortgage
Express"), a mortgage brokerage business in Florida, for approximately
$950,000 in cash, net of approximately $250,000 in cash acquired in the
transaction. The purchase agreement provides for contingent consideration in
each of the seven years following the acquisition based on Mortgage Express'
net income, if any, in each of those seven years. The Company has the option
to pay up to 50 percent of the contingent consideration in Common Stock. The
amount of contingent consideration, if any, cannot currently be determined.
Also in September 1999, the Company acquired an 80 percent interest in
Apollo Housing Capital, L.L.C. ("Apollo") for approximately $1.6 million in
cash, net of approximately $380,000 in cash acquired in the transaction.
Apollo structures and sells interests in investment portfolios composed of
affordable housing and historic rehabilitation tax credits. The Company also
agreed to pay an additional $3.3 million of initial consideration, contingent
upon the attainment of various cash flow targets by Apollo following the
closing of this acquisition. In addition, the purchase agreement provides for
contingent consideration in each of the eight years following the acquisition
based on Apollo's net income, if any, in each of those eight years. The 20
percent interest in Apollo not acquired by the Company is currently held by
AHC Holdings, L.L.C. ("AHC"). AHC has
F-14
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the right to require the Company to purchase the remaining 20 percent interest
in Apollo beginning on January 1, 2004 or upon a change of control of Prism
Financial. If AHC exercises this right, the Company would pay a purchase price
based on a multiple of Apollo's average earnings during certain historical
periods. If AHC requires the Company to purchase all or part of its remaining
interest in Apollo, the Company will have the right to pay up to 50 percent of
the purchase price in shares of its Common Stock.
Each of the Company's acquisitions discussed above has been accounted for
using the purchase method of accounting. Accordingly, the accompanying
consolidated statements of income do not include any revenues or expenses of
the acquired companies prior to the respective closing dates of the
acquisitions.
For the year ended December 31, 1998, the Company recorded goodwill of
approximately $2.9 million related to the acquisitions of Pacific Guarantee
and Mortgage Market. For the year ended December 31, 1999, the Company
recorded goodwill of approximately $12.7 million, of which approximately $8.3
million related to additional purchase price paid for 1998 acquisitions,
including $5.7 million of contingent consideration issued to Pacific Guarantee
in conjunction with the Offering, and approximately $4.4 million related to
1999 acquisitions.
The following unaudited pro forma summary presents the Company's results of
operations as if the acquisitions accounted for using the purchase method had
occurred at the beginning of each period presented. This summary is provided
for informational purposes only. It does not necessarily reflect the actual
results that would have occurred had the acquisition been made as of those
dates or of results that may occur in the future:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(in thousands,
except per share
amounts)
<S> <C> <C>
Revenues............................................... $168,744 $183,781
Net income............................................. 10,796 15,176
Net income per share--diluted.......................... $ 0.80 $ 1.43
</TABLE>
NOTE 6--INVESTMENTS IN AFFILIATED BUSINESS ARRANGEMENTS AND INVESTEE
PARTNERSHIPS
During 1999, the Company terminated its participation in ABAs, which
previously provided certain mortgage origination services and were organized
as limited liability corporations and joint ventures. The Company previously
owned interests, ranging up to 50 percent, in several ABAs. Under these
arrangements, the Company was reimbursed for certain operating costs incurred.
Condensed financial information of the combined ABAs as of and for the
years ended December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
(in
thousands)
<S> <C> <C>
Assets...................................................... $ 344 $ 110
====== ======
Liabilities................................................. $ 9 $ --
Members' equity............................................. 335 110
------ ------
$ 344 $ 110
====== ======
Revenue..................................................... $1,434 $3,070
Expenses.................................................... 980 2,046
------ ------
Net income.................................................. $ 454 $1,024
====== ======
</TABLE>
As of December 31, 1999, the Company owned limited partner interests in 22
investee partnerships, which were formed to acquire, develop, own, construct,
renovate, lease and operate property as qualified low income housing or
qualified historic tax credit structures. The Company's interests in these
partnerships ranged between 98.99% and 99.99%.
F-15
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Presented below is condensed financial information of the investee
partnerships as of and for the year ended December 31, 1999.
<TABLE>
<CAPTION>
1999
--------------
(in thousands)
<S> <C>
Assets..................................................... $124,037
========
Liabilities................................................ 48,772
Partners' capital.......................................... 75,265
--------
$124,037
========
Revenue.................................................... $ 246
Expenses................................................... 88
--------
Net income................................................. $ 158
========
</TABLE>
As of December 31, 1999, the Company held the following investments through
its investee partnerships:
<TABLE>
<CAPTION>
As of
December 31, 1999
-----------------
(in thousands)
<S> <C>
Jefferson Chase Limited Partnership, Columbus, OH...... $ 2,723
Emmetsburg Partners L.P., Emmetsburg, IA............... 892
Dickson Partners, L.P., Dickson, TN.................... 1,685
Watseka Senior Apartments Limited Partnership, Wateska,
IL.................................................... 1,854
Montgomery Housing Partners I, Ltd., Montgomery, AL.... 1,878
Cedarburg Seniors Apartments II, LLC, Cedarburg, WI.... 2,028
Robins Housing Partners I, Ltd., Warner Robins, GA..... 604
Belmont Village, L.P., Chicago, IL..................... 5,758
Cedar Wood Limited Partnership, Mansfield, OH.......... 2,291
Oak Wood Limited Partnership, Lexington, OH............ 2,013
River Chase Limited Partnership, Chillicothe, OH....... 1,957
Sycamore Creek Limited Partnership, Sydney, OH......... 2,183
Mercy Franciscan at Winton Woods I, L.P., Cincinnati,
OH.................................................... 4,314
Coulter Court Limited Partnership, Aurora, IL.......... 3,729
Shepherd Hills Apartments Limited Partnership, Las
Vegas, NV............................................. 5,237
Cultural Campus Limited Partnership, Hot Springs, AZ... 2,425
Timberlake Limited Partnership, Vandalia, OH........... 3,639
Goodell Place Limited Partnership, Maywood, IL......... 1,577
Madison Park Place Limited Partnership, Springfield,
IL.................................................... 12,271
Union Square Limited Partnership, Springfield, IL...... 6,453
Huffman Senior Apartments Limited Partnership, Dayton,
OH.................................................... 4,631
Brenwood Park Senior Community LLC, Franklin, WI....... 3,928
-------
Total.............................................. $74,070
=======
</TABLE>
NOTE 7--RELATED PARTY TRANSACTIONS
In January 1996, the Company loaned $100,000 each to two of its
stockholders to purchase outstanding common shares of the Company from another
stockholder. Since January 1, 1997, the loans accrued interest at 8.25%
annually. The principal was payable in five annual installments of $20,000,
plus interest, beginning December 31, 1997. At December 31, 1998, the balance
due from the two stockholders on these loans was $120,000. Each stockholder
repaid the remaining principal and accrued interest balance of the loans to
the Company in May 1999.
F-16
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On April 30, 1998, IGT became a wholly-owned subsidiary of Prism Financial
as a result of the transfer of stockholders' interests in IGT to Prism
Financial. The stockholders of IGT received no consideration for this
transaction. Prior to this transaction, IGT stock was fully held by Prism
Financial's principal stockholders. IGT is a full-service provider of
residential title services to in-house and third party customers. Under
generally accepted accounting principles, transfers of assets between
companies under common control are valued at the predecessor basis. The net
book value of the assets transferred at April 30, 1998 was zero.
The Company paid management fees for the expense of shared services in
1999, 1998 and 1997 of approximately $115,000, $187,000 and $55,000,
respectively, to a company formerly controlled by the late Bruce C. Abrams,
Chief Executive Officer and Chairman of the Board of Directors of Prism
Financial, which is now controlled by Mr. Abrams' estate.
The estate of Bruce C. Abrams owns a one-third equity interest, and a
director of the Company has an indirect equity interest, in an Illinois
limited partnership, which is the landlord of an office building in Chicago,
Illinois that is leased by the Company. This board member of Prism Financial
is also on the board of directors for the company from which Prism Financial
subleases the office space. The Company paid sublease payments of
approximately $422,000 to the sublessor during 1999.
Prism Financial acquired 80 percent of the membership interests of Apollo
in September 1999. See Note 5--Acquisitions. Fifty percent of the interests in
Apollo were owned by AHC and 50 percent were owned by Vision AHC, L.L.C.
("Vision"), an entity formerly controlled by the late Bruce C. Abrams and now
controlled by Bruce C. Abrams' estate. Vision did not receive any cash from
the Company upon the closing of the transaction. Vision is entitled to receive
initial consideration of up to $3.3 million in cash only if Apollo satisfies
conditions relating to available cash flows following the closing. In
addition, Vision will receive a percentage of Apollo's net cash flow in 1999
following the acquisition and will receive contingent consideration equal to a
percentage of Apollo's pre-tax net income in each of the years 2000 through
2007.
At the time of the closing of Prism Financial's acquisition of Apollo,
Apollo had outstanding obligations of $500,000 under a promissory note payable
to Vision. The note was paid in full in the third quarter of 1999.
During 1999, the Company made $21.4 million in distributions to
stockholders of record prior to the closing of the Offering, relating to the
Company's retained earnings through May 28, 1999 (the termination of the S
corporation status). The Company also recorded a note payable of $1.4 million
to reflect the undistributed S corporation earnings as of December 31, 1999.
As of December 31, 1999, the Company owned limited partnership interests in
two investee partnerships that were purchased from a real estate development
company formerly controlled by the late Bruce C. Abrams totaling $18.7
million. This real estate development company sold limited interests in low-
income housing properties to Apollo in 1999, with one of these transactions
occurring before the Company's acquisition of Apollo. See Note 6--Investments
in Affiliated Business Arrangements and Investee Partnerships for further
discussion of investee partnerships. Additionally, the Company owed capital
contribution notes totaling $17.1 million as of December 31, 1999 pursuant to
limited partnership interests in the two investee partnerships discussed
above. See Note 15--Capital Contributions Payable for further discussion of
capital contribution notes.
NOTE 8--DISCONTINUED OPERATIONS
On July 1, 1999, the Company adopted a plan to discontinue the operations
relating to its subsidiary, Infiniti. Infiniti was created to originate and
sell sub-prime mortgages. As a result of the discontinuance of Infiniti's
operations, the Company no longer originates loans from specialized retail
branches focusing primarily on sub-prime mortgages. The Company has accounted
for this business as a discontinued operation in the accompanying consolidated
financial statements for all periods presented, with a measurement date of
July 1, 1999. For the year ended December 31, 1999, the Company reported a
loss on disposal of this business, net of income taxes, of approximately
$853,000.
F-17
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents approximate revenues and net loss for the non-
prime business segment for the period of January 1, 1999 to June 30, 1999 and
for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
January 1, 1999 Year Ended Year Ended
to June 30, 1999 December 31, 1998 December 31, 1997
---------------- ----------------- -----------------
(in thousands)
<S> <C> <C> <C>
Revenues............ $2,297 $ 5,176 $ 590
====== ======= =====
Net loss............ $ (244) $(1,001) $(333)
====== ======= =====
</TABLE>
The Company sold no assets to outside parties and was relieved of no
liabilities in conjunction with the discontinuance of the sub-prime business
segment in 1999. The following table presents the summarized financial
position of the sub-prime business segment as of December 31, 1999:
<TABLE>
<CAPTION>
As of December 31,
1999
------------------
(in thousands)
<S> <C>
Loans held for sale.................................... $3,347
Loan fees and other receivables, net................... 263
Deferred tax asset..................................... 589
Other assets........................................... 8
Furniture, fixtures and equipment, net................. 132
Warehouse lines of credit.............................. (1,645)
Interest payable....................................... (23)
Accrued expenses and other liabilities................. (898)
------
Net assets of discontinued operations.................. $1,773
======
</TABLE>
F-18
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 9--SEGMENT INFORMATION
The Company operates primarily in the mortgage origination industry. The
Company has two subsidiaries that provide mortgage-related ancillary services.
As discussed in Note 7--Related Party Transactions, IGT provides title
services to in-house and third party customers and was contributed to Prism
Financial by the Company's principal stockholders on April 30, 1998. Lender's
Mortgage Services, L.L.C. ("LMS") sells products and services necessary in
obtaining a loan, such as appraisals, credit reports, flood zone determination
and title insurance. The Company formed LMS during the second quarter of 1999.
Additionally, as discussed in Note 5--Acquisitions, the Company owns an 80%
interest in Apollo, which is an affordable housing and historic rehabilitation
tax credit syndication business. Selected financial information of the
mortgage origination, ancillary services and tax credit syndication businesses
is presented below.
<TABLE>
<CAPTION>
Mortgage Ancillary Tax Credit
Origination Services Syndication Adjustments Consolidated
----------- --------- ----------- ----------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
For the year ended
December 31, 1999...... $146,544 $2,843 $ 3,519 $(2,247) $150,659
For the year ended
December 31, 1998...... 84,848 818 -- -- 85,666
For the year ended
December 31, 1997...... 26,763 -- -- -- 26,763
Income from continuing
operations before income
taxes:
For the year ended
December 31, 1999...... $ 4,727 $1,438 $ 2,318 $ -- $ 8,483
For the year ended
December 31, 1998...... 11,530 566 -- -- 12,096
For the year ended
December 31, 1997...... 2,837 -- -- -- 2,837
Identifiable assets:
At December 31, 1999.... $251,310 $ 860 $80,024 $ (591) $331,603
At December 31, 1998.... 503,100 522 -- -- 503,622
</TABLE>
The adjustments reflected above relate to the following: (1) fees charged
for ancillary services provided to the Company's mortgage origination segment
by LMS in the amount of $1,911,000 for 1999; (2) management fee of $336,000
charged to Apollo by the mortgage origination segment for 1999; and (3) a
receivable of $591,000 due to LMS by the mortgage origination segment as of
December 31, 1999.
The Company operates entirely in North America. Accordingly, no information
on geographic segments is presented.
F-19
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 10--FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consisted of the following at December 31,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------- ------
(in thousands)
<S> <C> <C>
Furniture and equipment.................................. $ 3,771 $2,405
Leasehold improvements................................... 1,543 897
Computer equipment and software.......................... 10,318 2,956
------- ------
15,632 6,258
Less accumulated depreciation............................ 4,447 1,974
------- ------
Total................................................ $11,185 $4,284
======= ======
</TABLE>
Depreciation expense for the years ended December 31, 1999, 1998 and 1997
was $2,664,000, $1,429,000 and $326,000, respectively.
NOTE 11--OTHER ASSETS
Other assets as of December 31, 1999 and 1998 were comprised of the
following:
<TABLE>
<CAPTION>
December 31,
-------------
1999 1998
------ ------
(in
thousands)
<S> <C> <C>
Restricted cash............................................ $1,202 $1,000
Notes and interest receivable.............................. -- 441
Security deposits.......................................... 522 265
Prepaid expenses........................................... 1,420 1,039
Deferred compensation, net................................. 2,793 --
Deferred tax assets........................................ 3,079 --
Other...................................................... 902 20
------ ------
$9,918 $2,765
====== ======
</TABLE>
F-20
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 12--WAREHOUSE LINES OF CREDIT AND OTHER SHORT-TERM BORROWINGS:
As of December 31, 1999, the Company had two warehouse lines of credit with
financial service companies, which have been used for warehousing loans prior
to sale to investors (the "Mortgage Origination Warehouse Facility") and
acquiring investee partnerships (the "Tax Syndication Warehouse Facility").
The Company had several warehouse lines of credit that expired, and were not
renewed, during 1999 and 1998. The balances in the Company's lines of credit
as of December 31, 1999 and 1998 are presented below:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Advances under $250,000,000 Mortgage Origination Warehouse
Facility, paying monthly interest at the Federal Funds
Funding Rate plus 1.125%, expiring March 31, 2000.......... $176,116 $ --
Advances under $30,000,000 Tax Syndication Warehouse
Facility, paying monthly interest at either the bank's
Prime Rate or LIBOR plus 2.25%, expiring June 30, 2001..... 15,487 --
Advances under $15,600,000 warehouse line of credit, paying
monthly interest at LIBOR plus 1.75%, expired June 1, 1999
and no additional loans have been funded from this line
since maturity............................................. -- 183
Advances under $50,000,000 warehouse line of credit, paying
monthly interest at GE commercial paper rate + 1.25%,
expired April 30, 1999 and no additional loans have been
funded from this line since maturity....................... -- 92,490
Advances under $50,000,000 warehouse line of credit, paying
monthly interest at average LIBOR + 1.50%, expired May 31,
1999 and no additional loans have been funded from this
line since maturity........................................ -- 46,095
Advances under $5,900,000 warehouse line of credit, paying
monthly interest at Bank of America prime rate, expired May
31, 1999 and no additional loans have been funded from this
line since maturity........................................ -- 1,557
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
Advances under $25,000,000 warehouse line of credit, paying
monthly interest at LIBOR plus 2.50%. The line of credit
expired March 31, 1999 and no additional loans have been
funded from this line since maturity....................... -- 3,657
Advances under $25,000,000 Warehouse Line of Credit, paying
monthly interest at GE commercial paper rate + 1.25%,
expired April 30, 1999 and no additional loans have been
funded from this line since maturity....................... -- 17,420
-------- --------
Total................................................... $191,603 $170,217
======== ========
</TABLE>
The weighted average interest rate of the Mortgage Origination Warehouse
Facility in 1999 and 1998 was 6.29% and 7.10%, respectively. The weighted
average interest rate of the Tax Syndication Warehouse Facility in 1999 was
7.55%.
Under the terms of the Mortgage Origination Warehouse Facility, 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 this line of credit. Upon the sales of the
mortgage loans, the warehouse lines of credit are repaid. This agreement
contains various financial covenants, and as of December 31, 1999, the Company
was in compliance with all covenants relating to this outstanding line of
credit.
F-21
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In addition, the Tax Syndication Warehouse Facility had irrevocable letters
of credit totaling $9,287,000 outstanding as of December 31, 1999. Pursuant to
the agreement, any and all limited partnership interests purchased by the
Company using this facility are pledged as collateral on this line of credit.
The Company is required to repay each borrowing within a stated amount of time
pursuant to the agreement. This agreement contains various financial
covenants, and as of December 31, 1999, the Company was in compliance with all
covenants relating to this outstanding line of credit. The Tax Syndication
Warehouse Facility has a monthly commitment fee based on 0.375% of the average
daily unused portion of the facility.
The Company also has a $10,000,000 operating line of credit on a revolving
basis from a commercial bank. This revolving line of credit is secured by a
pledge of the Company's assets, other than loans securing the warehouse
facilities. As of December 31, 1999, the Company had approximately $5,923,000
outstanding under this revolving line of credit, which expires on October 5,
2000.
NOTE 13--LOANS SOLD UNDER AGREEMENTS TO REPURCHASE
The Company delivers loans to Fannie Mae under its "As soon as pooled/early
purchase Option" ("ASAP Plus"). Under the ASAP Plus program, Fannie Mae funds
the Company 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. The Company agrees to deliver mortgage
loans to Fannie Mae and assigns any related trades. The Company then
redelivers all loans in the ASAP Plus program to reflect related forward
pricing on a semi-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, 1999, Prism Financial had an outstanding balance of
approximately $11.9 million on the ASAP Plus line in repurchase agreements
with Fannie Mae, with interest accruing at 5.11%. The underlying loans were
sold during 2000.
NOTE 14--LONG-TERM DEBT
Long-term debt outstanding at December 31, 1999 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
---- ------
(in
thousands)
<S> <C> <C>
Term note with a commercial bank, maturing July 2003............... $-- $3,425
Notes payable to stockholders, with maturities ranging from 2000 to
2002, paying monthly interest at a fixed rate of 10.00%,
unsecured......................................................... -- 850
Notes payable to private investors, maturing in 2002, paying
monthly interest at a fixed rate of 10.00%, unsecured............. -- 400
Notes payable to various lending institutions with maturities
ranging from 2000 to 2003, paying monthly interest ranging from
6.30% to 33.92%, collateralized by various equipment.............. 222 352
---- ------
Total.......................................................... 222 5,027
Less: current portion of long-term debt........................ 146 729
---- ------
$ 76 $4,298
==== ======
</TABLE>
Long-term debt principal repayments are due as follows:
<TABLE>
<CAPTION>
Years ending December 31: Amount
------------------------- --------------
(in thousands)
<S> <C>
2000........................................................ $146
2001........................................................ 59
2002........................................................ 14
2003........................................................ 3
----
Total................................................... $222
====
</TABLE>
F-22
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 15--CAPITAL CONTRIBUTION NOTES PAYABLE
The Company has entered into capital contribution notes pursuant to the
purchase of its limited partnership interests in certain investee
partnerships. See Note 6--Investments in Affiliated Business Arrangements and
Investee Partnerships. These notes are secured by the respective limited
partnership interests including, without limitation, the Company's rights to
profits, losses, tax credits and other items allocated by such investee
partnerships.
As of December 31, 1999, the Company had non-interest bearing notes payable
for capital contributions as follows:
<TABLE>
<CAPTION>
As of
December 31, 1999
-----------------
(in thousands)
<S> <C>
Jefferson Chase Limited Partnership, Columbus, OH..... $ 1,973
Emmetsburg Partners L.P., Emmetsburg, IA.............. 310
Dickson Partners, L.P., Dickson, TN................... 1,685
Watseka Senior Apartments Limited Partnership,
Wateska, IL.......................................... 360
Montgomery Housing Partners I, Ltd., Montgomery, AL... 1,502
Cedarburg Seniors Apartments II, LLC, Cedarburg, WI... 1,318
Robins Housing Partners I, Ltd., Warner Robins, GA.... 469
Belmont Village, L.P., Chicago, IL.................... 688
Cedar Wood Limited Partnership, Mansfield, OH......... 2,291
Oak Wood Limited Partnership, Lexington, OH........... 2,013
River Chase Limited Partnership, Chillicothe, OH...... 1,957
Sycamore Creek Limited Partnership, Sydney, OH........ 2,183
Mercy Franciscan at Winton Woods I, L.P., Cincinnati,
OH................................................... 4,314
Coulter Court Limited Parnership, Aurora, IL.......... 3,247
Shepherd Hills Apartments Limited Partnership, Las
Vegas, NV............................................ 5,237
Cultural Campus Limited Partnership, Hot Springs, AZ.. 2,425
Timberlake Limited Partnership, Vandalia, OH.......... 3,639
Goodell Place Limited Partnership, Maywood, IL........ 1,183
Madison Park Place Limited Partnership, Springfield,
IL................................................... 11,748
Union Square Limited Partnership, Springfield, IL..... 5,314
Huffman Senior Apartments Limited Partnership, Dayton,
OH................................................... 4,631
Brenwood Park Senior Community LLC, Franklin, WI...... 3,187
-------
Total............................................. $61,674
=======
</TABLE>
NOTE 16--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 Note
5--Acquisitions. On December 31, 1998, Prism Financial received from the
private investor group a capital infusion of $1.25 million and converted the
group's $1.25 million bridge note into common shares. Prism Financial issued
574,756 shares to this private investor group in exchange for their aggregate
investment of $2.5 million. The capital infusion was used to repay the GEM
Value/Prism L.L.C. $1.25 million bridge note.
F-23
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 17--LEASE COMMITMENTS
The Company leases its offices under various noncancelable agreements that
expire through 2006 and require various minimum annual rental payments. The
Company also leases office equipment under operating leases expiring through
2004. The total future minimum lease payments under these leases are as
follows:
<TABLE>
<CAPTION>
Years ending December 31: Amount
------------------------- ------
(in thousands)
<S> <C>
2000........................................................ $ 6,538
2001........................................................ 5,276
2002........................................................ 3,764
2003........................................................ 2,118
2004........................................................ 480
Thereafter.................................................. 159
-------
Total................................................... $18,335
=======
</TABLE>
Total expense under all operating leases for 1999, 1998 and 1997 was
$8,253,000, $3,249,000 and $897,000, respectively.
NOTE 18--OFF-BALANCE-SHEET RISK AND CONTINGENCIES
The Company 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
The Company regularly enters into commitments to fund mortgage loans at a
future date, subject to compliance with stated conditions. The commitments, if
funded, are 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, 1999 and 1998 was $156.7 million and
$268.8 million, respectively.
The Company 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 the Company
does not have matching commitments to sell loans. In a rising interest rate
environment, the Company is exposed to lower of cost or market valuation
adjustments. The Company reduces interest rate exposure by limiting these
commitments to varying periods of less than 60 days.
