<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 17, 1997
REGISTRATION NO. 333-28643
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DELTA FINANCIAL CORPORATION
AND THE GUARANTORS LISTED ON SCHEDULE A
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
SEE SCHEDULE A 6162 SEE SCHEDULE A
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
1000 WOODBURY ROAD, SUITE 200
WOODBURY, NEW YORK 11797-9003
516-364-8500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
HUGH MILLER, CHIEF EXECUTIVE OFFICER
DELTA FINANCIAL CORPORATION
1000 WOODBURY ROAD, SUITE 200
WOODBURY, NEW YORK 11797-9003
516-364-8500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copies to:
<TABLE>
<S> <C>
JAMES R. TANENBAUM MARK A. STEGEMOELLER
STROOCK & STROOCK & LAVAN LLP LATHAM & WATKINS
180 MAIDEN LANE SEARS TOWER, SUITE 5800
NEW YORK, NEW YORK 10038-4982 233 SOUTH WACKER DRIVE
CHICAGO, ILLINOIS 60606-6401
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this form offered pursuant to
dividend or interest reinvestment plans, please check the following box: / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, other than securities offered only in connection with dividend
or interest reinvestment plans, please check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
------------------------
THIS REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
STATE OR OTHER JURISDICTION
OF I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION IDENTIFICATION NUMBER
- ----------------------------- ----------------------------
<S> <C> <C>
Delaware Delta Financial Corporation 11-3336165
New York Delta Funding Corporation 11-2609517
Delaware Fidelity Mortgage, Inc. 11-3360263
Fidelity Mortgage (Florida),
Delaware Inc. 11-3360266
Delaware DF Special Holdings Corporation 11-3374284
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment.
A registration statement relating to these securities has been filed
with the Securities and Exchange Commission. These securities may
not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. This prospectus shall
not constitute an offer to sell or the solicitation of an offer to buy
nor shall there be any sale of these securities in any State in which
such offer, solicitation or sale would be unlawful prior to registration
or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, JULY 2, 1997
PROSPECTUS
$150,000,000
[LOGO] DELTA FINANCIAL CORPORATION
% SENIOR NOTES DUE 2004
------------------------
The % Senior Notes due 2004 (the 'Notes') are being offered (the
'Offering') by Delta Financial Corporation ('Delta' or the 'Company') and will
mature on July , 2004. The Notes will bear interest at a rate of % per
annum, payable semi-annually on and , commencing on
, 1997. On or after , 2001, the Notes are redeemable at
the option of the Company, in whole or in part, at the redemption price set
forth herein plus accrued and unpaid interest to the date of redemption. Upon a
Change of Control (as defined), each holder of the Notes (a 'Holder') may
require the Company to repurchase the Notes held by such Holder at 101% of the
principal amount thereof plus accrued and unpaid interest to the date of
repurchase.
The Notes will be general unsecured obligations of the Company and will rank
pari passu in right of payment with all existing and future unsecured
unsubordinated Indebtedness (as defined) of the Company and senior in right of
payment to all existing and future subordinated Indebtedness of the Company. In
addition, the obligations of the Company under the Notes will be fully and
unconditionally guaranteed on a joint and several basis (each, a 'Subsidiary
Guarantee') by each of the Company's existing and future Subsidiaries (as
defined), other than Subsidiaries designated as 'Unrestricted Subsidiaries' in
accordance with the Indenture (collectively, the 'Subsidiary Guarantors'). The
Subsidiary Guarantees will rank pari passu in right of payment with all existing
and future unsubordinated Indebtedness of the Subsidiary Guarantors and senior
in right of payment to all existing and future subordinated Indebtedness of the
Subsidiary Guarantors. See 'Description of the Notes.' The Notes and the
Subsidiary Guarantees will be effectively subordinated to all existing and
future secured Indebtedness of the Company and the Subsidiary Guarantors (to the
extent of the assets securing such Indebtedness). As of March 31, 1997, after
giving pro forma effect to the Offering, the Company and the Subsidiary
Guarantors had approximately $3.3 million of secured Indebtedness outstanding.
See 'Description of the Notes.'
There is no existing market for the Notes and the Company does not intend to
list the Notes on any national securities exchange. See 'Risk Factors--Absence
of Public Market for the Notes.'
------------------------
SEE 'RISK FACTORS' BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3)
<S> <C> <C> <C>
Per Note.................................. % % %
Total..................................... $ $ $
</TABLE>
(1) Plus accrued interest, if any, from the date of issuance.
(2) See 'Underwriting' for indemnification arrangements with the Underwriters.
(3) Before deducting expenses payable by the Company estimated to be $650,000.
------------------------
The Notes are offered by the Underwriters, subject to prior sale, when, as
and if delivered to and accepted by the Underwriters and subject to certain
prior conditions, including the right of the Underwriters to reject any order in
whole or in part. It is expected that delivery of the Notes will be made in New
York, New York, on or about July , 1997.
------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
LEHMAN BROTHERS
SMITH BARNEY INC.
THE DATE OF THIS PROSPECTUS IS JULY , 1997
<PAGE>
[GRAPHIC DESCRIPTION: A MAP OF THE EASTERN HALF OF THE UNITED STATES SHOWING THE
STATES IN WHICH THE COMPANY ORIGINATED OR PURCHASED AT LEAST $3 MILLION OF LOANS
IN THE LAST TWELVE MONTHS AND THE SITES OF THE COMPANY'S OFFICES AND ITS
HEADQUARTERS.]
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
NOTES. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE
OFFERING AND MAY BID FOR AND PURCHASE NOTES IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE 'UNDERWRITING.'
------------------------
CERTAIN INFORMATION CONTAINED IN THIS PROSPECTUS CONSTITUTES
'FORWARD-LOOKING STATEMENTS' WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED (THE 'SECURITIES ACT'), AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE 'EXCHANGE ACT'), WHICH CAN BE
IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS 'MAY,' 'WILL,'
'EXPECT,' 'ANTICIPATE,' 'ESTIMATE' OR 'CONTINUE' OR THE NEGATIVES THEREOF OR
OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. THE STATEMENTS IN 'RISK
FACTORS' ON PAGES 11 TO 20 OF THIS PROSPECTUS CONSTITUTE CAUTIONARY STATEMENTS
IDENTIFYING IMPORTANT FACTORS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, WITH
RESPECT TO SUCH STATEMENTS THAT COULD CAUSE THE ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENTS OF THE COMPANY TO DIFFER MATERIALLY FROM THOSE REFLECTED IN SUCH
FORWARD-LOOKING STATEMENTS.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and consolidated financial
statements and notes thereto appearing elsewhere in this Prospectus. Unless the
context indicates otherwise, all references herein to the 'Company' or 'Delta'
refer to Delta Financial Corporation and its wholly-owned subsidiaries. All
financial information gives pro forma effect to the termination in October 1996
of the S corporation status of Delta Funding Corporation, a wholly-owned
subsidiary, and the transactions described in 'Selected Consolidated Financial
Data' and the related notes thereto and in 'Management's Discussion and Analysis
of Financial Condition and Results of Operations--Termination of S Corporation
Status and Income Taxes.'
THE COMPANY
Delta is a specialty consumer finance company that has engaged in
originating, acquiring, selling and servicing home equity loans since 1982.
Throughout its 15 years of operating history, Delta has focused on lending to
individuals who generally have impaired or limited credit profiles or higher
debt to income ratios and typically have substantial equity in their homes.
Management believes that these borrowers have been largely unsatisfied by the
more traditional sources of mortgage credit which underwrite loans to
conventional guidelines established by the Federal National Mortgage Association
('FNMA') and the Federal Home Loan Mortgage Corporation ('FHLMC'). The Company
makes loans to these borrowers for such purposes as debt consolidation, home
improvement, mortgage refinancing or education, and these loans are primarily
secured by first mortgages on one- to four-family residential properties.
Through its wholly-owned subsidiary, Delta Funding Corporation, the Company
originates home equity loans indirectly through licensed brokers and other real
estate professionals who submit loan applications on behalf of the borrower
('Brokered Loans') and also purchases loans from mortgage bankers and smaller
financial institutions that satisfy Delta's underwriting guidelines
('Correspondent Loans'). Delta Funding Corporation currently originates and
purchases the majority of its loans in 21 states, through its network of
approximately 1,000 brokers and correspondents. The Company believes that it has
a competitive advantage in serving brokers and correspondents in the
non-conforming home equity market that stems from its substantial experience in
this sector and its emphasis on providing quality service that is prompt,
responsive and consistent. The 19 members of Delta Funding Corporation's senior
management have an average of over 13 years of non-conforming mortgage loan
experience. Management believes this industry-specific experience, coupled with
the systems and programs it has developed over the past 15 years, enable the
Company to provide quality services that include preliminary approval of most
Brokered Loans and certain Correspondent Loans within one day, consistent
application of its underwriting guidelines and funding or purchasing of loans
within 14 to 21 days of preliminary approval. In addition, the Company seeks to
establish and maintain productive relationships with its network of brokers and
correspondents by servicing each one with a business development representative,
a team of experienced underwriters and, in the case of Brokered Loans, a team of
loan officers and processors assigned to specific brokers to process all
applications submitted by such brokers.
The Company currently originates and purchases the majority of its loans
through the Company's main office in Woodbury, New York, its full service office
in Atlanta, Georgia, its full processing offices in St. Louis, Missouri,
Chicago, Illinois and Warwick, Rhode Island and from seven business development
offices located in Michigan (2), New Jersey, Ohio (2), Pennsylvania and
Virginia. The Company historically made loans primarily in New York, New Jersey
and Pennsylvania. Commencing in 1995, the Company implemented a program to
expand its geographic presence into the New England, Mid-Atlantic, Midwest and
Southeast regions. As a consequence of its expansion into new markets, as well
as its further penetration of existing markets, the Company increased its loan
production substantially in 1995 and 1996. Total loan originations and purchases
increased $168.1 million, or 140%, from $119.7 million in 1994 to $287.8 million
in 1995, and increased $371.0 million, or 129%, in 1996 to $658.8 million.
In February 1997, in an effort to broaden its origination sources and to
expand its geographic presence in the Company's new markets, the Company
acquired two related retail originators of home equity loans, Fidelity Mortgage,
Inc., based in Cincinnati, Ohio, and Fidelity Mortgage (Florida), Inc., based in
West Palm Beach, Florida (together, 'Fidelity Mortgage'). The Company acquired
Fidelity Mortgage with the expectation that the
3
<PAGE>
acquisition would result in beneficial synergies, with Fidelity Mortgage
providing a dedicated source of mortgage loans for Delta Funding Corporation's
securitization pools and for its servicing arm, and Delta Financial Corporation
providing capital to Fidelity Mortgage for the expansion of its retail network.
Fidelity Mortgage develops retail loan leads primarily through its telemarketing
system and its network of nine retail offices located in Florida (2), Georgia,
Indiana, Ohio (4) and North Carolina. Four of these offices were opened in the
second quarter of 1997, and the Company intends to expand the Fidelity Mortgage
network further.
The Company has been profitable in each of its 15 years of operation. The
Company's results of operations have improved significantly in recent periods as
a result of increased loan production and improved operating efficiencies. Total
revenues increased $37.4 million, or 103%, to $73.5 million in 1996 from $36.1
million in 1995, and pro forma income before extraordinary item increased 630%
to $19.1 million in 1996 from $2.6 million in 1995. During 1995 compared to
1994, the Company's total revenues increased 66% from $21.8 million to $36.1
million and pro forma income increased 128% from $1.1 million to $2.6 million.
See 'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
The Company generates earnings and cash flow primarily through the
origination, purchase, securitization and servicing of home equity loans. In a
securitization, the Company sells the loans that it originates or purchases to a
trust for cash and records certain assets and income based upon (a) the
difference between all principal and interest received from the mortgage loans
sold and (i) all principal and interest required to be passed through to the
asset-backed bond investors, (ii) all contractual servicing fees, (iii) other
recurring fees and (iv) an estimate of losses on the loans (the 'Excess
Servicing') and (b) the difference between the contractual and estimated
ancillary servicing revenue with respect to the loans and the estimated cost to
service them ('Mortgage Servicing Rights'). At the time of the securitization,
the Company estimates these amounts based upon a declining principal balance of
the underlying loans, which has been calculated by using an estimated prepayment
rate, and capitalizes these amounts using a discount rate that market
participants would use for similar financial instruments. These capitalized
assets are recorded on the Company's balance sheet as interest-only and residual
certificates and capitalized Mortgage Servicing Rights, respectively, and are
aggregated and reported on the income statement as net gain on sale of mortgage
loans, after being reduced (increased) by (i) loan acquisition premiums paid to
correspondents and brokers, (ii) costs of securitization and (iii) any hedge
losses (gains).
The Company typically begins to receive Excess Servicing cash flow eight to
twelve months from the date of securitization, although this time period may be
shorter or longer depending upon the structure and performance of the
securitization. Prior to such time, a reserve provision is created within the
securitization trust which uses Excess Servicing cash flows to retire a portion
of the securitization bond debt until the spread between the outstanding
principal balance of the mortgage loans in the securitization trust and the
securitization bond debt equals 2-3% of the initial securitization principal
balance (hereinafter, the 'overcollateralization limit'). Once this
overcollateralization limit is met, excess cash flows are distributed to Delta.
The Company begins to receive contractual mortgage servicing cash flows in the
month following the securitization.
Since 1991, Delta has sold approximately $1.7 billion of its mortgage loans
through 15 real estate mortgage investment conduit ('REMIC') securitizations.
Each of these securitizations has been credit-enhanced by an insurance policy
provided through a monoline insurance company to receive ratings of 'Aaa' from
Moody's Investors Service, Inc. ('Moody's') and 'AAA' from Standard & Poor's
Ratings Group, a division of The McGraw-Hill Companies, Inc. ('Standard &
Poor's'). The Company sells loans through securitizations and, from time to
time, on a whole loan basis, to enhance its operating leverage and liquidity, to
minimize financing costs and to reduce its exposure to fluctuations in interest
rates.
In addition to the excess cash flow from securitizations and proceeds from
whole loan sales, the Company earns the net interest spread on loans held for
sale, origination fees on its Brokered Loans and retail loans (which are
included in other income) and servicing fees of between 0.50% and 0.65% per
annum of the outstanding balance of the loans it services. Since its inception,
the Company has serviced substantially all of the loans it has originated and
purchased, including all of those that it has subsequently sold through
securitizations. Management believes that servicing this loan portfolio enhances
certain operating efficiencies and provides an additional and profitable revenue
stream that is less cyclical than the business of originating and purchasing
loans. As of March 31, 1997, Delta had a servicing portfolio of $1.1 billion of
loans. See 'Business--Loans.'
4
<PAGE>
The Company's business objective is to increase profitably the volume of
its loan originations and purchases and the size of its servicing portfolio by
implementing the following strategies:
Continuing to Provide Quality Service. The Company believes its commitment
to service provides it with a competitive advantage in establishing and
maintaining productive broker and correspondent relationships. The Company's
loan officers and underwriters endeavor to respond promptly and consistently on
every loan submission. In addition, through its business development
representatives, Delta regularly communicates with brokers and correspondents in
order to better understand and respond to their needs.
Maintaining Underwriting Standards. The Company believes the depth and
experience of its underwriting staff, coupled with the consistent application of
its underwriting procedures and criteria, provide the infrastructure needed to
manage and sustain the Company's recent growth, while maintaining the quality of
loans originated or purchased. The depth and experience in the Company's
underwriting department provide two significant competitive advantages. First,
they help to ensure that the Company's underwriting standards and subjective
judgments required in the non-conforming market are consistently applied, thus
enabling the Company to effectively implement a risk-based pricing strategy.
Second, they provide the opportunity to expand underwriting activities beyond
the Company's headquarters while maintaining consistent underwriting standards.
Further Penetrating Existing and Recently Entered Markets and Expanding
into New Markets. The Company intends to continue to increase the volume of its
loan originations and purchases through a three-pronged strategy that includes
greater originations and purchases from its existing brokers and correspondents,
establishment of new broker and correspondent relationships in both existing and
recently-entered markets and expansion into new markets.
Expanding its Retail Origination Capabilities. The Company intends to
devote management and capital resources to expanding its retail network in order
to continue to broaden its origination capabilities and strengthen its
geographic presence. Since the acquisition of Fidelity Mortgage and its five
retail offices, the Company has opened additional Fidelity Mortgage branch
offices in Atlanta, Georgia, Fort Lauderdale, Florida, Charlotte, North Carolina
and Cleveland, Ohio.
Expanding Through Acquisitions. Management believes acquisitions can be a
means of cost effectively increasing or diversifying the Company's loan
production capabilities. The Company continually considers acquisition
candidates which operate in geographic or product areas that complement the
Company's existing business.
Leveraging its Information and Processing Technologies. In recent years,
the Company has made significant capital investments to upgrade and expand its
information and processing technologies. These investments have included the
acquisition and implementation of a new servicing system and have enabled the
Company to achieve operating efficiencies and cost savings. The Company's recent
and anticipated geographic expansion and growth in originations and servicing
portfolio were considered when these systems were designed, and management
believes its strategic plans can be met by leveraging its existing systems
without substantial additional investment in the near future. See
'Business--Business Strategy.'
All of the Company's operations are conducted through its wholly-owned
subsidiaries, Delta Funding Corporation, DF Special Holdings Corporation,
Fidelity Mortgage, Inc. and Fidelity Mortgage (Florida), Inc. In November 1996,
Delta completed the initial public offering of its common stock which trades on
the New York Stock Exchange under the symbol 'DFC.'
The principal executive offices of the Company are located at 1000 Woodbury
Road, Suite 200, Woodbury, New York 11797, and its telephone number is (516)
364-8500.
5
<PAGE>
RECENT DEVELOPMENTS
On June 18, 1997, Delta Funding Corporation entered into a $100 million
syndicated credit agreement (the 'Credit Agreement') with a group of banks for
which the First National Bank of Chicago ('First Chicago') acts as agent. The
Credit Agreement will be used primarily to finance mortgage loans held for sale
and to fund advances to securitization trusts by Delta Funding Corporation. The
Credit Agreement provides for a $100 million secured revolving credit facility
with various borrowing base sublimits, including, but not limited to, a $15
million secured recoverable servicing advance sublimit. Delta Funding
Corporation's obligations under the Credit Facility are guaranteed by the
Company. Advances under the Credit Facility are secured by a first priority lien
on warehouse collateral and receivables created from recoverable servicing
advances.
In connection with the Credit Agreement, Delta Funding Corporation has
agreed to certain standard affirmative covenants, including corporate existence,
maintenance of its properties and insurance coverage, prompt payment of taxes
and other claims and maintenance of a standard accounting system. Delta Funding
Corporation also made certain negative covenants which, among other things: (i)
specify maximum leverage ratios, (ii) limit its ability to incur additional
indebtedness, (iii) require a minimum net worth, (iv) limit its ability to
pledge, mortgage or encumber its assets and (v) limit its ability to merge with
another entity or dispose of more than a specified percentage of its total
assets.
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered........................ $150,000,000 aggregate principal amount of % Senior Notes due
2004.
Maturity Date............................. July , 2004.
Interest Payment Dates.................... Each , and , commencing ,
1997.
Guarantees................................ The obligations of the Company under the Notes will be fully and
unconditionally guaranteed on a joint and several basis by each of
the existing and future Subsidiaries of the Company, other than
Subsidiaries designated as 'Unrestricted Subsidiaries' in accordance
with the Indenture. See 'Description of the Notes--Guarantees.'
Optional Redemption....................... On or after July , 2001, the Notes will be redeemable at the option
of the Company, in whole or in part, at the redemption prices set
forth herein, plus accrued and unpaid interest to the date of
redemption. See 'Description of the Notes--Optional Redemption.'
Change of Control......................... Upon a Change of Control (as defined), each Holder of the Notes may
require the Company to repurchase the Notes held by such Holder at
101% of the principal amount thereof plus accrued and unpaid interest
to the date of repurchase. See 'Description of the Notes--Repurchase
at the Option of Holders--Change of Control.'
Asset Sales............................... The Indenture relating to the Notes (the 'Indenture') requires that
the proceeds of certain Asset Sales (as defined) be applied as
specified in the Indenture or be used to repurchase the Notes, at the
option of the Holder thereof, at 100% of the principal amount
thereof, plus accrued and unpaid interest thereon to the date of
purchase.
Ranking................................... The Notes will be general unsecured obligations of the Company and
will rank pari passu in right of payment with all existing and future
unsecured unsubordinated Indebtedness of the Company and senior in
right of payment to all existing and future subordinated Indebtedness
of the Company. The Subsidiary Guarantee of each of the Subsidiary
Guarantors will rank pari passu in right of payment with all existing
and future unsubordinated Indebtedness of such Subsidiary Guarantor
and senior in right of payment to all existing and future
subordinated Indebtedness of the Subsidiary Guarantors. However, the
Notes and Subsidiary Guarantees will be effectively subordinated to
all existing and future secured Indebtedness of the Company and the
Subsidiary Guarantors (to the extent of the value of the collateral
securing such indebtedness). As of March 31, 1997, after giving pro
forma effect to the Offering, the Company and the Subsidiary
Guarantors had approximately $3.3 million of secured Indebtedness
outstanding.
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Certain Covenants......................... The Indenture will contain certain covenants, including, but not
limited to, covenants with limitations on the following matters: (i)
restricted payments; (ii) incurrence of additional indebtedness;
(iii) issuance of preferred stock; (iv) incurrence of additional
liens; (v) dividends and other payment restrictions affecting
subsidiaries; (vi) restrictions on distributions from subsidiaries;
(vii) merger, consolidation or sale of assets; (viii) transactions
with affiliates; and (ix) lines of business. However, all these
limitations are subject to a number of important exceptions and
qualifications. See 'Description of the Notes--Certain Covenants.'
Use of Proceeds........................... The net proceeds will be used (i) to pay off all residual financing
agreements (approximately $57.5 million at March 31, 1997), (ii) to
repay amounts outstanding under certain of the Company's warehouse
lines of credit (lines of credit used to finance, and secured by, a
portion of the Company's inventory of mortgage loans) (approximately
$51.8 million as of March 31, 1997), (iii) to fund future loan
originations and purchases, (iv) to support securitization
transactions, (v) to fund expansion of Fidelity Mortgage's retail
network and (vi) for general corporate purposes, including to fund
acquisitions. See 'Use of Proceeds' and 'Underwriting.'
</TABLE>
8
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Net gain on sale of mortgage loans...... $ 4,757 $ 7,639 $ 6,661 $ 15,383 $ 46,525
Interest................................ 13,402 9,156 9,839 13,588 16,372
Servicing fees.......................... 1,892 2,101 2,183 2,855 5,368
Other................................... 5,413 3,617 3,114 4,309 5,266
----------- ----------- ----------- ----------- -----------
Total revenues........................ $ 25,464 $ 22,513 $ 21,797 $ 36,135 $ 73,531
----------- ----------- ----------- ----------- -----------
Total expenses........................ $ 22,154 $ 18,853 $ 19,788 $ 31,549 $ 40,043
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes and
extraordinary item...................... $ 3,310 $ 3,660 $ 2,009 $ 4,586 $ 33,488
Provision for income taxes(1)............ -- -- -- -- 9,466
Extraordinary item:
Gain on extinguishment of debt.......... -- -- -- -- 3,168
----------- ----------- ----------- ----------- -----------
Net income (loss)........................ $ 3,310 $ 3,660 $ 2,009 $ 4,586 $ 27,190
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
UNAUDITED PRO FORMA INFORMATION:
Provision for pro forma income taxes
before extraordinary item(1)(2)......... $ 1,423 $ 1,574 $ 864 $ 1,972 $ 14,400
----------- ----------- ----------- ----------- -----------
Pro forma income (loss) before
extraordinary item(1)(2)................ $ 1,887 $ 2,086 $ 1,145 $ 2,614 $ 19,088
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
PER SHARE DATA:
Pro forma earnings (loss) per share of
common stock(1)(2)(3)(4)................ $ 0.15 $ 0.17 $ 0.09 $ 0.21 $ 1.46
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Pro forma weighted average number of
shares outstanding(3)(4)................ 12,629,182 12,629,182 12,629,182 12,629,182 13,083,327
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
CASH FLOW DATA(1):
(Used in) provided by operating
activities.............................. $ (5,057) $ 8,780 $ (10,160) $ (23,903) $ (42,025)
(Used in) provided by investing
activities.............................. (44) (64) (917) (1,207) (2,283)
Provided by (used in) financing
activities.............................. 2,893 (7,139) 13,460 32,388 46,414
Net increase (decrease) in cash and cash
equivalents............................. (2,208) 1,577 2,383 7,278 2,106
OPERATING DATA:
Loans originated or purchased:
Brokered Loans(5)....................... $ 66,553 $ 76,220 $ 81,407 $ 175,738 $ 321,733
Correspondent Loans..................... 10,080 26,844 38,341 112,065 337,033
----------- ----------- ----------- ----------- -----------
Total................................. $ 76,633 $ 103,064 $ 119,748 $ 287,803 $ 658,766
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Average principal balance per loan....... 51 60 67 74 78
Weighted average interest rate........... 13.5% 12.9% 12.1% 11.8% 11.4%
Combined weighted average initial
loan-to-value ratio..................... 47.8 51.7 55.2 63.2 68.8
Percent of loans secured by first
mortgages............................... 71.5 81.1 88.0 89.6 93.8
Loan sales:
Loans sold through securitizations...... $ 64,102 $ 88,943 $ 90,000 $ 229,998 $ 615,000
Whole loan sales........................ 1,031 8,708 11,950 17,615 15,273
----------- ----------- ----------- ----------- -----------
Total................................. $ 65,133 $ 97,651 $ 101,950 $ 247,613 $ 630,273
----------- ----------- ----------- ----------- -----------
Total loans serviced.................... $ 273,788 $ 292,700 $ 310,229 $ 468,846 $ 932,958
----------- ----------- ----------- ----------- -----------
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Net gain on sale of mortgage loans...... $ 103 $ 17,314
Interest................................ 3,967 5,559
Servicing fees.......................... 1,015 1,392
Other................................... 219 3,040
----------- -----------
Total revenues........................ $ 5,304 $ 27,305
----------- -----------
Total expenses........................ $ 5,616 $ 15,065
----------- -----------
Income (loss) before income taxes and
extraordinary item...................... $ (312) $ 12,240
Provision for income taxes(1)............ 44 5,250
Extraordinary item:
Gain on extinguishment of debt.......... -- --
----------- -----------
Net income (loss)........................ $ (356) $ 6,990
----------- -----------
----------- -----------
UNAUDITED PRO FORMA INFORMATION:
Provision for pro forma income taxes
before extraordinary item(1)(2)......... $ (134) n/a
-----------
Pro forma income (loss) before
extraordinary item(1)(2)................ $ (178) n/a
-----------
-----------
PER SHARE DATA:
Pro forma earnings (loss) per share of
common stock(1)(2)(3)(4)................ $ (0.01) $ 0.45
----------- -----------
----------- -----------
Pro forma weighted average number of
shares outstanding(3)(4)................ 12,629,182 15,420,883
----------- -----------
----------- -----------
CASH FLOW DATA(1):
(Used in) provided by operating
activities.............................. $ (108,880) $ (11,437)
(Used in) provided by investing
activities.............................. (228) (4,335)
Provided by (used in) financing
activities.............................. 101,863 16,142
Net increase (decrease) in cash and cash
equivalents............................. (7,245) 370
OPERATING DATA:
Loans originated or purchased:
Brokered Loans(5)....................... $ 66,389 $ 114,063
Correspondent Loans..................... 49,373 122,679
----------- -----------
Total................................. $ 115,762 $ 236,742
----------- -----------
----------- -----------
Average principal balance per loan....... 78 81
Weighted average interest rate........... 11.0% 11.3%
Combined weighted average initial
loan-to-value ratio..................... 67.4 71.0
Percent of loans secured by first
mortgages............................... 94.1 93.6
Loan sales:
Loans sold through securitizations...... $ -- $ 235,000
Whole loan sales........................ 6,899 --
----------- -----------
Total................................. $ 6,899 $ 235,000
----------- -----------
Total loans serviced.................... $ 536,864 $ 1,110,999
----------- -----------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------- -------------
1992 1993 1994 1995 1996 1996 1997
----- ----- ----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
DELINQUENCY DATA:
Total delinquencies as a percentage of
loans serviced (period end)(6)........... 19.96% 13.49% 11.44% 10.64% 8.37% 7.50% 7.98%
Defaults as a percentage of loans serviced
(period end)(7).......................... 3.76% 5.35% 7.32% 5.87% 4.33% 5.91% 4.35%
Net losses as a percentage of average
loans serviced........................... 0.02% 0.03% 0.23% 0.57% 0.43% 0.15% 0.09%
FINANCIAL RATIOS:
Ratio of earnings to fixed charges(8).... 1.73 2.26 1.54 1.58 3.96 0.87 4.86
Ratio of indebtedness to total
capitalization(9)...................... 0.58 0.56 0.60 0.64 0.35 0.64 0.37
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1997
---------------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Loans held for sale............................... $ 77,769 $ 77,769
Interest-only and residual certificates........... 101,858 101,858
Capitalized mortgage servicing rights............. 13,448 13,448
Total assets...................................... 257,356 298,139
Warehouse financing and other borrowings(10)...... 112,507 3,290
% Senior Notes due 2004......................... -- 150,000
Investor payables................................. 20,770 20,770
Total liabilities................................. 154,332 195,115
Stockholders' equity.............................. 103,024 103,024
</TABLE>
- ------------------
(1) Prior to October 31, 1996, Delta Funding Corporation was treated as an S
corporation for federal and state income tax purposes. As a result, the
Company's historical earnings prior to such date had been taxed directly to
the former shareholders of Delta Funding Corporation (the 'Former
Shareholders') and not to the Company. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations--Termination of S
Corporation Status and Income Taxes.'
(2) Pro forma presentation reflects a provision for income taxes, as if the
Company had been a C corporation since inception, at an assumed tax rate of
43%.
(3) Figures for the three months ended March 31, 1997 are actual.
(4) Reflects the effect of 10,653,000 shares of common stock issued to the
Former Shareholders and the effect of the issuance of 4,600,000 shares of
common stock issued in the Company's initial public offering, 1,976,182 of
which are treated as if they had always been outstanding to give effect to
certain distributions paid to the Former Shareholders in connection with
termination of S corporation status.
(5) Includes $8.1 million of retail loans originated by Fidelity Mortgage
during the three months ended March 31, 1997.
(6) Represents the percentages of account balances contractually past due 30
days or more, exclusive of loans in foreclosure and real estate owned
('REO').
(7) Represents the percentages of account balances on loans in foreclosure and
REO.
(8) For the purpose of determining the ratio of earnings to fixed charges,
earnings consist of income before income taxes and fixed charges; fixed
charges consist of interest expense.
(9) Represents the ratio of (i) total debt, exclusive of warehouse financing,
to (ii) the sum of total stockholders' equity and total debt, exclusive of
warehouse financing.
(10) Includes $57.5 million in residual financing.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN 'RISK
FACTORS' AND IN 'MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--LIQUIDITY AND CAPITAL RESOURCES.'
10
<PAGE>
RISK FACTORS
An investment in the Notes involves certain risks. Prospective investors
should carefully consider the following risk factors, which constitute all the
material risk factors, in addition to the other information contained in this
Prospectus, in evaluating an investment in the Notes offered hereby.
LEVERAGE; ASSET ENCUMBRANCE
The Company currently has substantial outstanding indebtedness, and,
subsequent to the Offering, the Company will be significantly leveraged.
Although the covenants under the Indenture will restrict the incurrence of
Indebtedness by the Company and its Restricted Subsidiaries, the Indenture does
not limit the amount of Indebtedness under the Company's warehouse facilities
that qualifies as Permitted Warehouse Debt (as defined). With respect to the
Company's existing warehouse facilities, Permitted Warehouse Debt generally
means indebtedness used exclusively to finance or refinance the origination or
purchase of mortgage loans by the Company or a Subsidiary, up to the lesser of
(i) the amount advanced by the warehouse lender or (ii) 100% of the principal
amount of such loans. See 'Description of the Notes--Certain Definitions.' All
Permitted Warehouse Debt is secured by the mortgage loans financed thereby.
Although lenders under Permitted Warehouse Debt in a default or bankruptcy
situation can be expected to seek payment first out of the collateral securing
such Indebtedness, such existing Indebtedness is recourse to the Subsidiaries
incurring such Indebtedness and certain of such Indebtedness is unconditionally
guaranteed by the Company. Similarly, although the Company intends to use a
portion of the proceeds from this Offering to pay off all its residual
facilities, the Indenture will limit but not prohibit the Company's incurrence
of Indebtedness secured by interest-only and residual certificates, and such
Indebtedness would also be recourse to the Subsidiaries incurring such
Indebtedness. Thus, if the value of the collateral securing any such
Indebtedness was to be insufficient to repay such Indebtedness in full, the
lenders could be entitled to seek payment of the shortfall, if any, from the
Subsidiary incurring such Indebtedness, and in some cases, from the Company. See
'--Dependence on Funding Sources--Dependence on Warehouse and Other Financing
Sources.' The Indenture also will permit the Company and its Restricted
Subsidiaries to incur substantial amounts of additional secured Indebtedness. At
March 31, 1997 on a pro forma basis to give effect to the Offering and the
application of the net proceeds therefrom, aggregate outstanding consolidated
Indebtedness (including the current maturities thereof) of the Company would
have been approximately $155.0 million, of which $3.3 million would have been
secured Indebtedness to which the Notes and the Guarantees are effectively
subordinated, and the Company would have been able to incur (based upon
available collateral) an additional $76.6 million of Indebtedness (all of which
is secured) under its existing credit facilities and warehouse facilities. In
addition, assuming additional financing was available to the Company, it could
have incurred an additional $51.1 million of Indebtedness (excluding Permitted
Warehouse Debt) and complied with the covenants of the Indenture that will
restrict incurrence of Indebtedness. See 'Capitalization.'
The degree to which the Company is leveraged could have important
consequences to the Holders of the Notes, including: (i) the Company may be more
vulnerable to adverse general economic and industry conditions; (ii) the Company
may find it more difficult to obtain additional financing for future working
capital, capital expenditures, acquisitions, general corporate purposes or other
purposes; and (iii) the Company will have to dedicate a substantial portion of
the Company's cash flows from operations to the payment of principal and
interest on Indebtedness (a substantial portion of which may become due prior to
the maturity of the Notes), thereby reducing the funds available for operations
and future business opportunities.
The Company's ability to sustain its growth and make payments of principal
or interest on, or to refinance, its Indebtedness (including the Notes) will
depend on its future operating performance, and its ability to effect additional
securitizations and debt and/or equity financing, which to a certain extent is
subject to economic, financial, competitive and other factors beyond its
control. If the Company is unable to generate sufficient cash flow in the future
to service its debt, it may be required to refinance all or a portion of its
existing debt, including the Notes, or to obtain additional financing. There can
be no assurance that any such refinancing would be available or that any
additional financing could be obtained on terms reasonably satisfactory to the
Company. The inability to obtain additional financing could have a material
adverse effect on the Company's ability to grow and on its ability to service
debt, including the Notes. See '--Ability to Service Debt; Negative Cash Flows;
Access to Capital Markets' and '--Dependence on Funding Sources--Dependence on
Warehouse and Other Financing Sources.'
11
<PAGE>
ABILITY TO SERVICE DEBT; NEGATIVE CASH FLOWS; ACCESS TO CAPITAL MARKETS
There can be no assurance that the cash available from operations and
financing activities will be sufficient to enable the Company to make required
interest payments on the Notes and interest and principal payments on its other
debt obligations. The Company may encounter liquidity problems which could
affect its ability to meet such obligations while attempting to withstand
competitive pressures or adverse economic conditions. In such circumstances, the
value of the Notes could be materially adversely affected.
The Company requires substantial amounts of cash to fund its loan
origination, purchase and securitization activities. The Company has operated,
and expects to continue to operate, on a negative cash flow basis due to
increases in the volume of loan originations and purchases and due to the growth
of its securitization program. In a securitization, the Company recognizes a
gain on sale of the loans securitized upon the closing of the securitization and
incurs significant associated taxes (both current and deferred) and expenses but
does not receive the cash representing such gain until it receives the cash
flows from the interest-only and residual certificates and from servicing of the
loans, which are payable over the actual life of the loans securitized. For the
three months ended March 31, 1997 and the year ended December 31, 1996, the
Company operated on this negative cash flow basis using $11.4 million and $42.0
million, respectively, in operating activities; this negative cash flow is
expected to increase for the foreseeable future as, and to the extent, the
Company continues to grow.
Currently, the Company's primary cash requirements include the funding of
(i) mortgage originations and purchases pending their pooling and sale, (ii) the
points and expenses paid in connection with the acquisition of Brokered and
Correspondent Loans, (iii) interest expense on warehouse, residual and other
financing, (iv) fees, expenses and tax payments incurred in connection with its
securitization program and (v) ongoing administrative and other operating
expenses. The Company funds these cash requirements primarily through warehouse
and other financing facilities, securitizations and whole loan sales, interest,
servicing and other cash income and, subject to market conditions, debt and
equity financings. The Company believes that the sources of liquidity, including
the funds raised in this Offering, available to it should be sufficient to fund
the Company's liquidity requirements for the next 12 months if the Company's
future operations are consistent with management's current growth expectations.
However, because the Company expects to continue to require substantial amounts
of cash for the foreseeable future, it anticipates that it will need to effect
debt or equity financings regularly, in addition to quarterly securitizations.
The type, timing and terms of financing selected by the Company will be
dependent upon the Company's cash needs, the availability of other financing
sources and the prevailing conditions in the financial markets. There can be no
assurance that any such sources will be available to the Company at any given
time or as to the favorableness of the terms on which such sources may be
available. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources.'
DEPENDENCE ON FUNDING SOURCES
Dependence on Warehouse and Other Financing Sources. The Company funds
substantially all of the loans which it originates and purchases through
borrowings under warehouse financing facilities and through repurchase
agreements. The Company's borrowings are in turn repaid with the proceeds
received by the Company from selling such loans through securitizations or whole
loan sales. The Company's ability to implement its business strategy will
require increased financing. Historically, the Company has relied upon a few
lenders to provide the primary credit facilities for its loan originations and
purchases. There can be no assurance that such financings will be available on
terms reasonably satisfactory to the Company or at all. Any failure to renew or
obtain adequate funding under these warehouse financing facilities or other
financing arrangements, or any substantial reduction in the size of or increase
in the cost of such facilities, could have a material adverse effect on the
Company. Furthermore, the Indenture will impose certain restrictions on the
Company's ability to incur additional warehouse financing and will require the
Company to achieve, and thereafter maintain, a specified amount of unencumbered
interest-only and residual certificates, thereby precluding the Company's
ability to access residual financing for a specified period and limiting its
access to such financing until the Company reaches predetermined levels in
accordance with the Indenture. Historically, the Company has relied upon
residual financing agreements (credit facilities secured by interest-only and
residual certificates) to fund the tax consequences of the recognition of the
gains on sale when a securitization occurs and other working capital needs prior
to receipt of any cash flow from the interest-only and residual certificates
retained by the Company in
12
<PAGE>
its securitizations. Delta Funding Corporation has recently entered into the
Credit Agreement with First Chicago. The Credit Agreement will be used primarily
to finance mortgage loans held for sale and to fund recoverable servicing
advances by Delta Funding Corporation, subject to specified sublimits set forth
therein. To the extent that the Company is not successful in maintaining or
replacing adequate financing, it would not be able to hold a large volume of
loans pending securitization and therefore would have to curtail its loan
production activities or sell loans either through whole loan sales or in
smaller securitizations, thereby having a material adverse effect on the
Company. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources.'
Dependence on Securitizations. The Company relies significantly upon
securitizations to generate cash proceeds for repayment of its warehouse
facilities and to create availability to originate and purchase additional
loans. Further, gains on sale of loans generated by the Company's
securitizations represent a significant portion of the Company's revenues. The
Company anticipates effecting loan securitizations on at least a quarterly
basis. Several factors affect the Company's ability to complete securitizations,
including conditions in the securities markets generally, conditions in the
asset-backed securities market specifically, the credit quality of the Company's
portfolio of loans and the Company's ability to obtain credit enhancement.
Accordingly, if the Company were unable to securitize profitably a sufficient
number of loans in a particular financial reporting period, then the Company's
revenue, representing gain on sale, for such period would decline and could
result in lower income or a loss for such period. In addition, unanticipated
delays in closing securitizations could increase the Company's costs associated
with carrying its loans during the warehousing period, including hedging costs.
Any impairment of, or delay in, the Company's ability to complete
securitizations could result in a material adverse effect on the Company.
The Company has primarily relied on credit enhancements provided by
monoline insurance carriers to guarantee outstanding investor certificates in
the related trusts to enable it to obtain an AAA/Aaa rating for such investor
certificates, having structured only one securitization based solely on the
internal credit enhancements of the mortgage loan pool. Any substantial
reductions in the size or availability of such insurance policies, or increases
in the price charged by, or increases in the overcollateralization limits
required by, the insurance companies issuing such policies, could have a
material adverse effect on the Company. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources' and 'Business--Loans--Loan Sales.'
POTENTIAL CHANGE IN VALUATION OF INTEREST-ONLY AND RESIDUAL CERTIFICATES AND
MORTGAGE SERVICING RIGHTS
The Company sells substantially all of the loans that it originates or
purchases through securitizations. The Company derives a substantial portion of
its income by recording a gain on sale when loans are sold in such a manner. In
a securitization, the Company receives as an investment the interest-only and
residual certificates created as a result of such securitization. In addition,
under Statement of Financial Accounting Standards ('SFAS') No. 125, 'Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities' ('SFAS No. 125'), the Company also recognizes as an asset the
capitalized value of Mortgage Servicing Rights (including normal servicing and
other ancillary fees). The Company calculates the value of its interest-only and
residual certificates and Mortgage Servicing Rights based upon their fair
values. The fair value of these assets is determined based on various economic
factors, including loan types, balances, interest rates, dates of origination,
terms and geographic locations. The Company also uses other available
information applicable to the types of loans the Company originates and
purchases, such as reports on prepayment rates, interest rates, collateral
value, economic forecasts and historical default and prepayment rates of the
portfolio under review. The Company estimates the expected cash flows that it
will receive over the life of a portfolio of loans. These expected cash flows
constitute the excess of the interest rate payable by the obligors of loans over
the interest rate passed through to the purchasers of the related securities,
less applicable recurring fees and credit losses. The Company discounts the
expected cash flows using an interest rate that market participants would use
for similar financial instruments. As of March 31, 1997, the Company's balance
sheet reflected the fair value of interest-only and residual certificates of
$101.9 million and Mortgage Servicing Rights of $13.4 million.
Realization of the value of these interest-only and residual certificates
and Mortgage Servicing Rights in cash is subject to the prepayment and loss
characteristics of the underlying loans and to the timing and ultimate
13
<PAGE>
realization of the stream of cash flows associated with such loans. Significant
prepayment or loss experience would impair the future cash flows of the
interest-only and residual certificates and Mortgage Servicing Rights. If actual
experience differs from the assumptions used in determination of the asset
values, future cash flows and earnings could be negatively impacted and the
Company could be required to write down the value of its interest-only and
residual certificates and Mortgage Servicing Rights. No assurance can be given
that the Company's receivables will not experience significant prepayments or
losses or as to whether, and in what amounts, the Company in the future may have
to write down the value of the interest-only and residual certificates or
Mortgage Servicing Rights from its securitization transactions. In addition, if
the prevailing interest rate rose, the required discount rate might also rise,
resulting in impairment of the value of the interest-only and residual
certificates and Mortgage Servicing Rights. The Company believes that there is
no active market for the sale of its interest-only and residual certificates or
its Mortgage Servicing Rights. No assurance can be given that these assets could
be sold at their stated value on the balance sheet, if at all. See 'Management's
Discussion and Analysis of Financial Condition and Results of Operations.'
DELINQUENCIES; RIGHT TO TERMINATE SERVICING RIGHTS
The forms of pooling and servicing agreements entered into in connection
with the Company's securitizations set forth certain conditions under which the
insurer or the trustee of a particular securitization can terminate the
Company's right to act as servicer. If, at any measuring date, the loss and
delinquency performance of the mortgage loans in the securitization exceeds
certain levels, the monoline insurance company may terminate the Company's
servicing rights. Although the insurer has the right to terminate servicing with
respect to three of the Company's securitizations (including one in which the
Company sold all of the residual interests), to date, no servicing rights have
been terminated. There can be no assurance that the Company's servicing rights
with respect to the mortgage loans in such securitizations, or any other
securitization which exceeds the specified limits in future periods, will not be
terminated in the future. The monoline insurer has other rights to terminate
servicing if the Company were to breach its obligations under the pooling and
servicing agreements, losses on foreclosure were to exceed specified limits, the
insurance company was required to make payments under its policy or the Company
failed to meet certain financial tests, including a minimum net worth test.
Under some of the Company's servicing agreements, a failure by the Miller family
to continue to own, directly or indirectly, a majority of the Company's
outstanding voting stock may result in a termination event. None of these events
has occurred with respect to any of the Company's securitizations. Any
termination of the Company's right to act as servicer under a securitization
would materially and adversely affect its ability to engage in future
securitizations which would have a material adverse effect on the Company.
In addition, high delinquency rates have a negative impact on cash flows.
Provisions in the pooling and servicing agreements have the effect of requiring
the overcollateralization account, which is primarily funded by Excess Servicing
from the loans held in the trust, to be increased to certain specified levels
when delinquency rates exceed predetermined limits. As of March 31, 1997, the
Company was required to maintain an additional $1.8 million in
overcollateralization accounts as a result of delinquency rates in two
securitizations being higher than the predetermined limits set in the respective
pooling and servicing agreements. No assurance can be given that future
delinquencies will not increase or that any such increase will not have a
material adverse effect on the Company.
CONTINGENT RISKS
Although the Company sells substantially all of the loans that it
originates and purchases on a nonrecourse basis, the Company retains some degree
of credit risk on all loans originated or purchased. During the period of time
that loans are held pending sale, the Company is subject to the various business
risks associated with lending, including the risk of borrower default, the risk
of foreclosure and the risk that an increase in interest rates would result in a
decline in the value of loans to potential purchasers. The Company's
securitizations generally require the use of the excess cash flow distributions
related to the residual certificates to accelerate the amortization of
certificate holders' principal balances relative to the amortization of the
mortgage loans held by the trust up to certain overcollateralization limits. The
resulting overcollateralization serves as credit enhancement for the related
trust and therefore are available to absorb losses realized on loans held by
such trust. Generally, the form of credit enhancement agreement entered into in
connection with securitization transactions
14
<PAGE>
contains specified limits on the delinquency, default and loss rates on the
receivables included in each trust. If, at any measuring date, the delinquency,
default or loss rate with respect to any trust were to exceed the specified
delinquency, default and loss rates, excess cash flow from the trust, if any,
would be used to fund the increased overcollateralization limit instead of being
distributed to the Company, which would have a material adverse effect on the
Company's cash flow. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations.' In addition, when borrowers are delinquent
in making monthly payments on loans included in a securitization, the Company is
required to advance interest payments with respect to such delinquent loans to
the extent that the Company deems such advances ultimately recoverable. These
advances require funding from the Company's capital resources but have priority
of repayment from the succeeding month's collections. Lastly, agreements
governing securitizations, including the Company's securitizations, require the
seller to commit to repurchase or replace loans that do not conform to the
representations and warranties made by the seller at the time of sale. To date,
the Company has not been required to repurchase or replace a loan due to a
violation of a representation or warranty; however, there can be no assurance
that in future the Company will not be required to repurchase or replace a loan.
Prior to 1991, the Company combined mortgage loans into pools and sold
these pools as well as individual mortgage loans directly to a network of
commercial banks, savings and loans, insurance companies, pension funds and
accredited investors. The Company generally sold these pools or individual loans
with recourse whereby the Company is obligated to repurchase any loan if it
defaults and the related mortgaged property becomes a REO property. This
obligation is subject to various terms and conditions, including, in some
instances, a time limit. At March 31, 1997, $18.0 million, or 1.6%, of the
Company's $1.1 billion servicing portfolio was subject to be repurchased in the
future should such loans become REO properties.
In the ordinary course of its business, the Company is subject to claims
made against it by borrowers and private investors arising from, among other
things, losses that are claimed to have been incurred as a result of alleged
breaches of fiduciary obligations, misrepresentations, errors and omissions of
employees, officers and agents of the Company (including its appraisers),
incomplete documentation and failures by the Company to comply with various laws
and regulations applicable to its business. The Company believes that the
liability with respect to any currently asserted claims or legal actions is not
likely to be material to the Company's financial condition or results of
operations; however, any claims asserted in the future may result in legal
expenses or liabilities which could have a material adverse effect on the
Company.
RESTRICTIVE COVENANTS
The instruments governing the Indebtedness of the Company, including the
Indenture, impose significant operating and financial restrictions on the
Company. Such restrictions will affect, and in many respects significantly limit
or prohibit, among other things, the ability of the Company to incur additional
Indebtedness, pay dividends, repay Indebtedness prior to its stated maturity,
sell assets or engage in mergers or acquisitions. See 'Description of the
Notes--Certain Covenants.' These restrictions could also limit the ability to
the Company to effect future financings, make needed capital expenditures,
withstand a future downturn in the business or the economy, or otherwise conduct
necessary corporate activities.
FRAUDULENT CONVEYANCES CONSIDERATIONS
Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent conveyance law, if, among other things, the
Company or any of the Subsidiary Guarantors, at the time it incurred the
indebtedness evidenced by the Notes or its Subsidiary Guarantee, as the case may
be, (i) (a) was or is insolvent or rendered insolvent by reason of such
occurrence or (b) was or is engaged in a business or transaction for which the
assets remaining with the Company or such debts as they mature, and (ii) the
Company or such Subsidiary Guarantor received or receives less than the
reasonably equivalent value of fair consideration for the incurrence of such
indebtedness, the Notes and the Subsidiary Guarantees could be voided, or claims
in respect of the Notes or such Subsidiary Guarantees could be subordinated to
all other debts of the Company or such Subsidiary Guarantors, as the case may
be. In addition, the payment of interest and principal by the Company pursuant
to the Notes or the payment of amounts by a Subsidiary Guarantor pursuant to a
Subsidiary Guarantee could be voided and required to be returned to the person
making such payment, or to fund for the benefit of the creditors of the Company
or such Subsidiary Guarantor, as the case may be.
15
<PAGE>
The measures of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, the Company or a Subsidiary Guarantor would be
considered insolvent if (i) the sum of its debts, including contingent
liabilities, were greater than the saleable value of all of its assets at a fair
valuation or if the present saleable value of its assets were less than the
amount of its probable liability on its existing debts, including contingent
liabilities, as they become absolute and mature or (ii) it could not pay its
debts as they become due.
To the extent any Subsidiary Guarantees were voided as a fraudulent
conveyance or held unenforceable for another reason, Holders of the Notes would
cease to have any claim in respect of such Subsidiary Guarantor and would be
creditors solely of the Company and any Subsidiary Guarantor whose Subsidiary
Guarantee was not avoided or held unenforceable. In such event, the claims of
the Holders of the Notes against the issuer of an invalid Subsidiary Guarantee
would be subject t o the prior payment of all liabilities and preferred stock
claims of such Subsidiary Guarantor. There can be no assurance that, after
providing for all prior claims and preferred stock interests, if any, there
would be sufficient assets to satisfy the claims of the Holders of the Notes
relating to any voided portions of any Subsidiary Guarantees. The Company is a
holding company whose material assets consist primarily of the capital stock of
the Subsidiary Guarantors. Consequently the Company is dependent upon dividends
paid by the Subsidiary Guarantors to pay its operating expenses, service its
debt obligations, including the Notes, and satisfy any mandatory repurchase
obligations relating to the Notes, as a result of a Change of Control or sale or
other disposition of certain assets. See 'Description of the Notes' and
'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
On the basis of historical financial information, recent operating history
as discussed in 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' and other factors, the Company and each Subsidiary
Guarantor believes that, after giving effect to the indebtedness incurred in
connection with the Offering, it (i) will not be insolvent, will not have
unreasonably small capital for the businesses in which it is engaged and will
not incur debts beyond its ability to pay such debts as they mature and (ii)
will have sufficient assets to satisfy any probable money judgment against it in
any pending action. There can be no assurance, however, as to what standard a
court would apply in making such determination.
ECONOMIC CONDITIONS
General. The Company's business may be adversely affected by periods of
economic slowdown or recession which may be accompanied by decreased demand for
consumer credit and declining real estate values. In the mortgage business, any
material decline in real estate values reduces the ability of borrowers to use
the equity in their homes to support borrowings and increases the loan-to-value
ratios of loans previously made by the Company, thereby weakening collateral
coverage and increasing the possibility of a loss in the event of default.
Delinquencies, foreclosures and losses generally increase during economic
slowdowns or recessions, however, delinquencies, foreclosures and losses have
also increased during recent periods of economic growth and there can be no
assurance that delinquencies, foreclosures and losses will not increase in the
future during periods of continued economic growth.