Derivative financial instruments
In order to offset the risk that a change in interest rates will result in
a decrease in the value of the Company's current mortgage loan inventory or
its loan commitments, the Company enters into hedging transactions. The
Company'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 the Company's inventory and committed
pipeline. At December 31, 1999 and 1998, the Company had open forward
commitments with a total notional amount of approximately $151.4 million and
$670.0 million, respectively, to sell mortgage loans with varying settlement
dates not extending beyond February 2000. On December 31, 1999, the Company
had two call options to buy Treasuries through February 2000, with a total
notional amount of $40.0 million. No options were outstanding at December 31,
1998. The Company also hedges some of its loans held for sale by using whole-
loan sale commitments to ultimate investors, which totaled $152.1 million and
$28.4 million at December 31, 1999 and 1998, respectively.
F-24
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
While the Company does not anticipate nonperformance by any counterparty,
it is exposed to potential credit losses in the event of nonperformance by the
counterparties to the various instruments. The Company 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
other nationally recognized financial institutions. The Company'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 the Company only purchases options that allow it, at its option, to
purchase or sell a financial instrument, the exposure of the Company at any
time is limited to the premium paid to purchase the option.
Mortgage loans sold with recourse
Through the Company's various correspondent agreements with financial
institutions, it 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, the Company
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 sub-prime loan sales, the Company 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.
Litigation
The Company 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 the Company's financial position or results of operations.
NOTE 19--STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN
In March 1999, the Company's board of directors adopted the 1999 Omnibus
Stock Incentive Plan (the "1999 Omnibus Plan") and the Company's employee
stock purchase plan (the "Stock Purchase Plan"). Prior to the Offering in May
1999, the Company's stockholders approved the 1999 Omnibus Plan, with an
aggregate of 1,500,000 shares of Common Stock reserved for issuance, as well
as the Stock Purchase Plan, with an aggregate of 750,000 shares of Common
Stock reserved for issuance.
The 1999 Omnibus Plan 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.
Stock options issued under this plan have an exercise price equal to the
closing market price of the Common Stock on the date of grant and have a legal
life of ten years. The stock options granted in 1999 vest annually over a
period ranging from two to five years, beginning one year from the date of
grant.
The Company applies APB Opinion No. 25 in accounting for the 1999 Omnibus
Plan and the Stock Purchase Plan. Accordingly, no compensation cost has been
recognized for the Company's issuance of options to employees pursuant to the
1999 Omnibus Plan or in conjunction with the Stock Purchase Plan.
F-25
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Had compensation cost for the 1999 Omnibus Plan and the Stock Purchase Plan
been determined consistent with SFAS No. 123, the Company's net income and net
earnings per share would have been the pro forma amounts indicated below for
the year ended December 31, 1999:
<TABLE>
<CAPTION>
1999
---------------------
(in thousands, except
per share data)
<S> <C>
Net income
As reported....................................... $8,853
Pro forma......................................... 3,513
Net earnings per share, basic
As reported....................................... $ 0.66
Pro forma......................................... 0.26
Net earnings per share, diluted
As reported....................................... $ 0.66
Pro forma......................................... 0.26
</TABLE>
Under SFAS No. 123, the pro forma compensation expense related to the 1999
Omnibus Plan and Stock Purchase Plan, before the effects for income taxes, was
approximately $8,750,000 for 1999.
In 1999, the Company began offering the Stock Purchase Plan to its
employees who work more than 20 hours a week, work more than five months a
year and receive a Form W-2 from the Company. Under this plan, the Company is
authorized to issue up to 750,000 shares of Common Stock, plus annual
increases beginning in or after 2000 equal to the lesser of 500,000 shares, 3%
of the outstanding shares on such date, or a lesser amount determined by the
board of directors. Under the terms of the Stock Purchase Plan, employees may
elect two times a year to withhold between one and 10 percent of their
eligible compensation through regular payroll deductions to purchase Common
Stock, subject to limitations of the Stock Purchase Plan and Internal Revenue
Service. The purchase price is 90 percent of the lower of the price at the
grant date, which is the beginning of a six month deduction period (February 1
or August 1) or the purchase date, which is the end of a six month deduction
period (January 31 or July 31). As of December 31, 1999, approximately seven
percent of eligible employees were participating in the Stock Purchase Plan.
The first purchase date for the Stock Purchase Plan was January 31, 2000.
The fair value of the stock option grants is estimated using the Black-
Scholes option-pricing model, with the following weighted-average assumptions
used for stock option grants in 1999: weighted average option price, which
equals the fair market value at date of grant, of $11.82; expected dividend
yield of 0%; expected volatility of 121.74%; risk-free interest rate of 6.50%;
and expected life of six years. The fair value of the employees' purchase
rights pursuant to the Stock Purchase Plan are estimated using the Black-
Scholes option-pricing model, with the following weighted-average assumptions
used for purchase rights granted in 1999: average fair market value of $8.89;
expected dividend yield of 0%; expected volatility of 121.74%; average risk-
free interest rate of 4.79%; and the expected life of six months.
Stock option plan activity during the year ended December 31, 1999 was as
follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Fixed Options Shares Price
------------- ------- --------
<S> <C> <C>
Outstanding at beginning of year....................... -- $ --
Granted................................................ 734,210 13.70
Exercised.............................................. -- --
Canceled............................................... (40,570) 13.99
-------
Outstanding at end of year............................. 693,640 13.69
=======
Options exercisable at year-end........................ --
=======
Weighted-average fair value of options granted during
the year.............................................. $ 11.82
</TABLE>
F-26
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
----------------------------------- -----------------------
Weighted-avg.
Number Remaining Weighted-avg. Weighted-avg.
of contractual exercise Number exercise
Range of Exercise prices Shares life price of Shares price
- ------------------------ ------ ------------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
$ 5.6250-$ 9.7500....... 14,600 10.00 $ 5.63 -- $--
$10.0000-$12.7500....... 20,710 9.86 10.00 -- --
$12.8125-$13.7500....... 11,830 9.83 12.81 -- --
$14.0000-$17.6250....... 646,500 9.40 14.00 -- --
</TABLE>
NOTE 20--EMPLOYEE BENEFITS
Defined Contribution Plan
The Company 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. The Company may, at its discretion, make contributions to the plan.
The Company did not make any contributions to the plan during 1999, 1998 or
1997.
Profit Sharing Plan
On January 31, 1998, the Company adopted a profit sharing plan. Under this
plan, the Company awards qualified employees a specified number of incentive
share units ("ISUs"), contingent upon reaching predefined performance goals
over a period of three years. The Company deemed these goals to be met as of
January 2000. The maximum total award, which could be paid out under the plan,
is $3.2 million. ISUs are credited to the qualified employees based on
commissions or compensation earned during the three-year period, as defined in
the plan agreement. Qualified employees are fully vested in their incentive
share units over three years of subsequent service, as defined in the plan
agreement. This vesting may be accelerated by one year based on the attainment
of an additional performance goal. For the years ended December 31, 1999 and
1998, no compensation expense was recognized under the plan.
NOTE 21--INCOME TAXES
Total income tax benefit for the period from May 28, 1999 (termination of S
corporation status) through December 31, 1999 was allocated as follows:
<TABLE>
<CAPTION>
1999
--------------
(in thousands)
<S> <C>
Loss from continuing operations........................... $ 239
Income tax benefit due to conversion from an "S" corpora-
tion..................................................... 1,228
------
Tax benefit from continuing operations.................. 1,467
------
Loss from discontinued operations......................... 585
------
Tax benefit............................................. $2,052
======
</TABLE>
Income tax benefit for the year ended December 31, 1999 consisted of the
following:
<TABLE>
<CAPTION>
1999
--------------
(in thousands)
<S> <C>
Current:
Federal.................................................. $ --
State.................................................... --
Deferred:
Federal.................................................. 1,653
State.................................................... 399
------
$2,052
======
</TABLE>
F-27
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The reconciliation of the income tax benefit computed using the federal
statutory rate of 34 percent to the income tax benefit from continuing
operations as reflected in the financial statements is as follows for the year
ended December 31, 1999:
<TABLE>
<CAPTION>
1999
--------------
(in thousands)
<S> <C>
Computed "expected" tax from continuing operations........ $ 2,884
State and local income taxes, net of federal income taxes. 424
Tax on S corporation income, taxable to S corporation
shareholders............................................. (3,428)
Establishment of deferred tax asset due to S corporation
conversion (1,228)
Permanent differences, net................................ (119)
-------
Effective tax benefit..................................... $(1,467)
=======
</TABLE>
As discussed in Note 2--Significant Accounting Policies, the Company was an
S corporation prior to the consummation of the Offering, and accordingly, no
federal or state income tax expense has been provided for this period. The pro
forma provision for income taxes of $3.3 million differs from the expected
provision due to state and local income taxes, net of federal income tax
benefit.
The tax effects of temporary differences and carryforwards that give rise
to deferred tax assets and liabilities at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
1999
--------------
(in thousands)
<S> <C>
Deferred tax assets:
Allowance for loan and servicing losses.................. $ 499
Accrued expenses and other............................... 19
Net operating loss carryforwards......................... 2,908
Other...................................................... 331
------
Total deferred tax asset................................... $3,757
======
Deferred tax liabilities:
Deferred compensation.................................... $ (352)
Depreciation and amortization............................ (326)
------
Total deferred tax liabilities............................. (678)
------
Net deferred tax asset..................................... $3,079
======
</TABLE>
During the year ended December 31, 1999, the Company acquired several
businesses for which deferred taxes were established to account for the
differences in the book and tax bases of assets acquired and liabilities
assumed. The tax benefit of approximately $1.6 million attributable to these
acquisitions was allocated directly to goodwill.
At December 31, 1999, the Company had net operating loss carryforwards for
federal income tax purposes of $8.4 million, which are available to offset
future federal taxable income and expire in the years 2017 through 2020. The
Company also has an alternative minimum tax credit carryforward of
approximately $24,000, which has no expiration date.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that any portion of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. Based upon the
projections for future taxable income over the periods in which the deferred
tax assets are deductible, management believes it is more likely than not that
the Company will realize the benefits of these deductible differences.
F-28
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 22--CONCENTRATION RISK
The Company has over 150 branches located in 27 states, which principally
grant residential first and second mortgage loans. For the years ended
December 31, 1999 and 1998, 25% and 32%, respectively, of the Company's loans
were originated by branches in Chicago, Illinois, and its surrounding
communities ("Chicagoland"). As of December 31, 1999 and 1998, the Company had
seven branches in Chicagoland.
In 1999, the Company sold approximately 85% of its loan production to three
entities, and in 1998, the Company sold approximately 60% of its loan
production to two entities.
NOTE 23--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 the Company's financial
instruments as of December 31, 1999 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 the Company 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 the Company.
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents..... $ 6,915 $ 6,915 $ 12,124 $ 12,124
Loans held for sale........... 198,294 198,685 467,254 470,419
Loan fees and other
receivables, net............. 14,316 14,316 14,207 14,207
Options contracts............. 88 38 -- --
Liabilities:
Loans sold under agreements to
repurchase................... 11,934 11,934 292,627 292,627
Warehouse lines of credit..... 191,603 191,603 170,217 170,217
Operating line of credit...... 5,923 5,923 -- --
Current portion of long-term
debt......................... 146 146 729 729
Long-term debt, less current
portion...................... 76 76 4,298 4,298
Capital contributions payable. 61,674 61,674 -- --
Gain (loss) on derivative
financial instruments:
Whole-loan sale commitments... -- 730 -- 155
Forward contracts............. -- 380 -- (1,290)
</TABLE>
The fair value of cash and cash equivalents, loan fees and other
receivables, loans sold under agreements to repurchase, warehouse lines of
credit, operating line of credit, long-term debt and capital contributions
payable 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.
F-29
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For derivative financial instruments, the fair value is defined as the
amount that the Company 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.
NOTE 24--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- ------
(in thousands)
<S> <C> <C> <C>
Cash paid during the year for interest........ $ 19,363 $ 10,471 $2,452
======== ======== ======
Cash paid during the year for income taxes.... $ 296 $ -- $ --
======== ======== ======
Detail of acquisitions:
Fair value of assets acquired, including
goodwill................................... $ 94,181 $ 74,526 $ --
Liabilities assumed......................... (86,746) (74,799) --
Common stock issued......................... -- (1,500) --
-------- -------- ------
Net cash paid (acquired) for acquisitions. 7,435 (1,773) --
Cash acquired in acquisition................ 2,238 6,603 --
-------- -------- ------
Gross cash paid for acquisitions.......... $ 9,673 $ 4,830 $ --
======== ======== ======
Non-cash transaction:
Conversion of bridge note into common
shares..................................... $ -- $ 1,250 $ --
======== ======== ======
</TABLE>
NOTE 25--UNAUDITED PRO FORMA FINANCIAL INFORMATION
The pro forma financial information has been presented to show the effect
on the historical results of continuing operations of the Company had it been
treated as a C corporation for federal and state income tax purposes for the
entire period ended December 31, 1999 and for the years ended December 31,
1998 and 1997.
The pro forma earnings per share has been presented as if the shares issued
at the time of the Offering, including the shares issued to Pacific Guarantee
and Mortgage Market, were outstanding as of January 1, 1999.
NOTE 26--INCORPORATION TRANSACTIONS
In February 1999, Prism Financial was formed as a holding company for Prism
Mortgage Company and its subsidiaries. Immediately prior to the Offering, the
previous stockholders of Prism Mortgage exchanged their shares for an
aggregate of 11,495,297 shares of Prism Financial Common Stock. As a result of
these transactions, immediately prior to the Offering, the former stockholders
of Prism Mortgage owned all of the issued and outstanding shares of Prism
Financial, and Prism Financial owned all of the outstanding shares of Prism
Mortgage. Prior to the Incorporation Transactions, Prism Financial did not
conduct any business and had no assets or liabilities. The legal name of Prism
Financial has been retroactively applied to all periods presented in these
financial statements.
NOTE 27--SUBSEQUENT EVENTS
In March 2000, Mark Filler, President and Chief Executive Officer, and
Terry Markus, President of Prism Illinois, and the estate of Bruce C. Abrams
loaned money to the Company for working capital purposes. The aggregate amount
loaned to the Company was approximately $1.2 million. The loans accrue
interest at 6.25%, with no set repayment terms, and are expected to be repaid
by the end of 2000.
F-30
<PAGE>
PRISM FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On March 10, 2000, the Company and Royal Bank of Canada ("RBC") announced
the execution of a merger agreement pursuant to which RBC has agreed to
acquire the Company through a cash tender offer. Under the terms of the
agreement, RBC will offer to purchase all outstanding shares of the Company's
Common Stock for $7.50 per share. Consummation of the tender offer is subject
to certain conditions, including the condition that at least a majority of the
outstanding shares of the Company's Common Stock be tendered and not
withdrawn. Consummation of the tender offer is also subject to the expiration
or termination of any applicable antitrust waiting period. Following
completion of the tender offer and subject to certain conditions, the Company
will be a wholly-owned subsidiary of RBC. The transaction is expected to be
completed in mid-2000.
On March 21, 2000, the Company extended its Mortgage Origination Warehouse
Facility through April 28, 2000. Pursuant to the agreement, the maximum
borrowing base has been reduced from $250.0 million to $200.0 million.
F-31
<PAGE>
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors and Stockholders
of Prism Financial Corporation:
Our audits of the consolidated financial statements referred to in our report
dated February 21, 2000, except for Note 27, as to which the date is March 21,
2000 appearing in the 1999 Annual Report on Form 10-K of Prism Financial
Corporation also included an audit of the financial statement schedule listed in
Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement
schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
PricewaterhouseCoopers LLP
February 21, 2000
S-1
<PAGE>
Schedule II
Prism Financial Corporation and Subsidiaries
Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Beginning Additions Ending
Description Balance Provision Other Decrease Balance
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan fees and
miscellaneous receivables
Year ended December 31, 1999 $ - $505,000 $120,000 $ - $625,000
Year ended December 31, 1998 - - - - -
Year ended December 31, 1997 - - - - -
Allowance for servicing losses
Year ended December 31, 1999 350,000 456,504 - 151,504 655,000
Year ended December 31, 1998 - 350,000 - - 350,000
Year ended December 31, 1997
Allowance for potential repurchase of loans
Year ended December 31, 1999 550,000 150,000 - 430,000 270,000
Year ended December 31, 1998 - 550,000 - - 550,000
Year ended December 31, 1997 - - - - -
</TABLE>
Other additions represent reserves acquired as part of acquisitions.
S-2
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 30th day of March
2000.
PRISM FINANCIAL CORPORATION
By: /s/ MARK A. FILLER
-----------------------------------
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
---------- ----- ----
<S> <C> <C>
/s/ MARK A. FILLER President and Chief Executive March 30, 2000
- -------------------------------------------------- Officer
Mark A. Filler
/s/ DAVID A. FISHER Senior Vice President, Chief
- -------------------------------------------------- Financial Officer and Secretary March 30, 2000
David A. Fisher (Principal Financial Officer)
/s/ JAMES P. HAYES Senior Vice President, Treasurer and March 30, 2000
- -------------------------------------------------- Controller (Chief Accounting
James P. Hayes Officer)
/s/ TERRY A. MARKUS President of Prism Illinois March 30, 2000
- --------------------------------------------------
Terry A. Markus
Chairman of the Board of Directors
- --------------------------------------------------
Richard L. Wellek
Director
- --------------------------------------------------
Michael P. Krasny
/s/ ANDREW S. HOCHBERG Director March 30, 2000
- ---------------------------------------------------
Andrew S. Hochberg
</TABLE>
<PAGE>
EXHIBIT 10.17
THIRD RESTATED AND AMENDED LINE OF CREDIT AGREEMENT
---------------------------------------------------
THIS THIRD RESTATED AND AMENDED LINE OF CREDIT AGREEMENT (the "Agreement"),
dated as of September 30/th/, 1999 by and between APOLLO HOUSING CAPITAL,
L.L.C., a limited liability company organized under the laws of Illinois, having
its principal office at 600 Superior Avenue East, Cleveland, Ohio 44114 (the
"Company" or the "Borrower"), and LASALLE BANK NATIONAL ASSOCIATION, successor
in interest to LASALLE NATIONAL BANK, a national banking association, having an
office at 135 South LaSalle Street, Chicago, Illinois 60603 ("LaSalle"), BANK OF
AMERICA, NATIONAL ASSOCIATION successor in interest to BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION, a national banking association, having an office
at 231 South LaSalle ("BofA") (LaSalle and BofA are hereinafter collectively
referred to as "Banks") and LaSalle as agent for the Banks ("Agent").
WHEREAS, pursuant to that certain Line of Credit Agreement dated September
30, 1997, LaSalle agreed to extend to the Company a revolving warehousing line
of credit to the Company to finance the purchase of certain ownership interests
in limited partnerships and limited liability companies formed for the purpose
of developing and owning tax credit eligible real estate; and
WHEREAS, the Line of Credit Agreement was amended pursuant to an Amendment
to Line of Credit Agreement dated October 23, 1997 by a Second Amendment to Line
of Credit Agreement and Amendment to Security Agreement and Collateral
Assignment dated December 22, 1997 and by a Third Amendment to Line of Credit
Agreement and Second Amendment to Security Agreement and Collateral Assignment
dated March 16, 1998 and a Restated and Amended Line of Credit Agreement dated
November 20, 1998, a First Amendment to Restated and Amended Line of Credit
Agreement dated January 26, 1999 and a Second Restated and Amended Line of
Credit Agreement dated September 27, 1999 (the credit facility described in the
Line of Credit Agreement, as amended, is hereinafter referred to as the "Line of
Credit"); and
WHEREAS, BofA became a participant in the loan in March of 1998 and a co-
lender in November of 1998; and
WHEREAS, the parties desire to restate and amend further the Line of Credit
as set forth herein;
NOW, THEREFORE, for good and valuable consideration, the sufficiency of
which is hereby acknowledged by the parties hereto, the parties hereto hereby
agree as follows:
<PAGE>
ARTICLE I
DEFINITIONS
Section 1.1 Defined Terms.
-------------
Capitalized terms defined below or elsewhere in this Agreement (including
the Exhibits hereto) shall have the following meanings:
"Acquisition Date" means the date a Limited Partnership Interest becomes a
----------------
Pledged Limited Partnership Interest.
"Advance" means a disbursement by the Banks under the Commitment, including
-------
readvances of funds previously advanced to the Company and repaid to the Banks,
and LC Advances.
"Advance Rate" has the meaning set forth in Section 2.1(c) hereof.
------------
"Advance Request" has the meaning set forth in Section 2.2(a) hereof.
---------------
"Affiliate" has the meaning set forth in Rule 12b-2 of the General Rules
---------
and Regulations under the Exchange Act.
"Agent" has the meaning set forth in the Recitals of this Agreement.
-----
"Agent-Related Persons" means Agent and any successor agent arising under
---------------------
Section 10.10 hereof, together with its officers, directors, employees, agents
and attorneys in fact.
"Agreement" or "Loan Agreement" means this Line of Credit Agreement, either
--------- --------------
as originally executed or as it may from time to time be supplemented, modified
or amended.
"Banks" has the meaning set forth in the Recitals of this Agreement.
-----
"Borrowing Base Certificate" has the meaning set forth in Section 2.1(c)
--------------------------
hereof.
"Business Day" means any day excluding Saturday, Sunday and any day which
------------
is a legal holiday under the laws of the State of Illinois.
"Capitalization" means the total capital intended to be raised in the
--------------
establishment of a Portfolio Entity.
"Capitalization Proceeds" means capital contributions to be paid to or
-----------------------
deposited for the benefit of a Portfolio Entity by Investors pursuant to
subscription agreements between the Portfolio Entity and such Investors.
2
<PAGE>
"Collateral" has the meaning set forth in the Third Restated and Amended
----------
Security Agreement and Collateral Assignment attached hereto as Exhibit B; and
---------
for purposes of this Agreement shall include Pledged Subscription Agreements.
"Collateral Documents" means with respect to any Project Partnership, the
--------------------
final executed limited partnership agreement or operating agreement, as
applicable, copies (or canceled originals) of any notes executed pursuant
thereto, any tax opinions rendered with respect thereto, and UCC Financing
Statements as requested by the Agent to perfect the Banks' security interest in
the Collateral related thereto.
"Commitment" has the meaning set forth in Section 2.1(a) hereof.
----------
"Commitment Fee" has the meaning set forth in Section 2.9 hereof.
--------------
"Company" has the meaning set forth in the first paragraph of this
-------
Agreement.
"Cost" has the meaning set forth in Section 2.1(d) hereof.
----
"Credit Agreement" means that certain Credit Agreement dated March 31, 1999
----------------
among Prism Mortgage Company, Pacific Guarantee Mortgage Corporation, Mortgage
Market Inc., Pointsource Financial, L.L.C., Infiniti Mortgage, L.L.C., Lender,
The First National Bank of Chicago Individually and as Agent, First Chicago
Capital Markets, Inc., The Bank of New York, Comerica Bank, First Union National
Bank, Guaranty Federal Bank, F.S.B., Hibernia National Bank, Mercantile Bank,
and U.S. Bank National Association, as amended through September 30, 1999, but
without subsequent modification or amendment.
"DPLC Fee" has the meaning set forth in Section 2.11(b) hereof.
--------
"Debt" means, with respect to any Person, at any date (a) all indebtedness
----
or other obligations of such Person which, in accordance with GAAP, would be
included in determining total liabilities as shown on the liabilities side of a
balance sheet of such Person at such date; (b) all indebtedness or other
obligations of such Person for borrowed money or for the deferred purchase price
of property or services; (c) all indebtedness or other obligations of any other
Person for borrowed money or for the deferred purchase price of property or
services in respect of which such Person is liable, contingently or otherwise,
to pay or advance money or property as guarantor, endorser, or otherwise (except
as endorser of negotiable instruments for collection in the ordinary course of
business), or which such Person has agreed to purchase or otherwise acquire; and
(d) all indebtedness for borrowed money or for the deferred purchase price of
property or services secured by a Lien on any property owned or being purchased
by such Person (even though such Person has not assumed or otherwise become
liable for the payment of such indebtedness) to the extent that such
indebtedness would not be otherwise counted as a liability for purposes of
determining the Tangible Net Worth of such Person and to the extent that such
indebtedness does not exceed the net book value for such property.
3
<PAGE>
"Default" means the occurrence of any event or existence of any condition
-------
which, but for the giving of notice, the lapse of time, or both, would
constitute an Event of Default.
"Direct Pay Letter of Credit" means one or more Direct Pay Letters of
---------------------------
Credit issued in accordance with the terms of this Agreement by LaSalle at the
request of Borrower and having a term not to exceed the shorter of (i) one (1)
year or (ii) the time remaining from date of issuance to the expiration date of
the Commitment set forth in Section 2.6 hereof.