Because of the Company's focus on credit-impaired borrowers in the home
equity loan market, the actual rates of delinquencies, foreclosures and losses
on such loans could be higher under adverse economic conditions than
delinquencies, foreclosures and losses currently experienced in the mortgage
lending industry in general. In addition, in an economic slowdown or recession,
the Company's actual costs of servicing the loans may increase without an
increase in the servicing fee paid to the Company under its securitizations. Any
sustained period of increased delinquencies, foreclosures, losses or increased
costs could adversely affect the Company's ability to sell, and could increase
the cost of selling, loans through securitization or on a whole loan basis,
which could adversely affect the Company.
Interest Rates. The Company's profitability may be directly affected by
the levels of and fluctuations in interest rates, which affect the Company's
ability to earn a spread between interest received on its loans and the costs of
borrowing. The profitability of the Company is likely to be adversely affected
during any period of unexpected or rapid changes in interest rates. For example,
a substantial or sustained increase in interest rates could adversely affect the
ability of the Company to originate and purchase loans and would reduce the
value of loans that were originated prior to such increase. A significant
decline in interest rates could decrease the size of
16
<PAGE>
the Company's loan servicing portfolio by increasing the level of loan
prepayments. Higher than anticipated rates of loan prepayments or losses could
require the Company to write down the value of such Excess Servicing, adversely
impacting the Company.
Fluctuating interest rates also may affect the net interest income earned
by the Company, resulting from the difference between the yield to the Company
on fixed rate loans held pending sale and the interest paid by the Company for
funds borrowed at variable rates under the Company's warehouse financing
facilities. While the Company monitors the interest rate environment and
currently employs a hedging strategy designed to mitigate the impact of changes
in interest rates, there can be no assurance that the profitability and cash
flow of the Company would not be adversely affected during any period of changes
in interest rates. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources--Hedging'
and '--Inflation and Interest Rates.'
MANAGEMENT OF RAPID GROWTH
Since January 1, 1995, the Company has expanded into new geographic regions
and products and substantially increased its volume of loans originated and
purchased. The Company recently completed its initial public offering and the
Fidelity Mortgage acquisition. In light of such growth, the historical financial
performance of the Company may be of limited relevance in predicting future
performance. Any credit or other problems associated with the large number of
loans originated and purchased in the recent past would not become apparent
until sometime in the future. The Company's continued growth and expansion will
place additional pressures on the Company's personnel and systems. Any future
growth may be limited by, among other things, the Company's need for continued
funding sources, access to capital markets, ability to retain and attract
qualified personnel, sensitivity to economic slowdowns, fluctuations in interest
rates and competition from other consumer finance companies and from new market
entrants. There can be no assurance that the Company will successfully obtain or
apply the human, operational and financial resources needed to manage a
developing and expanding business. Failure by the Company to manage its growth
effectively, or to sustain its historical levels of performance in credit
analysis and transaction structuring with respect to the increased loan
origination and purchase volume, could have a material adverse effect on the
Company. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' and 'Business--Business Strategy.'
With its acquisition of Fidelity Mortgage during the first quarter of 1997,
the Company expanded its origination network to include the retail solicitation
of home equity loans. The Company acquired Fidelity Mortgage with the
expectation that the acquisition would result in beneficial synergies, with
Fidelity Mortgage providing a dedicated source of mortgage loans for Delta
Funding Corporation's securitization pools and for its servicing arm, and Delta
Financial Corporation providing capital to Fidelity Mortgage for the expansion
of its retail network. There is no assurance that the integration of these
operations will be accomplished smoothly or successfully. Although all the key
senior managers of Fidelity Mortgage have remained with Fidelity Mortgage and
entered into employment contracts, the integration of the operations of Fidelity
Mortgage will require the dedication of certain management resources of Delta.
The inability to integrate successfully the Fidelity Mortgage business in a
timely manner could adversely affect the Company.
As part of its general business strategy the Company regularly evaluates
potential acquisition candidates. See 'Business--Business Strategy.' There can
be no assurance that any such additional acquisitions will be consummated, that
satisfactory terms or financing, if necessary, will be negotiated or that, if
consummated, any acquired business will be integrated successfully into the
Company's operations.
COMPETITION
As an originator and purchaser of mortgage loans, the Company faces intense
competition, primarily from mortgage banking companies, commercial banks, credit
unions, savings and loans, credit card issuers and finance companies. Many of
these competitors in the financial services business are substantially larger
and have more capital and other resources than the Company. Competition can take
many forms, including convenience in obtaining a loan, service, marketing and
distribution channels and interest rates. Competition may be affected by
fluctuations in interest rates and general economic conditions. During periods
of rising rates, competitors which have 'locked in' low borrowing costs may have
a competitive advantage. During periods of declining rates,
17
<PAGE>
competitors may solicit the Company's borrowers to refinance their loans. During
economic slowdowns or recessions, the Company's borrowers may have new financial
difficulties and may be receptive to offers by the Company's competitors.
Furthermore, the current level of gains realized by the Company and its
competitors on the sale of the type of loans originated and purchased is
attracting additional competitors into this market with the effect of lowering
the gains that may be realized by the Company on future loan sales. In addition,
greater investor acceptance of securities backed by loans comparable to the
Company's mortgage loans and greater availability of information regarding the
prepayment and default experience of such loans creates greater efficiencies in
the market for such securities. Such efficiencies may create a desire for even
larger transactions giving companies with greater volumes of originations a
competitive advantage. In addition, a more efficient market for such securities
may lead certain investors to purchase securities backed by other types of
assets where potential returns may be greater.
Furthermore, certain large national finance companies, with greater
capitalization and financial resources, and conforming mortgage originators have
announced their intention to adapt their conforming origination programs and
allocate resources to the origination of non-conforming loans. In addition,
certain of these larger mortgage companies, commercial banks and savings and
loans have begun to offer products similar to those offered by the Company,
targeting customers similar to those of the Company. The entrance of these
competitors into the Company's market could have a material adverse effect on
the Company. See 'Business--Competition.'
DEPENDENCE ON BROKERS AND CORRESPONDENTS
The Company depends primarily on brokers and correspondents for its
originations and purchases of new loans. Most of these brokers and
correspondents are not contractually obligated to do business with the Company.
Further, the Company's competitors also have relationships with the Company's
brokers and correspondents and actively compete with the Company in its efforts
to expand its broker and correspondent networks. Accordingly, there can be no
assurance that the Company will be successful in maintaining its existing
relationships or expanding its broker and correspondent networks.
The Company currently originates and purchases loans from a network of
approximately 1,000 brokers and correspondents. However, the top 20 brokers and
correspondents and the top broker accounted for approximately 48.2% and 11.4%,
respectively, and 48.2% and 8.9%, respectively, of the total volume of loans
originated and purchased for the year ended December 31, 1996 and for the three
months ended March 31, 1997. Accordingly, the loss of a significant number of
any of these brokers or correspondents could have a material adverse impact on
the volume of loan originations and purchases and a resulting material adverse
effect on the Company. See 'Business--Loans.'
CONCENTRATION OF OPERATIONS
For the three months ended March 31, 1997 and the year ended December 31,
1996, 85.7% and 87.6%, respectively, of the aggregate principal balance of the
mortgage loans originated or purchased by the Company were secured by properties
located in 10 states, with New York and New Jersey together accounting for 56.1%
and 62.0%, respectively, of total originations and purchases. Although the
Company continues to expand its mortgage origination network in other regions of
the country, the Company's origination business is likely to remain concentrated
in the Northeast for the foreseeable future. Consequently, the Company's
financial condition, results of operations and cash flows are dependent upon
general trends in the economy and the residential real estate market in the
Northeast. See 'Business--Loans.'
CREDIT-IMPAIRED BORROWERS
The Company targets credit-impaired borrowers. Loans made to such borrowers
generally entail a higher risk of delinquency and possibly higher losses than
loans made to more creditworthy borrowers. No assurance can be given that the
Company's underwriting policies and collection procedures will alleviate such
risks. In the event that pools of loans warehoused, sold and serviced by the
Company experience higher delinquencies, foreclosures or losses than
anticipated, the Company would be adversely affected. See 'Business--Loans.'
18
<PAGE>
LEGISLATIVE AND REGULATORY RISK; LEGAL PROCEEDINGS
Members of Congress and government officials from time to time have
suggested the elimination of the mortgage interest deduction for federal income
tax purposes, either entirely or in part, based on borrower income, type of loan
or principal amount. Because many of the Company's loans are made to borrowers
for the purpose of consolidating consumer debt or financing other consumer
needs, the competitive advantages of tax deductible interest, when compared with
alternative sources of financing, could be eliminated or seriously impaired by
such government action. Accordingly, the reduction or elimination of these tax
benefits could have a material adverse effect on the demand for loans of the
kind offered by the Company.
The Company's business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and is subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of its operations. The Company's consumer lending
activities are subject to the Federal Truth-in-Lending Act and Regulation Z
(including the Home Ownership and Equity Protection Act of 1994), the Federal
Equal Credit Opportunity Act and Regulation B, as amended ('ECOA'), the Fair
Credit Reporting Act of 1994, as amended, the Federal Real Estate Settlement
Procedures Act ('RESPA') and Regulation X, the Home Mortgage Disclosure Act and
the Federal Debt Collection Practices Act, as well as other federal and state
statutes and regulations affecting the Company's activities. The Company is also
subject to the rules and regulations of, and examinations by, the Department of
Housing and Urban Development ('HUD') and state regulatory authorities with
respect to originating, processing, underwriting, selling and servicing loans.
These rules and regulations, among other things, impose licensing obligations on
the Company, establish eligibility criteria for mortgage loans, prohibit
discrimination, provide for inspections and appraisals of properties, require
credit reports on loan applicants, regulate assessment, collection, foreclosure
and claims handling, investment and interest payments on escrow balances and
payment features, mandate certain disclosures and notices to borrowers and, in
some cases, fix maximum interest rates, fees and mortgage loan amounts. Failure
to comply with these requirements can lead to loss of approved status,
termination or suspension of servicing contracts without compensation to the
servicer, demands for indemnification or mortgage loan repurchases, certain
rights of rescission for mortgage loans, class action lawsuits and
administrative enforcement actions. There can be no assurance that the Company
will maintain compliance with these requirements in the future without
additional expenses, or that more restrictive local, state or federal laws,
rules and regulations will not be adopted that would make compliance more
difficult for the Company. See 'Business--Regulation.'
Several class-action lawsuits have been filed recently against a number of
consumer finance companies, including one against the Company, alleging that the
compensation of mortgage brokers through the payment of yield spread premiums
violates various federal and state consumer protection laws. Although management
believes the Company has meritorious defenses and intends to defend this suit,
the Company cannot estimate with any certainty its ultimate legal or financial
liability, if any, with respect to the alleged claims. No assurance can be given
that a negative outcome in this suit will not have a material adverse effect on
the Company. See 'Business--Legal Proceedings.'
DEPENDENCE ON KEY PERSONNEL
The Company's growth and development to date has been largely dependent
upon the services of Sidney A. Miller, Hugh Miller and other key members of
management. The Company has employment agreements with both persons, as well as
with certain other members of senior management. Although the Company has been
able to hire and retain other qualified and experienced management personnel,
the loss for any reason of the services of one or more key members of management
could have a material adverse effect on the Company. See 'Management--Employment
Agreements; Key-Man Life Insurance.'
CONTROL BY PRINCIPAL STOCKHOLDERS
As of June 5, 1997, the Company's principal stockholders, members of the
Miller family, beneficially own an aggregate of 67.8% of the outstanding shares
of the Company's common stock. Accordingly, such persons, if they were to act in
concert, would have majority control of the Company with the ability to approve
certain fundamental corporate transactions (including mergers, consolidations
and asset sales), to elect all members of
19
<PAGE>
the Board of Directors and to appoint new management. As long as the Millers are
the controlling stockholders of the Company, third parties will not be able to
gain control of the Company through purchases of common stock not beneficially
owned or otherwise controlled by the Millers. The directors elected by the
Millers will have the authority to effect decisions affecting the capital
structure of the Company, including the issuance of additional capital stock,
the implementation of stock repurchase programs and the declaration of
dividends. See 'Description of the Notes--Repurchase at the Option of
Holders--Change of Control' and 'Principal Stockholders.'
POSSIBLE ENVIRONMENTAL LIABILITIES
In the ordinary course of its business, the Company from time to time
forecloses on properties securing loans. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real estate may be required to investigate and clean up hazardous or
toxic substances or chemical releases at such property and may be held liable to
a governmental entity or to third parties for property damage, personal injury,
and investigation and cleanup costs incurred by such parties in connection with
the contamination. Such laws typically impose cleanup responsibility. Liability
under such laws has been interpreted to be joint and several unless the harm is
divisible, and there is a reasonable basis for allocation of responsibility. The
costs of investigation, remediation or removal of such substances may be
substantial, and the presence of such substances, or the failure to properly
remediate such property, may adversely affect the owner's ability to sell or
rent such property or to borrow using such property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic substances also may
be liable for the costs of removal or remediation of such substances at a
disposal or treatment facility, whether or not the facility is owned or operated
by such person. In addition, the owner or former owners of a contaminated site
may be subject to common law claims by third parties based on damages and costs
resulting from environmental contamination emanating from such property. See
'Business--Environmental Matters.' Although the Company has not incurred
material costs or liabilities with respect to such matters to date, there can be
no assurance that any such material costs or liabilities will not arise in the
future.
ABSENCE OF PUBLIC MARKET FOR THE NOTES
There is no public market for the Notes, and the Company does not intend to
list the Notes on any national securities exchange. The Company has been advised
by the Underwriters that, following completion of the Offering, they intend to
make a market in the Notes; however, they are under no obligation to do so and
market-making activities with respect to the Notes may be discontinued at any
time without notice. There can be no assurance as to the liquidity of the
trading market for the Notes or that an active public market for the Notes will
develop. If such a market were to develop, the Notes could trade at prices that
may be higher or lower than the initial offering price thereof depending on a
number of factors, including prevailing interest rates, the Company's operating
results and markets for similar securities. If an active public market for the
Notes does not develop, the market price and liquidity of the Notes may be
adversely affected. See 'Underwriting.'
20
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes offered hereby
are estimated to be $ , after deducting the underwriting discounts
and commissions and estimated offering expenses.
The net proceeds will be used (i) to pay off all residual financing
agreements (approximately $57.5 million as of March 31, 1997), see
'Underwriting,' (ii) to repay amounts outstanding under certain of Company's
warehouse lines of credit (approximately $51.8 million as of March 31, 1997),
(iii) to fund future loan originations and purchases, (iv) to support
securitization transactions, (v) to fund expansion of Fidelity Mortgage's retail
network and (vi) for general corporate purposes, including to fund acquisitions.
Currently, the Company has no agreement or understanding with respect to any
acquisition.
Pending their ultimate application, net proceeds will be invested in
short-term, investment grade, interest-bearing securities and deposit accounts.
21
<PAGE>
CAPITALIZATION
The following table shows the capitalization of the Company at March 31,
1997 and as adjusted, to give pro forma effect to the Offering and the
anticipated application of the net proceeds therefrom. See 'Use of Proceeds.'
This table should be read in conjunction with the Company's consolidated
financial statements and the notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------
ACTUAL PRO FORMA AS ADJUSTED
---------------------- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
DEBT:
Warehouse financing and other
borrowings(1).............................. $112,507 $ 3,290
Bank payable................................. 1,696 1,696
% Senior Notes due 2004................ -- 150,000
----------- -----------
Total debt................................. $114,203 $154,986
----------- -----------
----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value; 49,000,000
shares authorized; 15,372,288 shares
outstanding, actual and pro forma.......... 154 154
Preferred Stock, $.01 par value; 1,000,000
shares authorized; no shares outstanding... -- --
Additional paid-in capital................... 93,468 93,468
Retained earnings............................ 9,402 9,402
----------- -----------
Total stockholders' equity................. 103,024 103,024
----------- -----------
Total capitalization.................... $217,227 $258,010
----------- -----------
----------- -----------
</TABLE>
- ------------------
(1) Includes aggregate residual financing of $57,454 and $0 outstanding under
working capital lines of credit.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth historical selected consolidated financial
and operating data of the Company as of December 31, 1992, 1993, 1994, 1995 and
1996 and for each of the years in the five year period ended December 31, 1996
and as of March 31, 1996 and 1997 and for each of the three month periods then
ended.
The following selected consolidated income statement data for the years
ended December 31, 1994, 1995 and 1996 and the consolidated balance sheet data
as of December 31, 1995 and 1996 are derived from the Company's audited
consolidated financial statements and notes thereto included elsewhere herein
audited by KPMG Peat Marwick LLP, independent public accountants, as set forth
in their report also included elsewhere herein. The selected consolidated income
statement data for the year ended December 31, 1992 and 1993 and the selected
consolidated balance sheet data as of December 31, 1992, 1993 and 1994 are
derived from the Company's audited consolidated financial statements not
included herein.
The financial data for the Company as of and for the three months ended
March 31, 1996 and 1997 have been derived from unaudited consolidated financial
statements of the Company. The consolidated unaudited financial statements have
been prepared on the same basis as the audited consolidated financial statements
and include all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of the financial information for the interim periods.
Results of operations for the three months ended March 31, 1997 are not
necessarily indicative of the results to be expected for 1997.
The information set forth below should be read in conjunction with
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and all of the consolidated financial statements, notes thereto and
other financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------ -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Net gain on sale of mortgage loans.... $ 4,757 $ 7,639 $ 6,661 $15,383 $46,525 $ 103 $17,314
Interest.............................. 13,402 9,156 9,839 13,588 16,372 3,967 5,559
Servicing fees........................ 1,892 2,101 2,183 2,855 5,368 1,015 1,392
Other................................. 5,413 3,617 3,114 4,309 5,266 219 3,040
------- ------- ------- ------- ------- ------ -------
Total revenues...................... $25,464 $22,513 $21,797 $36,135 $73,531 $5,304 $27,305
------- ------- ------- ------- ------- ------ -------
Expenses:
Payroll and related costs............. $10,713 $ 9,268 $ 8,815 $12,876 $16,509 $1,373 $ 7,496
Interest.............................. 4,536 2,915 3,735 7,964 11,298 2,401 3,170
General and administrative............ 6,905 6,670 7,238 10,709 12,236 1,842 4,399
------- ------- ------- ------- ------- ------ -------
Total expenses...................... $22,154 $18,853 $19,788 $31,549 $40,043 $5,616 $15,065
------- ------- ------- ------- ------- ------ -------
Income (loss) before income taxes and
extraordinary item.................. $ 3,310 $ 3,660 $ 2,009 $ 4,586 $33,488 $ (312) $12,240
Provision for income taxes(1)......... -- -- -- -- 9,466 44 5,250
------- ------- ------- ------- ------- ------ -------
Income (loss) before extraordinary
item................................ $ 3,310 $ 3,660 $ 2,009 $ 4,586 $24,022 $ (356) $ 6,990
Extraordinary item:
Gain on extinguishment of debt...... -- -- -- -- 3,168 -- --
------- ------- ------- ------- ------- ------ -------
Net income (loss)..................... $ 3,310 $ 3,660 $ 2,009 $ 4,586 $27,190 $ (356) $ 6,990
------- ------- ------- ------- ------- ------ -------
------- ------- ------- ------- ------- ------ -------
UNAUDITED PRO FORMA INFORMATION:
Provision for pro forma income taxes
before extraordinary item(1)(2)....... $ 1,423 $ 1,574 $ 864 $ 1,972 $14,400 $ (134) n/a
------- ------- ------- ------- ------- ------
Pro forma income (loss) before
extraordinary item(1)(2).............. $ 1,887 $ 2,086 $ 1,145 $ 2,614 $19,088 $ (178) n/a
------- ------- ------- ------- ------- ------
------- ------- ------- ------- ------- ------
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------------------------- --------------------------
1992 1993 1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Pro forma earnings (loss)
per share of common
stock(1)(2)(3)(4)....... $ 0.15 $ 0.17 $ 0.09 $ 0.21 $ 1.46 $ (0.01) $ 0.45
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Pro forma weighted average
number of shares
outstanding(4).......... 12,629,182 12,629,182 12,629,182 12,629,182 13,083,327 12,629,182 15,420,883
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
CASH FLOW DATA(1):
(Used in) provided by
operating activities.... $ (5,057) $ 8,780 $ (10,160) $ (23,903) $ (42,025) $ (108,880) $ (11,437)
(Used in) investing
activities.............. (44) (64) (917) (1,207) (2,283) (228) (4,335)
Provided by (used in)
financing activities.... 2,893 (7,139) 13,460 32,388 46,414 101,863 16,142
Net increase (decrease) in
cash and cash
equivalents............. (2,208) 1,577 2,383 7,278 2,106 (7,245) 370
OPERATING DATA:
Loans originated or
purchased:
Brokered Loans(5)....... $ 66,553 $ 76,220 $ 81,407 $ 175,738 $ 321,733 $ 66,389 $ 114,063
Correspondent Loans..... 10,080 26,844 38,341 112,065 337,033 49,373 122,679
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total................. $ 76,633 $ 103,064 $ 119,748 $ 287,803 $ 658,766 $ 115,762 $ 236,742
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Average principal balance
per loan................ 51 60 67 74 78 78 81
Weighted average interest
rate.................... 13.5% 12.9% 12.1% 11.8% 11.4% 11.0% 11.3%
Combined weighted average
initial loan-to-value
ratio................... 47.8% 51.7% 55.2% 63.2% 68.8% 67.4% 71.0%
Percent of loans secured
by first mortgages...... 71.5% 81.1% 88.0% 89.6% 93.8% 94.1% 93.6%
Loan sales:
Loans sold through
securitizations....... $ 64,102 $ 88,943 $ 90,000 $ 229,998 $ 615,000 $ -- $ 235,000
Whole loan sales........ 1,031 8,708 11,950 17,615 15,273 6,899 --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total................. $ 65,133 $ 97,651 $ 101,950 $ 247,613 $ 630,273 $ 6,899 $ 235,000
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total loans serviced...... $ 273,788 $ 292,700 $ 310,229 $ 468,846 $ 932,958 $ 536,864 $ 1,110,999
----------- ----------- ----------- ----------- ----------- ----------- -----------
DELINQUENCY DATA:
Total delinquencies as a
percentage of loans
serviced (period
end)(6)................. 19.96% 13.49% 11.44% 10.64% 8.37% 7.50% 7.98%
Defaults as a percentage
of loans serviced
(period end)(7)......... 3.76% 5.35% 7.32% 5.87% 4.33% 5.91% 4.35%
Net losses as a percentage
of average loans
serviced................ 0.02% 0.03% 0.23% 0.57% 0.43% 0.15% 0.09%
FINANCIAL RATIOS:
Ratio of earnings to fixed
charges(8).............. 1.73 2.26 1.54 1.58 3.96 0.87 4.86
Ratio of indebtedness to
total
capitalization(9)....... 0.58 0.56 0.60 0.64 0.35 0.64 0.37
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------------------------------------------------- --------------------------
1992 1993 1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Loans held for sale....... $47,079 $41,703 $48,833 $ 63,816 $ 83,677 $ 171,999 $ 77,769
Interest-only and residual
certificates............ -- 2,204 7,514 25,310 83,073 25,317 101,858
Capitalized mortgage
servicing rights........ 5,705 3,491 2,421 3,831 11,412 3,534 13,448
Total assets.............. 80,775 81,143 98,589 139,612 232,736 240,719 257,356
Warehouse financing and
other borrowings........ 42,659 36,780 52,491 82,756 95,482 184,964 112,507
Investor payables......... 4,959 8,687 11,091 14,272 22,569 13,638 20,770
Total liabilities......... 54,891 52,793 70,425 109,779 139,218 211,422 154,332
Stockholders' equity...... 25,884 28,350 28,164 29,833 93,518 29,297 103,024
</TABLE>
- ------------------
(1) Prior to October 31, 1996, Delta Funding Corporation was treated as an S
corporation for federal and state income tax purposes. As a result, the
Company's historical earnings prior to such date had been taxed directly to
the Former Shareholders and not to the Company. See 'Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Termination of S Corporation Status and Income Taxes.'
(Footnotes continued on next page)
24
<PAGE>
(Footnotes continued from previous page)
(2) Pro forma presentation reflects a provision for income taxes, as if the
Company had been a C corporation since inception, at an assumed tax rate of
43%.
(3) Figures for the three months ended March 31, 1997 are actual.
(4) Reflects the effect of 10,653,000 shares of common stock issued to the
Former Shareholders and the effect of the issuance of 4,600,000 shares of
common stock issued in the Company's initial public offering; 1,976,182 of
which are treated as if they had always been outstanding to give effect to
certain distributions paid to the Former Shareholders in connection with
termination of S corporation status.
(5) Includes $8.1 million of retail loans originated by Fidelity Mortgage
during the three months ended March 31, 1997.
(6) Represents the percentages of account balances contractually past due 30
days or more, exclusive of loans in foreclosure and REO.
(7) Represents the percentages of account balances on loans in foreclosure and
REO.
(8) For the purpose of determining the ratio of earnings to fixed charges,
earnings consist of income before income taxes and fixed charges; fixed
charges consist of interest expense.
(9) Represents the ratio of (i) total debt, exclusive of warehouse financing,
to (ii) the sum of total stockholders' equity and total debt, exclusive of
warehouse financing.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements of the Company and the notes thereto.
GENERAL
Overview
The Company is a specialty consumer finance company engaged in the business
of originating, acquiring, selling and servicing mortgage loans secured
primarily by one- to four-family residences. Delta has focused on lending to
individuals who generally have impaired or limited credit profiles or higher
debt to income ratios and typically have substantial equity in their homes. The
Company primarily generates revenue from gain on sale of loans sold through
securitizations, gains recognized from premiums on loans sold through whole loan
sales, interest earned on loans held for sale, origination fees received as part
of the loan application process and fees earned from servicing loans.
Recent Growth
The Company has experienced significant growth in the last few years,
particularly since January 1, 1995. Management believes that this growth is
primarily attributable to (i) the Company's geographic expansion of its
operations, (ii) the Company's further penetration into its established markets
and (iii) the Company's increased access to additional funding sources through
larger warehouse agreements which enabled the Company to accumulate larger pools
of loans for sales through securitizations.
In connection with its geographic expansion, the Company has continued to
focus on developing loan production from brokers and correspondents. The Company
has followed a two-pronged approach to increase the volume of loan originations
from these sources. The Company employs business development representatives to
initiate and expand relationships with brokers and correspondents. In addition,
the Company uses its loan officers and correspondent underwriters to maintain
and strengthen existing relationships. The Company is also committed to
developing and growing the Fidelity Mortgage retail origination network. There
can be no assurance that the Company will continue to grow significantly in the
future. Any future growth will be limited by, among other things, the Company's
need for continued funding sources, access to capital markets, sensitivity to
economic slowdowns, ability to attract and retain qualified personnel,
fluctuations in interest rates and competition from other consumer finance
companies and from new market entrants. To date, the Company has not experienced
any significant seasonal variations in loan originations and purchases.
The Company's recent and rapid growth may have a somewhat distortive impact
on certain of the Company's ratios and financial statistics and may make
period-to-period comparisons difficult. In light of the Company's growth,
historical performance of the Company's earnings may be of limited relevance in
predicting future performance. Furthermore, the Company's financial statistics
may not be indicative of the Company's results in future periods. Any credit or
other problems associated with the large number of loans originated and
purchased in the recent past may not become apparent until sometime in the
future.
Operating Cash Flow
The Company has operated, and expects to continue to operate, on a negative
cash flow basis due to increases in the volume of loans purchased and originated
and due to the growth of its securitization program. Currently, the Company's
primary operating cash uses include the funding of (i) mortgage originations and
purchases pending their pooling and sale, (ii) the points and expenses paid in
connection with the acquisition of Brokered and Correspondent Loans, (iii)
interest expense on warehouse, residual and other financing, (iv) fees, expenses
and tax payments incurred in connection with the securitization program and (v)
ongoing administrative and other operating expenses. The Company's primary
operating sources of cash are (i) Excess Servicing received in each period, (ii)
cash payments of contractual and ancillary servicing revenues received by the
Company in its capacity as servicer for securitized loans, (iii) interest income
on loans held for sale and certain cash balances and (iv) income received in
connection with its broker and retail originations.
26
<PAGE>
The table below summarizes cash flows generated by and used in operating
activities:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- ---------------------
1994 1995 1996 1996 1997
-------- -------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING CASH INCOME:
Excess cash flow from securitization trusts............. $ 912 $ 1,612 $ 3,238 $ 888 $ 3,676
Servicing fees received................................. 2,267 2,539 5,012 956 1,568
Interest received....................................... 6,742 9,969 14,791 3,046 4,945
Securitization premium (discount) and hedge gain
(loss)................................................ 2,711 1,199 (600) -- 907
Other cash income....................................... 3,004 5,112 6,138 1,537 2,759
-------- -------- -------- --------- --------
Total operating cash income........................... $ 15,636 $ 20,431 $ 28,579 $ 6,427 $ 13,855
-------- -------- -------- --------- --------
OPERATING CASH EXPENSES:
Securitization and loan acquisition costs............... (655) (5,169) (20,712) (2,860) (8,029)
Cash operating expenses................................. (14,918) (22,563) (27,559) (6,292) (10,451)
Interest on warehouse financing......................... (3,045) (6,581) (7,945) (1,375) (3,055)
Interest on non-warehouse financing..................... (537) (1,423) (2,508) (480) (847)
Taxes paid.............................................. (138) (2) (250) -- (4,464)
-------- -------- -------- --------- --------
Total operating cash expenses......................... (19,293) (35,738) (58,974) (11,007) (26,846)
-------- -------- -------- --------- --------
Cash flow due to operating cash income and expenses..... (3,657) (15,307) (30,395) (4,580) (12,991)
Cash (used in) provided by other payables and
receivables........................................... 945 6,426 5,933 (514) (4,304)
Cash provided by (used in) loans held for sale.......... (7,448) (15,022) (17,563) (103,786) 5,858
-------- -------- -------- --------- --------
Net cash used in operating activities................... $(10,160) $(23,903) $(42,025) $(108,880) $(11,437)
-------- -------- -------- --------- --------
-------- -------- -------- --------- --------
</TABLE>
TERMINATION OF S CORPORATION STATUS AND INCOME TAXES
On October 31, 1996, in contemplation of the Company's initial public
offering, Delta Funding Corporation, one of the Subsidiaries, terminated its S
corporation status. The Former Shareholders, pursuant to the terms of a
contribution agreement, contributed their shares of capital stock of Delta
Funding Corporation to the Company, thereby becoming a wholly-owned subsidiary
of the Company, in exchange for 10,653,000 shares of common stock, which
constituted all of the then outstanding shares of common stock of the Company
(the 'Exchange'). Simultaneous with the Exchange, Delta Funding Corporation
ceased to be treated as an S corporation.
In connection with termination of its S corporation status, Delta Funding
Corporation made final S corporation distributions to the Former Shareholders
and the Company used $32.6 million of its net proceeds of its initial public
offering to pay such distributions.
As an S corporation, the Company's income, whether or not distributed, was
taxed at the shareholder level for federal and state tax purposes. The pro forma
provision for income taxes in the Company's statements of income shows results
as if the Company had always been fully subject to federal and state taxes at an
assumed tax rate of 43%. The Company incurred a $3.9 million deferred tax
liability as a result of its conversion from an S corporation to a C corporation
on October 31, 1996.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1996
Revenues
Total revenues increased $22.0 million, or 415% to $27.3 million for the
three months ended March 31, 1997, from $5.3 million for the three months ended
March 31, 1996. The increase in revenues was primarily due to the fact that the
Company completed a securitization during the three months ended March 31, 1997
but did
27
<PAGE>
not complete a securitization during the corresponding period of the prior year.
To a lesser extent, the increase was due to the increase in total loan
originations and purchases and a corresponding increase in the Company's
servicing portfolio. As a result, the Company generated an increased amount of
origination fees, servicing fees and interest income on loans held for sale.
Net Gain on Sale of Mortgage Loans. Net gain on sale of mortgage loans
represents the sum of (i) the present value of Excess Servicing of loans
securitized in each period, (ii) the present value of Mortgage Servicing Rights
associated with loans securitized in each period and (iii) premiums earned on
whole loan sales less the (a) premiums paid to originate or acquire mortgage
loans, (b) cost associated with securitizations and (c) any hedge loss (gain).
Net gain on sale of mortgage loans increased $17.2 million to $17.3 million in
three months ended March 31, 1997, from $0.1 million in the corresponding period
of the prior year. The Company completed a $235.0 million securitization, with a
weighted average net gain on sale of 7.4%, during the three months ended March
31, 1997 but did not complete a securitization during the corresponding period
of the prior year.
Interest Income. Interest income primarily represents the sum of (i)
interest earned on loans held for sale, (ii) interest earned on cash collection
balances and (iii) Excess Servicing received in each period less the accumulated
discount on previously recorded interest-only and residual certificates.
Interest income increased $1.6 million, or 40%, to $5.6 million in the three
months ended March 31, 1997, from $4.0 million in the corresponding period of
the prior year. The increase in interest income was primarily due to higher
interest rates on mortgage loans and to a higher average balance of mortgage
loans held for sale during the three months ended March 31, 1997 resulting from
the increase in loan originations and purchases.
Servicing Income. Servicing income represents all contractual and
ancillary servicing revenue earned by the Company less (a) the amortization of
capitalized Mortgage Servicing Rights and (b) prepaid interest shortfalls.
Servicing income increased $0.4 million, or 40%, to $1.4 million in the three
months ended March 31, 1997, from $1.0 million in the corresponding period of
the prior year. This increase was primarily due to higher average loan servicing
volume, which resulted in the increased contractual and ancillary service fees.
During the three months ended March 31, 1997, the average balance of mortgage
loans serviced by the Company increased 103% to $1,048.6 million from $517.2
million during the corresponding period of the prior year. Servicing fees
increased at a slower rate than average mortgage loans serviced primarily
because the Company lowered its contractual servicing fee rate to conform with
industry standards, and due to amortization of the capitalized servicing asset
in accordance with SFAS No. 125.
Other Income. Other income primarily represents origination fees earned on
brokered and retail loans and ancillary revenue associated with loan production.
Other income increased $2.8 million to $3.0 million in the three months ended
March 31, 1997 from $0.2 million in the corresponding period of the prior year.
This increase was primarily due to an increase in loan origination fees, which
is the primary component of other income. The Company generates loan origination
fees on loans originated through its broker network and from its Fidelity
Mortgage's retail operations. During the three months ended March 31, 1997,
Brokered Loan originations (excluding Fidelity Mortgage) increased by $39.6
million, or 60%, to $106.0 million from $66.4 million in the corresponding
period of the prior year. Fidelity Mortgage's originations were $8.1 million for
the period from February 11, 1997 through March 31, 1997. The Company did not
originate any retail loans during the corresponding period of the prior year.
Expenses
Total expenses increased $9.5 million, or 170%, to $15.1 million for the
three months ended March 31, 1997, from $5.6 million in the corresponding period
of the prior year. The increase in expenses was primarily the result of higher
operating expenses associated with the additional personnel required to process
a greater number of loan originations and purchases, the acquisition of Fidelity
Mortgage and increased interest expense on loans held for sale, as well as the
deferral of direct origination costs to a greater extent in the three months
ended March 31, 1996 in accordance with SFAS No. 91 (as defined). See '--Certain
Accounting Considerations--SFAS No. 91.'
Payroll Expense. Payroll expense increased $6.1 million to $7.5 million
for the three months ended March 31, 1997, from $1.4 million for the
corresponding period of the prior year. The increase was primarily due to (a)
increased staffing in the Company's originations area associated with increases
in loan originations and
28
<PAGE>
purchases and the acquisition of Fidelity Mortgage, and (b) the deferral of
payroll related direct origination costs to a greater extent in the three months
ended March 31, 1996 in accordance with SFAS No. 91. At March 31, 1997, the
Company employed 530 full-and part-time persons, including 383 employees of
Delta Funding Corporation and 147 employees of Fidelity Mortgage, compared to of
268 full- and part-time persons as of March 31, 1996.
Interest Expense. Interest expense increased $0.8 million, or 33%, to $3.2
million in the three months ended March 31, 1997, from $2.4 million in the
corresponding period of the prior year. The increase in interest expense was
attributable to the interest costs associated with both a higher balance of
loans pending sale during the three months ended March 31, 1997, resulting from
increases in loan originations and purchases during the period, and an increase
in interest-only and residual financings during the three months ended March 31,
1997. The Company had interest-only and residual certificate financings of $57.5
million as of March 31, 1997, compared to $15.7 million as of March 31, 1996.
General and Administrative Expenses. General and administrative expenses,
which consist primarily of office and administrative, rent, and health care and
insurance expenses increased $2.6 million, or 144%, to $4.4 million in the three
months ended March 31, 1997 from $1.8 million in the corresponding period of the
prior year. The increase in general and administrative expenses was primarily
due to (a) expenses incurred in connection with increases in loan originations
and purchases, increased employee benefit expenses and the Company's acquisition
of Fidelity Mortgage, and (b) the deferral of general and administrative related
direct origination costs to a greater extent in the three months ended March 31,
1996 in accordance with SFAS No. 91.
Income Taxes. Prior to October 31, 1996, Delta Funding Corporation was
treated as an S corporation for federal and state income tax purposes. As a
result, the Company's historical earnings prior to such date had been taxed
directly to the Former Shareholders and not the Company. For the three months
ended March 31, 1997, the Company recorded a tax provision of $5.3 million
compared to $0.04 million in the corresponding period of the prior year.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
Revenues
Total revenues increased $37.4 million, or 103%, to $73.5 million in 1996
from $36.1 million in 1995. The increase in revenues was primarily due to the
increase in loan originations and purchases and corresponding increase in the
amount of loans sold through securitizations.
Net Gain on Sale of Mortgage Loans. Net gain on sale of mortgage loans
increased $31.1 million, or 202%, to $46.5 million in 1996 from $15.4 million in
1995. This increase was the result of higher loan originations and purchases,
resulting in an increased amount of loans sold through securitizations. Total
loan originations and purchases increased $371.0 million, or 129%, to $658.8
million in 1996 from $287.8 million in 1995. The Company sold or securitized
$630.4 million of loans in 1996 compared to $247.6 million in 1995, with a
weighted average net gain on sale of 7.4% and 6.2%, respectively.
Interest Income. Interest income increased $2.8 million, or 20%, to $16.4
million in 1996 from $13.6 million in 1995. The increase in interest income was
primarily due to a higher average balance of loans held for sale during 1996
resulting from the increases in loan originations and purchases, but was
partially offset due to the shorter holding period during which the mortgage
loans remained in inventory during 1996. The Company completed three
securitizations during 1996 compared to two securitizations in 1995.
Servicing Income. Servicing income increased $2.5 million, or 88%, to $5.4
million in 1996 from $2.9 million in 1995. This increase was primarily due to
higher loan servicing volume, which resulted in increased contractual and
ancillary service fees. During 1996, the average balance of mortgage loans
serviced by the Company increased 79% to $667.4 million from $373.4 million
during 1995.
Other Income. Other income increased $1.0 million, or 22%, to $5.3 million
in 1996 from $4.3 million in 1995. This increase was primarily due to an
increase in loan origination fees, which is the primary component of other
income. The Company generates loan origination fees on loans originated through
its broker network. During 1996, Brokered Loan originations increased by $146.0
million, or 83%, to $321.7 million from
29
<PAGE>
$175.7 million in 1995. Loan origination fees increased at a slower rate than
Brokered Loan originations primarily because the Company earned lower average
origination fees per loan.
Expenses
Total expenses increased $8.5 million, or 27%, to $40.0 million for 1996
from $31.5 million in 1995. The increase in expenses was primarily the result of
increased interest expense on loans held for sale and higher operating expenses
associated with the additional personnel required to process the greater number
of loan originations and purchases. Total expenses increased at a much slower
rate than total revenues, primarily due to efficiencies realized from the
Company's investment in technology, experienced staff and economies of scale.
Payroll Expense. Payroll expense increased $3.6 million, or 28%, to $16.5
million for 1996, from $12.9 million for 1995. The increase was primarily due to
increased staffing in the Company's originations area associated with the
increase in loan originations and purchases, as well as the Company's expansion
into new and existing markets. As of December 31, 1996, the Company employed 346
full- and part-time persons compared to 255 full- and part-time persons as of
December 31, 1995.
Interest Expense. Interest expense increased $3.3 million, or 42%, to
$11.3 million in 1996 from $8.0 million in 1995. The increase in interest
expense was attributable to the interest costs associated with both a higher
balance of loans pending sale during 1996, resulting from increases in loan
originations and purchases during the period, and an increase in the Excess
Servicing receivable financing during 1996. The Company had financings against
its Excess Servicing receivables (interest-only and residual certificates) of
$47.0 million as of December 31, 1996 compared to $16.2 million as of December
31, 1995. Interest expense was partially offset by lower cost of funds on the
Company's floating rate borrowings which are based on one-month London Interbank
Offered Rate ('LIBOR'). The one-month LIBOR was on average 0.52% lower during
1996 than during 1995.
General and Administrative Expenses. General and administrative expenses,
which consist primarily of office and administrative, rent, and health care and
insurance expenses, increased $1.5 million, or 14%, to $12.2 million in 1996
from $10.7 million in 1995. The increase in general and administrative expenses
was primarily due to expenses incurred in connection with the increases in loan
originations and purchases and increased employee benefit expenses.
Extraordinary Gain
In May 1996, the Company closed out its long-term $31.7 million warehouse
facility with a European financial institution at a 10% discount. As a result,
the Company realized an extraordinary gain of $3.2 million for the year ended
December 31, 1996.
Income Taxes
On October 31, 1996, in conjunction with the Exchange, Delta Funding
Corporation's status as an S corporation was terminated and the Company became a
C corporation for federal and state income tax purposes and as such was subject
to federal and state income tax on its taxable income for the months of November
and December 1996. During 1996, the Company recorded a tax provision of $9.5
million. This includes a $4.2 million provision for November and December
earnings at the statutory rate of 42% and a deferred tax expense of $3.9 million
in connection with the change in tax status from an S corporation to a C
corporation.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
Revenues
Total revenues increased $14.3 million, or 66%, to $36.1 million in 1995
from $21.8 million in 1994. The increase in revenues was primarily due to the
combined effect of increases in loan originations and purchases, the effects of
certain accounting changes and higher gains realized on the sale of loans
through securitizations.
Net Gain on Sale of Loans. Net gain on sale of mortgage loans increased
$8.7 million, or 131%, to $15.4 million in 1995 from $6.7 million in 1994. This
increase was primarily due to the combined effect of increased loan originations
and purchases and subsequent sales of loans through securitizations and the
effects of certain
30
<PAGE>
accounting changes. Total loan originations and purchases increased $168.1
million, or 140%, to $287.8 million in 1995 from $119.7 million in 1994. The
Company sold or securitized $247.6 million of loans in 1995 compared to $102.0
million in 1994, with a weighted average net gain on sale of 6.2% and 6.5%,
respectively. Included in the gain on sale of loans in 1995 was $2.1 million
which represents the present value of Mortgage Servicing Rights that the Company
receives over time, as it sells loans through securitizations on a
servicing-retained basis.
Interest Income. Interest income increased $3.8 million, or 38%, to $13.6
million in 1995 from $9.8 million in 1994. The increase in interest income was
primarily due to a higher average balance of loans held for sale during 1995
resulting from the increases in loan originations and purchases and, to a lesser
extent, to unrealized gains on interest-only and residual certificates held in
the amount of $1.0 million.
Servicing Income. Servicing income increased $0.7 million, or 31%, to $2.9
million in 1995 from $2.2 million in 1994. This increase was primarily the
result of higher loan servicing volume which resulted in larger contractual and
ancillary service fees. During 1995, the average balance of mortgage loans
serviced by the Company increased 24% to $373.4 million, compared to $300.7
million in 1994. During 1995, the Company also increased its ancillary servicing
income by charging prepayment penalties in states where such charges are
allowed.
Other Income. Other income increased $1.2 million, or 38%, to $4.3 million
in 1995 from $3.1 million in 1994. This increase was primarily due to the
increase in loan origination fees, which is the largest component of other
income. During 1995, Brokered Loan originations increased by $94.3 million, or
116%, to $175.7 million from $81.4 million in 1994.
Expenses
Total expenses increased $11.7 million, or 59%, to $31.5 million for 1995
from $19.8 million in 1994. The increase in expenses was primarily the result of
increased interest expense on loans held for sale, the increased expense
associated with additional personnel required to process the greater number of
loan originations and purchases and higher operating expenses related to
increased loan volume during 1995 compared to 1994.
Payroll Expense. Payroll expense increased $4.1 million, or 46%, to $12.9
million for 1995, from $8.8 million for 1994. The increase was due primarily to
bonus increases granted to certain members of senior management and, to a lesser
extent, due to increased staffing in the Company's originations area. As of
December 31, 1995, the Company employed 255 persons as compared to 197 persons
as of December 31, 1994.
Interest Expense. Interest expense increased $4.3 million, or 113%, to
$8.0 million in 1995 from $3.7 million in 1994. The increase in interest expense
was attributable to the interest costs associated with a higher balance of loans
pending sale during 1995, resulting from increases in loan originations and
purchases during the period, and a higher balance of loans held for sale at the
beginning of the period ($48.8 million compared to $41.7 million for 1995 and
1994, respectively). The Company's cost of funds on its floating rate warehouse
facilities where it holds mortgage loans until the time of sale, was, on
average, 1.51% higher in 1995 compared to 1994.
General and Administrative Expenses. General and administrative expenses
increased $3.5 million, or 48%, to $10.7 million in 1995 from $7.2 million in
1994. The increase in general and administrative expenses was primarily due to
expenses incurred in connection with the increases in loan originations and
purchases and associated increases in personnel expenses and the direct costs
relating to the transfer of the Company's prior servicing system to its current
servicing system.
FINANCIAL CONDITION
MARCH 31, 1997 COMPARED TO DECEMBER 31, 1996
Cash and interest-bearing deposits increased $0.4 million, or 2%, to $19.1
million at March 31, 1997 from $18.7 million at December 31, 1996. The increase
was primarily due to additional moneys held in securitization trust accounts
related to the Company's ongoing securitization program.
31
<PAGE>
Accounts receivable increased $0.7 million, or 8%, to $9.4 million at March
31, 1997 from $8.7 million at December 31, 1996. This increase was primarily due
to higher average loan servicing volume, which resulted in increased recoverable
servicing advances made by the Company, acting as servicer on its
securitization.
Loans held for sale decreased $5.9 million, or 7%, to $77.8 million at
March 31, 1997 from $83.7 million at December 31, 1996. This decrease was
primarily the result of the Company securitizing a larger percentage of the
loans it originated and purchased during the three months ended March 31, 1997
as compared to the three months ended December 31, 1996.
Accrued interest and late charges receivable increased $1.8 million, or 9%,
to $22.0 million at March 31, 1997 from $20.2 million at December 31, 1996. This
increase was primarily due to a higher average loan servicing portfolio during
the first quarter of 1997. The Company's average servicing portfolio increased
22% to $1.05 billion during the first quarter of 1997 from $859.6 million during
the fourth quarter of 1996.
Capitalized Mortgage Servicing Rights increased $2.0 million, or 18%, to
$13.4 million at March 31, 1997 from $11.4 million at December 31, 1996. This
increase was primarily attributable to the Company's 1997-1 securitization.
Interest-only and residual certificates increased $18.8 million, or 23%, to
$101.9 million at March 31, 1997 from $83.1 million at December 31, 1996,
primarily due to interest-only and residual certificates acquired in connection
with the Company's 1997-1 securitization and recorded at fair value in
accordance with SFAS No. 125. See '--Certain Accounting Considerations.'
Warehouse financing and other borrowings increased $17.0 million, or 18%,
to $112.5 million at March 31, 1997 from $95.5 million at December 31, 1996,
primarily due to additional borrowings to finance loans held for sale and
additional financing secured by interest-only and residual certificates. During
the fourth quarter of 1996, the Company used $38.0 million in net proceeds from
its initial public offering to pay down amounts outstanding on a warehouse
facility.
Investor payable decreased $1.8 million, or 8%, to $20.8 million at March
31, 1997 from $22.6 million at December 31, 1996. The decrease was primarily due
to a decline in the amount of principal collected by the Company acting as
servicer, which must be remitted to the various trusts for the following
distribution period. Investor payable is comprised of all principal collected on
mortgage loans, either due to principal amortization or principal repayment, and
accrued certificate interest. Variability in this account is primarily due to
the principal prepayments collected within a given collection period.
Stockholders' equity increased $9.5 million, or 10%, to $103.0 million at
March 31, 1997 from $93.5 million at December 31, 1996. This increase is
primarily due to net income for the quarter of $7.0 million, as well as the
issuance of 119,288 additional shares of common stock valued at $2.5 million in
connection with the Company's acquisition of Fidelity Mortgage.
DECEMBER 31, 1996 COMPARED TO DECEMBER 31, 1995
Cash and interest-bearing deposits increased $2.1 million, or 13%, to $18.7
million at December 31, 1996 from $16.6 million at December 13, 1995. The
increase was primarily due to additional moneys held in securitization trust
accounts related to the Company's ongoing securitization program.
Accounts receivable increased $1.8 million, or 26%, to $8.6 million at
December 31, 1996 from $6.8 million at December 31, 1995. This increase was
primarily due to higher average loan servicing volume, which resulted in
increased recoverable servicing advances made by the Company, acting as servicer
on its securitizations.
Loans held for sale increased $19.9 million, or 31%, to $83.7 million at
December 31, 1996 from $63.8 million at December 31, 1995. This increase was a
result of increases in loan originations and purchases in the fourth quarter of
1996 compared to the fourth quarter of 1995, and a corresponding increase in the
amount of loans remaining in inventory subsequent to the Company's 1996-3
securitization. Loan originations and purchases increased $142.6 million, or
141%, to $243.7 million in the fourth quarter of 1996 from $101.1 million in the
fourth quarter of 1995.
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Accrued interest and late charges receivable increased $4.3 million, or
26%, to $20.2 million at December 31, 1996 from $15.9 million at December 31,
1995. This increase was primarily due to higher loan servicing volume during
1996. The Company's average servicing portfolio increased 79% to $667.4 million
in 1996 from $373.4 million in 1995.
Capitalized Mortgage Servicing Rights increased $7.6 million, or 198%, to
$11.4 million at December 31, 1996 from $3.8 million at December 31, 1995. This
increase was directly attributable to certain accounting changes, which allows
the Company to capitalize the fair market value of the servicing retained asset
after its completes a securitization. The Company's securitization issuance
amount increased 167% to $615 million from $230 million in 1995. In 1996, the
Company began to capitalize ancillary servicing fee income which was not
previously recognized in prior periods.
Interest-only and residual certificates increased $57.8 million, or 228%,
to $83.1 million at December 31, 1996 from $25.3 million at December 31, 1995,
primarily due to interest-only and residual certificates acquired in connection
with securitizations during the year. The Company securitized $615 million in
1996 compared to $230 million in 1995.
Warehouse financing and other borrowings increased $12.7 million, or 15%,
to $95.5 million at December 31, 1996 from $82.8 million at December 31, 1995,
primarily due to additional loans held for sale and additional financing secured
by interest-only and residual certificates. The Company initially used $38.0
million of net proceeds from its initial public offering to pay down amounts
outstanding on a warehouse facility.
Investor payable increased $8.3 million, or 58%, to $22.6 million at
December 31, 1996 from $14.3 million at December 31, 1995. The increase was
primarily due to the higher loan servicing volume which resulted in an increase
in the amount of principal collected by the Company acting as servicer, which
must be remitted to the various trusts for the following distribution period.
Investor payable is comprised of all principal collected on mortgage loans,
either due to principal amortization or principal repayment, and accrued
certificate interest. Variability in this account is primarily due to the
principal prepayments collected within a given collection period.
Stockholders' equity increased $63.7 million, or 213%, to $93.5 million at
December 31, 1996 from $29.8 million at December 31, 1995. This increase is
primarily due to the net proceeds of $69.7 million received in connection with
the Company's initial public offering at November 1, 1996, as well as net income
for the year of $27.2 million, offset by distributions of $33.2 million made to
the Former Shareholders in connection with the initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
The Company has operated, and expects to continue to operate, on a negative
cash flow basis due to increases in the volume of loan originations and
purchases and due to the growth of its securitization program. During 1994,
1995, 1996 and the three months ended March 31, 1997, the Company used cash in
operations of approximately $10.2 million, $23.9 million, $42.0 million and
$11.4 million, respectively.
Historically, the Company has utilized various financing facilities and an
equity financing to offset negative operating cash flows and support the
continued growth in loan volumes, securitizations and general operating
expenses. The Company's primary sources of liquidity are its warehouse and other
financing facilities, securitizations and whole loan sales and, subject to
market conditions, sales of additional debt and equity securities.