"Direct Pay Letter of Credit Request" has the meaning set forth in Section
-----------------------------------
2.2(a) hereof.
"Documentary Nonconforming Project" means a Nonconforming Project which has
---------------------------------
not received a preliminary reservation of low income housing tax credits from
the appropriate local tax credit allocation authority.
"Draw Fee" has the meaning set forth in Section 2.11(d) hereof.
--------
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended from time to time and any successor statute.
"Eligible" has the meaning set forth in Section 4.2(a) hereof.
--------
"Eligible Value" has the meaning set forth in Section 2.1(d) hereof.
--------------
"Event of Default" means any of the conditions or events set forth in
----------------
Section 8.1 hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended from
------------
time to time, and any successor statute.
"Executive Summary" means a Project-specific analysis prepared by the
-----------------
Company in connection with its review of a Project for potential purchase of a
Limited Partnership Interest.
"Federal Funds Rate" means the rate of interest at which federal fund
------------------
transactions with member banks of the Federal Reserve system are traded as
published on the next succeeding Business Day by the Federal Reserve Bank of New
York.
"Funding Date" means, with respect to any Advance, the date upon which
------------
funds are scheduled to be wired to the Company or deposited in the Company's
account with Agent or the date upon which a Letter of Credit is scheduled to be
issued.
"FICA" means the Federal Insurance Contributions Act.
----
"FNMA" means the Federal National Mortgage Association, also referred to as
----
Fannie Mae.
"FNMA Payment Obligation" has the meaning set forth in Section 2.2(i)
-----------------------
hereof.
4
<PAGE>
"GAAP" means generally accepted accounting principles set forth in the
----
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession, which are applicable to the circumstances as of the date of
determination.
"Guarantor" means Prism.
---------
"Indemnified Liabilities" has the meaning set forth in Section 9.3 hereof.
-----------------------
"Initial Installment" means, with respect to any Portfolio Entity, the
-------------------
first installment of Capitalization Proceeds.
"Installment" means with respect to any specific Portfolio Entity, any
-----------
payment of Capitalization Proceeds.
"Interest Rate" has the meaning set forth in Section 2.4(a) hereof.
-------------
"Internal Revenue Code" means the Internal Revenue Code of l986, or any
---------------------
subsequent federal income tax law or laws, as any of the foregoing have been or
may from time to time be amended.
"Investor" means an Accredited Investor (as defined in the Exchange Act)
--------
who invests in a Portfolio Entity.
"Investment Criteria" means the criteria, approved by the Banks, used by
-------------------
the Company in evaluating Projects for the purpose of purchasing Limited
Partnership Interests as set forth on Exhibit J attached hereto.
"Issuance Fee" has the meaning set forth in Section 2.11(c) hereof.
------------
"LC Advance" means a disbursement of funds by the Agent on behalf of the
----------
Banks pursuant to a draw on a Direct Pay Letter of Credit or a Standby Letter of
Credit.
"LC Fees" means, individually and collectively, DPLC Fees and SLC Fees.
-------
"Letter of Credit" means, individually and collectively, Direct Pay Letters
----------------
of Credit and Standby Letters of Credit.
"Libor" means, with respect to any Advance bearing interest for any Libor
-----
Interest Period, the interest rate per annum determined by the Agent two (2)
Business Days before the beginning of the applicable Libor Interest Period to be
the interest rate per annum, then being offered generally to the Agent at
approximately 11:00 a.m. (London, England time) by prime
5
<PAGE>
banks in the interbank eurodollar market for United States dollar deposits in an
amount approximately equal to the amount of the Advance, and for a contract term
of thirty, sixty, ninety or one hundred eighty days (as applicable), adjusted
for the Agents' reserve requirements and rounded (upward, if necessary) to the
nearest 1/16/th/ of 1%.
"Libor Interest Period" means the period of thirty, sixty, ninety or one
---------------------
hundred eighty days, commencing on the date of disbursement of an Advance
bearing interest at Libor or upon the Company's election to subsequently have an
Advance bear interest at Libor; provided; that if a Libor Interest Period would
--------
end on a day which is not a Business Day, it shall end on the next succeeding
Business Day, unless such day falls in the succeeding calendar month, in which
case the Libor Interest Period shall end on the next preceding Business Day. In
no event shall any Libor Interest Period end on a day after the expiration date
as set forth in Section 2.6 hereof.
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
----
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof, and any agreement to give
any security interest).
"Limited Partnership Documents" means with respect to any Limited
-----------------------------
Partnership Interest, the Executive Summary for the Project, a letter of intent
between the Company or a Portfolio Entity and the developer(s) of the Project,
the most current version of the limited partnership agreement or operating
agreement, as applicable, a certified copy of the Certificate of Limited
Partnership or Articles of Organization, as applicable, on file with the
Secretary of State of the jurisdiction of organization (except for Project
Partnerships being formed at closing), copies of financial projections with
respect thereto, a Borrowing Base Certificate, and any other documents
reasonably necessary to determine whether the Project satisfies the Investment
Criteria.
"Limited Partnership Interest" means an interest at all times, of not less
----------------------------
than 51% as (i) a limited partner in a Project Partnership which is a limited
partnership; or (ii) a member in a Project Partnership which is a limited
liability company, which interest has in each case been approved by the Banks,
such approval not to be unreasonably withheld provided such Limited Partnership
Interest substantially complies with the Investment Criteria.
"Loan" means the total of all Advances made hereunder together with all
----
other sums advanced by the Banks pursuant to the terms of this Agreement.
"Loan Documents" means this Agreement, the Notes, the Security Agreement
--------------
and all other documents and instruments evidencing or securing the Loan.
"Margin Stock" has the meaning assigned to that term in Regulation U of the
------------
Board of Governors of the Federal Reserve System as in effect from time to time.
"Multiemployer Plan" means a "multiemployer plan" as defined in Section
------------------
4001(a)(3) of ERISA which is maintained for employees of the Company or a
Subsidiary of the Company.
6
<PAGE>
"Net Worth" means with respect to any Person at any date, the excess of the
---------
total assets (determined on a fair market value basis) over total liabilities of
such Person on such date.
"Nonconforming Project" shall mean a Project which generally meets the
---------------------
Investment Criteria but is deficient in one or more aspects (other than the
requirements concerning the eligibility for and allocation of low-income housing
tax credits set forth in Section 2.1(b) except that Documentary Non Conforming
Projects need not meet such requirements), but which Borrower reasonably
believes, and certifies to the Bank's reasonable satisfaction, that correction
of such deficiencies is only a matter of additional time and that Borrower has
initiated action designed to correct such deficiencies.
"Notes" has the meaning set forth in Section 2.3 hereof.
-----
"Notices" has the meaning set forth in Section 11.3 hereof.
-------
"Officers' Certificate" means a certificate executed on behalf of the
---------------------
Company by an individual who has been duly authorized to act on behalf of the
Company in a manner analogous to a corporation's chief financial officer or
treasurer.
"Overadvance" has the meaning set forth in Section 2.2(a) hereof.
-----------
"Person" means and includes natural persons, corporations, limited
------
partnerships, general partnerships, limited liability companies, joint stock
companies, joint ventures, associations, companies, trusts, banks, trust
companies, land trusts, business trusts or other organizations, whether or not
legal entities, and governments and agencies and political subdivisions thereof.
"Plans" has the meaning set forth in Section 5.14 hereof.
-----
"Pledged Limited Partnership Interests" has the meaning set forth in
-------------------------------------
Section 3.1 hereof.
"Pledged Subscription Agreement" has the meaning set forth in Section 3.1
------------------------------
hereof.
"Portfolio Entity" means a limited partnership or limited liability company
----------------
organized by the Company for the purpose of investing in Project Partnerships.
"Portfolio Entity Percentage" means, with respect to any specific Portfolio
---------------------------
Entity, the amount of Capitalization allocated by a Portfolio Entity to be paid
to the Company or an Affiliate of the Company for expenses, overhead and profit.
"Prime Rate" has the meaning set forth in Section 2.4(a)(y) hereof.
----------
"Prism" means Prism Financial Corporation, a Delaware corporation.
-----
"Project" means an individual affordable housing or historic rehabilitation
-------
project which has received (or which the Company reasonably believes will
receive) an allocation or award of
7
<PAGE>
low income housing tax credits pursuant to Section 42 of the Internal Revenue
Code or approval of historic rehabilitation tax credits pursuant to Section 47
of the Internal Revenue Code.
"Project Partnership" means a limited partnership or a limited liability
-------------------
company which owns a Project and in which Borrower or a Portfolio Entity owns a
Pledged Limited Partnership Interest.
"Project Partnership Agreement" means the articles or agreement of limited
-----------------------------
partnership or the operating agreement, as applicable, governing a Project
Partnership.
"Pro Rata Share" means as to each of LaSalle and BofA, at any time a
--------------
percentage equivalent to fifty percent (50%).
"Redemption Amount" has the meaning set forth in Section 3.3 hereof.
-----------------
"Request" means, individually and collectively, an Advance Request, a
-------
Standby Letter of Credit Request and a Direct Pay Letter of Credit Request..
"SLC Fee" has the meaning set forth in Section 2.11(a) hereof.
-------
"Secretary" has the meaning set forth in Section 4.1(b)(6).
---------
"Security Agreement" has the meaning set forth in Section 3.1 hereof.
------------------
"Standby Letter of Credit" means one or more Standby Letters of Credit
------------------------
issued in accordance with the terms of this Agreement by LaSalle at the request
of Borrower, and having a term not to exceed the shorter of (i) one (1) year or
(ii) the time remaining from the date of issuance to the expiration date of the
Commitment set forth in Section 2.6 hereof.
"Standby Letter of Credit Request" has the meaning set forth in Section
--------------------------------
2.2(a) hereof.
"Statement Date" has the meaning set forth in Section 4.1(b)(8) hereof.
--------------
"Subordinated Debt" means Debt of the Company which has been subordinated
-----------------
as provided in Section 6.10 hereof.
"Subscription Agreement" means the documents and instruments evidencing an
----------------------
Investor's agreement (or the agreement of some other Person approved by the
Banks) to invest in and make capital contributions to a Portfolio Entity, and
includes without limitation any FNMA Payment Obligations or Subscription
Agreement Investor Notes executed by such Person pursuant to such transaction.
"Subscription Agreement Investor Note" means a promissory note executed and
------------------------------------
delivered by an Investor, or some other Person approved by the Banks, pursuant
to a Subscription
8
<PAGE>
Agreement, and evidencing such Person's obligation to pay a capital contribution
to a Portfolio Entity.
"Subsidiary" means any corporation, association or other business entity in
----------
which more than fifty percent (50%) of the total voting power or shares of stock
entitled to vote in the election of directors, managers or trustees thereof is
at the time owned or controlled, directly or indirectly, by any Person or one or
more of the other Subsidiaries of that Person or a combination thereof.
"Tangible Net Worth" means with respect to any Person at any date, the fair
------------------
market value of such Person's assets (excluding, without limitation, intangibles
such as good will, organization expense, treasury stock, unamortized debt
discount and expense, capitalized or deferred research and development costs,
deferred marketing expenses and deferred receivables) less such Person's total
liabilities (including, without limitation, accrued and deferred income taxes
and any reserves against assets) on such date, where fair market value is
determined in a manner, and by such parties, as may be acceptable to the Banks,
in their reasonable discretion.
"Tax Credits" means low income housing tax credits pursuant to Section 42
-----------
of the Internal Revenue Code and/or historic rehabilitation tax credits pursuant
to Section 47 of the Internal Revenue Code.
Section 1.2 Other Definitional Provisions.
-----------------------------
1.2(a) Accounting terms not otherwise defined herein shall have the
meanings given them under GAAP.
1.2(b) Defined terms may be used in the singular or the plural, as
the context requires.
Section 1.3 Prior Documentation. This Agreement is a restatement and
-------------------
amendment of the Line of Credit in its entirety, provided, however, that it is
the intention of the parties hereto that all security interests previously made
or granted in favor of the Banks and not terminated or released on or before the
date hereof are hereby reaffirmed in all respects.
ARTICLE II
THE LINE OF CREDIT
Section 2.1 The Commitment.
--------------
2.1(a) Subject to the terms and conditions of this Agreement and
provided no Default has occurred and is continuing, each of the Banks severally
agrees, from time to time during the period from the date hereof to the
expiration date (unless such period is earlier terminated pursuant hereto) to
issue Letters of Credit for the account of Borrower (which shall be issued by
LaSalle on behalf of the Banks) and to make Advances to, or on behalf of, the
Company, in an aggregate amount not to exceed each Bank's Pro Rata Share of the
9
<PAGE>
Commitment, provided the total aggregate principal amount which is outstanding
at any one time of all such Letters of Credit and Advances shall not exceed
Thirty Million Dollars ($30,000,000.00). The obligation of the Banks to issue
Letters of Credit and to make Advances hereunder up to such limits or the amount
to which such limit may be reduced pursuant to Section 2.7(b) hereof, is
hereinafter referred to as the "Commitment". Within the Commitment, the Company
may borrow, repay and reborrow. Notwithstanding the foregoing, the Banks shall
not be obligated to issue Letters of Credit or to make Advances hereunder at all
or up to any specified aggregate limit unless the Company shall be current in
its obligation to pay the Commitment Fee specified in Section 2.9 hereof and the
LC Fees specified in Section 2.11 hereof.
2.1(b) The purposes of the Loan are to enable Borrower to provide
credit support to Project Partnerships, to make equity investments in Project
Partnerships through the purchase of Limited Partnership Interests, where such
Project Partnerships are engaged in the acquisition, development,
rehabilitation, construction, operation, leasing and management of Projects and
to fund reimbursement obligations under Letters of Credit drawn upon by the
beneficiaries thereof. Except for Nonconforming Projects, all Projects must
satisfy the Investment Criteria. Projects may qualify for historic
rehabilitation tax credits or other tax benefits in addition to low-income
housing tax credits, or may provide historic rehabilitation tax credits instead
of low-income housing tax credits so long as Investment Criteria are maintained.
Except for Nonconforming Projects,all Projects that qualify (or that the Company
reasonably believes will qualify) under the low-income housing tax credit
provisions of Section 42 of the Internal Revenue Code of 1986, as amended, shall
have received a conditional reservation, or, in the case of tax-exempt bond
financing, a determination letter from the appropriate governmental agency that
the Project is eligible for an allocation of low-income housing tax credits,
unless such requirement is waived by Lender in writing. All Projects that
qualify (or that the Company reasonably believes will qualify) under the
historic rehabilitation tax credit provisions of Section 47 of the Internal
Revenue Code of 1986, as amended, shall have received an approval of Part 1 and
shall reasonably expect to receive or shall have received approval of Part 2 of
the Historic Preservation Certification Application from the United States
Department of the Interior, National Park Service, unless such requirement is
waived by Lender in writing. Borrower understands and agrees that the proceeds
of the Loan may not serve under any circumstances as security for any
indebtedness of Borrower, whether previously existing or hereafter created, and
may not be used for any purposes other than the purposes stated in this Section
2.1(b). Except for the FNMA LC and the Leasehold Letter of Credit, Letters of
Credit and Advances shall be used by the Company for the purposes of providing
credit support to, and purchasing Limited Partnership Interests in, Project
Partnerships that are Eligible. Letters of Credit shall be issued and Advances
shall be made at the request of the Company, in the manner hereinafter provided
in Section 2.2, against the pledge of Limited Partnership Interests and the
assignment of Subscription Agreements.
2.1(c) Subject to the addition of capitalized interest pursuant to
Section 2.4(e), the total amount of Advances and Letters of Credit outstanding
at any time with respect to any specific Pledged Limited Partnership Interest
shall not exceed the lesser of (i) one hundred
10
<PAGE>
percent (100%) (the "Advance Rate") of the Eligible Value of such Pledged
Limited Partnership Interest, or (ii) Eight Million Dollars ($8,000,000), or
(iii) the amount determined by reference to the borrowing base calculation set
forth on Exhibit E attached hereto ("Borrowing Base Certificate"). In addition,
---------
with respect to Nonconforming Projects, (iv) the maximum amount that may be
issued and outstanding at any given time as a Letter of Credit for any specific
Nonconforming Project shall be $1,000,000; (v) the aggregate amount of Advances
and Letters of Credit outstanding at any given time for all Nonconforming
Projects shall not exceed $5,000,000 and (vi) the aggregate amount of Advances
and Letters of Credit outstanding at any time for Documentary Non-Conforming
Projects shall not exceed $2,000,000. The Banks, in their reasonable discretion,
may reduce the Advance Rate with respect to a Pledged Limited Partnership
Interest (to an amount less than one hundred percent (100%) of the Eligible
Value) should the Banks determine, in their reasonable discretion, that the
Borrower will be unable to sell such Pledged Limited Partnership Interest for at
least one hundred five percent (105%) of the Cost of such Pledged Limited
Partnership Interest within five hundred forty (540) days following the
Acquisition Date. Subject to the limits set forth in this Section 2.1(c), the
Company may request multiple Advances for any specific Pledged Limited
Partnership Interest, consistent with the Executive Summary approved by the
Banks and the applicable Project Partnership Agreement.
2.1(d) For purposes of this Agreement, "Eligible Value" shall mean:
i. one hundred percent (100%) of the total amount actually
paid by the Company to a Project Partnership and/or the
amount of any Letters of Credit issued to acquire a
Limited Partnership Interest, (the "Cost") commencing on
the Acquisition Date and continuing until the day which
is 540 days thereafter;
ii. zero percent (0%) of the Cost of any Limited Partnership
Interest which has been a Pledged Limited Partnership
Interest for a period of time in excess of 540 days
unless subparagraph 2.1(d)(iii) is operative;
iii. with respect to Pledged Limited Partnership Interests
which have been assigned to a Portfolio Entity and such
Portfolio Entity has assigned Pledged Subscription
Agreements to Lender within 540 days following the
Acquisition Date, one hundred percent (100%) of the Cost
of any Limited Partnership Interest which has been a
Pledged Limited Partnership Interest for a period of time
in excess of 540 days but less than 730 days; and
iv. zero percent (0%) of the Cost of any Pledged Limited
Partnership Interest which has been a Pledged Limited
Partnership Interest for more than 730 days.
11
<PAGE>
Section 2.2 Procedures for Obtaining Advances and Letters of Credit.
-------------------------------------------------------
2.2(a) The Company may obtain an Advance or Letter of Credit
hereunder, subject to the satisfaction of the conditions set forth in Sections
4.1 and 4.2 hereof, upon compliance with the procedures set forth in this
Section 2.2. Requests for Advances or Letters of Credit shall be initiated by
the Company by delivering to each of the Banks, not less than three (3) Business
Days prior to the Funding Date, a completed and duly executed (i) request for an
Advance (an "Advance Request") in the forms set forth in Exhibit C-1 or Exhibit
----------- -------
C-1A hereto for Advances and Advances for capitalized interest respectively or,
- ----
(ii) a completed and duly executed Application for Standby Letter of Credit (a
"Standby Letter of Credit Request") in the form set forth in Exhibit C-2 hereto,
-----------
or (iii) a completed and duly executed Application for Direct Pay Letter of
Credit (a "Direct Pay Letter of Credit Request") in the form set forth in
Exhibit C-3 hereto, as applicable, together with copies of the Limited
- -----------
Partnership Documents applicable thereto. The Banks shall have the right to
revise or supplement approved forms of Request by giving notice thereof to the
Company, provided that any such revisions or supplements shall not materially
affect the Company's rights or obligations under the Loan Documents or the
Request. The Company may request that the Banks issue Letters of Credit and/or
make Advances which would, in the aggregate, exceed the Eight Million Dollars
($8,000,000.00) per Project limit set forth in Section 2.1(c)(ii) above (an
"Overadvance"). In the event an Overadvance is requested, the Banks shall have
an additional three (3) Business Days to process and respond to the Request. It
shall be a condition precedent to the Bank's obligation to issue Letters of
Credit that the Company shall have executed and delivered to LaSalle the Master
Letter of Credit Agreement in the form attached hereto as Exhibit C-4.
-----------
2.2(b) Before funding any Advance or issuing a Letter of Credit, the
Banks shall have not less than three (3) Business Days to examine each Request
and the Limited Partnership Documents, as set forth in Exhibit C-1, Exhibit C-
----------------------
1A, Exhibit C-2 and Exhibit C-3 hereto, as applicable, and may, in their
- -------------------------------
reasonable discretion, reject such of them as do not meet the requirements of
this Agreement, provided, however, that the Banks shall provide a reasonably
detailed explanation as to the reasons for such rejection. If either Bank
rejects a Request, then the other Bank shall be deemed to have rejected the
Request.
2.2(c) To make an Advance, the Agent, at the Company's direction,
shall wire funds to the Company or deposit funds to the Company's account with
the Agent, upon compliance by the Company with the terms of this Agreement,
including without limitation, those terms and conditions set forth in this
Agreement relating to the Banks' review and approval of the Limited Partnership
Documents. On the Funding Date, each Bank shall make the amount of its Pro Rata
Share of such Advance available to the Agent in immediately available funds for
the account of the Company at such account as the Agent may specify in writing.
2.2(d) To issue a Standby Letter of Credit, LaSalle shall issue its
standard form Standby Letter of Credit for the benefit of the party designated
by the Borrower in the Standby Letter of Credit Request, upon compliance by the
Company with the terms of this Agreement,
12
<PAGE>
including without limitation, those terms and conditions set forth in this
Agreement relating to the Banks' review and approval of the Limited Partnership
Documents and LaSalle's standard policies and procedures for issuing letters of
credit.
2.2(e) To issue a Direct Pay Letter of Credit, LaSalle shall issue
its standard form Direct Pay Letter of Credit for the benefit of the party
designated by the Borrower in the Direct Pay Letter of Credit Request, upon
compliance by the Company with the terms of this Agreement, including without
limitation, those terms and conditions set forth in this Agreement relating to
the Banks' review and approval of the Limited Partnership Documents and
LaSalle's standard policies and procedures for issuing letters of credit. In
addition, the obligation to issue any Direct Pay Letter of Credit is expressly
contingent upon the Banks' satisfactory review of an appropriate form of
reimbursement agreement executed by a Project Partnership if the Direct Pay
Letter of Credit is issued in connection with a municipal bond-financed
transaction.
2.2(f) Within fifteen (15) days after the Banks have funded an
Advance, or LaSalle has issued a Letter of Credit, the Company shall deliver to
the Agent the applicable Collateral Documents.
2.2(g) Subject to the provisions of Sections 2.5(b), 2.5(c)(7) and
3.3 hereof, all Advances and Letters of Credit issued under this Agreement shall
constitute a single indebtedness and all of the Collateral shall be security for
the Notes and for the performance of all obligations of the Company to the
Banks.
2.2(h) The failure of any Bank to make any Loan on any Funding Date
shall not relieve any other Bank of any obligation hereunder to make a Loan on
such Funding Date, but no Bank shall be responsible for the failure of any other
Bank to make the Loan to be made by such other Bank on any Funding Date.
2.2(i) In order to be acceptable as a Pledged Subscription Agreement
hereunder, a Subscription Agreement must satisfy the following criteria:
A. The Subscription Agreement is duly executed by an
Investor;
B. The Subscription Agreement is duly executed by an entity
which does not qualify as an Investor hereunder but has
been preapproved by the Banks in writing: or
C. The Subscription Agreement is or contains a contracted
obligation to pay a sum certain executed by FNMA ("FNMA
Payment Obligation"); and
D. Borrower must possess full power and authority to pledge
and assign the Subscription Agreement, or to cause the
Subscription Agreement to be pledged and assigned by the
Portfolio Entity, to Agent.
13
<PAGE>
2.2(j) In connection with Pledged Subscription Agreements, Borrower
shall deliver to the Agent:
A. One Assignment of Subscription Agreement in the form of
Exhibit K annexed hereto for each Subscription Agreement
---------
to be assigned hereunder;
B. One Endorsement of the Subscription Agreement Investor
Note in the form of Exhibit L annexed hereto for each
---------
Subscription Agreement Investor Note, (if any) duly
executed by the Portfolio Entity to Lender;
C. An assignment in the form of Exhibit M annexed hereto of
---------
all or any portion of any FNMA Payment Obligations; or
D. For each Subscription Agreement Investor Note, (if any)
one Payment Instruction Letter, in the form of Exhibit N
---------
annexed hereto;
E. For each FNMA Payment Obligation, one Payment Instruction
Letter in the form of Exhibit O annexed hereto;
---------
F. Each Subscription Agreement Investor Note or FNMA Payment
Obligation must be accompanied by a certificate in the
form of Exhibit P annexed hereto, duly executed by
---------
Borrower;
G. If required by the Banks, to the extent in Borrower's
possession each Subscription Agreement Investor Note or
FNMA Payment Obligation must be accompanied by evidence
reasonably satisfactory to the Banks as to the due
authorization, execution and delivery and the legality,
validity, binding nature and enforceability of each
Subscription Agreement Investor Note or FNMA Payment
Obligation.