The Company securitized and sold in the secondary market $90.0 million,
$230.0 million, $615.0 million and $235.0 million of loans in 1994, 1995, 1996
and the three months ended March 31, 1997, respectively. In connection with each
securitization transaction completed during these periods, the Company has or is
utilizing Excess Servicing cash flow from such securitization to prepay an
overcollateralization limit and generally did or does not receive any such
Excess Servicing cash flow from the securitization until such level was or is
prepaid.
In addition, the increasing use of securitization transactions as a funding
source by the Company has resulted in a significant increase in the amount of
gain on sale recognized by the Company. During 1994, 1995, 1996 and the three
months ended March 31, 1997, the Company recognized net gain on sale of mortgage
loans in
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the amounts of $6.7 million, $15.4 million, $46.5 million and $17.3 million,
respectively. The recognition of this gain has a negative impact on the cash
flow of the Company since the Company is required to pay federal and state taxes
on a portion of the gain in the period recognized although it does not receive
the cash representing the gain until later periods. The Company also incurs
certain expenses in connection with securitizations, including underwriting
fees, rating agency fees, legal fees, accounting fees, shelf registration fees,
credit enhancement fees, trustee fees, hedging and other costs.
To accumulate loans for securitization, the Company borrows money on a
short-term basis through warehouse lines of credit. To date, substantially all
of the loans which the Company has purchased and originated have been funded
through borrowing under those warehouse lines. The Company has two warehouse
lines of credit for this purpose. One warehouse facility is a committed
revolving line for $250 million with a variable rate of interest and a maturity
date of February 1998. The Company's second warehouse facility is a $200 million
committed revolving line with a variable rate of interest and a maturity date of
February 1998. This facility was obtained subsequent to December 31, 1996 and
replaced a $100 million uncommitted credit facility previously maintained by the
Company with the warehouse lender. The outstanding balance on the $250 million
facility and $200 million facility as of March 31, 1997 was $51.8 million and
$0, respectively.
The Company has obtained financing facilities for interest-only and
residual certificates acquired as part of its securitizations. As of March 31,
1997, the outstanding balance on these facilities was $57.5 million. These
facilities have variable interest rates and mature between October 1997 and
March 2000.
In addition, the Company has a line of credit with a financial institution
to support its daily operating requirements. This one-year renewable credit line
in the amount of $1.0 million has a variable interest rate and is renewable in
September 1997. The outstanding balance on the credit line was $0 as of March
31, 1997.
On October 31, 1996, the Company issued to the public 4,600,000 shares of
common stock and received net proceeds of approximately $69.7 million. $37.1
million of the net proceeds were used to repay amounts outstanding under the
Company's warehouse lines, and $32.6 million was used to pay S corporation
distributions to the Former Shareholders.
On June 18, 1997, Delta Funding Corporation entered into the Credit
Agreement with First Chicago. The Credit Agreement will be used primarily to
finance mortgage loans held for sale and to fund recoverable servicing advances
by Delta Funding Corporation, subject to specified sublimits set forth therein.
See 'Prospectus Summary--Recent Developments.'
The Company is required to comply with various operating and financial
covenants as provided in the agreements described above which are customary for
agreements of their type. The Company does not believe that its existing
financial covenants will restrict its operations or growth. Continued
availability of funds under these agreements is subject to the Company's
compliance with such covenants. Management believes the Company is in compliance
with all such covenants under these agreements.
The Company's ability to make payments of principal of or interest on, or
to refinance its Indebtedness (including the Notes) depends on its future
operating performance, and its ability to effect additional debt and/or equity
financings, which to a certain extent is subject to economic, financial,
competitive and other factors beyond its control. If the Company is unable to
generate sufficient cash flow in the future to service its debt, it may be
required to refinance all or a portion of its existing debt, including the
Notes, or to obtain additional financing. There can be no assurance that any
such refinancing would be possible or that any additional financing could be
obtained. The inability to obtain additional financing could have a material
adverse effect on the Company. See 'Risk Factors--Leverage; Asset Encumbrance,'
'--Ability to Service Debt; Negative Cash Flows; Access to Capital Markets' and
'--Dependence on Funding Sources--Dependence on Warehouse and Other Financing
Sources.' The Company believes that the sources of liquidity, including the
funds raised in this Offering, available to it should be sufficient to fund the
Company's liquidity requirements for the next 12 months if the Company's future
operations are consistent with management's current growth expectations.
However, because the Company expects to continue to require substantial amounts
of cash for the foreseeable future, it anticipates that it will need to effect
debt or equity financings regularly, in addition to quarterly securitizations.
The type, timing and terms of financing selected by the Company will be
dependent upon the Company's cash needs, the availability of other financing
sources and the prevailing conditions in the financial markets. There can
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be no assurance that any such sources will be available to the Company at any
given time or as to the favorableness of the terms on which such sources may be
available.
Hedging
The Company originates and purchases mortgage loans and then sells them
primarily through securitization. At the time of securitization and delivery of
the loans, the Company recognizes gain on sale based on a number of factors
including the difference or 'spread' between the interest rate on the loans and
the interest rate on treasury securities with maturities corresponding to the
anticipated life of the loans. If interest rates rise between the time the
Company originates or purchases the loans and the time the loans are priced at
securitization, the Excess Spread narrows, resulting in a loss in value of the
loans. To protect against such losses, the Company currently hedges the value of
the loans through the use of treasury rate lock contracts which function similar
to the short sale of securities. Prior to hedging, the Company performs an
analysis of its loans taking into account such factors as interest rates,
maturities, durations, inventory of loans and amount of loans held for sale to
determine the proportion of contracts to sell so that the risk to the value of
the loans is most effectively hedged. The Company will enter into treasury lock
rate contracts through one of its warehouse lenders and/or one of the investment
bankers which underwrite the Company's securitizations. These contracts are
designated as hedges in the Company's records and are closed out when the loans
are sold through securitization.
If the value of the hedges decrease, offsetting an increase in the value of
the loans, the Company, upon settlement with its counterparty, will pay the
hedge loss in cash and realize the corresponding increase in the value of the
loans as part of its interest-only and residual certificates. Conversely, if the
value of the hedges increase, offsetting a decrease in the value of the loans,
the Company, upon settlement with its counterparty, will receive the hedge gain
in cash and realize the corresponding decrease in the value of the loans through
a reduction in the value of the corresponding interest-only and residual
certificates.
The Company believes that its current hedging strategy of using treasury
rate lock contracts is the most effective way to manage its interest rate risk
on loans prior to securitization.
INFLATION AND INTEREST RATES
Inflation affects the Company most significantly in the area of loan
originations and can have a substantial effect on interest rates. Interest rates
normally increase during periods of high inflation and decrease during periods
of low inflation. Profitability may be directly affected by the level and
fluctuation in interest rates which affect the Company's ability to earn a
spread between interest received on its loans and the costs of its borrowings.
The profitability of the Company is likely to be adversely affected during any
period of unexpected or rapid changes in interest rates. A substantial and
sustained increase in interest rates could adversely affect the ability of the
Company to originate and purchase loans and affect the mix of first and second
mortgage loan products. Generally, first mortgage production increases relative
to second mortgage production in response to low interest rates and second
mortgage production increases relative to first mortgage production during
periods of high interest rates. A significant decline in interest rates could
decrease the size of the Company's loan servicing portfolio by increasing the
level of loan prepayments. Additionally, to the extent servicing rights,
interest-only and residual classes of certificates have been capitalized on the
books of the Company, higher than anticipated rates of loan prepayments or
losses could require the Company to write down the value of such servicing
rights, interest-only and residual certificates, adversely impacting earnings.
Fluctuating interest rates also may affect the net interest income earned by the
Company resulting from the difference between the yield to the Company on loans
held pending sales and the interest paid by the Company for funds borrowed under
the Company's warehouse facilities.
CERTAIN ACCOUNTING CONSIDERATIONS
Interest-Only and Residual Certificates
The Company derives a substantial portion of its income by recognizing gain
on sale of loans sold through securitization, represented by the interest-only
and residual certificates that the Company retains. In securitizations, the
Company sells loans that it has originated or purchased to a trust for a cash
purchase price and
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the interest-only and residual certificates. The cash purchase price is raised
through an offering by the trust of pass-through certificates representing
regular interests in the trust. Following the securitizations, the purchasers of
the pass-through certificates receive the principal collected and the investor
pass-through interest rate on the principal balance, while the Company receives
the excess of the interest rate payable by an obligor on a loan over the
interest rate passed through to the purchasers of the regular-interest
certificates (with respect to the interest-only and residual certificates), as
well as the Company's normal servicing fee and other recurring fees. The
interest-only and residual certificates which are capitalized on the Company's
balance sheet are reduced as cash distributions are received. The interest-only
and residual certificates are accounted for as trading securities in accordance
with SFAS No. 115, 'Accounting for Certain Investments in Debt and Equity
Securities,' and as such they are recorded at their fair value. Changes in fair
value of the interest-only and residual certificates are reflected in the
statement of operations. Fair value of the interest-only and residual
certificates is determined based on various economic factors, including
considerations of loan type, size, date of origination, interest rate, term,
collateral value and geographic location. Higher than anticipated rates of loan
prepayments or losses would require the Company to write down the fair value of
the interest-only and residual certificates, adversely impacting earnings.
Similarly, if delinquencies, liquidations or interest rates were greater than
initially assumed by the Company, the fair value of the interest-only and
residual certificates would be negatively impacted resulting in an adverse
effect on interest income for the periods during which such events occurred. The
residual certificates held by the Company are subject to losses on liquidated
loans which flow through each securitization trust. Since the calculation of the
fair value of these certificates at the time of securitization included certain
assumptions concerning losses, any additional losses from such assumptions will
have an adverse effect on interest income.
SFAS No. 91
In December 1986, the Financial Accounting Standards Board ('FASB') issued
SFAS No. 91, 'Accounting for Non-Refundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases' ('SFAS No.
91'). SFAS No. 91 establishes the accounting for non-refundable fees and costs
associated with lending, committing to lend, or purchasing a loan or a group of
loans.
Under SFAS No. 91, direct loan origination costs, net of loan origination
fees, are recognized as a reduction of the loan's yield over the earlier of the
life of the related loan or the sale of the loan. In effect, SFAS No. 91
requires that origination fees be offset by their related direct loan costs and
that net deferred fees be recognized over the earlier of the life of the loan or
the sale of the loan, whether the loan is sold through securitization or on a
whole loan basis.
Prior to the second quarter of 1996, the Company generally sold loans
through securitization on a semiannual basis and, as such, carried a larger
inventory of loans on its books from quarter to quarter and from year to year,
which resulted in SFAS No. 91 adjustments being made during those periods. The
Company contemplates that in the future it will sell substantially all of its
loan originations and purchases on a quarterly basis primarily through
securitizations and, to a lesser extent, on a whole loan basis. This should
minimize the amount of loans being held in inventory and, therefore, minimize
the effects of SFAS No. 91 on the Company's financial statements.
SFAS No. 125
In June 1996, FASB issued SFAS No. 125 which provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a financial-
components approach that focuses on control. SFAS No. 125 distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. SFAS No. 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996, and
is to be applied prospectively. Effective January 1, 1997, the Company adopted
SFAS No. 125, which supersedes SFAS No. 122, 'Accounting for Mortgage Servicing
Rights.'
Securitization of a financial asset, a portion of a financial asset, or a
pool of financial assets in which the transferor surrenders control over the
assets transferred, is accounted for as a sale. If the transfer does not qualify
as a sale, the transferred assets will remain on the balance sheet and the
proceeds raised will be accounted for as a
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secured borrowing with no gain or loss recognition. Because Delta's transfers of
loans made in connection with its securitizations qualify as sales under this
pronouncement, the required accounting will be an allocation of basis approach.
After the securitization of mortgage loans held for sale, the
mortgage-backed security (or any retained interests in REMIC securitizations of
loans held for sale, whether they are subordinate classes or interest-only or
residual certificates) shall be classified as a trading security and reported at
fair value under SFAS No. 115, 'Accounting for Certain Investments in Debt and
Equity Securities.'
Servicing assets created in a securitization (contractually specified
servicing fees which are due the servicer in exchange for servicing those
assets) shall initially be measured at their allocated carrying amount, based
upon the relative fair value at the date of securitization. Servicing assets are
to be amortized in proportion to, and over the period of, estimated net
servicing income (the excess of servicing revenues over servicing costs).
SFAS No. 125 requires mortgage banking entities that acquire or originate
loans and subsequently sell or securitize those loans and retain the Mortgage
Servicing Rights to allocate the total cost of the loans to the Mortgage
Servicing Rights and the mortgage loans without the Mortgage Servicing Rights.
The Company determines fair value based upon the present value of estimated net
future servicing revenues less the estimated cost that would fairly compensate a
substitute servicer to service the loans. The servicing asset is then recorded
on the balance sheet and accounted for under SFAS No. 125 using the allocation
of cost relative to fair value approach. The assumptions used to calculate fair
value are the same assumptions used to determine the fair value of the
interest-only strip. The cost allocated to the servicing rights is amortized in
proportion to and over the period of estimated net future cash flows related to
servicing income.
SFAS No. 125 also requires impairment evaluations of all amounts
capitalized as servicing rights, including those purchased before the adoption
of SFAS No. 125, based upon the fair value of the underlying servicing rights.
The Company periodically performs these evaluations on a disagregated basis for
the predominant risk characteristics of the underlying loans which are loan
type, term, credit quality and interest rate. The continuing effects of SFAS No.
125 on the Company's financial position and results of operations will depend on
several factors, including, among other things, the amount of acquired or
originated loans sold or securitized, the type, term and credit quality of loans
and estimates of future prepayment rates.
SFAS No. 123
In October 1995, FASB issued SFAS No. 123, 'Accounting for Stock-Based
Compensation' ('SFAS No. 123'). SFAS No. 123 establishes financial accounting
and reporting standards for stock-based employee compensation plans. Those plans
include all arrangements by which employees receive shares of stock or other
equity instruments of the employer or the employer incurs liabilities to
employees in amounts based on the price of the employer's stock. Examples are
stock purchase plans, stock options, restricted stock awards, and stock
appreciation rights. This statement also applies to transactions in which an
entity issues its equity instruments to acquire goods or services from
non-employees. Those transactions must be accounted for, or at least disclosed
in the case of stock options, based on the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measurable. The accounting requirements of SFAS No. 123 are effective
for financial statements for fiscal years beginning after December 15, 1995, or
for an earlier fiscal year for which SFAS No. 123 is initially adopted for
recognizing compensation cost. The statement permits a company to choose either
a new fair value-based method or the current APB Opinion No. 25 intrinsic value-
based method of accounting for its stock-based compensation arrangements. The
Company applies APB Opinion No. 25 in accounting for its stock option plan.
Further, the Company provides in a footnote to its financial statements pro
forma disclosures of net earnings and earnings per share computed as if the fair
value-based method had been applied in accordance with SFAS No. 123.
Earnings Per Share
SFAS No. 128, 'Earnings per Share' ('SFAS No. 128') specifies the
computation, presentation and disclosure requirements for earnings per share.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997 and the pronouncement supersedes APB Opinion No. 15,
'Earnings per Share.' The objectives of SFAS No. 128 are to simplify the
computation of earnings per share and make
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financial statements more useful for investors and creditors by increasing the
international comparability of accounting standards concurrent with improving
the quality of accounting standards. The Company has not completed its analysis
of SFAS No. 128.
Disclosure of Information about Capital Structure
SFAS No. 129, 'Disclosure of Information about Capital Structure' ('SFAS
No. 129') was issued in February 1997 and is effective for financial statements
for periods ending after December 15, 1997. SFAS No. 129 requires disclosure of
pertinent rights and privileges of the various securities outstanding. The
statement also requires disclosure of the number of shares issued upon
conversion, exercise, or satisfaction of required conditions during at least the
most recent annual fiscal period and any subsequent interim period presented.
The Company has not completed its analysis of SFAS No. 129.
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BUSINESS
Delta is a specialty consumer finance company that has engaged in
originating, acquiring, selling and servicing home equity loans since 1982.
Throughout its 15 years of operating history, Delta has focused on lending to
individuals who generally have impaired or limited credit profiles or higher
debt to income ratios and typically have substantial equity in their homes.
Management believes that these borrowers have been largely unsatisfied by the
more traditional sources of mortgage credit which underwrite loans to
conventional guidelines established by FNMA and FHLMC. The Company makes loans
to these borrowers for such purposes as debt consolidation, home improvement,
mortgage refinancing or education, and these loans are primarily secured by
first mortgages on one- to four-family residential properties.
Through its wholly-owned subsidiary, Delta Funding Corporation, the Company
originates Brokered Loans and also purchases Correspondent Loans. Delta Funding
Corporation currently originates and purchases the majority of its loans in 21
states, through its network of approximately 1,000 brokers and correspondents.
The Company believes that it has a competitive advantage in serving brokers and
correspondents in the non-conforming home equity market that stems from its
substantial experience in this sector and its emphasis on providing quality
service that is prompt, responsive and consistent. The 19 members of Delta
Funding Corporation's senior management have an average of over 13 years of
non-conforming mortgage loan experience. Management believes this
industry-specific experience, coupled with the systems and programs it has
developed over the past 15 years, enable the Company to provide quality services
that include preliminary approval of most Brokered Loans and certain
Correspondent Loans within one day, consistent application of its underwriting
guidelines and funding or purchasing of loans within 14 to 21 days of
preliminary approval. In addition, the Company seeks to establish and maintain
productive relationships with its network of brokers and correspondents by
servicing each one with a business development representative, a team of
experienced underwriters and, in the case of Brokered Loans, a team of loan
officers and processors assigned to specific brokers to process all applications
submitted by such brokers.
The Company currently originates and purchases the majority of its loans
through the Company's main office in Woodbury, New York, its full service office
in Atlanta, Georgia, its full processing offices in St. Louis, Missouri,
Chicago, Illinois and Warwick, Rhode Island and from seven business development
offices located in Michigan (2), New Jersey, Ohio (2), Pennsylvania, and
Virginia. The Company historically made loans primarily in New York, New Jersey
and Pennsylvania. Commencing in 1995, the Company implemented a program to
further expand its geographic presence into the New England, Mid-Atlantic,
Midwest and Southeast regions. As a consequence of its expansion into new
markets, as well as its further penetration of existing markets, the Company
increased its loan production substantially in 1995 and 1996. Total loan
originations and purchases increased $168.1 million, or 140%, from $119.7
million in 1994 to $287.8 million in 1995, and increased $371.0 million or 129%,
in 1996 to $658.8 million.
In February 1997, in an effort to broaden its origination sources and to
expand its geographic presence in the Company's new markets, the Company
acquired Fidelity Mortgage. The Company acquired Fidelity Mortgage with the
expectation that the acquisition would result in beneficial synergies, with
Fidelity Mortgage providing a dedicated source of mortgage loans for Delta
Funding Corporation's securitization pools and for its servicing arm, and Delta
Financial Corporation providing capital to Fidelity Mortgage for the expansion
of its retail network. Fidelity Mortgage develops retail loan leads primarily
through its telemarketing system and its network of nine retail offices located
in Florida (2), Georgia, Indiana, Ohio (4) and North Carolina. Four of these
offices were opened in the second quarter of 1997, and the Company intends to
expand the Fidelity Mortgage network further.
The Company has been profitable in each of its 15 years of operation. The
Company's results of operations have improved significantly in recent periods as
a result of increased loan production and improved operating efficiencies. Total
revenues increased $37.4 million, or 103%, to $73.5 million in 1996 from $36.1
million in 1995, and pro forma income before extraordinary item increased 630%
to $19.1 million in 1996 from $2.6 million in 1995. During 1995 compared to
1994, the Company's total revenues increased 66% from $21.8 million to $36.1
million and pro forma income increased 128% from $1.1 million to $2.6 million.
See 'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
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The Company generates earnings and cash flow primarily through the
origination, purchase, securitization and servicing of home equity loans. In a
securitization, the Company sells the loans that it originates or purchases to a
trust for cash and records certain assets and income based upon the Excess
Servicing and the Mortgage Servicing Rights. At the time of the securitization,
the Company estimates these amounts based upon a declining principal balance of
the underlying loans, adjusted by an estimated prepayment rate, and capitalizes
these amounts using a discount rate that market participants would use for
similar financial instruments. These capitalized assets are recorded on the
Company's balance sheet as interest-only and residual certificates and
capitalized Mortgage Servicing Rights, respectively and are aggregated and
reported on the income statement as net gain on sale of mortgage loans, after
being reduced (increased) by (i) loan acquisition premiums paid to
correspondents and brokers, (ii) cost of securitization and (iii) any hedge
losses (gains).
The Company typically begins to receive Excess Servicing cash flow eight to
twelve months from the date of securitization, although this time period may be
shorter or longer depending upon the structure and performance of the
securitization. Prior to such time, a reserve provision is created within the
securitization trust which uses Excess Servicing cash flows to retire a portion
of the securitization bond debt until the spread between the outstanding
principal balance of the mortgage loans in the securitization trust and the
securitization bond debt equals 2-3% of the initial securitization principal
balance. Once this overcollateralization limit is met, excess cash flows are
distributed to Delta. The Company begins to receive contractual mortgage
servicing cash flows in the month following the securitization.
Since 1991, Delta has sold approximately $1.7 billion of its mortgage loans
through 15 REMIC securitizations. Each of these securitizations has been
credit-enhanced by an insurance policy provided through a monoline insurance
company to receive ratings of 'Aaa' from Moody's and 'AAA' from Standard &
Poor's. The Company sells loans through securitizations and, from time to time,
on a whole loan basis, to enhance its operating leverage and liquidity, to
minimize financing costs and to reduce its exposure to fluctuations in interest
rates.
In addition to the excess cash flow from securitizations and proceeds from
whole loan sales, the Company earns the net interest spread on loans held for
sale, origination fees on its Brokered Loans and retail loans (which are
included in other income) and servicing fees of between 0.50% and 0.65% per
annum of the outstanding balance of the loans it services. Since its inception,
the Company has serviced substantially all of the loans it has originated and
purchased, including all of those that it has subsequently sold through
securitizations. Management believes that servicing this loan portfolio enhances
certain operating efficiencies and provides an additional and profitable revenue
stream that is less cyclical than the business of originating and purchasing
loans. As of March 31, 1997, Delta had a servicing portfolio of $1.1 billion of
loans. See '--Loans.'
BUSINESS STRATEGY
The Company's business objective is to increase profitably the volume of
its loan originations and purchases and the size of its servicing portfolio by
(i) continuing to provide top quality service to its network of brokers and
correspondents, (ii) maintaining its underwriting standards, (iii) further
penetrating its established markets and recently-entered markets and expanding
into new geographic markets, (iv) expanding its retail origination capabilities,
(v) expanding through acquisitions and (vi) leveraging its information and
processing technologies.
Continuing to Provide Quality Service
The Company provides a high level of service to its network of brokers and
correspondents that includes preliminary approval of most Brokered Loans and
certain Correspondent Loans within one day, consistent application of its
underwriting guidelines and funding or purchase of loans generally within 14 to
21 days of preliminary approval. In addition, the Company services each broker
and correspondent with a team of professionals that includes a business
development representative, a team of experienced underwriters and, in the case
of Brokered Loans, a team of loan officers working primarily on a commission
basis with processors assisting them to handle applications submitted by each
broker. The Company's loan officers and underwriters endeavor to respond
promptly and consistently on every loan submission. In addition, through its
business development representatives, Delta regularly communicates with brokers
and correspondents in order to better
40
<PAGE>
understand and respond to their needs. The Company believes that this commitment
to service provides it with a competitive advantage in establishing and
maintaining productive broker and correspondent relationships.
Maintaining Underwriting Standards
Over its 15 years in existence, the Company has developed an underwriting
process designed to thoroughly, but efficiently, review and underwrite each
prospective loan. The Company underwrites loans on a highly centralized basis
from its Woodbury, New York headquarters, as well as from its newly opened
underwriting office in Atlanta, Georgia and its Fidelity Mortgage Cincinnati,
Ohio headquarters. Based on its belief that an experienced staff provides a more
effective means of assessing credit risk, the Company employs 51 underwriters,
with an average of seven and one-half years of non-conforming mortgage loan
experience, to ensure that all originated or purchased loans satisfy the
Company's underwriting criteria. The Company's experienced personnel use
underwriting standards developed by the Company in accordance with its
risk-based approach to structuring loans. Each loan must be approved by at least
two underwriters, undergo a full appraisal review and is subject to pre- and
post-funding reviews to confirm compliance with the underwriting procedures and
guidelines. The Company believes that the depth and experience of its
underwriting staff, coupled with consistent application of its underwriting
procedures and criteria, provide the infrastructure needed to manage and sustain
the Company's recent growth, while maintaining the quality of loans originated
or purchased. The depth and experience in the Company's underwriting department
has provided two significant competitive advantages. First, they help to ensure
that the Company's underwriting standard and subjective judgments required in
the non-conforming market are consistently applied, thus enabling the Company to
effectively implement a risk-based pricing strategy. Second, the Company's
extensive training produces experienced underwriters, some of whom are relocated
to the Company's new offices to ensure the same consistency in recently-entered
markets.
Further Penetrating Existing and Recently Entered Markets and Expanding into
New Markets
The Company intends to continue to increase the volume of its Brokered and
Correspondent Loan originations and purchases through a three-pronged strategy
that includes greater originations and purchases from its existing brokers and
correspondents, establishment of new broker and correspondent relationships in
both existing and recently-entered markets and expansion into new markets.
The Company currently originates and purchases loans through its network of
approximately 1,000 brokers and correspondents. Of these, the top 20 brokers and
correspondents and the top broker accounted for 48.2% and 8.9%, respectively, of
the total loans originated and purchased for the three months ended March 31,
1997. Accordingly, the Company believes that there is an opportunity to increase
loan volume from its existing brokers and correspondents.
Prior to 1995, the Company concentrated its efforts on serving brokers and
correspondents in New York, New Jersey and Pennsylvania. Commencing in 1995, the
Company began to implement a program to expand its geographic focus into the New
England, Mid-Atlantic (outside of the tri-state area), Midwest and Southeast
regions. To increase its network of brokers and correspondents in these new
markets, the Company opened four new regional branch offices--including a full
service office in Atlanta, Georgia staffed by two members of Delta's senior
management, three full processing offices in St. Louis, Missouri, Warwick, Rhode
Island and Chicago, Illinois and five business development offices in Ohio (2),
Michigan (2) and Virginia. Although these steps enabled the Company to increase
production in the Midwest, New England, Mid-Atlantic and Southeast regions from
$6.6 million in 1994 to $221.9 million in 1996, production in such regions for
1996 represented only 33.7% of total production, and the Company believes that
it has opportunities to continue to increase loan volume from brokers and
correspondents in these markets.