Section 2.3 Notes. The Company's obligation to pay the principal of, and
-----
interest on, all Advances made by the Banks shall be evidenced by the promissory
notes (the "Notes") of the Company dated September 30, 1999 substantially in the
form of Exhibit A-1 and Exhibit A-2 attached hereto. The term "Notes" shall
---------------------------
include all extensions, renewals and modifications of the Notes and all
substitutions therefor. All terms and provisions of the Notes are incorporated
herein.
Section 2.4 Interest & Fees.
---------------
2.4(a) So long as no Event of Default shall have occurred, each
Advance shall bear interest from the date made until paid in full at the
applicable per annum Interest Rate (as defined below). Interest shall be
computed on the basis of a 360-day year, comprised of twelve
14
<PAGE>
30-day months, and the number of days actually elapsed in any partial month.
With respect to Advances bearing interest at the Prime Rate, Borrower shall pay
to Agent for the account of the Banks interest in arrears on the first day of
each month following the date of the Advance. With respect to Advances bearing
interest at a rate based on Libor, Borrower shall pay to Agent, for the account
of the Banks, interest at the end of the applicable Libor Interest Period,
except for 180 day contracts, where interest shall be payable at the end of 90
days and 180 days.
"Interest Rate" as used herein shall be either:
(x) The rate per annum equal to the sum of two hundred twenty-five
(225) basis points (2.25%), plus Libor; or
----
(y) The rate per annum equal to the prime rate publicly announced by
LaSalle from time-to-time as its prime commercial lending rate
("Prime Rate"), which rate is not necessarily the lowest rate of
interest charged by LaSalle to its borrowers.
The initial Interest Rate applicable to each Advance (except for L/C
Advances) shall be selected by Borrower by designation in writing not less than
two (2) Business Days prior to the Advance, and at Borrower's option, may be
designated in the Advance Request. If Borrower fails to elect an Interest Rate
option pursuant to this Section 2.4(a) or Section 2.4(e), the initial Interest
Rate applicable to such Advance shall be the Prime Rate. The initial Interest
Rate for LC Advances shall be the Prime Rate. So long as no Event of Default
exists and is continuing hereunder, Borrower may elect not later than 11:00 a.m.
Chicago time on a day which is not less than two (2) Business Days prior to the
date of continuation or conversion, by advance notice to the Banks and the
filing of an Interest Rate Change/Libor Rollover Certificate in the form
attached hereto as Exhibit I, to (i) convert the Interest Rate applicable to an
---------
Advance to any other Interest Rate available hereunder, and (ii) continue, as of
the last day of an applicable Libor Interest Period, an Advance bearing interest
based on Libor as a Libor-based Advance, with the succeeding Libor Interest
Period commencing on the expiration of the then-current Libor Interest Period.
In the absence of such notice, Advances previously bearing interest based on
Libor shall bear interest at the Prime Rate effective upon expiration of the
applicable Libor Interest Period. Notwithstanding the foregoing, the Company
may not select a Libor-based Interest Rate for a Libor Interest Period which
would end after the expiration date set forth in Section 2.6 hereof. If,
pursuant to the terms hereof, the Commitment is terminated prior to the date set
forth in Section 2.6, Borrower shall be responsible for any actual out-of-pocket
costs incurred by Banks in breaking Libor contracts.
2.4(b) After the occurrence of an Event of Default and prior to its
cure, each Advance shall bear interest at the Interest Rate per annum applicable
to such Advance prior to such Event of Default plus three percent (3%).
2.4(c) Notwithstanding anything to the contrary herein, if at any
time the Interest Rate payable with respect to any portion of the Loan exceeds
the highest rate of
15
<PAGE>
interest permissible under any law which a court of competent jurisdiction shall
deem applicable to such portion of the Loan, then so long as such maximum rate
would be exceeded, the rate of interest with respect thereto shall be equal to
such maximum rate and if Banks shall ever receive interest on any portion of the
Loan in excess of the maximum permissible rate, the amount of such excess shall
be applied as a prepayment of principal under the Notes.
2.4(d) Intentionally Omitted
2.4(e) After the Initial Installment, at Borrower's option, and
provided no Event of Default exists and is continuing, Borrower, by filing an
Advance Request, may elect, on a Portfolio Entity-specific basis, to have
interest accruing hereunder capitalized as an Advance against the Commitment,
with payment to occur on the earliest to occur of (i) the date of the next
Installment for such Portfolio Entity; (ii) ninety (90) days after the date of
the Initial Installment; or (iii) the occurrence of an event described in
Section 2.5(c)(1) through (c)(6) hereof with respect to such Portfolio Entity's
Advances. At such time, Borrower will remit to the Agent all capitalized
interest with respect to such Portfolio Entity's Advances.
2.4(f) The holders of the Notes are hereby authorized to record the
date and amount of each payment of principal and interest, and applicable
interest rates and other information with respect thereto, on the schedules
annexed to and constituting a part of the Notes and any such recordation shall
constitute prima facie evidence of the accuracy of the information so recorded;
provided, however, that the failure to make a notation or the inaccuracy of any
notation shall not limit, be deemed by the parties hereto to be a legal defense
to, or otherwise affect the obligations of the Company hereunder or thereunder.
2.4(g) If either Bank determines (which determination shall be final
and conclusive) that, by reason of circumstances affecting the interbank
eurodollar market generally, deposits in dollars (in the applicable amounts) are
not being offered to banks in the interbank eurodollar market for the selected
term, or adequate means do not exist for ascertaining the Libor rate, then such
Bank shall give or cause the Agent to give notice thereof to the Borrower.
Thereafter until the Agent notifies the Borrower that the circumstances giving
rise to such suspension no longer exist, (a) the availability of Advances
bearing interest based on Libor shall be suspended, and (b) the interest rate
for all Advances then bearing interest at Libor shall be converted to the Prime
Rate at the expiration of the then current Libor Interest Period.
In addition, if after the date of this Agreement, either Bank shall
determine (which determination shall be final and conclusive) that any
enactment, promulgation or adoption of or any change in any applicable law, rule
or regulation, or any change in the interpretation or administration thereof by
a governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by the Banks with any
guideline, request or directive (whether or not having the force of law) of any
such authority, central bank or comparable agency shall make it unlawful or
impossible for either Bank to make or maintain or fund Advances based upon
Libor, the Agent shall notify the Borrower. Upon receipt of such notice, until
the Agent notifies the Borrower that the circumstances giving rise to such
16
<PAGE>
determination no longer apply, (a) the availability of Advances based upon Libor
shall be suspended, and (b) the interest rate on all Advances then bearing
interest based upon Libor shall be converted to the Prime Rate either (i) on the
last day of the then current Libor Interest Period if the Banks may lawfully
continue to maintain Advances based upon Libor; or (ii) immediately, if the
Banks may not lawfully continue to maintain Advances based upon the Libor rate.
2.4(h) The Borrower shall indemnify the Banks against all
liabilities, losses or expenses (including loss of margin, any loss or expense
incurred in liquidating or employing deposits from third parties and any loss or
expense incurred in connection with funds acquired by the Banks to fund or
maintain Advances bearing interest based upon Libor) which the Banks sustain or
incur as a consequence of any attempt by the Borrower to revoke (expressly, by
later inconsistent notices or otherwise) in whole or in part any notice given to
the Banks to request, convert, renew or repay any such Advance. If either Bank
sustains or incurs any such loss, it shall cause the Agent to notify the
Borrower of the amount determined by such Bank to be necessary to indemnify such
Bank for such loss or expense (which determination may include such assumptions,
allocations of costs and expenses and averaging or attribution methods as the
Banks reasonably deem appropriate). Such amount shall be due and payable by the
Borrower ten (10) days after such notice is given.
Section 2.5 Principal Payments.
------------------
2.5(a) The outstanding principal amount of each Advance shall be
payable in full upon the earlier to occur of (i) the occurrence of any event
described in Section 2.5(c) hereof with respect to such Advance or (ii)
expiration or termination of the Commitment.
2.5(b) The Company shall have the right to prepay the outstanding
Advances in whole or in part, from time to time, without premium or penalty or
advance notice, except for actual out-of-pocket costs incurred by Banks in
breaking Libor contracts, if applicable, which costs shall be reimbursed by
Borrower. The Company may designate the Advances to be prepaid, but in the
absence of such designation such prepayments shall be applied to such
outstanding Advances as the Banks may elect. The Banks shall apply prepayments
to Advances designated by Borrower at all times.
2.5(c) The Company shall be obligated to pay to the Banks, without
the necessity of prior demand or notice from the Banks, and the Company
authorizes the Agent to charge its account for, the amount of any outstanding
Advance against a specific Pledged Limited Partnership Interest, upon the
occurrence of any of the following events with respect to such Advance or
Pledged Limited Partnership Interest:
(1) Five hundred forty (540) calendar days elapse from the
date the Advance was made, unless such Advance was for Pledged Limited
Partnership Interests which have been assigned to a Portfolio Entity and the
Portfolio Entity has assigned Pledged Subscription Agreements to the Banks, in
which case 730 days elapse from the date the Advance was made.;
17
<PAGE>
(2) Fifteen (15) days elapse from the date the Collateral
Documents relating to such Advance were required to be received by the Agent
without the actual receipt thereof;
(3) Ten (10) Business Days elapse from the date a Collateral
Document relating to such Advance was delivered to the Company for correction or
completion, without being returned to the Agent;
(4) A default occurs under the Limited Partnership Agreement
creating the Pledged Limited Partnership Interest with respect to which such
Advance was made and which default remains uncured for a period of thirty (30)
days;
(5) There is a draw on a Letter of Credit (an "LC Advance") and
repayment is required under Exhibit C-2, Exhibit C-3 or Exhibit C-4 hereto;
----------- ----------- -----------
(6) The Loan shall fail to be in balance as required pursuant to
Section 6.12 hereof; or
(7) Upon sale or transfer of the Pledged Limited Partnership
Interest, provided, however that the Company may, subject to the provisions of
Section 2.5(c)(1) hereof, assign a Pledged Limited Partnership Interest to a
Portfolio Entity and defer payment of principal of the Advance with which such
Pledged Limited Partnership Interest was purchased, provided the following
conditions are met:
(i) the instrument of transfer to such Portfolio Entity
contains a clear and conspicuous disclosure of the Banks' security interest,
which shall be acknowledged by such Portfolio Entity in writing and delivered to
the Agent;
(ii) at the time of such transfer, no Event of Default or
situation which with the giving of notice or passage of time would constitute an
Event of Default, exists;
(iii) at the time of such transfer, the Portfolio Entity
delivers to Agent one or more Pledged Subscription Agreements and other
documentation as set forth in Section 2.2(j) hereof; and
(iv) Capitalization Proceeds are applied to deferred
payments of principal and capitalized interest as permitted hereunder according
to the following schedule:
I. The Initial Installment shall be applied as follows: (y) first to the
Company to fund the Portfolio Entity Percentage, plus an amount equal
to the aggregate interest payments made to Banks prior to the Initial
Installment with respect to Advances for Pledged Limited Partnership
Interests assigned to the Portfolio Entity (unless such interest
payments are included in the Portfolio Entity Percentage); and (z)
then to repayment of Advances for Pledged Limited Partnership
Interests assigned to the Portfolio Entity.
18
<PAGE>
II. Subsequent Installments shall be applied as follows:
(x) first to the Banks in repayment of capitalized interest;
(y) then to the Banks to be applied to outstanding Advances for
Pledged Limited Partnership Interests assigned to the Portfolio
Entity or to the Portfolio Entity for investment in Project
Partnerships, at Borrower's option; and
(z) then to the Company when all outstanding Advances for Pledged
Limited Partnership Interests assigned to the Portfolio Entity
have been paid in full and all Standby Letters of Credit for such
Pledged Limited Partnership Interests have expired or been
returned to Agent.
To the extent Capitalization Proceeds are paid directly to the Agent or the
Banks pursuant to the Pledged Subscription Agreements, the Banks shall cause the
Agent to remit promptly to the Company such portion of the Capitalization
Proceeds to which the Company is entitled pursuant to this Section
2.5(c)(7)(iv). Notwithstanding anything to the contrary contained herein or in
the other Loan Documents Capitalization Proceeds generated by a specific
Portfolio Entity shall only be used to repay Advances for Pledged Limited
Partnership Interests owned by such Portfolio Entity.
In the event principal payment of any Advance is deferred pursuant to
Section 2.5(c)(7) hereof, such principal payment shall be due and payable upon
the occurrence of any of the events listed in Sections 2.5(c)(1) through
2.5(c)(6) hereof with respect to such Advance.
Notwithstanding the foregoing, the Company shall pay to the Banks with
respect to any specific Pledged Limited Partnership Interest which has been a
Pledged Limited Partnership Interest for a period of 540 days or more, such
principal amounts, if any, as are necessary for the total amount of Advances
with respect to such Pledged Limited Partnership Interest which has been a
Pledged Limited Partnership Interest for a period of 540 days or more to comply
with the limitations on Advances set forth in Section 2.1(d) hereof.
Section 2.6 Expiration and/or Termination of Commitment.
-------------------------------------------
Unless terminated earlier as permitted hereunder, the Commitment shall
expire of its own term, and without the necessity of action by the Banks, on
June 30, 2001.
Section 2.7 Method of Making Payments; Reductions in Commitment.
---------------------------------------------------
2.7(a) Except as otherwise specifically provided herein, all payments
hereunder shall be received by the Banks on the date when due and shall be made
in lawful money of the United States of America in immediately available funds
at the office of the Agent, at 135 South LaSalle Street, Chicago, Illinois 60603
Attention: Pamela Daniels-Halisi, or at such other place as the Banks from time
to time shall designate. Whenever any payment to be made hereunder or under
the Notes shall be stated to be due on a day which is not a Business Day, the
due date
19
<PAGE>
thereof shall be extended to the next succeeding Business Day, and, with respect
to payments of principal, the interest thereon shall be payable at the
applicable rate during such extension. Funds received by the Agent after 12:00
noon (Chicago, Illinois time) on a Business Day shall be deemed to have been
paid by the Company on the next succeeding Business Day.
2.7(b) The Company shall have the right, at any time and from time to
time, effective as of the first day of any calendar month, to terminate in whole
or permanently reduce in part, without premium or penalty, the amount of the
Commitment in excess of the then outstanding principal amount of all Advances
hereunder. The Company shall give written notice to the Banks designating the
date of such termination or reduction not less than five (5) Business Days'
prior to the date such termination or reduction is to take effect, and the
amount of any partial reduction of the Commitment shall be in an aggregate
minimum amount of One Million Dollars ($1,000,000) or integral multiples of One
Hundred Thousand Dollars ($100,000) in excess of that amount.
Section 2.8 Late Payment Fees. In the event the Company fails to make any
-----------------
payment (whether of principal, interest or any other sum) on the date such
payment is due and payable hereunder or under the Notes, and such failure
continues for more than five (5) days, the Company shall pay to the Agent, for
the account of each Bank, upon demand therefor, a late payment fee equal to five
percent (5%) of the amount of such payment.
Section 2.9 Commitment Fee. As a condition to obtaining the Commitment,
--------------
the Company agrees to pay to the Agent for the account of each Bank monthly in
arrears on the first day of each month a fee (the "Commitment Fee") determined
by multiplying the average daily unused portion of the Commitment for the
preceding month by thirty seven and one half basis points (0.375%) and further
multiplying the result by a fraction, the numerator of which is the number of
days in the preceding month and the denominator of which is 360. For purposes
of determining the Commitment Fee, the aggregate amount of Letters of Credit
outstanding shall be included in the used portion of the Commitment.
Section 2.10 Net Payments; Reduced Return.
----------------------------
2.10(a) All payments with respect to any Advance accruing interest
based on Libor shall be made in such amounts as may be necessary in order that
all such payments after withholding for or on account of any present or future
taxes, levies, imports, duties or other similar charges of whatsoever nature
imposed by any government or any political subdivision or taxing authority
hereof, other than any taxes on or measured by the net income of the Banks
pursuant to the state, federal and local tax laws of the jurisdiction where each
Bank's principal office or offices or lending office or offices are located,
compensate Banks for any additional cost or reduced amount receivable of making
or maintaining Advances accruing interest based on Libor as a result of such
taxes, imports, duties or other charges.
2.10(b) If, after the date hereof, any Bank shall have determined
that the adoption of any applicable law, rule or regulation regarding capital
adequacy, or any change therein, or any change in the interpretation or
administration thereof by any governmental authority, central
20
<PAGE>
bank or comparable agency charged with the interpretation or administration
thereof, or compliance by any Bank with any request or directive regarding
capital adequacy (whether or not having the force of law) of any such authority,
central bank or comparable agency, has or would have the effect of reducing the
rate of return on any Bank's capital as a consequence of its obligations
hereunder to fund or maintain Advances accruing interest based on Libor to a
level below that which such Bank could have achieved but for such adoption,
change or compliance (taking into consideration the Banks' policies with respect
to capital adequacy) by an amount deemed by such Bank to be material, then from
time to time, within 30 days after demand by the Bank the Company shall pay to
such Bank such additional amount or amounts as will compensate such Bank for
such reduction. Compensation due any Bank under this subsection (b) will only
accrue after the Bank has notified the Company of any event of which it has
knowledge, occurring after the date hereof, which will entitle such Bank to
compensation pursuant to this subsection (b). A certificate of any Bank claiming
compensation under this subsection (b) and setting forth the additional amount
or amounts to be paid to it hereunder shall be conclusive in the absence of
manifest error. In determining such amount, such Bank may use any reasonable
averaging and attribution methods.
2.11 Letter of Credit Fees. As a condition of the availability of Letters
----------------------
of Credit, the Company agrees to pay to the Banks, or to the Agent, as
applicable, the following Letter of Credit Fees for each Letter of Credit
issued:
(a) To the Agent for the account of the Banks on the date of
issuance of any Standby Letter of Credit, an annual fee (the "SLC Fee") in the
amount of one percent (1%) of the stated amount of such Standby Letter of Credit
which shall be prorated if the stated expiry date of such Standby Letter of
Credit is less than one year following the date of issuance. On each re-
issuance, if any, of the Standby Letter of Credit, the SLC Fee shall be payable
for the upcoming year, prorated if such Standby Letter of Credit has an expiry
date which will occur before the next yearly anniversary.
(b) To the Agent for the account of the Banks on the date of
issuance of any Direct Pay Letter of Credit, an annual fee (the "DPLC Fee") in
the amount of one and one quarter percent (1.25%) of the stated amount of such
Direct Pay Letter of Credit which shall be prorated if the stated expiry date of
such Direct Pay Letter of Credit is less than one year following the date of
issuance. On each re-issuance of the Direct Pay Letter of Credit, the DPLC Fee
shall be payable for the upcoming year, prorated if such Letter of Credit has an
expiry date which will occur before the next yearly anniversary.
(c) To the Agent on the date of the issuance of any Standby
Letter of Credit, an issuance fee equal to Two Hundred Forty Dollars ($240) (the
"Issuance Fee").
(d) To the Agent for the account of the Banks on the date of
each draw under a Standby Letter of Credit, a fee equal to one quarter of one
percent (.25%) of the amount of such draw (the "Draw Fee"), and to the Agent for
its own account a wire transfer fee of Thirty Dollars ($30.00) to the extent any
draw is done by wire transfer, or a postage fee of Two and 75/100 Dollars
($2.75) to the extent any draw is done by mail.
21
<PAGE>
(e) Such other fees as are customarily charged by the Agent in
connection with the issuance of, or draws upon, letters of credit.
The Company acknowledges that the fees set forth in Sections 2.11(c) and 2.11(d)
are the Agent's current fees as of the date hereof and are subject to change at
any time and from time to time, and the Company shall be bound by, and hereby
agrees to pay, any such changed fees.
2.12 Leasehold Letter of Credit.
--------------------------
(a) In connection with the Loan, LaSalle has issued a separate letter
of credit in the amount of Thirty Six Thousand Four Hundred Dollars ($36,400)
naming 600 Superior Place Partnership as beneficiary thereunder (as amended,
modified or supplemented the "Leasehold Letter of Credit") and Borrower has
executed a separate reimbursement agreement. Notwithstanding anything to the
contary contained herein or in the other Loan Documents, Borrower's
reimbursement obligations pursuant to the Leasehold Letter of Credit and such
reimbursement agreement shall not be secured by, the Collateral.
(b) Any default by Borrower in connection with its reimbursement
obligations relating to the Leasehold Letter of Credit shall not be an Event of
Default hereunder.
(c) Borrower's reimbursement obligations relating to the Leasehold
Letter of Credit are obligations covered by the Guaranty, subject to the
limitations on liability set forth therein.
2.13 FNMA Letter of Credit. In addition to the Letters of Credit issued
---------------------
pursuant to Section 2.2 and Section 2.12 hereof, Borrower has requested, and the
Banks have agreed, to issue a letter of credit naming Apollo Tax Credit Fund
III, Limited Partnership as beneficiary in the amount of Five Hundred Thousand
and No/100 Dollars ($500,000) (the "FNMA LC"). The FNMA LC shall have an expiry
date which is on or before the expiration date of the Commitment set forth in
Section 2.6 hereof. Notwithstanding anything to the contrary contained herein
or in the other Loan Documents, there shall be no Pledged Limited Partnership
Interest or Pledged Subscription Agreement corresponding to or securing the FNMA
LC, but so long as the FNMA LC is outstanding, it shall reduce the amount
available under the Commitment by an amount equal to the face amount of the FNMA
LC. Issuance of the FNMA LC is contingent upon execution by Borrower of the
Master Letter of Credit Agreement attached hereto as Exhibit C-4.
-----------
2.14 Loan Fee. This Agreement represents an increase in the amount of the
--------
Commitment by Five Million Dollars ($5,000,000) for which Borrower hereby agrees
to pay a fee ("Loan Fee") in the amount of Twenty-Five Thousand Dollars
($25,000).
22
<PAGE>
ARTICLE III
COLLATERAL
Section 3.1 Security Agreement and Collateral Assignment. In order to
--------------------------------------------
induce Banks to make the Loan and to enter into this Agreement, Borrower is
entering into a Third Restated and Amended Security Agreement and Collateral
Assignment with Agent on behalf of the Banks (the "Security Agreement"), in the
form of Exhibit B annexed hereto, granting, assigning and confirming to Agent,
---------
for the account of the Banks, a security interest in the Collateral described
and defined therein. The Collateral includes, but is not limited to, all
Limited Partnership Interests purchased with the proceeds of Advances but not
yet released ("Pledged Limited Partnership Interests") and, for purposes of this
Agreement, shall also include Subscription Agreements which have been assigned
to the Banks as additional security and have not been reassigned ("Pledged
Subscription Agreements"). All previously delivered, but not yet released,
Pledged Limited Partnership Interests shall, from and after the date hereof, be
held by LaSalle as Agent for the account of the Banks.
Section 3.2 Delivery of Additional Collateral or Mandatory Prepayment. In
---------------------------------------------------------
the event that the Banks, in their sole and reasonable discretion, shall
determine at any time that the value of the Collateral then pledged hereunder
(such value being determined at such time with respect to, among other things,
Eligible Value as set forth in Section 2.1(d) hereof) is less than the aggregate
amount of the Advances then outstanding hereunder, the Company shall immediately
(a) deliver to the Agent for the account of the Banks for pledge hereunder
additional Collateral satisfactory to the Banks, in aggregate amounts sufficient
to cover the difference between the value of the Collateral pledged and the
aggregate amount of Advances outstanding hereunder, or (b) repay the Advances in
an amount sufficient to reduce the aggregate balance thereof outstanding to or
below the value of the Collateral pledged hereunder.
Section 3.3 Right of Redemption from Pledge.
-------------------------------
3.3(a) The Company or a Portfolio Entity may redeem all Pledged
Limited Partnership Interests owned by a Portfolio Entity from pledge, and cause
all Pledged Subscription Agreements assigned by such Portfolio Entity to be
reassigned to such Portfolio Entity, by delivering to Agent all outstanding
original Letters of Credit issued in connection with such Pledged Limited
Partnership Interests and by paying to the Agent for the account of the Banks,
for application to prepayment of the principal balance of the Notes, an amount
(the "Redemption Amount") equal to the sum of all accrued interest and principal
with respect to all Advances for all Pledged Limited Partnership Interests held
by such Portfolio Entity plus an amount equal to the total of all Letters of
Credit outstanding with respect to Pledged Limited Partnership Interests
transferred or sold to such Portfolio Entity (excluding Letters of Credit
returned to Agent as provided above). Upon such redemption, the Banks shall
cause the Agent to deliver, release or reassign, as applicable, to the Company
(or, as applicable, a Portfolio Entity) all Collateral in the Agent's possession
with respect to such Pledged Limited Partnership Interests and deliver
terminations and releases of all liens, security interests, financing statements
and encumbrances relating to such Collateral. In addition, the Agent shall
deliver such re-
23
<PAGE>
endorsements and payment instruction letters as may be necessary to effectuate
the foregoing provisions.
3.3(b) The Company or a Portfolio Entity may redeem a specific
Pledged Limited Partnership Interest from pledge by delivering to Agent all
original outstanding Letters of Credit issued in connection with such Pledged
Limited Partnership Interest and by paying to the Agent for the account of the
Banks, for application to prepayment of the principal balance of the Notes, an
amount equal to the sum of all accrued interest and principal with respect to
all Advances applicable to such Pledged Limited Partnership Interest plus an
amount equal to the total of all Letters of Credit, outstanding with respect to
such Pledged Limited Partnership Interest (excluding Letters of Credit returned
to Agent as provided above). Upon such redemption, the Banks shall cause the
Agent to deliver such documents as may be necessary to deliver or release to the
Company (or, as applicable, a Portfolio Entity) all Collateral in the Agent's
possession with respect to such Pledged Limited Partnership Interest and deliver
terminations and releases of all liens, security interests, financing statements
and encumbrances relating to such Collateral.
Section 3.4 Return of Collateral at End of Commitment. If (i) the
-----------------------------------------
Commitment shall have expired or been terminated, and (ii) no Advances,
interest, Standby Letters of Credit or other amounts evidenced by the Notes or
due under this Agreement shall be outstanding and/or unpaid, the Banks shall
cause the Agent to deliver or release or reassign, as applicable all Collateral
in its possession to the Company (or, as applicable, a Portfolio Entity) and
deliver terminations and releases of all liens, security interests, financing
statements and encumbrances relating to the Collateral. The written
acknowledgment of receipt of the Company for any Collateral released or
delivered to the Company pursuant to any provision of this Agreement shall be a
complete and full acquittance for the Collateral so returned, and the Banks
shall thereafter be discharged from any liability or responsibility therefor.
In addition, the Agent shall deliver such re-endorsements and payment
instruction letters as may be necessary to effectuate the foregoing provisions.
ARTICLE IV
CONDITIONS PRECEDENT
Section 4.1 Conditions Precedent To Initial Advance. The obligation of
---------------------------------------
the Banks to make the initial Advance under this Agreement, irrespective of
satisfaction of any conditions under the Line of Credit prior to previous
Advances, is subject to the satisfaction, in the sole discretion of the Banks,
on or before the date hereof of the following conditions precedent:
4.1(a) The Banks shall have received the following, all of which must
be satisfactory in form and content to the Banks, in their sole discretion:
(1) The Notes duly executed by the Company;
(2) The Guaranty, in the form attached hereto as Exhibit D,
---------
duly executed by Prism;
24
<PAGE>
(3) Certified copies of the Company's articles of organization
and operating agreement, and certificates of good standing dated no less
recently than ten (10) days prior to the date of this Agreement;
(4) A written opinion of counsel to the Company and counsel to
the Guarantor (each such counsel shall be acceptable to the Banks, in their sole
discretion) in form and content satisfactory to the Banks, dated as of, or prior
to, the date of this Agreement, addressed to the Banks.
(5) An original resolution of the members of the Company,
certified as of the date of this Agreement by an individual possessing powers on
behalf of the Company analogous to those of a corporate secretary (such
individual is for purposes of this Agreement hereinafter referred to as the
"Secretary"), authorizing the execution, delivery and performance of this
Agreement and the Notes, and all other instruments or documents to be delivered
by the Company pursuant to this Agreement;
(6) A certificate of the Company's Secretary in the form
attached hereto as Exhibit F as to the incumbency and authenticity of the
---------
signatures of the representatives of the Company executing this Agreement and
the Notes and each Request and all other instruments or documents to be
delivered pursuant hereto (the Banks being entitled to rely thereon until a new
such certificate has been furnished to the Banks);
(7) Original financial statements of the Company for the most
recent fiscal year end (the "Statement Date") containing a balance sheet and
related statements of income and retained earnings and changes in financial
position for the period ended on the Statement Date, all prepared in accordance
with a tax basis of accounting , and applied on a basis consistent with prior
periods and acceptable to the Banks;
(8) Financial statements of the Guarantor, duly certified as
true, correct and complete by an officer, dated no less recently than June 30,
1999;
(9) Copies of the Company's insurance policies or certificates
in lieu of policies, all in form and content satisfactory to the Bank, showing
compliance by the Company as of the date of the initial Advance with the related
provisions of Section 6.9 hereof;
(10) A certified copy of the Investment Criteria; and
(11) Payment to Banks for reimbursement of out-of-pocket fees and
expenses incurred by Banks in connection with the negotiation and documentation
of the Loan.
(12) A UCC-1 Financing Statement, in the form of Exhibit G
---------
attached hereto executed by Borrower and evidencing Borrower's grant to Agent on
behalf of the Banks of a security interest in the Collateral. (Notwithstanding
anything to the contrary in this Agreement, the Banks shall be under no
obligation to fund any Advance hereunder until the
25
<PAGE>
Banks shall have received a post-filing lien search evidencing the appropriate
filing of the Financing Statement and disclosing no notice of any liens or
encumbrances filed against any of the Collateral other than the Financing
Statement and other liens in favor of the Banks.)
(13) Uniform Commercial Code, pending litigation, tax lien,
judgment and bankruptcy searches dated no more than thirty (30) days prior to
the date hereof and updated as frequently as the Banks may reasonably request.
(14) Such other documents, instruments and agreements as the
Banks shall reasonably request, in form and substance satisfactory to the Banks.
(15) At the sole discretion of the Banks, the Banks may require
any member or manager of the Company, all Affiliates of the Company or of any
Subsidiary of the Company, and the Guarantor, to whom, or to any of whom, the
Company shall be indebted as of the date of this Agreement, to duly execute a
Subordination of Debt Agreement, in form attached hereto as Exhibit H; and the
---------
Banks shall have received an executed copy of said Subordination of Debt
Agreement, certified by the Secretary of the Company to be true, correct and
complete and in full force and effect as of the date of the Advance, or if a
Subordination of Debt Agreement has been executed and delivered previously, an
acknowledgment by such creditor of the increased amount of the Loan hereby
evidenced and the continued validity of such Subordination of Debt Agreement
with respect to the Loan as hereby restated.
Section 4.2 Each Advance. The obligation of the Banks to make each
------------
Advance is subject to the satisfaction, in the reasonable discretion of the
Banks, as of the date of each such Advance, of the following additional
conditions precedent:
4.2(a) Prior to making any Advance with respect to a specific
Project, the Banks shall have received and approved, in the Banks' reasonable
discretion, the Limited Partnership Documents with respect to such Project. The
Banks, upon completion of such review, shall give the Company verbal approval or
disapproval of any specific Project, in the Banks' reasonable discretion. All
Projects which are approved by the Banks shall be deemed "Eligible". The Banks
shall deliver to the Company a written explanation for any Project which is
disapproved.
4.2(b) At least three (3) Business Days before the requested date of
each Advance, the Company shall have delivered to the Banks the Request duly
executed by Borrower, and the Limited Partnership Documents called for
thereunder, and shall have satisfied the procedures set forth in Sections 2.2(a)
through 2.2(e) hereof and the applicable Exhibits hereto described in those
Sections. All items delivered to the Bank must be reasonably satisfactory to the
Banks in form and content, and the Banks, in their reasonable discretion, may
reject such of them as do not meet the requirements of this Agreement.
4.2(c) The Banks shall have received evidence reasonably satisfactory
to them as to the due filing and recording in all appropriate offices of all
financing statements and other
26
<PAGE>
instruments as may be necessary to perfect the security interest of the Banks in
the Collateral under the Uniform Commercial Code of the State of Illinois or
other applicable law.
4.2(d) The representations and warranties of the Company contained in
Article V hereof shall be true and correct in all material respects as if made
on and as of the date of each Advance.
4.2(e) The Company and the Guarantor shall have performed all
agreements to be performed by them hereunder and under the Guaranty,
respectively, and after giving effect to the requested Advance, there shall
exist no Default hereunder.
4.2(f) The Company shall not have (i) incurred any material
liabilities, direct or contingent, other than Subordinated Debt and debt in the
ordinary course of its business, since the dates of the Company's most recent
financial statements theretofore delivered to the Banks or (ii) experienced any
other material adverse change in its business or operations which could
materially and adversely affect the Company's ability to repay Advances
hereunder.
4.2(g) The Banks shall have received from counsel for the Company or
counsel for the Guarantor, or both, if requested by the Banks, in their
reasonable discretion, an updated opinion, in form and substance reasonably
satisfactory to the Banks, addressed to the Banks and dated as of the date of
such Advance, covering such of the matters set forth in the opinion delivered to
the Banks in connection with the initial Advance as the Banks may reasonably
request, provided, however, that the Company shall not be required to provide
more than one (1) such updated opinion per year.
4.2(h) The Banks shall have received from counsel acceptable to the
Banks, a written opinion of counsel confirming the availability to the Banks of
low income housing tax credits or historical rehabilitation tax credits in the
event the Banks succeed to ownership of the Limited Partnership Interests
pledged as security pursuant to this Agreement, provided, however, that the
Company shall not be required to provide more than one (1) such opinion per
Project.
4.2(i) The Banks shall have received such other documents,
instruments and agreements as the Banks may reasonably request, in form and
substance reasonably satisfactory to the Banks.
4.2(j) As of the date hereof and the date of each Advance, the
Company shall be in compliance with all of the terms and provisions set forth in
this Agreement, the other Loan Documents and the Collateral Documents on its
part to be observed or performed, and no Event of Default, nor any event which
upon notice or lapse of time or both, would constitute an Event of Default,
shall have occurred and be continuing.
Acceptance of the proceeds of the requested Advance by the Company
shall be deemed a representation by the Company that all conditions set forth in
this Section 4.2 shall have been satisfied as of the date of such Advance.
27
<PAGE>
ARTICLE V
REPRESENTATIONS AND WARRANTIES
In order to induce the Banks to enter into this Agreement and make each
Advance, the Company hereby represents and warrants to the Banks, as of the date
of this Agreement and as of the date of each Request, that:
Section 5.1 Organization; Good Standing; Subsidiaries. The Company is a
-----------------------------------------
limited liability company duly organized, validly existing and in good standing
under the laws of the jurisdiction of its organization, has the full legal power
and authority to own its assets and to carry on its business as currently
conducted and is duly qualified to do business and is in good standing in each
jurisdiction in which the transaction of its business makes such qualification
necessary.
Section 5.2 Authorization and Enforceability. The Company has the power
--------------------------------
and authority to execute, deliver and perform this Agreement, the Notes and all
other documents contemplated hereby or thereby. The Guarantor has the power and
capacity to execute, deliver and perform the Guaranty. The execution, delivery
and performance by the Company of this Agreement, the Notes and all other
documents contemplated hereby or thereby and the making of the borrowing
hereunder and thereunder, have been duly and validly authorized by all necessary
action on the part of the Company (none of which actions have been modified or
rescinded, and all of which actions are in full force and effect) and do not and
will not conflict with or violate any provision of law or of the articles of
organization or operating agreement of the Company, conflict with or result in a
breach of or constitute a default or require any consent under, or result in the
creation of any Lien upon any property or assets of the Company, or result in or
require the acceleration of any indebtedness of the Company pursuant to any
agreement, instrument or indenture to which the Company is a party or by which
the Company or its assets may be bound or affected. This Agreement, the Notes
and all other documents contemplated hereby or thereby and the Guaranty
constitute legal, valid, and binding obligations of the Company or of the
Guarantor, respectively, enforceable in accordance with their respective terms,
except as limited by bankruptcy, insolvency or other such laws affecting the
enforcement of creditors' rights.
Section 5.3 Approvals. The execution and delivery of this Agreement, the
---------
Notes and all other documents contemplated hereby or thereby and the performance
of the Company's obligations hereunder and thereunder do not require any
license, consent, approval or other action of any state or federal agency or
governmental or regulatory authority, other than any license, consent, approval
or action which has been obtained or taken.
Section 5.4 Financial Condition. The balance sheet of the Company as at
-------------------
the Statement Date, and the related statements of income and changes in members'
equity for the fiscal year ended on the Statement Date, heretofore furnished to
the Banks, fairly present the financial condition of the Company as of the
Statement Date and the results of its operations for the fiscal period ended on
the Statement Date. The Company had, on the Statement Date, no liabilities,
direct or indirect, fixed or contingent, matured or unmatured, known or unknown,
or liabilities for taxes, long-term leases or unusual forward or long-term
commitments not disclosed
28
<PAGE>
by, or reserved against in, said balance sheet and related statements, and at
the present time there are no material unrealized or anticipated losses from any
loans, advances or other commitments of the Company except as heretofore
disclosed to the Banks in writing. Said financial statements were prepared in
accordance with GAAP applied on a consistent basis throughout the periods
involved. Since the Statement Date, there has been no material adverse change in
the business, operations, assets or financial condition of the Company which
could result in a breach of the covenants set forth in Article VII hereof, nor
is the Company aware of any state of facts which (with or without notice or
lapse of time or both) would or could result in any such material adverse
change.
Section 5.5 Litigation. Other than as previously disclosed to the Banks,
----------
there is no action, suit or proceeding or any investigation pending or, to the
best of Borrower's knowledge, threatened, against Borrower or Guarantor by or
before any court, arbitrator or governmental or administrative body, agency
commission, board, bureau or other government instrumentality which, if
determined adversely, is likely to have a material adverse effect on the
activities, operations, assets, or properties, or on the condition, financial or
otherwise, of Borrower or Guarantor, or materially impair the ability of
Borrower or Guarantor to perform their obligations under this Agreement or any
other Loan Document to which it is a party. Neither Borrower nor Guarantor is
in default with respect to any judgment, writ, injunction, decree, rule or
regulation of any court or any governmental or administrative body or agency or
other government instrumentality, which would likely have a material adverse
effect on the activities, operations, assets or properties, or on the condition,
financial or otherwise, of Borrower or Guarantor, or would materially impair the
ability of Borrower or Guarantor to perform their obligations under this
Agreement or any other Loan Document to which it is a party, and to Borrower's
knowledge, there is no state of facts presently existing which is likely to
cause such a default.
Section 5.6 No Conflicts. The execution and delivery of and performance
------------
by Borrower and Guarantor under this Agreement and the other Loan Documents, and
the borrowing hereunder, will not (a) violate any provision of law, order, rule,
or regulation of any court or governmental or regulatory body, the articles of
organization or the operating agreement of the company, or any indenture,
agreement or instrument to which Borrower or Guarantor is a party or by which
Borrower or Guarantor or their assets or properties are bound, or (b) conflict
with, result in a breach of or constitute (with due notice or lapse of time or
both) a default under any such indenture, agreement or instrument, or (c) result
in the creation or imposition of any lien, charge or encumbrance of any nature
whatsoever upon any of the assets or properties of Borrower or Guarantor, except
as otherwise permitted, required or contemplated by the Loan Documents. Neither
Borrower nor Guarantor is a party to any indenture, agreement or instrument, or
subject to any restriction (including, without limitation, any restriction set
forth in the articles of organization or the operating agreement of the Company)
or the terms of any Project Partnership Agreement pursuant to which Borrower has
purchased a Limited Partnership Interest which materially adversely affects the
ability of Borrower or Guarantor to perform their obligations under the Loan
Documents. Neither Borrower nor Guarantor is in default (beyond applicable
cure periods) under any indenture, agreement or instrument for borrowed money,
and neither is in default (beyond applicable cure periods) under any indenture,
29
<PAGE>
agreement or instrument which, if in default, might reasonably be expected to
result in a material adverse change in the activities, operations, assets or
properties, or in the condition, financial or otherwise, of Borrower or
Guarantor, or to impair the ability of Borrower or Guarantor to perform their
obligations under the Loan Documents to which it is a party.
Section 5.7 No Default. To Borrower's knowledge, Borrower is in
----------
compliance with all of the terms and provisions set forth in this Agreement and
the other Loan Documents on its part to be observed or performed, and to
Borrower's knowledge, no Event of Default specified in Article VIII hereof, nor
any event which upon notice or lapse of time or both would constitute any such
Event of Default, has occurred and is continuing.
Section 5.8 Tax Returns. Borrower and Guarantor have each filed all tax
-----------
returns required to be filed in any jurisdiction, and have paid all taxes,
assessments, fees or other governmental charges which have become due and
payable, except for any taxes which are being timely contested in good faith by
appropriate proceedings, and for which adequate reserves have been established.
As of the date of this Agreement, no such taxes are being contested, and
Borrower and Guarantor, as the case may be, shall promptly notify Lender of the
instigation against either of them of any such proceedings. Except as disclosed
to the Banks, there are no tax audits presently being conducted or to Borrower's
knowledge threatened in respect of Borrower or Guarantor.
Section 5.9 Validity of Subscription Agreements. To the best of
------------------------------------
Borrower's knowledge, each of the Subscription Agreements and all rights and
interests in connection therewith are valid and enforceable in accordance with
the organizational documents of the respective Portfolio Entity pursuant to
which they are created and governed. The Person or Persons assigning or pledging
Pledged Subscription Agreements has or have the unrestricted right and power to
do so. Borrower has not assigned or pledged, shall not assign or pledge, , has
not allowed to be assigned or pledged and is not aware of any other Person who
has assigned or pledged other than to the Agent for the account of the Banks,
any interest in or to any Pledged Subscription Agreement.
Section 5.10 Compliance with Laws. To Borrower's knowledge, neither the
--------------------
Borrower nor Guarantor is in violation of any provision of any law, or of any
judgment, award, rule, regulation, order, decree, writ or injunction of any
court or public regulatory body or authority which might have a material adverse
effect on the business, operations, assets or financial condition of the Company
as a whole.
Section 5.11 Regulation U. The Company is not engaged principally, or as
------------
one of its major activities, in the business of extending credit for the purpose
of purchasing or carrying Margin Stock, and no part of the proceeds of any
Advances made hereunder will be used to purchase or carry any Margin Stock or to
extend credit to others for the purpose of purchasing or carrying any Margin
Stock.
30
<PAGE>
Section 5.12 Investment Company Act. The Company is not an "investment
----------------------
company," or a company controlled by an "investment company," within the meaning
of the Investment Company Act of 1940, as amended.
Section 5.13 Title to Properties. The Company has good, valid, insurable
-------------------
(in the case of real property) and marketable title to all of its properties and
assets (whether real or personal, tangible or intangible) reflected on the
financial statements described in Section 5.4 hereof, except for such properties
and assets as have been disposed of since the date of such financial statements
as no longer used or useful in the conduct of its business or as have been
disposed of in the ordinary course of business, and all such properties and
assets are free and clear of all Liens except as disclosed in such financial
statements and those in favor of the Banks.
Section 5.14 ERISA. All plans ("Plans") of a type described in Section
-----
3(3) of ERISA in respect of which the Company or any Subsidiary of the Company
is an "Employer", as defined in Section 3(8) of ERISA, are in substantial
compliance with ERISA, and none of such Plans is insolvent or in reorganization,
has an accumulated or waived funding deficiency within the meaning of Section
412 of the Internal Revenue Code, and neither the Company nor any Subsidiary of
the Company has incurred any material liability (including any material
contingent liability) to or on account of any such Plan pursuant to Sections
4062, 4063, 4064, 4201 or 4204 of ERISA; and no proceedings have been instituted
to terminate any such plan, and to Borrower's knowledge, no condition exists
which presents a material risk to the Company or a Subsidiary of the Company of
incurring a liability to or on account of any such Plan pursuant to any of the
foregoing Sections of ERISA. No Plan or trust forming a part thereof has been
terminated since September 1, 1974.
Section 5.15 Representations and Warranties. To Borrower's knowledge, no
------------------------------
representation, warranty or statement of Borrower or Guarantor included in this
Agreement or any document furnished to Lender pursuant thereto, or in connection
with the transactions contemplated therein, contains any untrue statement of a
material fact, or omits any material fact, the omission of which would be
misleading.
Section 5.16 Sale of Limited Partnership Interests; No Default.
-------------------------------------------------
(a) Borrower has not sold any Pledged Limited Partnership Interests nor
received any payment therefor which has not been forwarded to Lender, except as
permitted hereunder.
(b) Borrower is not aware of the occurrence of any event of default by any
party under any of the Project Partnership Agreements.
Section 5.17 Validity of Limited Partnership Interests. To the best of
-----------------------------------------
Borrower's knowledge, each of the Pledged Limited Partnership Interests and all
rights and interests in connection therewith are valid and enforceable in
accordance with the respective Project Partnership Agreements pursuant to which
they are created and governed. Borrower has the unrestricted right to assign and
pledge, or to cause to be assigned and pledged to Lender each
31
<PAGE>
Pledged Limited Partnership Interest. Except as permitted under Section 5.18(b),
Borrower has not and shall not assign or pledge to any person other than the
Agent for the account of the Banks, any interest in or to any Pledged Limited
Partnership Interest, except for transfers of Pledged Limited Partnership
Interests to Portfolio Entities in compliance with this Agreement.
Section 5.18 Special Representations Concerning Collateral. The Company
---------------------------------------------
hereby represents and warrants to the Bank, as of the date of this Agreement and
as of the date of each Advance Request, that:
5.18(a) Except for Pledged Subscription Agreements and except as
permitted under Section 5.18(b), the Company or a Portfolio Entity owns the
Collateral free and clear of any lien, security interest, charge or encumbrance
except for the security interest created by this Agreement and the other Loan
Documents. Except as permitted under Section 5.18(b), no effective financing
statement or other instrument similar in effect covering all or any part of the
Collateral is on file in any recording office, except such as may have been
filed in favor of the Agent for the account of the Banks relating to this
Agreement. The Pledged Subscription Agreements, are free and clear of any lien,
security interest, charge or encumbrance except for the security interest
created by this Agreement and the other Loan Documents.
5.18(b) To the best of Borrower's knowledge, this Agreement, together
with the Security Agreement, duly filed financing statements and the
documentation executed in connection with Pledged Subscription Agreements,
create, or will create at the time of execution, delivery and filing a valid and
perfected security interest in, or assignment of, the Collateral, securing the
payment of the Loan, subject to Sections 2.5(b), 2.7(c) (7) and 3.3 of this
Agreement, and to the best of Borrower's knowledge, all filings and other
actions necessary or desirable to perfect and protect such security interest
have been or will be duly taken. The Banks' security interest in the Collateral
is a first priority security interest except in those cases where the Project
Partnership Agreement requires that the Pledged Limited Partnership Interest be
pledged to secure the Company's obligations to make capital contributions, in
which case the Banks' security interest shall be subordinate to such pledge only
and no others. Upon request, the Banks shall deliver reasonable subordination
agreements and other documents to provide evidence of such subordination.
5.18(c) No authorization, approval or other action by, and no notice
to or filing with, any governmental authority or regulatory body is required
(other than those that have been or will be obtained, delivered or filed, as
applicable) for (i) the grant by the Company of the security interest granted
hereby or for the execution, delivery or performance of this Agreement by the
Company or (ii) to the best of Borrower's knowledge, for the perfection of or
the exercise by the Banks of their rights and remedies hereunder, other than the
filing of a financing statement which has been duly executed by the Company and
delivered to the Agent for filing.
5.18(d) The principal office of the Company for purposes of Section
9-103 of the Uniform Commercial Code is located at the address set forth at the
front of this Agreement.
32
<PAGE>
5.18(e) Each Pledged Limited Partnership Interest conforms to the
requirements and the specifications set forth in the Investment Criteria except
for Nonconforming Projects and for such deviations as have been specifically
approved in writing by the Banks.
5.18(f) In each instance the applicable Collateral Documents have
been duly executed by the appropriate parties thereunder and there have been
filed all required documents in the appropriate offices to create valid and
legally binding business entities enforceable in accordance with their terms.