The Company will continue to consider expansion into new markets. Potential
new markets include those with demographic statistics and regulatory
requirements comparable to or more favorable than those in the Company's
established markets and markets in which the Company is able to hire a business
development representative with substantial contacts with the local brokers and
correspondents.
41
<PAGE>
Expanding its Retail Origination Capabilities
The Company intends to continue its strategy of increasing the volume of
its retail loan originations by expanding its Fidelity Mortgage operations
through new branch openings in new geographic markets and by further penetrating
its existing and newly entered markets. Since the acquisition of Fidelity
Mortgage and its five retail offices, the Company has opened four additional
Fidelity Mortgage offices in Atlanta, Georgia, Fort Lauderdale, Florida,
Charlotte, North Carolina and Cleveland, Ohio.
Expanding Through Acquisitions
Management believes acquisitions can be a means of cost effectively
increasing or diversifying the Company's loan production capabilities. Given the
highly competitive and fragmented nature of the non-conforming mortgage finance
industry, acquisitions present an attractive opportunity for growth. During the
first quarter of 1997, the Company completed its acquisition of Fidelity
Mortgage, which represents Delta's entrance into the retail mortgage origination
market. The Company continually considers acquisition candidates which operate
in geographic or product areas that complement the Company's existing business.
Leveraging its Information and Processing Technologies
In its continued effort to increase efficiency, the Company has added a new
servicing system, purchased a secondary marketing system and a new general
ledger system and upgraded all of its computer hardware within the last year.
The Company's recent and anticipated geographic expansion and growth in
originations and servicing portfolio were considered when these systems were
designed, and management believes its strategic plans can be met without
substantial additional investment in informational systems in the near future.
Management also believes that as the Company further develops the capabilities
of these new systems, further cost savings can be realized.
LOANS
Overview
Delta's consumer finance activities consist of originating, acquiring,
selling and servicing non-conforming mortgage loans. These loans are primarily
secured by first mortgages on one- to four-family residences. Once loan
applications have been received, the underwriting process completed and the
loans funded or purchased, Delta typically packages the loans in a portfolio and
sells the portfolio through a securitization. Delta retains the right to service
the loans that it securitizes. To a lesser extent, the Company sells loans on a
whole loan basis with servicing released.
The Company focuses on providing its customers with an array of loan
products designed to meet customer needs. The Company implements a risk-based
pricing strategy and, as such, has developed products for the various risk
categories. Historically, the Company offered fixed rate loan products. As the
Company has expanded geographically, it has expanded its product offerings to
include adjustable rate mortgage and fixed/adjustable mortgages.
Historically, the Company conducted substantially all of its broker and
correspondent lending operations out of its Woodbury, New York headquarters.
Recently, the Company has begun opening regional branch offices, which include
loan processing, underwriting and business development functions, to bring it in
closer contact with brokers and correspondents and enhance customer service
while underscoring Delta's long-term commitment in newer regions. Typically,
these offices are staffed with a combination of experienced Delta personnel who
oversee implementation of Delta's operating methods and local employees with
established relationships in, and specific knowledge of, the local market.
Currently, the Company's Southeast regional office (Atlanta, Georgia), which is
staffed by two members of Delta's senior management including a Vice President
of Underwriting, is the only 'full service' regional branch, i.e., it has full
underwriting authority. Delta's Midwest (St. Louis, Missouri and Chicago,
Illinois) and New England (Warwick, Rhode Island) regional offices are 'full
processing' regional branches, i.e., final underwriting approval is required
from the Woodbury, New York headquarters for all mortgage loans. As these
branches mature and demonstrate their ability to meet operating
42
<PAGE>
standards, Delta intends to further strengthen their operations by delegating
full underwriting authority, thereby increasing the Company's long-term growth
potential. The Fidelity Mortgage offices have full underwriting authority.
The following chart illustrates the Company's principal consumer finance
activities:
BORROWER
Applies for loan from
|
________________________|________________________
| | |
| | |
CORRESPONDENT BROKER FIDELITY MORTGAGE
Closes loan in own Refers loan to Retail loan organization
name and sells loan to | |
| | |
| | |
D E L T A F U N D I N G C O R P O R A T I O N
|
|
DELTA'S LOAN HELD FOR SALE
| |
Sells loan through securitiza- | | Sells loan on whole loan basis,
tion and recognizes gain on sale | | without recourse, to institu-
represented by interest-only and | | tional purchasers for a cash
residual certificates | | gain on sale
| |
SECURITIZATION WHOLE LOAN SALE
| SERVICING RELEASED
Services all loans sold |
through securitization, |
earning a fixed, recurring |
servicing fee and ancillary |
service income |
|
LOAN SERVICING
PORTFOLIO
Loan Originations and Purchases
The Company has increased its loan originations and purchases by 129% to
$658.8 million in 1996 from $287.8 million in 1995, which was an increase of
140% over 1994 production of $119.7 million.
43
<PAGE>
As Delta has expanded into new markets, Correspondent Loans as a percentage
of all originations and purchases have increased because the average
correspondent generates significantly more production than the average broker.
Delta initially establishes itself in these new markets primarily through
purchases of loans, after which it focuses on broker development which often
leads to establishing a physical presence in the market. Due to Delta's growth
and the repositioning of its portfolio of loans, in recent years the weighted
average loan-to-value ratios have increased while weighted average interest
rates have decreased. The Company believes that a decreased interest rate
environment, coupled with increased lending to 'A' and 'B' borrowers relative to
'C' and 'D' borrowers, has resulted in higher loan-to-value ratios and lower
interest rates. Also, since the late 1980's and early 1990's, home equity
lenders in general have become more comfortable with the stability of home
values.
Delta currently originates and acquires the majority of its loans in 21
states through its network of approximately 1,000 brokers and correspondents.
The following table shows certain information regarding the Company's loan
originations and purchases by source for the periods shown:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- --------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BROKER:
Principal balance.................................. $ 81,407 $175,738 $321,733 $ 66,389 $114,063
Average principal balance per loan................. 66 76 85 85 87
Combined weighted average initial loan-to-value
ratio(1)........................................ 54.8% 62.3% 67.7% 66.8% 70.1%
Weighted average interest rate..................... 11.7% 11.4% 11.1% 10.4% 11.0%
CORRESPONDENT:
Principal balance.................................. $ 38,341 $112,065 $337,033 $ 49,373 $122,679
Average principal balance per loan................. 68 70 73 70 76
Combined weighted average initial loan-to-value
ratio(1)........................................ 56.2% 64.5% 69.8% 68.1% 71.9%
Weighted average interest rate..................... 13.0% 12.4% 11.7% 11.8% 11.6%
TOTAL LOAN ORIGINATIONS AND PURCHASES:
Principal balance.................................. $119,748 $287,803 $658,766 $115,762 $236,742
Average principal balance per loan................. 67 74 78 78 81
Combined weighted average initial loan-to-value
ratio(1)........................................ 55.2% 63.2% 68.8% 67.4% 71.0%
Weighted average interest rate..................... 12.1% 11.8% 11.4% 11.0% 11.3%
PERCENTAGE OF LOANS SECURED BY:
First mortgage..................................... 88.0% 89.6% 93.8% 94.1% 93.6%
Second mortgage.................................... 12.0% 10.4% 6.2% 5.9% 6.4%
</TABLE>
- ------------------
(1) The weighted average initial loan-to-value ratio of a loan secured by a
first mortgage is determined by dividing the amount of the loan by the
lesser of the purchase price or the appraised value of the mortgage property
at origination. The weighted average initial loan-to-value ratio of loan
secured by a second mortgage is determined by taking the sum of the loan
secured by the first and second mortgages and dividing by the lesser of the
purchase price or the appraised value of the mortgage property at
origination.
The following table shows the geographic distribution of loan originations
and purchases for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996
------------------------- ------------------------- -------------------------
REGION PERCENTAGE DOLLAR VALUE PERCENTAGE DOLLAR VALUE PERCENTAGE DOLLAR VALUE
- ------------------------- ---------- ------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
NY, NJ and PA............ 94.5% $113.2 86.2% $248.0 66.3% $436.9
Midwest.................. 2.4 2.9 5.4 15.7 17.0 112.0
Southeast................ 0.3 0.3 0.8 2.2 4.2 27.6
New England.............. 1.8 2.1 2.2 6.2 5.9 38.6
Mid-Atlantic*............ 1.0 1.2 5.4 15.7 6.6 43.7
<CAPTION>
THREE MONTHS
ENDED MARCH 31, 1997
---------------------------
REGION PERCENTAGE DOLLAR VALUE
- ------------------------- ---------- ------------
<S> <C> <C>
NY, NJ and PA............ 60.6% $143.5
Midwest.................. 18.2 43.1
Southeast................ 9.4 22.2
New England.............. 6.4 15.2
Mid-Atlantic*............ 5.4 12.7
</TABLE>
- ------------------
* Excluding New York (NY), New Jersey (NJ) and Pennsylvania (PA).
44
<PAGE>
Broker and Correspondent Marketing. Throughout its history Delta has been
successful in establishing and maintaining relationships with brokers and
correspondents interested in offering non-conforming mortgage products to their
clientele, and management believes that this success is primarily attributable
to the quality of service the Company provides to its network of brokers and
correspondents.
Delta typically initiates contact with a broker or correspondent through
Delta's Business Development Department, comprised of 20 business development
representatives supervised by a senior officer with over ten years of sales and
marketing experience in the industry. The Company usually hires business
development representatives who have contacts with brokers and correspondents
that originate nonconforming mortgage loans within their geographic territory.
The business development representatives are responsible for developing and
maintaining the Company's broker and correspondent networks within their
geographic territory by frequent visits to the broker or correspondent,
communicating the Company's underwriting guidelines, disseminating new product
information and pricing changes, and by a continuing commitment to understanding
the needs of the customer. The business development representatives attend
industry trade shows and are a source of information to Delta concerning
products and pricing offered by competitors and new market entrants, all of
which assists Delta in refining its programs and product offerings in order to
offer competitive service. Business development representatives are compensated
with a base salary and commissions based on the volume of loans originated or
purchased as a result of their efforts.
Approval Process. Before a broker or correspondent becomes part of Delta's
network, it must go through an approval process. Once approved, brokers and
correspondents may immediately begin submitting applications and/or loans to
Delta.
To be approved, a broker must demonstrate that it is properly licensed and
registered in the state in which it seeks to transact business, submit to a
credit check, and sign a standard broker agreement with Delta. A correspondent
is eligible to submit loans to Delta for purchase only after an extensive
investigation of the prospective correspondent's lending operations including an
on-site visit, a review of the correspondent's financial statements for the
prior two years, a credit report on the correspondent, a review of sample loan
documentation and business references provided by the correspondent. Once
approved, Delta requires that each correspondent sign an Agreement of Purchase
and Sale in which the correspondent makes representations and warranties
governing both the mechanics of doing business with Delta and the quality of the
loan submissions themselves. Delta also performs an annual review of each
approved correspondent in order to ensure continued compliance with legal
requirements and that lending operations and financial information continue to
meet Delta's standards. In addition, Delta regularly reviews the performance of
loans originated or purchased through its brokers or correspondents.
Brokers. For the three months ended March 31, 1997, the Company's broker
network accounted for $114.1 million, or 48.2%, of Delta's loan originations and
purchases compared to $66.4 million, or 57.3% of Delta's loan originations and
purchases for the three months ended March 31, 1996, compared to $27.8 million
or 65.8% of Delta's loan originations and purchases for the three months ended
March 31, 1995. No single broker contributed more than 8.9%, 13.5% or 7.4% of
Delta's total originations and purchases for the three months ended March 31,
1997, 1996 or 1995, respectively.
Once approved, a broker may submit loan applications for prospective
borrowers to Delta. To process broker submissions, Delta's broker originations
area is organized into teams, consisting of loan officers and processors, which
are generally assigned to specific brokers. Because Delta operates in a highly
competitive environment where brokers may submit the same loan application to
several prospective lenders simultaneously, Delta strives to provide brokers
with a rapid and informed response. Loan officers analyze the application and
provide the broker with a preliminary approval, subject to final underwriting
approval, or a denial, typically within one business day. If the application is
approved by the Company's underwriters, a 'conditional approval' will be issued
to the broker with a list of specific conditions to be met and additional
documents to be supplied prior to funding the loan. The loan officer and
processor team will then work directly with the submitting broker to collect the
requested information and meet all underwriting conditions. In most cases, the
Company funds loans within 14 to 21 days after preliminary approval of the loan
application. In the case of a denial, Delta will make all reasonable attempts to
ensure that there is no missing information concerning the borrower or the
application that might change the decision on the loan.
The Company compensates its loan officers, who on a loan-by-loan basis are
the primary relationship contacts with the brokers, predominantly on a
commission basis. The Company believes its primarily commission-based
45
<PAGE>
compensation for loan officers gives it a competitive advantage over its
competitors, who, the Company believes, typically assign non- or
lower-commissioned processors to handle this function. Furthermore, all of the
Company's loan officers must complete an extensive 9 to 12 month training
program to attain the level of knowledge and experience integral to the
Company's commitment to providing the highest quality service for brokers.
Management believes that by maintaining an efficient, trained and experienced
staff, it has addressed three central factors which determine where a broker
sends its business: (i) the speed with which a lender closes loans and (ii) the
lender's knowledge concerning the broker and his business and (iii) the support
a lender provides.
Correspondents. For the three months ended March 31, 1997, respectively,
Delta's correspondent network accounted for $122.7 million or 51.8% of Delta's
loan originations and purchases compared to $49.4 million or 42.7% of Delta's
loan originations and purchases for the three months ended March 31, 1996 and
$14.5 million or 34.2% of Delta's loan originations and purchases for the three
months ended March 31, 1995. No single correspondent contributed more than 6.2%,
4.4% or 13.3% of Delta's total loan originations and purchases for the three
months ended March 31, 1997, 1996 or 1995, respectively.
An approved correspondent is a licensed mortgage banker or savings and loan
who sells loans to Delta which the correspondent has originated, processed,
closed and funded in its own name in conformity with Delta's underwriting
standards. The loans are sold to Delta either on an individual flow basis or in
block sales. When selling on a flow basis, a correspondent will typically seek a
preapproval from Delta prior to closing the loan, and Delta will approve the
loan based on a partial or full credit package, stipulating for any items needed
to complete the package in adherence to Delta's underwriting guidelines. On a
block sale, a correspondent will offer a group of loans to Delta for sale (not
necessarily loans that have been preapproved), and Delta will underwrite and
purchase those loans in the block that meet Delta's underwriting criteria. As
with the broker network, Delta's Correspondent Division has a commitment to
quick and knowledgeable service, and is staffed by some of the most capable
mortgage professionals within the Company.
Retail Loans. Fidelity Mortgage is able, through its marketing efforts, to
identify, locate and focus on individuals who, based on its historic customer
profiles, are likely customers for the Company's products. Fidelity Mortgage's
telemarketing representatives identify interested customers and refer these to
loan officers at the retail branch offices who, then, proceed to determine the
applicant's qualifications for the Company's loan products, negotiate loan terms
with the borrower and process the loan through completion.
Loan Underwriting
All of Delta's brokers, correspondents and retail offices are provided with
the Company's underwriting guidelines. Loan applications received from brokers
and correspondents or retail customers are classified according to certain
characteristics, including but not limited to: condition and location of the
collateral, credit history of the applicant, ability to pay, loan-to-value ratio
and general stability of the applicant in terms of employment history and time
in residence. Delta has established classifications with respect to the credit
profile of the applicant, and each loan is placed into one of four letter
ratings 'A' through 'D', with subratings within those categories. Terms of loans
made by Delta, as well as maximum loan-to-value ratios and debt-to-income
ratios, vary depending on the applicant's classification. Loan applicants with
less favorable credit ratings are generally offered loans with higher interest
rates and lower loan-to-value ratios than applicants with more favorable credit
ratings. The general criteria used by Delta's underwriting staff in classifying
loan applicants are set forth below.
46
<PAGE>
DELTA'S UNDERWRITING CRITERIA
<TABLE>
<CAPTION>
'A' RISK
EXCELLENT CREDIT 'B' RISK 'C' RISK 'D' RISK
HISTORY GOOD OVERALL CREDIT GOOD TO FAIR CREDIT FAIR TO POOR CREDIT
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Existing mortgage
history............ Current at Current at Up to 30 days Mortgage rating not a
application time and application time and delinquent at factor
a maximum of two a maximum of four application time and
30-day late payments 30-day late payments a maximum of four
in the last 12 months in the last 12 months 30-day late payments,
two 60-day late
payments and one
90-day late payment
in the last 12 months
Other credit......... Minor 30-day late Some slow pays Slow pays, some open Not a factor.
items allowed with a allowed but majority delinquencies Derogatory credit
letter of of credit and allowed. Isolated must be paid with
explanation; no open installment debt paid charge-offs, proceeds. Must
collection accounts, as agreed. Small collection accounts demonstrate ability
charge-offs, isolated charge-offs, or judgments case- to pay
judgments collections, or by-case
judgments allowed
case-by-case
Bankruptcy
filings............ Discharged more than Discharged more than Discharged more than May be open at
four years prior to three years prior to one year prior to closing, but must be
closing and excellent closing and excellent closing and good paid off with
reestablished credit reestablished credit reestablished credit proceeds
Debt service to
income ratio....... Generally 45% or less Generally 50% or less Generally 50% or less Generally 50% or less
Maximum loan-to-value
ratio:
Owner-occupied....... Generally 80% (up to Generally 80% (up to Generally 75% (up to Generally 65% (up to
90%*) for a one- to 85%*) for a one- to 80%*) for a one- to 70%*) for a one- to
four-family residence four-family residence four-family residence four-family residence
Non-owner occupied... Generally 70% (up to Generally 70% (up to Generally 65% (up to Generally 55% (up to
80%*) for a one- to 80%*) for a one- to 75%*) for a one- to 60%*) for a one- to
four-family residence four-family residence four-family residence four-family residence
Employment........... Minimum 2 years Minimum 2 years No minimum required No minimum required
employment in the employment in the
same field same field
</TABLE>
- ------------------
* On an exception basis.
47
<PAGE>
Delta uses the foregoing categories and characteristics as guidelines only.
On a case-by-case basis, the Company may determine that the prospective borrower
warrants an exception, if sufficient compensating factors exist. Examples of
such compensating factors are: low loan-to-value ratio, low debt ratio,
long-term stability of employment and/or residence, excellent payment history on
past mortgages, or a significant reduction in monthly housing expenses.
The following table sets forth certain information with respect to Delta's
originations and purchases of first and second mortgage loans by borrower
classification, along with weighted average coupons, for the periods shown.
<TABLE>
<CAPTION>
YEAR CREDIT TOTAL PERCENT OF TOTAL WAC(1) WLTV(2)
- ------------------------------ ------- -------- ---------------- ------ -------
<S> <C> <C> <C> <C> <C>
1994 A $ 35,121 29.4% 10.8% 58.9%
B 38,575 32.2% 11.7% 56.4%
C 25,562 21.3% 12.8% 52.9%
D 20,490 17.1% 14.3% 49.3%
-------- ------ ------ -------
Totals $119,748 100.0% 12.1% 55.2%
-------- ------ ------ -------
-------- ------ ------ -------
1995 A $ 89,830 31.3% 10.7% 66.8%
B 124,954 43.4% 11.6% 64.5%
C 37,190 12.9% 12.8% 59.6%
D 35,831 12.4% 14.5% 53.2%
-------- ------ ------ -------
Totals $287,805 100.0% 11.8% 63.2%
-------- ------ ------ -------
-------- ------ ------ -------
1996 A $219,550 33.4% 10.6% 72.1%
B 234,589 35.6% 11.2% 70.2%
C 156,296 23.7% 12.2% 65.7%
D 48,331 7.3% 13.8% 56.9%
-------- ------ ------ -------
Totals $658,766 100.0% 11.4% 68.8%
-------- ------ ------ -------
-------- ------ ------ -------
Three Months ended
March 31, 1997 A $109,829 46.4% 10.8% 74.2%
B 65,786 27.8% 11.2% 71.2%
C 46,192 19.5% 12.1% 67.8%
D 14,935 6.3% 13.6% 56.9%
-------- ------ ------ -------
Totals $236,742 100.0% 11.3% 71.0%
-------- ------ ------ -------
-------- ------ ------ -------
</TABLE>
- ------------------
(1) Weighted Average Coupon ('WAC').
(2) Weighted Average Initial Loan-to-Value Ratio ('WLTV').
Delta employs experienced nonconforming mortgage loan credit underwriters
to scrutinize the applicant's credit profile and to evaluate whether an impaired
credit history is a result of adverse circumstances or a continuing inability or
unwillingness to meet credit obligations in a timely manner. Personal
circumstances including divorce, family illnesses or deaths and temporary job
loss due to layoffs and corporate downsizing will often impair an applicant's
credit record. Assessment of an applicant's ability and willingness to pay is
one of the principal elements that distinguishes Delta's lending practices from
methods employed by traditional lenders, such as savings and loans and
commercial banks. All lenders utilize debt ratios and loan-to-value ratios in
the approval process. In contrast, many lenders simply use software packages to
score an applicant for loan approval and fund the loan after auditing the data
provided by the borrower.
Delta has a staff of 51 underwriters, with an average of more than seven
and one-half years of non-conforming underwriting experience. Delta does not
delegate underwriting authority to any broker or correspondent. Delta's
Underwriting Department functions independently of its Business Development and
Mortgage Origination Departments and does not report to any individual directly
involved in the origination process. No underwriter at Delta is compensated on
an incentive or commission basis.
48
<PAGE>
Delta has instituted underwriting checks and balances that are designed to
ensure that every loan is reviewed and approved by a minimum of two
underwriters, with certain higher loan amounts requiring a third approval.
Management believes that by requiring each file be seen by a minimum of two
underwriters, a high degree of accuracy and quality control is ensured
throughout the underwriting process.
Delta's underwriting of every loan submitted consists not only of a
thorough credit review, but also (i) a separate appraisal review conducted by
Delta's Appraisal Review Department and (ii) a full compliance review to ensure
that all documents have been properly prepared, all applicable disclosures have
been given in a timely fashion, proper compliance with all federal and state
regulations, the existence of title insurance insuring Delta's interest as
mortgagee and evidence of adequate homeowner's insurance naming Delta as an
additional insured party. Appraisals are performed by third party, fee-based
appraisers or by the Company's staff appraisers and generally conform to current
FNMA/FHLMC secondary market requirements for residential property appraisals.
Each such appraisal includes, among other things, an inspection of the exterior
of the subject property and, where available, data from sales within the
preceding 12 months of similar properties within the same general location as
the subject property.
Delta performs a thorough appraisal review on each loan prior to closing or
prior to purchasing. While Delta recognizes that the general practice by
conventional mortgage lenders is to perform only drive-by appraisals after
closings, management believes this practice does not provide sufficient
protection. In addition to reviewing each appraisal for accuracy, the Company
accesses other sources to validate sales used in the appraisal to determine
market value. These sources include: interfacing with Multiple Listing Services,
Comps, Inc. and other similar databases to access current sales and listing
information and other sources for verification, including broker price opinions
and market analyses by local real estate agents.
Post closing, in addition to its normal due diligence, the Company selects
one out of every ten appraisals and performs its own drive-by appraisal. This
additional step helps to give the Company an added degree of comfort with
respect to appraisers with which the Company has had limited experience. Delta
actively tracks all appraisers from which it accepts appraisals for quality
control purposes and does not accept work from appraisers who have not conformed
to its review standards.
The Company performs a post-funding quality control review to monitor and
evaluate the Company's loan origination policies and procedures. At least 10% of
all loan originations and purchases are subjected to a full quality control
re-underwriting and review, the results of which are reported to senior
management. Discrepancies noted by this review are analyzed and corrective
actions are instituted. However, to date, this important quality control process
has not revealed material deficiencies in the Company's loan underwriting
procedures. A typical quality control review currently includes: (a) obtaining a
new drive-by appraisal for each property; (b) running a new credit report from a
different credit report agency; (c) reviewing loan applications for
completeness, signatures, and for consistency with other processing documents;
(d) obtaining new written verification of income and employment; (e) obtaining
new written verification of mortgage to re-verify any outstanding mortgages; and
(f) analyzing the underwriting and program selection decisions. The quality
control process is updated from time to time as the Company's policies and
procedures change.
Loan Sales
Delta sells substantially all the loans it originates or purchases through
one of two methods: (i) securitizations, which involve the private placement or
public offering of pass-through mortgage-backed securities, and (ii) whole loan
sales, which include the sale of blocks of individual loans to institutional or
individual investors. Since 1991, the Company has sold $1.7 billion of the loans
it originated or purchased through securitizations and $54.6 million of loans
through whole loan sales.
49
<PAGE>
Securitizations. The following table sets forth certain information with
respect to Delta's securitizations (all of which, except for the 1997-2
transaction, have been insured by monoline insurance companies and all have been
rated AAA/Aaa by Standard & Poor's and Moody's, respectively) by offering size,
which includes prefunded amounts, remaining principal balance at March 31, 1997
and weighted average pass-through rate.
<TABLE>
<CAPTION>
REMAINING
OFFERING SIZE PRINCIPAL BALANCE WEIGHTED AVERAGE
SECURITIZATION COMPLETED (MILLIONS) AT MARCH 31, 1997 PASS-THROUGH RATE
-------------- --------- ------------- ---------------------- -----------------
<S> <C> <C> <C> <C> <C>
1991-1 02/22/91 $ 92.4 $ 15.5 9.000%
1991-2 12/12/91 $ 50.6 $ 9.1 7.850%
1992-1 11/25/92 $ 64.1 $ 14.7 7.875%
1993-1 03/31/93 $ 27.4 $ 6.9 6.850%
1993-3 08/31/93 $ 31.6 $ 8.6 6.180%
1993-4 12/15/93 $ 30.0 $ 8.8 6.380%
1994-1 03/30/94 $ 30.0 $ 12.1 6.950%
1994-2 10/26/94 $ 60.0 $ 21.3 8.310%
1995-1 05/10/95 $ 80.0 $ 45.8 7.527%
1995-2 11/30/95 $ 150.0 $109.1 6.791%
1996-1 06/12/96 $ 225.0 $193.5 6.598%
1996-2 09/26/96 $ 180.0 $167.0 6.658%
1996-3 12/27/96 $ 210.0 $203.9 6.307%
1997-1 03/27/97 $ 235.0 n/a 6.724%
1997-2 06/26/97 $ 260.0 n/a 6.715%
</TABLE>
When Delta securitizes loans, it sells a portfolio of loans to a trust (the
'Home Equity Loan Trust') and issues classes of certificates representing an
undivided ownership interest in the Home Equity Loan Trust. In its capacity as
servicer for each securitization, the Company collects and remits principal and
interest payments to the appropriate Home Equity Loan Trust which in turn passes
through payments to certificate holders. In every securitization beginning with
the 1995-2 transaction, Delta has retained 100% of the interests in the
interest-only and residual classes of certificates. The Company will continue to
retain the interest-only and residual certificates as long as, in management's
opinion, this practice maximizes earnings and is consistent with the Company's
liquidity requirements.
Each Home Equity Loan Trust, except for the 1997-2 transaction, has the
benefit of a financial guaranty insurance policy from a monoline insurance
company, which insures the timely payment of interest and the ultimate payment
of principal of the investor certificate. In addition to such insurance
policies, the Excess Servicing is applied as an additional payment of principal
of the investor certificates, thereby accelerating the amortization of the
investor certificates relative to the amortization of the loans. This use of the
Excess Servicing creates overcollateralization. Once the overcollateralization
limit is reached, the use of Excess Servicing to create overcollateralization
stops unless it subsequently becomes necessary to again obtain or maintain the
required overcollateralization limit. Overcollateralization is intended to
create a source of cash (the payments on the 'extra' loans) to absorb losses
prior to making a claim on the financial guaranty insurance policy, if
applicable. To date, no claims have been made on the financial guarantee
insurance policies for any of the Company's securitizations.
Delta may be required either to repurchase or to replace loans which do not
conform to the representations and warranties made by Delta in the pooling and
servicing agreement entered into when the portfolio of loans are sold through a
securitization. To date, Delta has not had to make any such repurchases or
replacements. Delta intends to continue to conduct loans sales through
securitization, either in private placements or in public offerings, when market
conditions are attractive for such loan sales.
Whole Loan Sales Without Recourse. The Company has determined from time to
time that some of its 'A' loans and higher loan-to-value ratio loans receive
better execution by being sold on a whole loan, servicing released, non-recourse
basis to third party institutions. The Company does not incur any future loss on
loans sold through this method. The Company intends to continue this practice as
long as it is deemed to be more profitable for the Company. For the three months
ended March 31, 1997, and the years ended 1996 and 1995, Delta sold $0 million,
$15.3 million and $17.6 million, respectively, which represents 0%, 2.3% and
6.1%, respectively, of its originations and purchases.
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<PAGE>
Whole Loan Sales With Recourse. Prior to 1991, Delta combined mortgage
loans into pools and sold those pools as well as individual mortgage loans
directly to a network of commercial banks, savings and loans, insurance
companies, pension funds and accredited investors. Delta generally sold these
pools or individual loans for 100% of the principal balance and negotiated the
pass-through rate of interest to be paid to the investor with the excess
interest retained by Delta. Delta sold loans to investors with recourse whereby
Delta would repurchase any loan which became REO property. This obligation is
subject to various terms and conditions, including, in some instances, a time
limit. At March 31, 1997, there were approximately $18.0 million of loans which
Delta could be required to repurchase in the future should such loans become REO
property.
Loan Servicing and Collections
Delta has been servicing loans since its inception in 1982, and Delta has
serviced or is servicing substantially all of the loans that it has originated
or purchased. Servicing involves, among other things, collecting payments when
due, remitting payments of principal and interest and furnishing reports to the
current owners of the loans and enforcing such owner's rights with respect to
the loans, including, recovering delinquent payments, instituting foreclosure
and liquidating the underlying collateral. The Company receives a servicing fee
for servicing residential mortgage loans of 0.50% per annum (0.65% per annum on
all securitizations completed before and including the 1996-1 securitization) on
the declining principal balance of all loans sold through securitization and on
the declining principal balance of the loans sold to investors on a recourse
basis, which servicing fees are collected out of the monthly mortgage payments.
Management believes that servicing the Company's own portfolio enhances certain
operating efficiencies and provides an additional and profitable revenue stream
that is less cyclical than the business of originating and purchasing loans. As
of March 31, 1997, Delta had a servicing portfolio of $1.1 billion of loans.
Delta services all loans out of its headquarters in Woodbury, New York,
utilizing a leading in-house loan servicing system ('LSAMS') which it
implemented in 1995. LSAMS replaced Delta's former 'service bureau' loan
servicing system, and has provided Delta with considerably more flexibility to
adapt the system to Delta's specific needs as a nonconforming home equity
lender. As such, Delta has achieved significant cost efficiencies by automating
a substantial number of previously manual servicing procedures and functions
since its conversion to LSAMS on July 1, 1995. Management believes that even
greater cost efficiencies can be realized through further automation provided by
LSAMS.
At the same time that it upgraded its primary servicing system, Delta
purchased a default management sub-servicing system ('TPLS') with separate
'modules' for foreclosure, bankruptcy and REO to provide it with the ability to
more efficiently monitor and service loans in default. These sub-servicing
modules provide detailed tracking of all key events in foreclosure and
bankruptcy on a loan-by-loan and portfolio-wide basis; the ability to track and
account for all pre- and post-petition payments received in bankruptcy from the
borrower and/or trustee; and the ability to monitor, market and account for all
aspects necessary to liquidate a REO property after foreclosure. These features
have led to cost savings through greater automation and system upgrades and have
helped mitigate loan losses as the Servicing Department has been able to
identify problem loans earlier, thus allowing for earlier corrective action.
Additionally, Delta's Management Information Systems Department has created a
market value analysis program to run with LSAMS, which provides Delta with the
ability to monitor its equity position on a loan-by-loan and/or portfolio-wide
basis.
Delta's collections policy is designed to identify payment problems
sufficiently early to permit Delta to quickly address delinquency problems and,
when necessary, to act to preserve equity in a pre-foreclosure property. Delta
believes that these policies, combined with the experience level of independent
appraisers engaged by Delta, help to reduce the incidence of charge-offs of a
first or second mortgage loan.
Centralized controls and standards have been established by Delta for the
servicing and collection of mortgage loans in its portfolio. Delta revises such
policies and procedures from time to time in connection with changing economic
and market conditions and changing legal and regulatory requirements.
Borrowers are billed on a monthly basis in advance of the due date.
Collection procedures commence upon identification of a past due account by
Delta's automated servicing system. If timely payment is not received, LSAMS
automatically places the loan in the assigned collector's 'auto queue' and
collection procedures are generally initiated on the day immediately following
the payment due date for chronic late payers, or the day
51
<PAGE>
immediately following the end of the grace period for those borrowers who
usually pay within the grace period or shortly thereafter. LSAMS automatically
queues up each loan in the assigned collector's 'auto queue' at one of these two
dates based upon a particular borrower's payment history over the prior 12
months. The account remains in the queue unless and until a payment is received,
at which point LSAMS automatically removes the loan from that collector's auto
queue until the next month's payment is due and/or becomes delinquent.
When a loan appears in a collector's auto queue, a collector will telephone
to remind the borrower that a payment is due. Follow-up telephone contacts are
attempted until the account is current or other payment arrangements have been
made. Standard form letters are utilized when attempts to reach the borrower by
telephone fail and/or, in some circumstances, to supplement the phone contacts.
During the delinquency period, the collector will continue to contact the
borrower. Company collectors have computer access to telephone numbers, payment
histories, loan information and all past collection notes. All collection
activity, including the date collection letters were sent and detailed notes on
the substance of each collection telephone call, is entered into a permanent
collection history for each account on LSAMS. Additional guidance with the
collection process is derived through frequent communication with Delta's senior
management.
For those loans in which collection efforts have been exhausted without
success, the Pre-foreclosure Manager recommends the loans be sent to foreclosure
at one of two Foreclosure Committee Meetings held each month. At each such
committee meeting, the Pre-foreclosure Manager meets with the Foreclosure
Manager and a member of the Executive Department, to determine whether
foreclosure proceedings are appropriate based upon their analysis of all
relevant factors, including a market value analysis, reason for default and
efforts by the borrower to cure the default.
Regulations and practices regarding the liquidation of properties (e.g.,
foreclosure) and the rights of a borrower in default vary greatly from state to
state. As such, all foreclosures are assigned to outside counsel, located in the
same state as the secured property. Bankruptcies filed by borrowers are
similarly assigned to appropriate local counsel. All aspects of foreclosures and
bankruptcies are closely monitored by Delta through its TPLS sub-servicing loan
system described above and through monthly status reports from attorneys.
Prior to foreclosure sale, Delta performs an in-depth market value analysis
on all defaulted loans. This analysis includes: (i) a current valuation of the
property obtained through a drive-by appraisal or broker's price opinion
conducted by an independent appraiser and/or a broker from Delta's network of
real estate brokers, complete with a description of the condition of the
property, recent price lists of comparable properties, recent closed
comparables, estimated marketing time and required or suggested repairs and an
estimate of the sales price; (ii) an evaluation of the amount owed, if any, for
real estate taxes; (iii) an evaluation of the amount owed, if any, to a senior
mortgagee and (iv) estimated carrying costs, broker's fee, repair costs and
other related costs associated with REO properties. Delta bases the amount it
will bid at foreclosure sales on this analysis.
If Delta acquires title to a property at a foreclosure sale or otherwise,
the REO Department immediately begins working the file by obtaining an estimate
of the sale price of the property by sending at least two local real estate
brokers to inspect the premises, and then hiring one to begin marketing the
property. If the property is not vacant when acquired, local eviction attorneys
are hired to commence eviction proceedings and/or negotiations are held with
occupants in an attempt to get them to vacate without incurring the additional
time and cost of eviction. Repairs are performed if it is determined that they
will increase the net liquidation proceeds, taking into consideration the cost
of repairs, the carrying costs during the repair period and the marketability of
the property both before and after the repairs.
Delta's loan servicing software also tracks and maintains homeowners'
insurance information and tax and insurance escrow information. Expiration
reports are generated bi-weekly listing all policies scheduled to expire within
the next 15 days. When policies lapse, a letter is issued advising the borrower
of such lapse and notifying the borrower that Delta will obtain force-placed
insurance at the borrower's expense. Delta also has an insurance policy in place
that provides coverage automatically for Delta in the event that Delta fails to
obtain force-placed insurance.
52
<PAGE>
The following table sets forth information relating to the delinquency and
loss experience of Delta for its servicing portfolio of mortgage loans for the
periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
-------------------------------------------- ------------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Total Outstanding Principal
Balance (at period end)....... $310,228,743 $468,846,079 $932,958,188 $536,863,662 $1,110,998,901
Average Outstanding (1)......... $300,678,046 $373,384,417 $667,368,565 $517,153,985 $1,048,629,760
DELINQUENCY (at period end)
30-59 Days:
Principal Balance............. $ 22,569,938 $ 35,052,951 $ 54,582,550 $ 27,846,676 $ 60,469,078
Percent(2).................... 7.28% 7.48% 5.85% 5.19% 5.44%
60-89 Days:
Principal Balance............. $ 6,398,055 $ 8,086,230 $ 14,272,587 $ 7,543,965 $ 15,092,040
Percent....................... 2.06% 1.72% 1.53% 1.41% 1.36%
90 Days or More:
Principal Balance............. $ 6,517,506 $ 6,748,061 $ 9,224,525 $ 4,860,781 $ 13,131,534
Percent....................... 2.10% 1.44% 0.99% 0.91% 1.18%
Total Delinquencies:
Principal Balance............. $ 35,485,499 $ 49,887,242 $ 78,079,663 $ 40,251,422 $ 88,692,651
Percent....................... 11.44% 10.64% 8.37% 7.50% 7.98%
FORECLOSURES
Principal Balance............. $ 20,768,336 $ 23,506,751 $ 34,765,638 $ 27,722,786 $ 41,892,909
Percent of Foreclosures by
Dollar...................... 6.69% 5.01% 3.73% 5.16% 3.77%
REO (at period end)............. $ 1,926,922 $ 4,020,295 $ 5,672,811 $ 4,019,817 $ 6,426,415
Net losses on liquidated loans.. $ (687,090) $ (2,142,099) $ (2,866,204) $ (799,130) $ (993,559)
Percentage of net losses on
liquidated loans (based on
Average Outstanding Principal
Balance)...................... (0.23)% (0.57)% (0.43)% (0.15)% (0.09)%
</TABLE>
- ------------------
(1) Calculated by summing the actual outstanding principal balances at the end
of each month and dividing the total by the number of months in the
applicable period.
(2) Percentages are expressed based upon the total outstanding principal balance
at the end of the indicated period.
53
<PAGE>
COMPETITION
As an originator and purchaser of mortgage loans, the Company faces intense
competition, primarily from mortgage banking companies, commercial banks, credit
unions, savings and loans, credit card issuers and finance companies. Many of
these competitors in the financial services business are substantially larger
and have more capital and other resources than the Company. Competition can take
many forms, including convenience in obtaining a loan, service, marketing and
distribution channels and interest rates. Furthermore, the current level of
gains realized by the Company and its competitors on the sale of the type of
loans originated and purchased is attracting additional competitors into this
market with the effect of lowering the gains that may be realized by the Company
on future loan sales. In addition, greater investor acceptance of securities
backed by loans comparable to the Company's mortgage loans and greater
availability of information regarding the prepayment and default experience of
such loans creates greater efficiencies in the market for such securities. Such
efficiencies may create a desire for even larger transactions giving companies
with greater volumes of originations a competitive advantage. In addition, a
more efficient market for such securities may lead certain investors to purchase
securities backed by other types of assets where potential returns may be
greater. Competition may be affected by fluctuations in interest rates and
general economic conditions. During periods of rising rates, competitors which
have 'locked in' low borrowing costs may have a competitive advantage. During
periods of declining rates, competitors may solicit the Company's borrowers to
refinance their loans. During economic slowdowns or recessions, the Company's
borrowers may have new financial difficulties and may be receptive to offers by
the Company's competitors.
Furthermore, certain large national finance companies and conforming
mortgage originators have announced their intention to adapt their conforming
origination programs and allocate resources to the origination of nonconforming
loans. In addition, certain of these larger mortgage companies and commercial
banks have begun to offer products similar to those offered by the Company,
targeting customers similar to those of the Company. The entrance of these
competitors into the Company's market could have a material adverse effect on
the Company.
REGULATION
Delta's business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and is subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of its operations. Delta's consumer lending
activities are subject to the Federal Truth-in-Lending Act and Regulation Z
(including the Home Ownership and Equity Protection Act of 1994), ECOA, the Fair
Credit Reporting Act of 1970, as amended, RESPA, and Regulation X, the Home
Mortgage Disclosure Act and the Federal Debt Collection Practices Act, as well
as other federal and state statutes and regulations affecting Delta's
activities. Delta is also subject to the rules and regulations of, and
examinations by HUD and state regulatory authorities with respect to
originating, processing, underwriting and servicing loans. These rules and
regulations, among other things, impose licensing obligations on Delta,
establish eligibility criteria for mortgage loans, prohibit discrimination,
provide for inspections and appraisals of properties, require credit reports on
loan applicants, regulate assessment, collection, foreclosure and claims
handling, investment and interest payments on escrow balances and payment
features, mandate certain disclosures and notices to borrowers and, in some
cases, fix maximum interest rates, fees and mortgage loan amounts. Failure to
comply with these requirements can lead to loss of approved status, termination
or suspension of servicing contracts without compensation to the servicer,
demands for indemnifications or mortgage loans repurchases, certain rights of
rescission for mortgage loan repurchases, certain rights of rescission for
mortgage loans, class action lawsuits and administrative enforcement actions.
Delta believes it is in compliance in all material respects with applicable
federal and state laws and regulations.
ENVIRONMENTAL MATTERS
To date, Delta has not been required to perform any investigation or
cleanup activities, nor has it been subject to any environmental claims. There
can be no assurance, however, that this will remain the case in the future. In
the ordinary course of its business, Delta from time to time forecloses on
properties securing loans. Although Delta primarily lends to owners of
residential properties, there is a risk that Delta could be required to
investigate and clean-up hazardous or toxic substances or chemical releases at
such properties after acquisition by
54
<PAGE>
Delta, and may be held liable to a governmental entity or to third parties for
property damage, personal injury and investigation and clean-up costs incurred
by such parties in connection with the contamination. In addition, the owner or
former owners of a contaminated site may be subject to common law claims by
third parties based on damages and costs resulting from environmental
contamination emanating from such property.
EMPLOYEES
As of March 31, 1997, Delta had a total of 530 employees (full and
part-time). None of Delta's employees is covered by a collective bargaining
agreement. Delta considers its relations with its employees to be good.
PROPERTIES
Delta's executive and administrative offices are located at 1000 Woodbury
Road, Suite 200, Woodbury, New York 11797, where Delta leases approximately
63,600 square feet of office space at an aggregate annual rent of approximately
$1.2 million. The lease provides for certain scheduled rent increases and
expires in 2004.
Delta Funding Corporation maintains a full service office in Atlanta,
Georgia, full processing offices in St. Louis, Missouri, Chicago, Illinois and
Warwick, Rhode Island, and business development offices in Michigan (2), New
Jersey, Ohio (2), Pennsylvania and Virginia. Fidelity Mortgage maintains nine
retail mortgage origination offices in Florida (2), Georgia, Indiana, Ohio (4)
and North Carolina. The terms of the leases vary as to duration and escalation
provisions, with the latest expiring in 2001.
LEGAL PROCEEDINGS
Because the nature of the Company's business involves the collection of
numerous accounts, the validity of liens and compliance with state and federal
lending laws, the Company is subject to numerous claims and legal actions in the
ordinary course of its business. While it is impossible to estimate with
certainty the ultimate legal and financial liability with respect to such claims
and actions, the Company believes that the aggregate amount of such liabilities
will not result in monetary damages which in the aggregate would have a material
adverse effect on the financial condition or results of the Company.
Several class-action lawsuits have been filed recently against a number of
consumer finance companies alleging that the compensation of mortgage brokers
through the payment of yield spread premiums violates various federal and state
consumer protection laws. On March 18, 1997, the Company received notice that it
had been named in a lawsuit filed in Federal District Court, E.D.N.Y., alleging
that the Company's compensation of mortgage brokers by means of yield spread
premiums violates, among other things, RESPA. The complaint seeks (i)
certification of a class of plaintiffs, (ii) an injunction against payment of
yield spread premiums by the Company and (iii) unspecified compensatory and
punitive damages (including attorney's fees). Management believes the Company
has meritorious defenses and intends to defend this suit, but the Company cannot
estimate with any certainty its ultimate legal or financial liability, if any,
with respect to the alleged claims. On July 7, 1997, the Company filed an answer
to the plaintiff's amended complaint.
55
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the current
directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
Sidney A. Miller................................ 63 Chairman of the Board of Directors
Hugh Miller..................................... 33 Chief Executive Officer, President and Director
Richard Blass................................... 33 Senior Vice President, Chief Financial Officer,
Treasurer and Director
Martin D. Payson................................ 61 Director
Arnold B. Pollard............................... 54 Director
Christopher Donnelly............................ 37 Senior Vice President
Teresa E. Ginter................................ 58 Senior Vice President and Secretary
Randall F. Michaels............................. 38 Senior Vice President
Franklin E. Pellegrin, Jr....................... 47 Senior Vice President
</TABLE>
References to positions held by persons named below covering periods before
the Company's incorporation in 1996 are references to positions held by such
persons at Delta Funding Corporation.
SIDNEY A. MILLER founded the Company and has been Chairman of the Board of
Directors of the Company since its inception. He was President and Chief
Executive Officer from 1982 to 1991 and has been involved in the mortgage
banking industry since 1974. He is also a chartered life insurance underwriter.
Mr. Miller is a director of the Home Equity Lenders Leadership Organization and
the National Home Equity Mortgage Association, as well as an Associate Trustee
of North Shore University Hospital.
HUGH MILLER has been the President and Chief Executive Officer of the
Company since 1991. He has been associated with the Company in various
capacities since 1985 and has been primarily responsible for the day-to-day
operations of the Company since 1985.
RICHARD BLASS is a Senior Vice President and Treasurer of the Company and,
in March 1997, became the Chief Financial Officer. He has served in various
capacities since joining the Company in 1992. Prior thereto, Mr. Blass was a
money market and derivatives trader at Citicorp Securities Markets Inc.
MARTIN D. PAYSON became a Director of the Company in 1996. Mr. Payson
formerly served as Vice Chairman of Time Warner, Inc. from 1990 to 1992, and
prior to the merger of Time Inc. and Warner Communications, Inc., Mr. Payson
held the position of Office of the President and General Counsel of Warner
Communications, Inc., of which he also was a Director for 14 years. Mr. Payson
also serves on the Board of Directors of Renaissance Communications, Corp., a
communications company, Meridian Sports Incorporated, a boating and sports
equipment company, Unapix Entertainment Inc., a media/communications company,
all publicly held companies, and these privately held companies: Latin
Communications Group Inc., Ithaca Holdings Inc., and SCUUL Ltd.
ARNOLD B. POLLARD, PH.D. became a Director of the Company in 1996. Dr.
Pollard has been the President and Chief Executive Officer of Chief Executive
Group, which publishes Chief Executive magazine, since 1993 and, for nearly 20
years, Dr. Pollard has been President of Decision Associates. Dr. Pollard was
also a founding member of the Strategic Decision Analysis Group of SRI and
previously served as Chairman and Chief Executive Officer of Biopool
International. Dr. Pollard also serves on the Board of Directors of GKN
Securities, Inc., a brokerage firm, a public company, and The Landry Service
Co., Inc. and is on the advisory board of Simply Interactive, Inc.
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<PAGE>
CHRISTOPHER DONNELLY has been a Senior Vice President of the Company since
1995 and was a Vice President of the Company from 1992 to 1995. Mr. Donnelly
joined the Company in 1987 and since 1991, has been primarily responsible for
supervising all aspects of credit and underwriting, including the Broker and
Correspondent Divisions and Appraisal Review. Since joining the Company in 1987,
Mr. Donnelly has served in a variety of positions, including Assistant Manager
of Originations.
TERESA E. GINTER has been a Senior Vice President of the Company since 1992
and was a Vice President of the Company from 1986 to 1992. Ms. Ginter's primary
responsibilities include supervising the internal operations of the Broker
Division. Ms. Ginter has been with the Company since its inception and has
served in a variety of positions.
RANDALL F. MICHAELS has been a Senior Vice President of the Company since
1996 and has been the National Sales Manager since he joined the Company in 1995
as a Vice President. Mr. Michaels is primarily responsible for supervising all
aspects of sales and marketing for the Company. Mr. Michaels has over 14 years
experience in the non-conforming mortgage loan markets. Prior to joining Delta,
Mr. Michaels was Regional Sales Manager of Quality Mortgage/Express Funding
Inc., a mortgage finance company, for two years and, before that, Regional Sales
Manager of American Funding Group, a mortgage finance company, for six years.
FRANKLIN E. PELLEGRIN, JR. has been a Senior Vice President of the Company
since 1996 and has been the Servicing Manager since he joined the Company in
1996 as a Vice President. Mr. Pellegrin has been involved in the mortgage
banking industry for 24 years. From 1979 to 1995, Mr. Pellegrin served as Senior
Vice President in charge of servicing and data processing of Mid-Coast Mortgage
Company, a mortgage finance company.
The directors are divided into three classes, denominated Class I, Class II
and Class III, with the terms of office of each class expiring at the 1997, 1998
and 1999 annual meeting of stockholders, respectively. At each annual meeting
following such initial classification and election, directors elected to succeed
those directors whose terms expire will be elected for a term to expire at the
third succeeding annual meeting of stockholders after their election. The
directors in each class are as follows: Class I--Arnold B. Pollard and Richard
Blass, Class II--Martin D. Payson and Sidney A. Miller, and Class III--Hugh
Miller. All officers are appointed by and serve, subject to the terms of their
employment agreements, if any, at the discretion of the Board of Directors.
FAMILY RELATIONSHIPS
Hugh Miller is Sidney A. Miller's son. No other family relationship exists
among any of the Directors or executive officers of the Company. No arrangement
or understanding exists between any Director or executive officer or any other
person pursuant to which any Director or executive officer was selected as a
Director or executive officer of the Company. Subject to rights under applicable
employment agreements, each executive officer serves at the pleasure of the
Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has three standing committees: the Executive
Committee, the Compensation Committee and the Audit Committee. Sidney A. Miller
and Hugh Miller serve on the Executive Committee which is authorized to exercise
the powers of the Board of Directors between meetings. However, the Executive
Committee may not (i) amend the Certificate of Incorporation or the By-laws of
the Company, (ii) adopt an agreement of merger or consolidation, (iii) recommend
to the stockholders the sale, lease, or exchange of all or substantially all of
the Company's property and assets, (iv) recommend to the stockholders a
dissolution of the Company or revoke a dissolution, (v) elect a director or (vi)
declare a dividend or authorize the issuance of stock. Messrs. Payson and
Pollard serve on the Compensation Committee and the Audit Committee. The
Compensation Committee is responsible for recommending to the Board of Directors
the Company's executive compensation policies for senior officers and
administering the 1996 Employee Stock Option Plan (the 'Stock Option Plan'). See
'--Stock Option Plan.' The Audit Committee is responsible for recommending
independent auditors, reviewing the audit plan, the adequacy of internal
controls, the audit report and the management letter and performing such other
duties as the Board of Directors may from time to time prescribe.
57
<PAGE>
EMPLOYMENT AGREEMENTS; KEY-MAN LIFE INSURANCE
Employment Agreements
Effective October 1, 1996, the Company entered into employment agreements
with Sidney A. Miller, Hugh Miller, Christopher Donnelly and Randall F.
Michaels, and on March 4, 1997, the Company entered into an employment agreement
with Richard Blass. Sidney A. Miller's and Hugh Miller's employment agreements
are for terms of five years, and Richard Blass', Christopher Donnelly's and
Randall F. Michaels' employment agreements are for terms of three years.
Under the terms of the respective employment agreements, the Company pays
Sidney A. Miller a minimum base salary of $350,000 per year, Hugh Miller a
minimum base salary of $350,000 per year, Richard Blass a minimum base salary of
$160,000 per year, Christopher Donnelly a minimum base salary of $150,000 per
year and Randall F. Michaels a minimum base salary of $125,000 per year. Each of
these officers is entitled to participate generally in the Company's employee
benefit plans, including the Stock Option Plan, and is eligible for an incentive
bonus from the Company's executive bonus pool. The cash bonuses available to
Christopher Donnelly and Randall F. Michaels are made at the discretion of the
Board of Directors and are based on subjective performance criteria. Under the
terms of their employment agreements, Sidney A. Miller, Hugh Miller and Richard
Blass are eligible for cash bonuses in any one fiscal year of up to 400% of
their annual salary for Messrs. Miller and Miller and up to 50% of his annual
salary for Richard Blass, payable on a quarterly basis 60 days after the
relevant quarter. The amount of such quarterly cash bonus is calculated under
the agreements as follows: for each 1% increase in net earnings per share for
the relevant fiscal quarter greater than 10% as measured against the
corresponding quarter in the prior fiscal year, each of Sidney A. Miller and
Hugh Miller will receive a quarterly cash bonus of 15% of his respective current
annual salary and Richard Blass will receive a quarterly cash bonus of 1.875% of
his current annual salary.