The full original principal amount of each Advance has been fully advanced or
disbursed to the Project Partnership named therein. This representation shall
be effective as of delivery to the Agent of the applicable Collateral Documents.
5.18(g) The books, records, accounts and reports of the Company with
respect to the Pledged Limited Partnership Interests and the Pledged
Subscription Agreements have been prepared and maintained in a prudent business
fashion.
5.19 Representations Concerning Guaranty. To the best of
-----------------------------------
Borrower's knowledge, the Guaranty is a valid and binding obligation of
Guarantor, enforceable against Guarantor in accordance with its terms. No facts
or circumstances known to Borrower exist which would cause Borrower to believe
that any Advance may not be paid in full when due or that any defense, offset or
counter-claim exists or may be asserted by Guarantor with respect to its
obligations under the Guaranty.
5.20 Year 2000. The Borrower has reviewed the areas within its
---------
business and operations which could be adversely affected by, and has developed
or is developing a program to address on a timely basis the risk that certain
computer applications used by the Borrower may be unable to recognize and
perform properly date-sensitive functions involving dates prior to and after
December 31, 1999 (the "Year 2000 Problem"). To the best of Borrower's
knowledge, the Year 2000 Problem will not result, and is not reasonably expected
to result, in any material adverse effect on the business, properties, assets,
financial condition, results of operations or prospects of the Borrower, or the
ability of the Borrower to duly and punctually pay or perform its obligations
hereunder and under the other Loan Documents.
ARTICLE VI
AFFIRMATIVE COVENANTS
The Company agrees that so long as the Commitment is outstanding or there
remain any obligations of the Company to be paid or performed under this
Agreement or under the Notes, the Company shall:
Section 6.1 Use of Proceeds. Use the proceeds of the Loan solely and
---------------
exclusively for the purposes and subject to the conditions set forth in Article
II hereof, and Borrower shall not engage in any business other than that
described in Article II.
33
<PAGE>
Section 6.2 Payment of Notes. Punctually pay or cause to be paid the
----------------
principal and interest on and all other amounts due and payable hereunder and
under the Notes in accordance with the terms hereof and thereof.
Section 6.3 Financial Statements and Other Reports. Deliver to the Banks:
--------------------------------------
6.3(a) Upon request by the Banks, as soon as available and in any
event within thirty (30) days after each calendar month, statements of income
and changes in members' equity of the Company for the immediately preceding
month, and related balance sheets as of the end of the immediately preceding
month, all in reasonable detail and certified by the chief financial officer of
the Company, subject, however, to year-end audit adjustments.
6.3(b) As soon as available and in any event within ninety (90) days
after the close of each of the first three fiscal quarters of the Company in
each fiscal year: statements of income and changes in members' equity of the
Company for the period from the beginning of such fiscal year to the end of such
fiscal quarter, and the related balance sheet as at the end of such fiscal
quarter, all in reasonable detail and certified by the chief financial officer
of the Company, subject, however, to year-end audit adjustments.
6.3(c) As soon as available and in any event within one hundred
twenty (120) days after the close of each fiscal year of the Company: a
statement of income and changes in members' equity of the Company for such year,
the related balance sheet as at the end of such year, all in reasonable detail
and accompanied by an opinion of an accounting firm reasonably satisfactory to
the Banks, or other independent public accountants of recognized standing
selected by the Company and acceptable to the Banks, as to said financial
statements and a certificate signed by the chief financial officer of the
Company stating that said financial statements fairly present the financial
condition and results of operations of the Company as at the end of, and for,
such year.
6.3(d) Together with each delivery of financial statements pursuant
to Sections 6.3(b) and 6.3(c) hereof, an Officer's Certificate stating that the
signatory or signatories thereto have reviewed the terms of this Agreement and
have made, or caused to be made under their supervision, a review in reasonable
detail of the transactions and conditions of the Company during the accounting
period covered by such financial statements and that such review has not
disclosed the existence during or at the end of such accounting period, and that
the signatory or signatories thereto do not have knowledge of the existence as
of the date of the Officer's Certificate, of any Event of Default or if any
Event of Default existed or exists, specifying the nature and period of the
existence thereof and what action the Company has taken, is taking and proposes
to take with respect thereto.
6.3(e) As soon as available and in any event within one hundred
twenty (120) days after the close of each fiscal year of the Guarantor, current
financial statements of the Guarantor, signed by Guarantor's chief financial
officer, and dated not more than one hundred twenty (120) days prior to the date
of required delivery to the Banks hereunder.
34
<PAGE>
6.3(f) Reports in respect of the Pledged Limited Partnership
Interests in such detail and at such times as the Banks in their reasonable
discretion may request at any time or from time to time, including without
limitation financial reports on any Portfolio Entities.
6.3(g) Copies of all regular or periodic financial and other reports,
if any, which the Company shall file with the Securities and Exchange Commission
or any governmental agency successor thereto.
6.3(h) Within ninety (90) days after the end of each fiscal year,
copies of the most recent reports delivered to Investors, which reports shall
include:
1. A report on the status and financial condition of each
Project Partnership and the Borrower's Limited Partnership Interests in such
Project Partnerships;
2. A report of the activities and investments of Borrower
during the period since the last report, including a description of all
transactions during such period between the Borrower and each Project
Partnership;
3. A listing of all Project Partnerships invested in directly
or indirectly by Borrower;
4. The status of any construction or rehabilitation to be
performed in connection with each Project, which information shall be provided
until Project construction or rehabilitation is complete;
5. A description of the geographic area in which each Project
is located;
6. The amount of capital raised by Borrower and not directly
or indirectly invested in Projects as of the date of each report, in terms of
dollars and percentage of total capital raised by the Borrower; and
7. Within ninety (90) days after the end of each taxable year
of each Project Partnership or within thirty (30) days after receipt by the
Borrower of any such report, whichever is later, a copy of the financial report
of each Project Partnership in which Borrower has invested.
6.3(i) Immediately upon the receipt by Borrower thereof, any notice
of an Internal Revenue Service proceeding involving a Project Partnership.
6.3(j) From time to time, with reasonable promptness, such further
information regarding the business, operations, properties or financial
condition of the Company or any Portfolio Entity as the Banks may reasonably
request.
35
<PAGE>
All financial statements and reports furnished to the Banks hereunder
shall be prepared in accordance with GAAP consistently applied, applied on a
basis consistent with that applied in preparing the financial statements as at,
and for the period ended, the Statement Date (except to the extent otherwise
required to conform to good accounting practice or to convert from a tax basis
of accounting to GAAP).
Section 6.4 Maintenance of Existence; Conduct of Business. Preserve and
---------------------------------------------
maintain its limited liability company existence in good standing and all of its
rights, privileges, licenses, qualifications and franchises necessary or
desirable in the normal conduct of its business, conduct its business in an
orderly and efficient manner; and make no change in the nature or character of
its business or engage in any business in which it was not engaged on the date
of this Agreement.
Section 6.5 Compliance with Applicable Laws. Comply with the requirements
-------------------------------
of all applicable laws, rules, regulations and orders of any governmental
authority and prudent industry standards, a breach of which could materially
adversely affect its business, operations, assets, or financial condition or
which could materially adversely impair the ability of Company to perform its
obligations hereunder, except where contested in good faith and by appropriate
proceedings.
Section 6.6 Inspection of Properties and Books. Permit authorized
----------------------------------
representatives of the Banks (who may be employees of the Banks or independent
contractors), its parent company or affiliates to discuss the business,
operations, assets and financial condition of the Company with their officers
and employees and to examine their books of account and make copies or extracts
thereof, all at such reasonable times as the Banks may request. The Company
will provide its accountants with a copy of this Agreement promptly after the
execution hereof and will instruct its accountants to answer candidly and fully
any and all questions that the officers of the Banks or any authorized
representatives of the Banks may address to them in reference to the financial
condition or affairs of the Company. The Company may have its representatives
in attendance at any meetings between the officers or other representatives of
the Banks and the Company accountants held in accordance with this
authorization.
Section 6.7 Notice. Give prompt written notice to the Banks of (a) any
------
action, suit or proceeding instituted by or against the Company or, if the
amount of damages claimed exceeds $100,000, Guarantor in any federal or state
court or before any commission or other regulatory body (federal, state or
local, domestic or foreign), or any such proceedings threatened against the
Company in a writing containing the details thereof, (b) the filing, recording
or assessment of any federal, state or local tax lien against it, or any of its
assets or the Guarantor or Guarantor's assets, (c) the occurrence of any Event
of Default hereunder, (d) any demand by any Investor for either the repurchase
by the Company of a Limited Partnership Interest or indemnification with respect
thereto and (e) any other action, event or condition of any nature which may
lead to or result in a material (i.e., with a monetary value equal to or in
excess of $100,000) adverse effect upon the business, operations, assets, or
financial condition of the Company or Guarantor or which, with or without notice
or lapse of time or both, would constitute a default under any other material
agreement, instrument or indenture to which the Company is a party or to which
the Company, its properties or assets may be subject.
36
<PAGE>
Section 6.8 Payment of Taxes, etc. Pay and discharge or cause to be paid
---------------------
and discharged promptly all taxes, assessments and governmental charges or
levies imposed upon the Company upon the Company's income, receipts or
properties before the same shall become past due, as well as all lawful claims
for labor, materials and supplies or otherwise which, if unpaid, might become a
Lien or charge upon such properties or any part thereof; provided, however, that
the Company shall not be required to pay taxes, assessments or governmental
charges or levies or claims for labor, materials or supplies for which the
Company shall have obtained an adequate bond or adequate insurance or which are
being contested in good faith and by proper proceedings which are being
reasonably and diligently pursued.
Section 6.9 Insurance. Will maintain in such amounts and against such
---------
risks as is, and to the extent, customarily carried by similar businesses (a)
errors and omissions insurance and blanket bond coverage, and (b) liability
insurance and fire and other hazard insurance on its properties,; and (c) within
thirty (30) days after notice from the Banks, will obtain such additional
insurance as the Banks shall reasonably require, all at the sole expense of the
Company. Copies of all such policies or certificates of insurance shall show
each Bank as "lender's loss payee" and shall be furnished to the Banks without
charge upon request of the Banks.
Section 6.10 Subordination of Certain Indebtedness. Will cause any
-------------------------------------
indebtedness of the Company, incurred after the date of this Agreement, to any
member or manager of the Company, or to any Affiliate of the Company or of any
Subsidiary of the Company, or to the Guarantor, or to any third party, to be
subordinated to all obligations of the Company under this Agreement and the
Notes, by the execution of a Subordination of Debt Agreement in the form
attached hereto as Exhibit H and will deliver to the Banks executed copies of
---------
said Agreement, certified by the Secretary of the Company to be true and
complete and in full force and effect.
Section 6.11 Other Loan Obligations. Will perform all obligations under
----------------------
the terms of each loan agreement, note, mortgage, security agreement or debt
instrument by which the Company is bound or to which any of its property is
subject, and will promptly notify the Banks in writing of the cancellation or
reduction of any of its other mortgage warehousing lines of credit or agreements
with any other lender.
Section 6.12 Loan To Be in Balance. At all times during the term of this
---------------------
Loan the aggregate of the principal balance of all outstanding Advances and the
stated amount of all issued Letters of Credit must be less than or equal to the
total of (i) the Eligible Value of all Pledged Limited Partnership Interests,
plus (ii) capitalized interest.
Section 6.13 Special Affirmative Covenants Concerning Collateral.
----------------------------------------------------
6.13(a) The Company warrants and will defend the right, title and
interest of the Banks in and to the Collateral against the claims and demands of
all persons whomsoever, subject to the terms of Section 5.18(b) hereof.
37
<PAGE>
6.13(b) The Company shall execute and deliver to the Banks such
Uniform Commercial Code financing statements with respect to the Collateral as
the Banks may reasonably request. The Company shall also execute and deliver to
the Banks such further instruments of pledge or collateral assignment or
transfer, and such powers of attorney, as reasonably required by the Banks, and
shall do and perform all matters and things reasonably necessary or desirable to
be done or observed, for the purpose of effectively creating, maintaining and
preserving the security and benefits intended to be afforded the Banks under
this Agreement. The Banks shall have all the rights and remedies of a secured
party under the Uniform Commercial Code of the State of Illinois, or any other
applicable law, in addition to all rights provided for herein.
6.13(c) The Company shall maintain, at its principal office or in the
office of a computer service bureau engaged by the Company and approved by the
Banks, and, upon request, shall make available to the Banks the originals, or
copies in any case where the original has been delivered to the Banks, or to a
Portfolio Entity, all Collateral related documents and instruments, and all
files, surveys, certificates, correspondence, appraisals, computer programs,
tapes, discs, cards, accounting records and other information and data relating
to the Collateral.
6.14 Operating Agreement. Borrower will promptly furnish to the
-------------------
Banks a copy of any change to the Borrower's operating agreement.
6.15 Net Income. The Company shall, throughout the term of this
----------
Agreement maintain positive net income, tested, in all cases, on a rolling four
(4) quarter basis.
6.16 Portfolio Entity. The Company shall cause the Initial
----------------
Installment with respect to each Portfolio Entity to be not less than fifteen
percent (15%) of such Portfolio Entity's Capitalization.
ARTICLE VII
NEGATIVE COVENANTS
The Company agrees that so long as the Commitment is outstanding or there
remain any obligation of the Company to be paid or performed hereunder or under
the Notes, the Company shall not, either directly or indirectly, without the
prior written consent of the Banks:
Section 7.1 Indebtedness. Incur, assume, guarantee, endorse, or otherwise
------------
become liable for any obligation or indebtedness on the Company's own behalf or
on behalf of any other person or entity except for (i) the Company's obligations
to make capital contributions pursuant to its investments in Project
Partnerships and Portfolio Entities, (ii) Subordinated Debt of the Company,
(iii) endorsement of negotiable instruments for deposit or collection in the
ordinary course of business, and (iv) trade payables incurred in the ordinary
course of business.
38
<PAGE>
Section 7.2 Merger; Sale of Assets; Acquisitions; Change in Control;
--------------------------------------------------------
Change of Senior Management. Except in the ordinary course of business as
- ---------------------------
described in Article II of this Agreement, liquidate, dissolve, consolidate or
merge or sell, transfer or otherwise dispose of, any substantial part of its
assets, nor acquire substantially all of the assets of another, nor permit any
change which would result in (i) Prism/Apollo, Inc. personally owning, directly
or through one or more Affiliates, less than fifty-one percent (51%) of the
membership interests in the Company; or (ii) a "Major Decision" as set forth in
the Company's Operating Agreement as of September 2, 1999 requiring the consent
of a Person other than Prism/Apollo, Inc..
Section 7.3 Deferral of Subordinated Debt. Pay in advance of the stated
-----------------------------
maturity thereof any Subordinated Debt of the Company to the lender thereof and
if an Event of Default hereunder shall have occurred and be continuing, make any
payment of any kind thereafter on such Subordinated Debt until all obligations
of the Company hereunder and under the Notes have been paid and performed in
full. This does not prohibit the payment of interest and principal on
Subordinated Debt provided the following conditions are satisfied:
a. Intentionally Omitted;
b. No payment shall be made which would cause the Company to
be in violation of any provision of this Agreement; and
c. At the time of any such payment there exists no Event of
Default, or event which with the passage of time or giving of notice, or both,
would constitute an Event of Default.
Section 7.4 Positive Tangible Net Worth of the Company. Permit the
------------------------------------------
Company at any time to have a negative Tangible Net Worth.
Section 7.5 Company Profitability. Permit the Company at any time to show
---------------------
a net loss for any annual reporting period.
Section 7.6 Loans to Managers and Members. Make any personal loans or
-----------------------------
advances to any of the Company's managers, employees or members, except as
described in the Company's Operating Agreement and except for loans to cover, or
in lieu of, salaries in an aggregate amount not to exceed $200,000 annually.
Section 7.7 Loans to Affiliates. Make any loans to Affiliates, except as
-------------------
provided in Section 7.6, and except to Project Partnerships for pre-development
purposes.
Section 7.8 Performance of Portfolio Entities. Permit any Portfolio
---------------------------------
Entity to show a net loss (i.e., the Capitalization Proceeds of such Portfolio
Entity when fully funded must exceed the aggregate of Costs of all Pledged
Limited Partnership Interests owned by such Portfolio Entity).
39
<PAGE>
Section 7.9 Special Negative Covenants Concerning Collateral.
------------------------------------------------
7.9(a) Except as permitted by this Agreement, the Company shall not
sell, assign, transfer or otherwise dispose of, or grant any option with respect
to, or pledge or otherwise encumber any of the Collateral or any interest
therein.
7.9(b) The Company shall not make any compromise, adjustment or
settlement in respect of any of the Collateral or accept other than cash in
payment or liquidation of the Collateral.
7.10 Intentionally Omitted.
----------------------
7.11 Other Financing. Except as otherwise permitted under this
---------------
Agreement, Borrower will not enter into any other financing transactions as a
lender or a borrower or incur any debt for its own account or for the account of
any Investor without the Banks' prior written approval.
7.12 Tangible Net Worth of Prism. Allow Prism's "Tangible Net
---------------------------
Worth" as defined in the Credit Agreement to be less than the required amount
set forth in Section 6.15.2 of the Credit Agreement.
7.13 Leverage Ratio (Prism). Allow Prism's "Leverage Ratio", as
----------------------
defined in the Credit Agreement, to be greater than the maximum ratio allowed by
Section 6.15.1 of the Credit Agreement.
7.14 Acknowledgment. The Company acknowledges and agrees that it
--------------
shall be bound by the financial benchmarks set forth in the covenants contained
in Section 7.12 and 7.13 hereof whether or not the Company is in a position to
control directly the operations of activities of the Person to whom such
benchmarks are ascribed.
ARTICLE VIII
DEFAULTS; REMEDIES
Section 8.1 Events of Default. The occurrence of any of the following
-----------------
conditions or events shall be an event of default ("Event of Default"):
8.1(a) Failure to pay the principal of any Advance when due and such
failure continues for more than five (5) days after notice of such failure is
given by Agent to Borrower, whether at stated maturity, by acceleration, or
otherwise; or failure to pay any installment of interest on any Advance or any
other amount due under this Agreement when due and such failure continues for
more than five (5) days after notice of such failure is given by Agent to
Borrower; or
40
<PAGE>
8.1(b) Failure of the Company or any default in the payment of any
principal or interest on, any other indebtedness or in the payment of any
contingent obligation beyond any period of grace provided; or breach or default
with respect to any other material term of any other indebtedness or of any loan
agreement, note, mortgage, security agreement, indenture or other agreement
relating thereto (which continues beyond applicable cure periods), if the effect
of such failure, default or breach is to cause, or to permit the holder or
holders thereof (or a trustee on behalf of such holder or holders) to cause,
indebtedness of the Company in the aggregate amount of $100,000 or more to
become or be declared due prior to its stated maturity; or
8.1(c) Any of the Company's representations or warranties made herein
or in any statement or certificate at any time given by the Company in writing
pursuant hereto or in connection herewith shall be false in any material respect
on the date as of which made; or
8.1(d) The Company shall default in the performance of or compliance
with any term contained in this Agreement other than those referred to above in
subsections 8.1(a), (b) or (c) and such default shall not have been remedied or
waived within thirty (30) days after receipt of notice from the Agent of such
default; or
8.1(e) (1) A court having jurisdiction shall enter a decree or order
for relief in respect of the Company or of the Guarantor in an involuntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, which decree or order is not stayed within 20 days; or (2)
any other similar relief shall be granted under any applicable federal or state
law; or a decree or order of a court having jurisdiction for the appointment of
a receiver, liquidator, sequestrator, trustee, custodian or other officer having
similar powers over the Company or of the Guarantor, or over all or a
substantial part of their respective property, shall have been entered; or the
involuntary appointment of an interim receiver, trustee or other custodian of
the Company or of the Guarantor for all or a substantial part of their
respective property; or the issuance of a warrant of attachment, execution or
similar process against any substantial part of the property of the Company or
of the Guarantor, and the continuance of any such events in this clause (2) for
sixty (60) days unless dismissed, bonded off or discharged; or
8.1(f) The Company or the Guarantor shall have an order for relief
entered with respect to it or commence a voluntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or shall
consent to the entry of an order for relief in an involuntary case, or to the
conversion to an involuntary case, under any such law, or shall consent to the
appointment of or taking possession by a receiver, trustee or other custodian
for all or a substantial part of its property; the making by the Company or the
Guarantor of any assignment for the benefit of creditors; or the inability or
failure of the Company or of Guarantor, or the admission by the Company or the
Guarantor in writing of its inability to pay its debts as such debts become due;
or
8.1(g) Any money judgment, writ or warrant of attachment, or similar
process involving in any case an amount in excess of $25,000 shall be entered or
filed against the Company or the Guarantor or any of their respective assets and
shall remain undischarged,
41
<PAGE>
unvacated, unbonded or unstayed for a period of thirty (30) days or in any event
later than five (5) days prior to the date of any proposed sale thereunder; or
8.1(h) Any order, judgment or decree shall be entered against the
Company decreeing the dissolution, liquidation or split up of the Company and
such order shall remain undischarged or unstayed for a period in excess of
twenty (20) days; or
8.1(i) Any Plan maintained by the Company or any of its Subsidiaries
shall be terminated within the meaning of Title IV of ERISA or a trustee shall
be appointed by an appropriate United States district court to administer any
Plan, or the Pension Benefit Guaranty Corporation (or any successor thereto)
shall institute proceedings to terminate any Plan or to appoint a trustee to
administer any Plan if as of the date thereof the Company's liability or any
such Subsidiary's liability (after giving effect to the tax consequences
thereof) to the Pension Benefit Guaranty Corporation (or any successor thereto)
for unfunded guaranteed vested benefits under the Plan exceeds the then current
value of assets accumulated in such Plan by more than $25,000 (or in the case of
a termination involving the Company or any of its Subsidiaries as a "substantial
employer" (as defined in Section 4001(a)(2) of ERISA) the withdrawing employer's
proportionate share of such excess shall exceed such amount); or
8.1(j) The Company or any of its Subsidiaries as employer under a
Multiemployer Plan shall have made a complete or partial withdrawal from such
Multiemployer Plan and the plan sponsor of such Multiemployer Plan shall have
notified such withdrawing employer that such employer has incurred a withdrawal
liability in an annual amount exceeding $25,000.
Section 8.2 Remedies.
--------
8.2(a) Upon the occurrence of any Event of Default described in
Section 8.1(e) or (f) the unpaid principal amount of and accrued interest on the
Notes shall automatically become due and payable, without presentment, demand or
other requirements of any kind, all of which are hereby expressly waived by the
Company.
8.2(b) Upon the occurrence of any Event of Default (other than those
described in Section 8.1(e) or (f)), the Banks may, by written notice to the
Company declare all or any portion of the Advances to be due and payable
whereupon the same shall forthwith become due and payable, together with all
accrued interest thereon, and the obligation of the Banks to make Advances shall
thereupon terminate.
8.2(c) Upon the occurrence of any Event of Default, the Banks, acting
through the Agent, may also do any one or more or all of the following:
(1) Foreclose upon or otherwise enforce its security interest
in and Lien on all of the Collateral or on any portion thereof to secure all
payments and performance of obligations owed by the Company under this Agreement
subject to Sections 2.5(b), 2.7(c) (7) and 3.3 hereof.
42
<PAGE>
(2) Notify all obligors of Collateral or on any portion
thereof that the Collateral has been assigned to the Banks and that all payments
thereon are to be made directly to the Agent for the account of the Banks or
such other party as may be designated by the Agent; settle, compromise, or
release, in whole or in part, any amounts owing on the Collateral, any such
obligor or Investor or any portion of the Collateral, on terms acceptable to the
Agent; enforce payment and prosecute any action or proceeding with respect to
and any and all Collateral; and where any such Collateral is in default,
foreclose on and enforce security interests in, such Collateral by any available
judicial procedure or without judicial process and sell property acquired as a
result of any such foreclosure.
(3) Exercise all rights and remedies of a secured creditor
under the Uniform Commercial Code of the State of Illinois or the state in which
the Collateral is located, including but not limited to selling the Collateral
at public or private sale. The Agent shall give the Company not less than ten
(10) days' notice of any such public sale or of the date after which private
sale may be held. The Company agrees that ten (10) days' notice shall be
reasonable notice. At any such sale the Collateral may be sold as an entirety or
in separate parts, as the Agent may determine. The Agent may, without notice or
publication, adjourn any public or private sale or cause the same to be
adjourned from time to time by announcement at the time and place fixed for the
sale, and such sale may be made at any time or place to which the same may be so
adjourned. In case of any sale of all or any part of the Collateral on credit or
for future delivery, the Collateral so sold may be retained by the Agent for the
account of the Banks until the selling price is paid by the purchaser thereof,
but the Banks shall not incur any liability in case of the failure of such
purchaser to take up and pay for the Collateral so sold and, in case of any such
failure, such Collateral may again be sold upon like notice. The Agent for the
account of the Banks may, however, instead of exercising the power of sale
herein conferred upon it, proceed by a suit or suits at law or in equity to
collect all amounts due upon all or any portion of the Collateral or to
foreclose the pledge and sell all or any portion of the Collateral under a
judgment or decree of a court or courts of competent jurisdiction, or both.
(4) Proceed against the Company on the Notes or, subject to
the limitations on amounts recoverable against the Guarantor set forth in the
Guaranty, against the Guarantor under the Guaranty, or both.
(5) Pursue any rights and/or remedies available at law or in
equity against the Company or subject to the limitations on amounts recoverable
against the Guarantor set forth in the Guaranty, the Guarantor or both.
8.2(d) The Banks shall incur no liability as a result of the sale of
the Collateral, or any part thereof, at any private sale. The Company hereby
waives any claims it may have against the Banks arising by reason of the fact
that the price at which the Collateral may have been sold at such private sale
was less than the price which might have been obtained at a public sale or was
less than the aggregate amount of the outstanding Advances and the unpaid
interest accrued thereon, even if the Banks accept the first offer received and
do not offer the Collateral, or any part thereof, to more than one offeree.
43
<PAGE>
8.2(e) The Company waives any right to require the Banks to (1)
proceed against any Person, (2) proceed against or exhaust all or any of the
Collateral or pursue its rights and remedies as against the Collateral in any
particular order, or (3) pursue any other remedy in its power.
8.2(f) The Banks may, but shall not be obligated to, advance any sums
or do any act or thing necessary to uphold and enforce the priority of, or the
security intended to be afforded by, any item included in the Collateral,
including, without limitation, payment of delinquent taxes or assessments and
insurance premiums, if applicable. All advances, charges, costs and expenses,
including reasonable attorneys' fees and disbursements, incurred or paid by the
Banks in exercising any right, power or remedy conferred by this Agreement, or
in the enforcement hereof, together with interest thereon, at the rate of
interest specified in the Notes, from the time of payment until repaid, shall
become a part of principal balance outstanding under the Notes.
8.2(g) No failure on the part of the Banks to exercise, and no delay
in exercising, any right, power or remedy provided hereunder, at law or in
equity shall operate as a waiver thereof; nor shall any single or partial
exercise by the Banks of any right, power or remedy provided hereunder, at law
or in equity preclude any other or further exercise thereof or the exercise of
any other right, power or remedy. Without intending to limit the foregoing, all
defenses based on the statute of limitations are hereby waived by the Company.
The remedies herein provided are cumulative and are not exclusive of any
remedies provided at law or in equity.
Section 8.3 Application of Proceeds. Subject to Sections 2.5(b),
-----------------------
2.5(c)(7) and 3.3 of this Agreement, the proceeds of any sale or other
enforcement of the Banks' security interests in all or any part of the
Collateral shall be applied by the Agent for the account of the Banks:
First, to the payment of the costs and expenses of such sale or
-----
enforcement, including reasonable compensation to the Banks' agents and counsel,
and all expenses, liabilities and advances made or incurred by or on behalf of
the Banks in connection therewith;
Second, to the payment of any other amounts due (other than principal
------
and interest) under the Notes or this Agreement;
Third, to the payment of interest accrued and unpaid on the Notes;
-----
Fourth, to the payment of the outstanding principal balance of the
------
Notes; and
Finally, to the payment to the Company, or to its successors or
-------
assigns, or as a court of competent jurisdiction may direct, of any surplus then
remaining from such proceeds. If the proceeds of any such sale are insufficient
to cover the costs and expenses of such sale, as aforesaid, and the payment in
full of the Notes and all other amounts due hereunder, the Company shall remain
liable for any deficiency.
44
<PAGE>
Section 8.4 Agent Appointed Attorney-in-Fact. The Agent is hereby
--------------------------------
appointed the attorney-in-fact of the Company, with full power of substitution,
for the purpose of carrying out the provisions of this Article following an
Event of Default and taking any action and executing any instruments which the
Banks may deem necessary or advisable to accomplish the purposes hereof, which
appointment as attorney-in-fact is irrevocable and coupled with an interest.
Without limiting the generality of the foregoing, following an Event of Default,
the Agent shall have the right and power to give notices of the Banks' security
interest in the Collateral to any Person, either in the name of the Company or
in its own name, or to receive, endorse and collect a11 checks made payable to
the order of the Company representing any payment on account of the principal of
or interest on, or the proceeds of sale of, any of the Pledged Limited
Partnership Interests or and to give full discharge for the same.
Section 8.5 Right of Set-Off. If an Event of Default shall occur and be
----------------
continuing, the Banks, shall have the right, at any time and from time to time,
without notice, to set-off and to appropriate or apply any and all deposits of
money or property or any other indebtedness at any time held or owing by the
Banks or a parent company, affiliate or subsidiary of the Banks, to or for the
credit of the account of the Company against and on account of the obligations
and liabilities of the Company under the Notes and this Agreement, irrespective
of whether or not the Banks shall have made any demand hereunder and whether or
not said obligations and liabilities shall have matured.
Section 8.6 Reasonable Assurances. If, at any time during the term of the
----------------------
Agreement, any Bank has reason to believe that Company is not conducting its
business in accordance with, or otherwise is not satisfying: (i) all applicable
statutes, regulations, rules, and notices of federal, state, or local
governmental agencies or instrumentalities, (ii) all applicable requirements of
the Banks, as set forth in this Agreement, then, any Bank shall have the right
to demand, pursuant to written notice from such Bank to Company specifying with
particularity the alleged act, error or omission in question, reasonable
assurances from Company that such a belief is in fact unfounded, and any failure
of Company to provide to Bank such reasonable assurances in form and substance
reasonably satisfactory to such Bank, within the time frame specified in such
written notice shall itself constitute an Event of Default hereunder. Company
hereby authorizes any Bank to take such actions as may be necessary or
appropriate to confirm the continued eligibility of Company for Advances
hereunder, including without limitation (i) ordering credit reports and (ii)
contacting Investors.
ARTICLE IX
REIMBURSEMENT OF EXPENSES; INDEMNITY
The Company shall:
Section 9.1 Cost of Preparation and Enforcement. Pay all out-of-pocket
-----------------------------------
costs and expenses of the Banks, including reasonable attorney's fees and
expenses, in connection with the successful enforcement of this Agreement, the
Notes, and other documents and instruments related hereto and the making and
repayment of the Advances and the payment of interest
45
<PAGE>
thereon, provided that the Company shall only be obligated to pay the fees and
expenses of a single attorney (or firm) hired to represent all of the Banks in
connection with any such enforcement.
Section 9.2 Payments of Taxes. Pay, and hold the Banks and any holder of
-----------------
the Notes harmless from and against, any and all present and future stamp,
documentary and other similar taxes with respect to the foregoing matters and
save the Banks and the holder or holders of the Notes harmless from and against
any and all liabilities with respect to or resulting from any delay or omission
to pay such taxes, provided that the Company shall only be obligated to pay the
fees and expenses of a single attorney (or firm) hired to represent all of the
Banks in connection with any such enforcement.
Section 9.3 Indemnification. Indemnify, pay and hold harmless the Banks
---------------
and any of their officers, directors, employees or agents and any subsequent
holder of the Note from and against any and all liabilities, obligations,
losses, damages, penalties, judgments, suits, costs, expenses and disbursements
of any kind whatsoever (the "Indemnified Liabilities") (excluding any such
Indemnified Liabilities resulting from gross negligence or willful misconduct by
any Bank in performing any of its obligations under this Agreement, the Notes,
or any other document referred to herein as established in a suit between the
Company and one or more of the Banks which may be the same suit in which
indemnification is being sought hereunder by the Banks) which may be imposed
upon, incurred by or asserted against the Banks or such holder in any way
relating to or arising out of this Agreement, the Notes, or any other document
referred to herein or any of the transactions contemplated hereby or thereby to
the extent that any such Indemnified Liabilities result (directly or indirectly)
from (i) the breach or material inaccuracy or incompleteness of any
representation or warranty made by the Company in this Agreement or any
schedule, statement, Exhibit or certificate furnished by the Company pursuant to
this Agreement or (ii) the failure by the Company to observe or perform any term
or provision of this Agreement or of any agreement executed in connection
herewith, including without limitation any claims made, or any actions, suits or
proceedings commenced or threatened, by or on behalf of any creditor (excluding
the Banks and the holder or holders of the Notes), security holder, shareholder,
mortgagor, customer (including, without limitation, any person or entity having
any dealings of any kind with the Company), member, manager, trustee, director,
officer, employee and/or agent of the Company acting in such capacity, the
Company or any governmental regulatory body or authority (excluding the Office
of the Comptroller of the Currency, the Federal Deposit Insurance Corporation
and any other banking regulatory body or authority having jurisdiction over the
Banks).
ARTICLE X
THE AGENT
Section 10.1 Appointment and Authorization. Each Bank hereby irrevocably
-----------------------------
(subject to Section 10.10) appoints, designates and authorizes the Agent to take
-------------
such action on its behalf under the provisions of this Agreement and to exercise
such powers and perform such duties as are expressly delegated to it by the
terms of this Agreement, together with such powers as are reasonably incidental
thereto. Notwithstanding any provision to the contrary contained
46
<PAGE>
elsewhere in this Agreement, the Agent shall not have any duties or
responsibilities, except those expressly set forth herein, nor shall the Agent
have or be deemed to have any fiduciary relationship with any Bank, and no
implied covenants, functions, responsibilities, duties, obligations or
liabilities shall be read into this Agreement or otherwise exist against the
Agent. Without limiting the generality of the foregoing sentence, the use of the
term "agent" in this Agreement with reference to the Agent is not intended to
connote any fiduciary or other implied (or express) obligations arising under
agency doctrine of any applicable law. Instead, such term is used merely as a
matter of market custom, and is intended to create or reflect only an
administrative relationship between independent contracting parties.
Section 10.2 Delegation of Duties. The Agent may execute any of its
--------------------
duties under this Agreement or by or through agents, employees or attorneys-in-
fact and shall be entitled to advice of counsel concerning all matters
pertaining to such duties. The Agent shall not be responsible for the
negligence or misconduct of any agent or attorney-in-fact that it selects with
reasonable care.
Section 10.3 Liability of Agent. None of the Agent-Related Persons shall
------------------
(a) be liable for any action taken or omitted to be taken by any of them under
or in connection with this Agreement or the transactions contemplated hereby
(except for its own gross negligence or willful misconduct); (b) be responsible
in any manner to any of the Banks for any recital, statement, representation or
warranty made by the Company, or any officer thereof, contained in this
Agreement, or in any certificate, report, statement or other document referred
to or provided for in, or received by the Agent under or in connection with,
this Agreement, or the validity, effectiveness, genuineness, enforceability or
sufficiency of this Agreement, or for any failure of the Company to perform its
obligations hereunder or thereunder. No Agent-Related Person shall be under any
obligation to any Bank to ascertain or to inquire as to the observance or
performance of any of the agreements contained in, or conditions of, this
Agreement, or to inspect the properties, books or records of the Company.
Section 10.4 Reliance by Agent. (a) The Agent shall be entitled to rely,
-----------------
and shall be fully protected in relying, upon any writing, resolution, notice,
consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone
message, statement or other document or conversation believed by it to be
genuine and correct and to have been signed, sent or made by the proper Persons,
and upon advice and statements of legal counsel (including counsel to the
Company), independent accountants and other experts selected by the Agent. The
Agent shall be fully justified in failing or refusing to take any action under
this Agreement unless it shall first receive such advice or concurrence of the
Banks as it deems appropriate and, if it so requests, it shall first be
indemnified to its satisfaction by the Banks against any and all liability and
expense which may be incurred by it by reason of taking or continuing to take
any such action. The Agent shall in all cases be fully protected in acting, or
in refraining from acting, under this Agreement in accordance with a request or
consent of the Banks and such request and any action taken or failure to act
pursuant thereto shall be binding upon the Banks.
10.4(b) Consent by Banks. For purposes of determining compliance with
----------------
the conditions specified in Section 4.1, each Bank that has executed this
-----------
Agreement shall be deemed
47
<PAGE>
to have consented to, approved or accepted or to be satisfied with, each
document or other matter either sent by the Agent to such Bank for consent,
approval, acceptance or satisfaction, or required thereunder to be consented to
or approved by or acceptable or satisfactory to the Bank.
Section 10.5 Notice of Default. The Agent shall not be deemed to have
-----------------
knowledge or notice of the occurrence of any Event of Default, except with
respect to defaults in the payment of principal, interest and fees required to
be paid to the Agent for the account of the Banks, unless the Agent shall have
received written notice from a Bank or the Company referring to this Agreement,
describing such Event of Default and stating that such notice is a "notice of
default". The Agent will notify the Banks of its receipt of any such notice.
The Agent shall take such action with respect to such Event of Default as may be
requested by the Banks in accordance with Article VIII; provided, however, that
-------- -------
unless and until the Agent has received any such request, the Agent may (but
shall not be obligated to) take such action, or refrain from taking such action,
with respect to such Event of Default as it shall deem advisable or in the best
interest of the Banks.
Section 10.6 Credit Decision. Each Bank acknowledges that none of the
---------------
Agent-Related Persons has made any representation or warranty to it, and that no
act by the Agent hereinafter taken, including any review of the affairs of the
Company and its Affiliates, shall be deemed to constitute any representation or
warranty by any Agent-Related Person to any Bank. Each Bank represents to the
Agent that it has, independently and without reliance upon any Agent-Related
Person and based on such documents and information as it has deemed appropriate,
made its own appraisal of and investigation into the business, prospects,
operations, property, financial and other condition and credit worthiness of the
Company and its Affiliates, and all applicable bank regulatory laws relating to
the transactions contemplated hereby, and made its own decision to enter into
this Agreement and to extend credit to the Company hereunder. Each Bank also
represents that it will, independently and without reliance upon any Agent-
Related Person and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit analysis appraisals and
decisions in taking or not taking action under this Agreement and to make such
investigations as it deems necessary to inform itself as to the business,
prospects, operations, property, financial and other condition and credit
worthiness of the Company. Except for notices, reports and other documents
expressly herein required to be furnished to the Banks by the Agent, the Agent
shall not have any duty or responsibility to provide any Bank with any credit or
other information concerning the business, prospects, operations, property,
financial and other condition of credit worthiness of the Company which may come
into the possession of any of the Agent-Related Persons.
Section 10.7 No Responsibility for Loans, Recitals, Etc. Neither the
-------------------------------------------
Agent nor any Agent-Related Person shall (i) be responsible for or have any duty
to ascertain, inquire into or verify any recitals, reports, statements,
representations or warranties contained in this Agreement or any other documents
or furnished pursuant hereto or thereto; (ii) be responsible for any Loans
hereunder; (iii) be bound to ascertain or inquire as to the performance or
observance of any of the terms of this Agreement or any other documents pursuant
thereto; (iv) be responsible for the satisfaction of any condition specified in
Article IV, except receipt of items required to be delivered to the Agent; (v)
be responsible for the validity, effectiveness, genuineness or
48
<PAGE>
enforceability of this Agreement or any other documents; or (vi) be responsible
for the creation, attachment, perfection or priority of any security interests
or liens purported to be granted to the agent or any of the Banks pursuant to
this Agreement or any other documents.
Section 10.8 Indemnification of Agent. Whether or not the transactions
------------------------
contemplated hereby are consummated, the Banks shall indemnify upon demand the
Agent-Related Persons (to the extent not reimbursed by or on behalf of the
Company and without limiting the obligation of the Company to do so), pro rata,
from and against any and all Indemnified Liabilities; provided, however, that no
-------- -------
Bank shall be liable for the payment to the Agent-Related Persons of any portion
of such Indemnified Liabilities resulting solely from such Person's gross
negligence or willful misconduct. Without limitation of the foregoing, each
Bank shall reimburse the Agent upon demand for its ratable share of any costs or
out-of-pocket expenses (including attorney costs) incurred by the Agent in
connection with the preparation, execution, delivery, administration,
modification, amendment or enforcement (whether through negotiations, legal
proceedings or otherwise) of, or legal advice in respect of rights or
responsibilities under, this Agreement, or any document contemplated by or
referred to herein, to the extent that the Agent is not reimbursed for such
expenses by or on behalf of the Company. The undertaking in this Section shall
survive the payment of all obligations hereunder and the resignation or
replacement of the Agent.
Section 10.9 Agent in Individual Capacity. LaSalle may make loans to,
----------------------------
issue letters of credit for the account of, accept deposits from, acquire equity
interests in and generally engage in any kind of banking, trust, financial
advisory, underwriting or other business with the Company as though LaSalle were
not the Agent hereunder and without notice to or consent of the Banks. The
Banks acknowledge that, pursuant to such activities, LaSalle may receive
information regarding the Company (including information that may be subject to
confidentiality obligations in favor of the Company) and acknowledge that the
Agent shall be under no obligation to provide such information to them. With
respect to its Loans, LaSalle shall have the same rights and powers under this
Agreement as any other Bank and may exercise the same as though it were not the
Agent, and the terms "Bank" and "Banks" include LaSalle in its individual
capacity.
Section 10.10 Successor Agent. The Agent may, and at the request of the
---------------
Banks and the Company, shall, resign as Agent upon 30 days' notice to the Banks.
If the Agent resigns under this Agreement, the Banks shall appoint a successor
agent for the Banks which successor agent shall be approved by the Company. If
no successor agent is appointed prior to the effective date of the resignation
of the Agent, the Agent may appoint, after consulting with the Banks and the
Company, a successor agent. Upon the acceptance of its appointment as successor
agent hereunder, such successor agent shall succeed to all the rights, powers
and duties of the retiring Agent and the term "Agent" shall mean such successor
agent and the retiring Agent's appointment, powers and duties as Agent shall be
terminated. After any retiring Agent's resignation hereunder as Agent, the
provisions of this Article X shall inure to its benefit as to any actions taken
or omitted to be taken by it while it was Agent under this Agreement. If no
successor agent has accepted appointment as Agent by the date which is 30 days
following a retiring Agent's notice of resignation, the retiring Agent's
resignation shall nevertheless
49
<PAGE>
thereupon become effective and the Banks shall perform all of the duties of the
Agent hereunder until such time, if any, as the Banks appoint a successor agent
as provided for above.
Section 10.11 Rights of the Company. Except as set forth in Section 10.10
---------------------
above, the terms of this Article X shall not affect in any way the rights,
obligations, duties and liabilities between the Company, on the one hand, and
the Banks, the Agent and/or the Agent-Related Persons, on the other hand.
ARTICLE XI
MISCELLANEOUS
Section 11.1 Relationship of Parties. The relationship between Banks and
-----------------------
the Company is limited to that of creditor/secured party, on the one hand, and
borrower, on the other hand. The provisions herein for compliance with
financial covenants and delivery of financial statements, are intended solely
for the benefit of Banks to protect their interests as lender in assuring
performance of the obligations hereunder, and nothing contained in this
Agreement shall be construed as permitting or obligating Banks to act as a
financial or business advisor or consultant to the Company, as permitting or
obligating the Banks to control the Company or to conduct the Company's
operations, as creating any joint venture, agency, fiduciary, trustee, or other
relationship between the parties other than as explicitly and specifically
stated in this Agreement. The Company acknowledges that it has had the
opportunity to obtain the advice of experienced counsel of its own choosing in
connection with the negotiation and execution of this Agreement and to obtain
the advice of such counsel with respect to all matters contained herein. The
Company further acknowledges that it is experienced with respect to financial
and credit matters and has made its own independent decision to execute and
deliver this Agreement.
Section 11.2 Recourse. The Company acknowledges and agrees that it is
--------
fully liable for repayment of all Advances and all sums due hereunder or under
the Notes and for performance of all obligations contained in this Agreement.
Section 11.3 Notices. All notices, demands, consents, requests and other
-------
communications required or permitted to be given or made hereunder
(collectively, "Notices") shall, except as otherwise expressly provided
hereunder, be in writing and shall be delivered in person or telegraphed or
mailed, first class, return receipt requested, postage prepaid, or by overnight
delivery service or by telecopy or other telecommunications device addressed to
the respective parties hereto at their respective addresses hereinafter set
forth or, as to any such party, at such other address as may be designated by it
in a Notice to the other. All Notices shall be conclusively deemed to have been
properly given or made when duly delivered, in person or by overnight delivery
service or by telecopy or other telecommunications device, or if mailed on the
third Business Day after being deposited in the mails or when delivered to the
telegraph company, addressed as follows:
50
<PAGE>
if to the Company: Apollo Housing Capital, L.L.C.
600 Superior Avenue East
Cleveland, Ohio 44114
Attn: Jack Griffiths and Thomas Rini
Telecopy No. (216) 875-2612
with a copy to: Prism Financial Corporation
440 N. Orleans
Chicago, Illinois 60610
Attn: David Fisher
Telecopy No. (312) 494-0273
if to LaSalle: LaSalle Bank National Association
135 South LaSalle Street
Suite 1225
Chicago, Illinois 60603
Attn: Pamela Daniels-Halisi
Telecopy No. (312) 904-6467
with a copy to: Albert Whitehead & McGaugh, P.C.
One South Wacker Drive
Suite 1990
Chicago, Illinois 60606
Attention: Gregory C. Whitehead
Telecopy No. (312) 357-6220
if to BofA: Bank of America, National Association
231 South LaSalle Street
Chicago, Illinois 60697
Attention: Mike Utterback
Telecopy No. (312) 974-9500
if to the Agent: LaSalle Bank National Association
135 South LaSalle Street
Chicago, Illinois 60603
Attention: Pamela Daniels-Halisi
Telecopy No. (312) 904-6467
Section 11.4 Terms Binding Upon Successors; Survival. The terms and
---------------------------------------
provisions of this Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns. All
representations, warranties, covenants and agreements herein contained on the
part of the Company shall survive the making of any Advance and the execution of
the Notes, and shall be effective so long as the Commitment is outstanding or
there remains any obligation of the Company hereunder or under the Notes to be
paid or performed.
51
<PAGE>
Section 11.5 Assignment. Subject to the provisions of Section 11.9
----------
hereof, this Agreement may not be assigned by the Company or by the Banks.
Section 11.6 Amendments. This Agreement may be modified or amended only
----------
by a written instrument signed by all parties.
Section 11.7 No Waiver; Remedies Cumulative. No failure or delay on the
------------------------------
part of the Company or the Banks or any holder of the Notes in exercising any
right, power or privilege hereunder and no course of dealing between the Company
and the Banks or the holder(s) of the Notes shall operate as a waiver thereof;
nor shall any single or partial exercise of any right, power or privilege
hereunder or under the Notes preclude any other or further exercise thereof or
the exercise of any other right, power or privilege hereunder. The rights and
remedies herein expressly provided are cumulative and not exclusive of any
rights or remedies which the Company or the Banks or the holder(s) of the Notes
would otherwise have. No notice to or demand on the Company in any case shall
entitle the Company to any other or further notice or demand in similar or other
circumstances or constitute a waiver of the rights of the Banks or the holder of
the Notes to any other or further action in any circumstances without notice or
demand.
Section 11.8 Invalidity. In case any one or more of the provisions
----------
contained in this Agreement shall for any reason be held to be invalid, illegal,
or unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions hereof, and this Agreement shall be
construed as if such invalid, illegal or unenforceable provision had not been
included.
Section 11.9 Participations. The Banks may, subject to the approval of
--------------
the Company, which approval shall not be unreasonably withheld or delayed, from
time to time sell or otherwise grant participations in the Commitment and the
Notes, and the holder of any such participation, if the participation agreement
so provides, (i) shall, with respect to its participation, be entitled to all of
the rights of the Banks and (ii) may exercise any and all rights of setoff or
banker's lien with respect thereto, in each case as fully as though the Company
were directly indebted to the holder of such participation in the amount of such
participation; provided, however, that the Banks shall always maintain a
majority interest in the Commitment and the Notes and shall be responsible for
servicing the same, and further provided that Company shall not be required to
send or deliver to any of the participants other than the Banks any of the
materials or notices required to be sent or delivered by it under the terms of
this Agreement, nor shall it have to act except in compliance with the
instructions of the Banks (which may be delivered through the Agent).
Section 11.10 Integration. This Agreement, together with the Notes, and
-----------
other documents executed pursuant to the terms hereof, constitute the entire
agreement between the parties hereto, with respect to the subject matter hereof.
52
<PAGE>
Section 11.11 Additional Instruments, etc. The Company shall execute and
---------------------------
deliver such further instruments and shall do and perform all matters and things
necessary or expedient to be done or observed for the purpose of effectively
creating, maintaining and preserving the security and benefits intended to be
afforded by this Agreement.
Section 11.12 GOVERNING LAW AND CONSENT TO JURISDICTION. THIS AGREEMENT
-----------------------------------------
AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND UNDER THE NOTES
SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF
ILLINOIS, WITHOUT REFERENCE TO ITS PRINCIPLES OF CONFLICTS OF LAW. IN THE EVENT
OF ANY LITIGATION ARISING OUT OF THIS AGREEMENT, THE COMPANY AGREES THAT THE
SUBSTANTIVE LAW OF THE STATE OF ILLINOIS SHALL APPLY, INCLUDING, WITHOUT
LIMITATION, ALL PROVISIONS RELATING TO THE RIGHTS AND REMEDIES OF THE OWNERS OR
HOLDER OF THE NOTES AGAINST ANY SECURITY THEREFOR AND/OR THE COMPANY AND ALL
ACTIONS RELATING TO SUCH LITIGATION SHALL ONLY BE BROUGHT IN A COURT OF
COMPETENT JURISDICTION RESIDING IN THE COUNTY OF COOK WITHIN THE STATE OF
ILLINOIS. THE COMPANY HEREBY CONSENTS TO JURISDICTION WITHIN THE STATE OF
ILLINOIS AND VENUE WITHIN THE COUNTY OF COOK OF THE STATE OF ILLINOIS FOR
PURPOSES OF SUCH LITIGATION. NOTHING HEREIN CONTAINED, HOWEVER, SHALL PREVENT
ANY OWNER OR HOLDER OF THE NOTES FROM BRINGING ANY ACTION OR EXERCISING ANY
RIGHTS AGAINST ANY SECURITY OR AGAINST THE COMPANY OR AGAINST ANY PROPERTY OF
THE COMPANY WITHIN ANY OTHER JURISDICTION OR STATE. INITIATING SUCH PROCEEDING
OR TAKING SUCH ACTION IN ANY OTHER JURISDICTION OR STATE SHALL NOT, HOWEVER,
CONSTITUTE A WAIVER OF THE AGREEMENT CONTAINED HEREIN THAT THE LAWS OF THE STATE
OF ILLINOIS SHALL GOVERN THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER.
Section 11.13 Company Information. The Company hereby authorizes the
--------------------
Banks to provide any Affiliate of the Banks with information regarding the
Company, including copies of documents, financial statements, corporate records
and reports, obtained by the Banks from the Company or any other entity during
the course of the negotiation or administration of this Agreement.
Section 11.14 WAIVER OF JURY TRIAL. THE COMPANY HEREBY (I) COVENANTS AND
--------------------
AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE RELATING TO THIS AGREEMENT
TRIABLE OF RIGHT BY A JURY, AND (II) WAIVES ANY RIGHT TO TRIAL BY JURY RELATING
TO THIS AGREEMENT FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER
EXIST. THIS WAIVER IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH
ISSUE AS TO WHICH THE RIGHT TO A JURY TRIAL WOULD OTHERWISE ACCRUE. THE BANKS
ARE HEREBY AUTHORIZED AND REQUESTED TO SUBMIT THIS AGREEMENT TO ANY COURT HAVING
JURISDICTION OVER THE SUBJECT MATTER AND THE PARTIES HERETO, SO AS TO SERVE AS
CONCLUSIVE EVIDENCE OF THE
53
<PAGE>
COMPANY'S HEREIN CONTAINED WAIVER OF THE RIGHT TO JURY TRIAL. FURTHER, THE
COMPANY HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF THE BANKS (INCLUDING
THE BANKS' COUNSEL) HAS REPRESENTED, EXPRESSLY OR OTHERWISE, TO ANY OF THE
UNDERSIGNED THAT THE BANKS WILL NOT SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY
TRIAL PROVISION.
54
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
COMPANY:
APOLLO HOUSING CAPITAL, L.L.C.
By: PRISM/APOLLO, INC.,
Its: Managing Member
By:______________________________
Its:_____________________________
BANKS:
LASALLE BANK NATIONAL ASSOCIATION
By:______________________________
Its:______________________________
BANK OF AMERICA, NATIONAL ASSOCIATION
By:______________________________
Its:______________________________
AGENT:
LASALLE BANK NATIONAL ASSOCIATION
By:______________________________
Its:______________________________
55
<PAGE>
EXHIBIT 10.19
THIRD AMENDMENT TO CREDIT DOCUMENTS
-----------------------------------
This Third Amendment to Credit Documents is made as of February 11, 2000
(the "Amendment") by and among Prism Mortgage Company, an Illinois corporation
(the "Borrower"), Pacific Guarantee Mortgage Corporation, a California
corporation, Mortgage Market, Inc., an Oregon corporation, PointSource
Financial, L.L.C., an Illinois limited liability company, Infiniti Mortgage,
L.L.C., an Illinois limited liability company, First City Financial Corp., a
Colorado corporation, the lenders identified on the signature pages hereof (the
"Lenders"), and Bank One, NA, a national banking association formerly known as
The First National Bank of Chicago, as administrative agent for the Lenders
("Agent").
1. RECITALS
The Borrower, the Borrowing Subsidiaries, the Agent and the Lenders are
parties to a certain Credit Agreement dated as of March 31, 1999, as amended by
an Amendment to Credit Documents dated as of May 24, 1999 and a Second Amendment
to Credit Documents dated as of October 7, 1999 (as so amended, the "Credit
Agreement"), pursuant to which the Lenders have agreed to provide a revolving
credit facility to the Borrower and the Borrowing Subsidiaries on the terms and
conditions set forth in the Credit Agreement. Any capitalized term not
expressly defined herein shall have the meaning ascribed to such term in the
Credit Agreement.
The Borrower, the Borrowing Subsidiaries, the Agent, and the Lenders desire
to amend the Credit Agreement to revise the definition of Change in Control.
NOW, THEREFORE, the parties hereto agree as follows:
1. Change in Control. The definition of Change in Control in Article I of
-----------------
the Credit Agreement is hereby deleted and replaced with the following:
"Change in Control" means (i) any Person or group of Persons acting
together shall, directly or indirectly, acquire and beneficially own more
than 35% of the outstanding shares of voting stock of Borrower's parent
corporation, Prism Financial Corporation (excluding the stock held in Bruce
Abrams' estate and the subsequent transfer of ownership from his estate to
his wife) or (ii) the Borrower shall cease to be a Wholly-Owned Subsidiary
of Prism Financial Corporation."
2. Collateral Audit. The Borrower shall, within fifteen days after the
----------------
date hereof, retain PricewaterhouseCoopers LLP to conduct an independent
collateral audit of the Mortgage Loans pledged as Collateral.
3. Miscellaneous.
-------------
(a) All references to the Credit Agreement in the Loan Documents
shall be deemed to refer to the Credit Agreement as amended by this Amendment.
<PAGE>
(b) The Borrower and each Borrowing Subsidiary each hereby represents
and warrants to the Lenders that on the date of execution hereof, both prior to
and after giving effect to this Amendment, (i) the representations and
warranties of the Borrower and the Borrowing Subsidiaries contained in the Loan
Documents are accurate and complete in all respects, and (ii) no Default or
Unmatured Default has occurred and is continuing.
(c) In all other respects, the Credit Agreement and the other Loan
Documents are and remain unmodified and in full force and effect and are hereby
ratified and confirmed. This Amendment may be executed in any number of
counterparts, all of which taken together shall constitute one agreement, and
any of the parties hereto may execute this Amendment by signing any such
counterpart.
(d) The Borrower agrees to reimburse the Agent for all reasonable
out-of-pocket expenses (including legal fees and expenses) incurred in
connection with the preparation, negotiation and consummation of this Amendment.
Notwithstanding the provisions of Section 2.7.5 of the Credit Agreement, the
Lenders agree that the amendment fee of $2,500 per Lender referred to therein
shall not apply to or be payable in connection with this Amendment.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first above written.
PRISM MORTGAGE COMPANY, an Illinois corporation
By: /s/ David Fisher
------------------------------------
Name: David Fisher
----------------------------------
Title: Senior VP
---------------------------------
PACIFIC GUARANTEE MORTGAGE CORPORATION, a California
corporation
By: /s/ David Fisher
------------------------------------
Name: David Fisher
----------------------------------
Title: Senior VP
---------------------------------
MORTGAGE MARKET, INC., an Oregon corporation
By: /s/ David Fisher
------------------------------------
Name: David Fisher
----------------------------------
Title: Senior VP
---------------------------------
-2-
<PAGE>
POINTSOURCE FINANCIAL, L.L.C., an Illinois limited
liability company
By: Prism Mortgage Company, its Manager
By: /s/ David Fisher
------------------------------------
Name: David Fisher
----------------------------------
Title: Senior VP
---------------------------------
INFINITI MORTGAGE, L.L.C., an Illinois limited
liability company
By: Prism Mortgage Company, its Manager
By: /s/ David Fisher
------------------------------------
Name: David Fisher
----------------------------------
Title: Senior VP
---------------------------------
FIRST CITY FINANCIAL CORP., a Colorado corporation
By: /s/ David Fisher
-----------------------------------------
Name: David Fisher
---------------------------------------
Title: Senior VP
--------------------------------------
BANK ONE, NA, Individually and as Agent
By: /s/ Thomas J. Connally
-----------------------------------------
Name: Thomas J. Connally
---------------------------------------
Title: Vice President
--------------------------------------
THE BANK OF NEW YORK
By: /s/ Perry D. Gasling
-----------------------------------------
Name: Perry D. Gasling
---------------------------------------
-3-
<PAGE>
Title: Managing Director
--------------------------------------
COMERICA BANK
By: /s/ Mandy J. Lark
-----------------------------------------
Name: Mandy J. Lark
---------------------------------------
Title: Asst. Vice President
--------------------------------------
FIRST UNION NATIONAL BANK
By: /s/ Peter G. Perna
-----------------------------------------
Name: Peter G. Perna
---------------------------------------
Title: Vice President
--------------------------------------
GUARANTY FEDERAL BANK, F.S.B.
By: /s/ Sean A. Tobias
-----------------------------------------
Name: Sean A. Tobias
---------------------------------------
Title: Vice President
--------------------------------------
HIBERNIA NATIONAL BANK
By: /s/ Stephanie F. Tyner
-----------------------------------------
Name: Stephanie F. Tyner
---------------------------------------
Title: VP
--------------------------------------
LASALLE BANK NATIONAL ASSOCIATION
By: /s/ David Scherer
-----------------------------------------
Name: David Scherer
---------------------------------------
Title: Vice President
--------------------------------------
MERCANTILE BANK
By: /s/ Mark Rieger
-----------------------------------------
Name: Mark Rieger
---------------------------------------
Title: Vice President
--------------------------------------
-4-
<PAGE>
U.S. BANK NATIONAL ASSOCIATION
By: /s/ Edwin D. Jenkins
-----------------------------------------
Name: Edwin D. Jenkins
---------------------------------------
Title: VP
--------------------------------------
-5-
<PAGE>
EXHIBIT 10.20
FOURTH AMENDMENT TO CREDIT DOCUMENTS
------------------------------------
This Fourth Amendment to Credit Documents is made as of March 21, 2000 (the
"Amendment") by and among Prism Mortgage Company, an Illinois corporation (the
"Borrower"), Pacific Guarantee Mortgage Corporation, a California corporation,
Mortgage Market, Inc., an Oregon corporation, PointSource Financial, L.L.C., an
Illinois limited liability company, Infiniti Mortgage, L.L.C., an Illinois
limited liability company, First City Financial Corp., a Colorado corporation,
the lenders identified on the signature pages hereof (the "Lenders"), and Bank
One, NA, a national banking association formerly known as The First National
Bank of Chicago, as administrative agent for the Lenders ("Agent").
1. RECITALS
The Borrower, the Borrowing Subsidiaries, the Agent and the Lenders are
parties to a certain Credit Agreement dated as of March 31, 1999, as amended by
an Amendment to Credit Documents dated as of May 24, 1999, a Second Amendment to
Credit Documents dated as of October 7, 1999, and a Third Amendment to Credit
Documents dated as of February 11, 2000 (as so amended, the "Credit Agreement"),
pursuant to which the Lenders have agreed to provide a revolving credit facility
to the Borrower and the Borrowing Subsidiaries on the terms and conditions set
forth in the Credit Agreement. Any capitalized term not expressly defined
herein shall have the meaning ascribed to such term in the Credit Agreement.
The Borrower, the Borrowing Subsidiaries, the Agent, and the Lenders desire
to amend the Credit Agreement to, among other things, extend the Termination
Date and reduce the Aggregate Commitment.
NOW, THEREFORE, the parties hereto agree as follows:
1. Change in Control. Effective as of the date hereof, the definition of
-----------------
Change in Control in Article I of the Credit Agreement is hereby deleted and
replaced with the following:
"Change in Control" means (i) any Person or group of Persons acting
together shall, directly or indirectly, acquire and beneficially own more than
35% of the outstanding shares of voting stock of Borrower's parent corporation,
Prism Financial Corporation (excluding (a) any transfer of the stock held in
Bruce Abrams' estate from his estate to his wife, and (b) any acquisition of
stock of Prism Financial Corporation by Royal Bank of Canada or any of its
Affiliates), or (ii) the Borrower shall cease to be a Wholly-Owned Subsidiary of
Prism Financial Corporation."
2. Termination Date. Effective as of the date hereof, the definition of
----------------
Termination Date in Article I of the Credit Agreement is hereby deleted and
replaced with the following:
"Termination Date" means April 28, 2000 or any earlier date on which the
Aggregate Commitment is reduced to zero or otherwise terminated pursuant to
the terms hereof."
<PAGE>
3. Commitment Reduction. Effective as of the date hereof, (i) the
--------------------
Aggregate Commitment is reduced from $250,000,000 to $200,000,000, (ii) each
Lender's Commitment and Swingline Commitment shall be reduced to the amounts
shown on Schedule 1 hereto, and (iii) Schedule 1 of the Credit Agreement is
replaced by Schedule 1 hereto. On the date hereof, the Borrower shall make any
payments which may be required to reduce the total outstanding Advances to an
amount no greater than $200,000,000.
4. Miscellaneous.
-------------
(a) All references to the Credit Agreement in the Loan Documents shall
be deemed to refer to the Credit Agreement as amended by this Amendment.
(b) The Borrower and each Borrowing Subsidiary each hereby represents
and warrants to the Lenders that on the date of execution hereof, both prior to
and after giving effect to this Amendment, (i) the representations and
warranties of the Borrower and the Borrowing Subsidiaries contained in the Loan
Documents are accurate and complete in all respects, and (ii) no Default or
Unmatured Default has occurred and is continuing.
(c) In all other respects, the Credit Agreement and the other Loan
Documents are and remain unmodified and in full force and effect and are hereby
ratified and confirmed. This Amendment may be executed in any number of
counterparts, all of which taken together shall constitute one agreement, and
any of the parties hereto may execute this Amendment by signing any such
counterpart.
(d) The Borrower agrees to reimburse the Agent for all reasonable out-
of-pocket expenses (including legal fees and expenses) incurred in connection
with the preparation, negotiation and consummation of this Amendment.
Furthermore, notwithstanding the provisions of Section 2.7.5 of the Credit
Agreement, the Borrower shall pay to each Lender an amendment fee in connection
with this Amendment equal to 0.05% of such Lender's Commitment as set forth on
Schedule 1 hereto (rather than paying each Lender an amendment fee of $2,500 as
described in Section 2.7.5 of the Credit Agreement).
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first above written.
PRISM MORTGAGE COMPANY, an Illinois
corporation
By: /s/ David Fisher
------------------------------------
Name: David Fisher
----------------------------------
Title: Senior VP
---------------------------------
PACIFIC GUARANTEE MORTGAGE CORPORATION, a California
corporation
-2-
<PAGE>
By: /s/ David Fisher
------------------------------------
Name: David Fisher
----------------------------------
Title: Senior VP
---------------------------------
MORTGAGE MARKET, INC., an Oregon corporation
By: /s/ David Fisher
------------------------------------
Name: David Fisher
----------------------------------
Title: Senior VP
---------------------------------
POINTSOURCE FINANCIAL, L.L.C., an Illinois limited
liability company
By: Prism Mortgage Company, its Manager
By: /s/ David Fisher
-------------------------------
Name: David Fisher
-----------------------------
Title: Senior VP
----------------------------
INFINITI MORTGAGE, L.L.C., an Illinois limited
liability company
By: Prism Mortgage Company, its Manager
By: /s/ David Fisher
-------------------------------
Name: David Fisher
-----------------------------
Title: Senior VP
----------------------------
FIRST CITY FINANCIAL CORP., a Colorado corporation
By: /s/ David Fisher
------------------------------------
Name: David Fisher
----------------------------------
Title: Senior VP
---------------------------------
-3-
<PAGE>
BANK ONE, NA, Individually and as Agent
By: /s/ Thomas J. Connally
------------------------------------
Name: Thomas J. Connally
----------------------------------
Title: VP
---------------------------------
THE BANK OF NEW YORK
By: /s/ Perry D. Gasling
------------------------------------
Name: Perry D. Gasling
----------------------------------
Title: Managing Director
---------------------------------
COMERICA BANK
By: /s/ Mandy J. Lark
------------------------------------
Name: Mandy J. Lark
----------------------------------
Title: Asst. VP
---------------------------------
FIRST UNION NATIONAL BANK
By: /s/ Peter G. Perna
------------------------------------
Name: Peter G. Perna
----------------------------------
Title: VP
---------------------------------
GUARANTY FEDERAL BANK, F.S.B.
By: /s/ Sean A. Tobias
------------------------------------
Name: Sean A. Tobias
----------------------------------
Title: VP
---------------------------------
HIBERNIA NATIONAL BANK
By: /s/ Stephanie F. Tyner
------------------------------------
Name: Stephanie F. Tyner
----------------------------------
Title: VP
---------------------------------
-4-
<PAGE>
LASALLE BANK NATIONAL ASSOCIATION
By: /s/ David Scherer
------------------------------------
Name: David Scherer
----------------------------------
Title: VP
---------------------------------
MERCANTILE BANK
By: /s/ Mark Rieger
------------------------------------
Name: Mark Rieger
----------------------------------
Title: VP
---------------------------------
U.S. BANK NATIONAL ASSOCIATION
By: /s/ Edwin D. Jenkins
------------------------------------
Name: Edwin D. Jenkins
----------------------------------
Title: VP
---------------------------------
-5-
<PAGE>
2. SCHEDULE "1"
COMMITMENTS AND COMMITMENT PERCENTAGES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
PRIMARY
COMMITMENT PRIMARY COMMITMENT SWINGLINE
LENDER COMMITMENT PERCENTAGE COMMITMENT PERCENTAGE COMMITMENT
------ ---------- ---------- ---------- ---------- ----------
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Bank One $32,000,000 16% $24,000,000 12.5% $8,000,000
- ----------------------------------------------------------------------------------------------------------------
Guaranty Federal $32,000,000 16% $32,000,000 16.66666667% $ 0
- ----------------------------------------------------------------------------------------------------------------
First Union $28,000,000 14% $28,000,000 14.58333333% $ 0
- ----------------------------------------------------------------------------------------------------------------
US Bank $28,000,000 14% $28,000,000 14.58333333% $ 0
- ----------------------------------------------------------------------------------------------------------------
Bank of New York $16,000,000 8% $16,000,000 8.33333333% $ 0
- ----------------------------------------------------------------------------------------------------------------
Comerica $16,000,000 8% $16,000,000 8.333333333% $ 0
- ----------------------------------------------------------------------------------------------------------------
Hibernia $16,000,000 8% $16,000,000 8.333333333% $ 0
- ----------------------------------------------------------------------------------------------------------------
LaSalle $16,000,000 8% $16,000,000 8.333333333% $ 0
- ----------------------------------------------------------------------------------------------------------------
Mercantile Bank $16,000,000 8% $16,000,000 8.333333333% $ 0
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
-6-
<PAGE>
Exhibit 11
Prism Financial Corporation and Subsidiaries
Basic and Diluted Earnings Per Share
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended
December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Historical:
Basic income per share:
Income from continuing operations $ 9,950 $12,096 $ 2,837
=========================
Net income $ 8,853 $11,095 $ 2,503
=========================
Weighted-average common shares outstanding 13,390 10,568 10,269
-------------------------
Earnings per share from continuing operations $ 0.74 $ 1.14 $ 0.28
=========================
Net earnings per share $ 0.66 $ 1.05 $ 0.24
=========================
Diluted income per share:
Income from continuing operations $ 9,950 $12,096 $ 2,837
=========================
Net income $ 8,853 $11,095 $ 2,503
=========================
Weighted-average common shares outstanding 13,390 10,568 10,269
Add: Common stock equivalents (1) 64 43 -
-------------------------
Diluted weighted average common shares outstanding 13,454 10,611 10,269
-------------------------
Earnings per share from continuing operations $ 0.74 $ 1.14 $ 0.28
=========================
Net earnings per share $ 0.66 $ 1.05 $ 0.24
=========================
Pro forma (2), (3):
Basic income per share:
Income from continuing operations $ 5,175
=======
Weighted-average common shares outstanding 14,625
-------
Per share amount $ 0.35
=======
Diluted income per share:
Income from continuing operations $ 5,175
=======
Weighted-average common shares outstanding 14,625
Add: Common stock equivalents (1) 64
-------
Diluted weighted average common shares outstanding 14,689
-------
Per share amount $ 0.35
=======
</TABLE>
(1) Calculated using the treasury stock method.
(2) Pro forma to present as if Prism Financial was taxable as a C corporation
under the Internal Revenue Code as of January 1, 1999.
(3) Pro forma to present as if the shares issued at the time of the Offering,
including the shares issued to Pacific Guarantee and Mortgage Market, were
outstanding as of January 1, 1999.
<PAGE>
Exhibit 21
Subsidiaries of Prism Financial Corporation
Prism Financial Corporation, a Delaware corporation, owns all the
outstanding equity interests of the following entities:
. Prism Mortgage Company, an Illinois corporation
Pacific Guarantee Mortgage Corporation, a California corporation
Valley Financial Acquisition Corporation, a Delaware corporation
Mortgage Market, Inc., an Oregon corporation
PointSource Financial, L.L.C., an Illinois limited liability
company
Illinois Guaranty Title, L.L.C., an Illinois limited liability
company
Lender's Mortgage Services, L.L.C., an Illinois limited
liability company
First City Financial Corporation, a Colorado corporation
MEI Acquisition Corporation, a Delaware corporation
. Prism/Apollo, Inc., a Delaware corporation
<PAGE>
Exhibit 23.1
Consent of Independent Accountants
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-81889) of Prism Financial Corporation of our
report dated February 21, 2000, except for Note 27, as to which the date is
March 21, 2000 relating to the financial statements, which is included in this
Annual Report on Form 10-K. We also consent to the incorporation by reference of
our report dated February 21, 2000 relating to the financial statement schedule,
which appears in this Form 10-K.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 29, 2000
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Prism Financial Corporation
As independent public accountants, we hereby consent to the incorporation of our
report dated March 27, 1998, appearing in item 14 of Prism Financial
Corporation's Annual Report on Form 10-K, into its previously filed Registration
Statement on Form S-8 (No. 333-81889).
/s/ McGladrey & Pullen, LLP
Schaumburg, Illinois
March 29, 2000
<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, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,915
<SECURITIES> 0
<RECEIVABLES> 15,596
<ALLOWANCES> 1,280
<INVENTORY> 198,294
<CURRENT-ASSETS> 297,118
<PP&E> 15,632
<DEPRECIATION> 4,447
<TOTAL-ASSETS> 331,603
<CURRENT-LIABILITIES> 289,427
<BONDS> 0
0
0
<COMMON> 146
<OTHER-SE> 41,889
<TOTAL-LIABILITY-AND-EQUITY> 331,603
<SALES> 0
<TOTAL-REVENUES> 150,659
<CGS> 0
<TOTAL-COSTS> 142,176
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 607
<INTEREST-EXPENSE> 19,544
<INCOME-PRETAX> 8,483
<INCOME-TAX> (1,467)
<INCOME-CONTINUING> 9,950
<DISCONTINUED> (1,097)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,853
<EPS-BASIC> 0.66
<EPS-DILUTED> 0.66
</TABLE>