Under the terms of their respective employment agreements, Sidney A. Miller
and Hugh Miller also are granted benefits covering life insurance (Sidney A.
Miller receives coverage up to $25,000,000, and Hugh Miller receives coverage of
up to $1,000,000), medical expenses not covered by insurance (up to $100,000 per
year) and allowances for business related travel and entertainment (up to
$25,000 per year).
If any of these five executive officers is terminated 'for cause,' which
definition generally includes termination by the Company due to the executive's
willful failure to perform his duties under the employment agreement, the
executive's personal dishonesty, or the executive's breach of his fiduciary
duties or the employment agreement to which he is a party, then the Company is
obligated to pay the executive so terminated only his base salary up to the date
of his termination 'for cause.' However, if either Richard Blass, Christopher
Donnelly or Randall F. Michaels is terminated without cause, the Company is
obligated to pay such executive officer certain amounts set forth in the
agreement which would be paid to Mr. Blass, Mr. Donnelly or Mr. Michaels in
equal installments over the six months following any such termination without
cause. If either Sidney A. Miller or Hugh Miller is terminated without cause,
the Company is obligated to pay such executive officer his base salary, bonus
and benefits for the remaining term of his employment agreement. If either
Sidney A. Miller or Hugh Miller resigns for 'good reason,' which generally
includes the executive officer's resignation due to a breach by the Company of
his employment agreement or a change of control in the ownership of the Company,
the Company must pay such executive officer his salary, bonus and benefits for
the remaining term of the employment agreement.
Key-Man Life Insurance
The Company maintains a key-man life insurance policy in the amount of
approximately $1,000,000 on Hugh Miller, on which the Company is named as
beneficiary. The Company does not maintain key-man life insurance policies on
any of its other executive officers, however, the Company would be reimbursed
from Sidney A. Miller's split-dollar life insurance policy for the lesser of the
cash value or all premiums paid during the term of the policy. See 'Certain
Relationships and Related Party Transactions.'
58
<PAGE>
COMPENSATION OF DIRECTORS
The Company pays each nonemployee director compensation of $20,000 per
annum and a fee of $1,000 for each meeting of the Board of Directors that he
attends. The Company initially granted 10,000 options to each nonemployee
director, one-quarter of which vested immediately, with an additional
one-quarter vesting each year thereafter. The Company reimburses each director
for ordinary and necessary travel expenses related to such director's attendance
at Board of Directors and committee meetings.
EXECUTIVE COMPENSATION
The Summary Compensation Table below provides certain summary information
concerning compensation paid or accrued during the years ended December 31,
1996, 1995 and 1994 by the Company to or on behalf of the Chief Executive
Officer and the four other highest paid executive officers of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
---------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION(1)
- -------------------------------- ---- -------- ---------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Sidney A. Miller................ 1996 $ 53,846 $ 350,000 -- 25,000 $ 5,218
Chairman of the Board 1995 -- 3,000,000 -- -- 4,672
1994 624,000 150,000 -- -- 2,669
Hugh Miller..................... 1996 408,554 350,000 -- 100,000 5,218
Chief Executive Officer 1995 419,200 275,000 -- -- 4,675
1994 520,000 50,000 -- -- 2,752
Richard Blass................... 1996 108,173 50,000 $2,038 25,000 5,218
Chief Financial Officer 1995 68,062 6,000 -- -- 2,308
1994 61,308 2,000 1,112 -- 1,182
Christopher Donnelly............ 1996 138,462 16,000 5,288 25,000 5,218
Senior Vice President 1995 91,019 9,500 488 -- 3,148
1994 68,851 4,950 747 -- 1,368
Randall F. Michaels............. 1996 120,739 143,054 -- 25,000 --
Senior Vice President 1995 32,298 7,155 -- -- --
1994 -- -- -- -- --
</TABLE>
- ------------------
(1) Consists of contributions by the Company to the executive officers'
respective accounts pursuant to the Delta Funding Corporation Profit-Sharing
Plan.
STOCK OPTION PLAN
The Company adopted the Stock Option Plan in October 1996. The Stock Option
Plan is administered by the Compensation Committee. All employees and directors
of, and consultants to, the Company as may be determined from time to time by
the Compensation Committee are eligible to receive options under the Stock
Option Plan.
A total of 2,200,000 shares of common stock were authorized for issuance
under the Stock Option Plan. Not more than 1,000,000 shares of common stock may
be the subject of options granted to any individual during the duration of the
Stock Option Plan. As of March 31, 1997, the Company granted options to purchase
an aggregate of 631,850 shares of its common stock to certain eligible
participants under the Stock Option Plan.
The exercise price of an incentive stock option and a non-qualified stock
option is fixed by the Compensation Committee at the date of grant; however, the
exercise price under an incentive stock option must
59
<PAGE>
be at least equal to the fair market value of the common stock at the date of
grant, and 110% of the fair market value of the common stock at the date of
grant for any incentive stock option granted to a member of the Miller family.
Stock options are exercisable for a duration determined by the Compensation
Committee, but in no event more than ten years after the date of grant. Options
shall be exercisable at such rate and times as may be fixed by the Compensation
Committee on the date of grant. The aggregate fair market value (determined at
the time the option is granted) of the common stock with respect to which
incentive stock options are exercisable for the first time by a participant
during any calendar year (under all stock option plans of the Company) shall not
exceed $100,000; to the extent this limitation is exceeded, such excess options
shall be treated as non-qualified stock options for purposes of the Stock Option
Plan and the Code (as defined).
At the time a stock option is granted, the Compensation Committee may, in
its sole discretion, designate whether the stock option is to be considered an
incentive stock option or non-qualified stock option. Stock options with no such
designation shall be deemed non-qualified stock options.
Payment of the purchase price for shares acquired upon the exercise of
options may be made by any one or more of the following methods: in cash, by
check, by delivery to the Company of shares of common stock already owned by the
option holder, or by such other method as the Compensation Committee may permit
from time to time. However, a holder may not use previously owned shares of
common stock to pay the purchase price under an option, unless the holder has
beneficially owned such shares for at least six months.
Stock options become immediately vested and exercisable in full upon the
occurrence of such special circumstances as in the opinion of the Board of
Directors merit special consideration.
Stock options terminate at the end of the 30th business day following the
holder's termination of employment or service. This period is extended to one
year in the case of the disability or death of the holder and, in the case of
death, the stock option is exercisable by the holder's estate. The
post-termination exercise period for any individual may be extended by the Board
of Directors, but not beyond the expiration of the original term of the option.
The options granted under the Stock Option Plan contain anti-dilution
provisions which will automatically adjust the number of shares subject to the
option in the event of a stock dividend, split-up, conversion, exchange,
reclassification or substitution. In the event of any other change in the
corporate structure or outstanding shares of common stock, the Compensation
Committee may make such equitable adjustments to the number of shares and the
class of shares available under the Stock Option Plan or to any outstanding
option as it shall deem appropriate to prevent dilution or enlargement of
rights.
The Company shall obtain such consideration for granting options under the
Stock Option Plan as the Compensation Committee in its discretion may request.
Each option may be subject to provisions to assure that any exercise or
disposition of common stock will not violate federal and state securities laws.
No option may be granted under the Stock Option Plan after the day
preceding the tenth anniversary of the adoption of the Stock Option Plan.
The Board of Directors or the Compensation Committee may at any time
withdraw or amend the Stock Option Plan and may, with the consent of the
affected holder of an outstanding option at any time withdraw or amend the terms
and conditions of outstanding options. Any amendment which would increase the
number of shares issuable pursuant to the Stock Option Plan or to any individual
thereunder or change the class of individuals to whom options may be granted
shall be subject to the approval of the stockholders of the Company.
401(K) SAVINGS PLAN
In 1994, Delta Funding Corporation established a 401(k) Profit-Sharing Plan
(the 'Plan'), which is intended to comply with Sections 401(a) and 401(k) of the
Code, and the applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended. Amounts contributed to the Plan are held under a trust
intended to be exempt from income tax pursuant to Section 501(a) of the Code.
All employees of Delta Funding
60
<PAGE>
Corporation that have completed at least one year of service and who are at
least 21 years old are eligible to participate in the Plan. Participating
employees are entitled to make pre-tax contributions to their accounts, subject
to certain maximum annual limits imposed by law, in 1996), and certain other
limitations. Delta Funding Corporation may elect to make a discretionary
contribution to the Plan each year. Employees are always fully vested in their
own contributions, Delta Funding Corporation's contributions vest in
participating employees over a six-year period. Distributions generally are
payable in a lump-sum after retirement, disability or death and, in certain
circumstances, upon termination of employment with Delta Funding Corporation for
other reasons.
OPTION GRANTS
The following table shows all grants of options in 1996 to the executive
officers of the Company named in the Summary Compensation Table. The options
were granted under the Stock Option Plan. Pursuant to the rules of the
Securities and Exchange Commission (the 'Commission'), the table also shows the
value of the options granted at the end of the option terms (seven years) if the
stock price were to appreciate annually by 5% and 10%, respectively. There is no
assurance that the stock price will appreciate at the rates shown in the table.
The table also indicates that if the stock price does not appreciate, there will
be no increase in the potential realizable value of the options granted.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
-------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
NO. OF PERCENT OF ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION --------------------------------
NAME GRANTED 1996 ($/SH) DATE 0% 5% 10%
- --------------------------- ---------- ------------- -------------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sidney A. Miller........... 25,000 5.36% $16.50 11-01-03 -- $167,929 $ 391,346
Hugh Miller................ 100,000 21.42 16.50 11-01-03 -- 671,716 1,565,383
Richard Blass.............. 25,000 5.36 16.50 11-01-03 -- 167,929 391,346
Christopher Donnelly....... 25,000 5.36 16.50 11-01-03 -- 167,929 391,346
Randall F. Michaels ....... 25,000 5.36 16.50 11-01-03 -- 167,929 391,346
</TABLE>
- ------------------
(1) No stock appreciation rights were granted to executive officers in 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
There were no options exercised by any of the executive officers of the
Company named in the Summary Compensation Table during 1996. No stock
appreciation rights ('SARs') have ever been granted to executive officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT DECEMBER 31, 1996 DECEMBER 31, 1996
ACQUIRED ON VALUE -------------------------------- --------------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE(#) UNEXERCISABLE(#) EXERCISABLE($) UNEXERCISABLE($)
- ---------------------------------- ----------- ----------- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Sidney A. Miller.................. 0 $ 0 0 25,000 $0 $ 37,500
Hugh Miller....................... 0 0 0 100,000 0 150,000
Richard Blass..................... 0 0 0 25,000 0 37,500
Christopher Donnelly.............. 0 0 0 25,000 0 37,500
Randall F. Michaels............... 0 0 0 25,000 0 37,500
</TABLE>
61
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the Company's initial public offering, the Company had not had a
compensation committee or any other committee of the Board of Directors
performing similar functions. Prior to the Company's initial public offering,
decisions concerning executive compensation were made by the Board of Directors,
including Sidney A. Miller and Hugh Miller, who were and continue to be
executive officers of the Company and participated in deliberations of the Board
of Directors regarding executive officer compensation. The Board of Directors of
the Company established a Compensation Committee on November 1, 1996. See
'--Committees of the Board of Directors.'
None of the executive officers of the Company currently serves on the
compensation committee of another entity or any other committee of the board of
directors of another entity performing similar functions. For other related
party transactions, see 'Certain Relationships and Related Party Transactions.'
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In October 1996, the Company's subsidiary, Delta Funding Corporation,
issued certain S corporation distribution notes in the amount of $23,400,000 to
the Former Shareholders. Such notes were repaid in November 1996.
A note due from Hugh Miller in the amount of $990,000 which had an interest
rate of 7.5% per annum and a maturity date in 2001 was repaid in full in June
1996.
A note due from Sidney A. Miller in the amount of $2,000,000 which had an
interest rate of 7.8% per annum was repaid in full when it matured in December
1995.
The Company previously sub-leased its Woodbury, New York office space from
Commercial Capital Corp. of New York ('Commercial Capital'), a corporation which
is wholly-owned by Rona V. Miller (Sidney A. Miller's wife). This lease was
assigned to the Company on August 2, 1996. Prior to this assignment, the Company
always paid rent to Commercial Capital in an amount equal to that which
Commercial Capital paid the landlord.
Long Island Closing Corporation, a company wholly-owned by Rona V. Miller,
is hired by title abstract companies as closing agent to clear titles on
substantially all of the Company's Brokered Loan closings held at the Company's
headquarters. All fees for these services are paid by the borrowers, which
amounted to $96,213 for 1995, $126,672 for 1996 and $29,660 for the three months
ended March 31, 1997.
Miller Planning Corporation, a company which is wholly-owned by Sidney A.
Miller, acts as the Company's agent in procuring the Company's group health,
disability and life insurance policies from independent insurance carriers and
receives commissions from the insurance companies on the same; which, in 1995,
totaled $29,240 and in 1996, totaled $25,455. This same affiliate previously
offered life and disability credit insurance to the Company's borrowers for
which this affiliate received commissions.
The Company pays the annual premium on a $25,000,000 split-dollar life
insurance policy for Sidney A. Miller. The beneficiaries on the policy are
certain members of the Miller family; however, in the event of Sidney A.
Miller's demise, the Company is first reimbursed out of the proceeds of the
policy for the lesser of the cash value or all premiums it has paid during the
term of the policy.
Certain members of the Miller family guaranteed two of the Company's lines
of credit with unaffiliated financial institutions in 1996. A $1,000,000 line
was personally guaranteed by Sidney A. Miller and a $2,500,000 line was
personally guaranteed, jointly and severally, by Sidney A. Miller and Hugh
Miller. Currently, none of the Company's credit facilities are personally
guaranteed. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources.'
TRANSACTIONS IN CONNECTION WITH TERMINATION OF S CORPORATION STATUS
On October 31, 1996, the Company acquired all of the outstanding stock of
Delta Funding Corporation in exchange for 10,653,000 shares of common stock of
the Company. Prior to the Exchange, Delta Funding Corporation was treated for
federal income tax purposes as an S corporation under Subchapter S of the Code,
and
62
<PAGE>
as such, the historical earnings of Delta Funding Corporation through October
31, 1996 were taxed directly to the shareholders of Delta Funding Corporation.
As a result of the Exchange, the Company and Delta Funding Corporation, which
became a wholly-owned subsidiary of the Company, became subject to federal and
state income taxes and the Company recorded a deferred tax liability on its
balance sheet relating to the tax effect of temporary differences between book
and tax accounting, principally relating to recognition of gain on sales of
mortgage loans.
On November 1, 1996, the Company completed its initial public offering of
4,600,000 shares of common stock at an offering price of $16.50 per share. The
net proceeds of the offering to the Company, exclusive of underwriting discounts
and commissions and other expenses, were $69,701,435. In November 1996,
$32,607,000 of the proceeds raised in the offering was distributed to the Former
Shareholders to make distributions of S corporation earnings. Remaining
undistributed S corporation earnings of $18,071,687 were reclassified as
additional paid-in capital.
On October 31, 1996, the Company became a C corporation for federal and
state income tax purposes and as such was subject to federal and state income
tax on its taxable income for the months of November and December 1996. In
connection with the change in tax status from an S corporation to a C
corporation, the Company incurred a deferred income tax expense of $3,900,496 as
of October 31, 1996. The liability for income taxes at December 31, 1996
reflected on the consolidated balance sheet includes a deferred tax liability of
$5,010,676. This represents the tax effect of differences between the tax basis
and financial statement carrying amounts of assets and liabilities.
Prior to the Exchange, Delta Funding Corporation and the Former
Shareholders entered into a tax agreement relating to their respective income
tax liabilities. Because the Company became fully subject to corporate income
taxation after the termination of the Company's S corporation status, the
reallocation of income and deduction between the period during which the Company
was treated as an S corporation and the period after which the Company became
subject to corporate income taxation may increase the taxable income of one
party while decreasing that of another party. Accordingly, the tax agreement is
intended to assure that taxes are borne by the Company on the one hand and the
Former Shareholders on the other, only to the extent that such parties received
the related income. The tax agreement generally provides that, if an adjustment
is made to the taxable income of the Company for a year in which it was treated
as an S corporation, the Company will indemnify the Former Shareholders and the
Former Shareholders will indemnify the Company against any increase in the
indemnified party's income tax liability (including interest and penalties and
related costs and expenses), with respect to any tax year to the extent such
increase results in a related decrease in the income tax liability of the
indemnifying party for that year. However, the tax agreement specifically
provides that the Former Shareholders will not be responsible for any portion of
any deferred tax liability recorded on the balance sheet of Delta Funding
Corporation upon termination of the S corporation status. The Company will also
indemnify the Former Shareholders for all taxes imposed upon them as the result
of their receipt of an indemnification payment under the tax agreement. Any
payment made by the Company to the Former Shareholders pursuant to the tax
agreement may be considered by the Internal Revenue Service or state taxing
authorities to be non-deductible by the Company for income tax purposes. Neither
parties' obligations under the tax agreement are secured, and, as such, there
can be no assurance that the Former Shareholders or the Company will have funds
available to make any payments which may become due under the tax agreement. To
date, no payments have been made under the tax agreement.
63
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table provides information at June 5, 1997, with respect to
(i) any person known to the Company to be the beneficial owner of five percent
or more of the common stock, (ii) all Directors (both continuing and nominees)
of the Company, (iii) each of the five most highly compensated executive
officers of the Company, and (iv) all directors and executive officers as a
group. Unless otherwise indicated, the beneficial ownership disclosed consists
of sole voting and investment power.
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER(1) NUMBER OF SHARES PERCENT OF CLASS
- -------------------------------------------------------------------- ---------------- ----------------
<S> <C> <C>
Hugh Miller(2)...................................................... 5,502,319 35.8%
Sidney A. Miller.................................................... 4,899,027 31.9%
Marc E. Miller(3)................................................... 4,004,645 26.1%
Lee Miller(4)....................................................... 4,004,645 26.1%
Richard Blass....................................................... 1,517 *
Martin D. Payson.................................................... 12,500(5) *
Arnold B. Pollard................................................... 2,500(6) *
Randall F. Michaels................................................. 2,064 *
Christopher Donnelly................................................ 508 *
All Directors and executive officers as a group..................... 10,423,010 67.8%
</TABLE>
- ------------------
* Less than one percent
(1) Unless otherwise indicated, the address of each beneficial owner is c/o
Delta Financial Corporation, 1000 Woodbury Road, Woodbury, New York 11797.
(2) Includes (i) 4,003,451 shares of common stock owned by two grantor retained
annuity trusts, of which Mr. Hugh Miller is a trustee and has shared voting
and investment power (Mr. Hugh Miller disclaims beneficial ownership of
these shares of common stock); and (ii) 2,388 shares of common stock of
which he has sole voting and investment power for the benefit of two family
members under the Uniform Gifts for Minor's Act (Mr. Hugh Miller disclaims
beneficial ownership of these shares of common stock).
(3) Includes 4,003,451 shares of common stock owned by two grantor retained
annuity trusts, of which Mr. Marc E. Miller is a trustee and has shared
voting and investment power (Mr. Marc E. Miller disclaims beneficial
ownership of these shares of common stock).
(4) Includes 4,003,451 shares of common stock owned by two grantor retained
annuity trusts, of which Mr. Lee Miller is a trustee and has shared voting
and investment power (Mr. Lee Miller disclaims beneficial ownership of these
shares of common stock).
(5) Includes 2,500 options to purchase shares of common stock held by Mr. Payson
which are currently exercisable. Mr. Payson's address is 750 Lexington
Avenue, New York, New York 10022.
(6) Includes 2,500 options to purchase shares of common stock held by Dr.
Pollard which are currently exercisable. Dr. Pollard's address is c/o Chief
Executive Group, 733 Third Avenue, New York, New York 10017.
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<PAGE>
DESCRIPTION OF THE NOTES
GENERAL
The Notes will be issued pursuant to an Indenture dated as of the Issue
Date (the 'Indenture'), among the Company, the Subsidiary Guarantors and The
Bank of New York, as trustee (the 'Trustee'). The terms of the Notes include
those stated in the Indenture and those made part of the Indenture by reference
to the Trust Indenture Act of 1939, as amended (the 'Trust Indenture Act'). The
Notes are subject to all such terms, and Holders of the Notes are referred to
the Indenture and the Trust Indenture Act for a statement thereof. The following
summary of certain provisions of the Indenture does not purport to be complete
and is qualified in its entirety by reference to the Indenture, including the
definitions therein of certain terms used below. A copy of the form of Indenture
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The definitions of certain terms used in the following
summary are set forth below under 'Certain Definitions.' For purposes of this
summary, the term 'Company' refers only to Delta Financial Corporation and not
to any of its Subsidiaries.
The Notes will be general unsecured obligations of the Company and will
rank pari passu in right of payment with all current and future unsecured
unsubordinated Indebtedness of the Company. However, the Notes will be
effectively subordinated to secured Indebtedness of the Company and the
Subsidiary Guarantors, and interests (including Indebtedness) of Securitization
Trusts which rank senior in right of payment to the Company's right to receive
excess cash flow of such trusts. The operations of the Company are conducted
through its Subsidiaries and, therefore, the Company is dependent upon the cash
flow of its Subsidiaries to meet its obligations, including its obligations
under the Notes. All of the Company's current and future Restricted Subsidiaries
will guarantee the Company's payment obligations under the Notes on a senior
unsecured basis. See 'Risk Factors--Fraudulent Conveyance Considerations.' As of
the Issue Date, all of the Subsidiaries will be Restricted Subsidiaries.
However, under certain circumstances, the Company will be able to designate
current or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted
Subsidiaries will not be subject to many of the restrictive covenants set forth
in the Indenture.
As of March 31, 1997, after giving effect to this Offering and the
application of the proceeds thereof, the Company and the Subsidiary Guarantors
had approximately $3.3 million of secured Indebtedness outstanding under credit
facilities and an additional $76.6 million was available for borrowing
thereunder. The Indenture will permit substantial additional borrowings by the
Company and the Subsidiary Guarantors under its credit facilities in the future,
subject to certain restrictions. See 'Risk Factors--Leverage; Asset
Encumbrances.'
PRINCIPAL, MATURITY AND INTEREST
The Notes will be limited in aggregate principal amount to $150.0 million
and will mature on July , 2004. Interest on the Notes will accrue at the rate
of % per annum and will be payable semi-annually in arrears on
and , commencing on , 1997, to Holders of record on the
immediately preceding and . Interest on the Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of original issuance. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal, premium, if any, and interest on the Notes will be payable at the
office or agency of the Company maintained for such purpose within the City and
State of New York or, at the option of the Company, payment of interest may be
made by check mailed to the Holders of the Notes at their respective addresses
set forth in the register of Holders of the Notes; provided that all payments of
principal, premium, if any, and interest with respect to the Notes the Holders
of which have given valid, timely and complete wire transfer instructions to the
Company and the Trustee will be required to be made by wire transfer of
immediately available funds to the accounts specified by the Holders thereof in
such instructions. Until otherwise designated by the Company, the Company's
office or agency in New York will be the office of the Trustee maintained for
such purpose. The Notes will be issued in denominations of $1,000 and integral
multiples thereof.
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<PAGE>
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Notes will be jointly and
severally guaranteed on a senior unsecured basis by the Subsidiary Guarantors.
The obligations of each Subsidiary Guarantor under its Subsidiary Guarantee will
be limited so as not to constitute a fraudulent conveyance under applicable law.
See, however, 'Risk Factors--Fraudulent Conveyance Considerations.' The Company
is a holding company and substantially all of its assets and liabilities are
held, and its operations are conducted, by such Restricted Subsidiaries.
Consequently, separate financial statements of the Subsidiary Guarantors are not
presented because management has determined that they would not be material to
investors.
The Indenture will provide that no Subsidiary Guarantor may consolidate
with or merge with or into (whether or not such Subsidiary Guarantor is the
surviving Person), another Person whether or not affiliated with such Subsidiary
Guarantor unless (i) subject to the provisions of the following paragraph, the
Person formed by or surviving any such consolidation or merger (if other than
such Subsidiary Guarantor) assumes all the obligations of such Subsidiary
Guarantor pursuant to a supplemental indenture in form and substance reasonably
satisfactory to the Trustee, under the Notes and the Indenture and (ii)
immediately after giving effect to such transaction, no Default or Event of
Default exists.
The Indenture will provide that, subject to the covenant described below
under 'Certain Covenants--Merger, Consolidation or Sale of Assets,' in the
event of a sale or other disposition of all of the assets of any Subsidiary
Guarantor, by way of merger, consolidation or otherwise, or a sale or other
disposition of all of the capital stock of any Subsidiary Guarantor, then such
Subsidiary Guarantor (in the event of a sale or other disposition, by way of
such a merger, consolidation or otherwise, of all of the capital stock of such
Subsidiary Guarantor) or the Person acquiring the property (in the event of a
sale or other disposition of all of the assets of such Subsidiary Guarantor)
will be released and relieved of its obligations under its Subsidiary Guarantee;
provided that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Indenture. In addition, the
Indenture will provide that, in the event the Company designates a Restricted
Subsidiary to be an Unrestricted Subsidiary in accordance with the Indenture,
then such Restricted Subsidiary shall be released from its obligations under its
Subsidiary Guarantee. See 'Repurchase at the Option of Holders--Asset Sales.'
OPTIONAL REDEMPTION
The Notes will not be redeemable at the option of the Company prior to July
, 2001. Thereafter, the Notes will be redeemable at the Company's option, in
whole or in part, at any time or from time to time, upon not less than 30 nor
more than 60 days' prior notice to each Holder, at the following redemption
prices (expressed in percentages of principal amount), plus accrued and unpaid
interest thereon to the applicable redemption date, if redeemed during the
twelve-month period commencing on of the years set forth below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- -------------------------------------------------------------- ----------
<S> <C>
2001.......................................................... %
2002.......................................................... %
2003 and thereafter........................................... %
</TABLE>
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
The Indenture will provide that, upon the occurrence of a Change of
Control, each Holder of the Notes will have the right to require the Company to
repurchase all or any part (equal to $1,000 or an integral multiple thereof) of
such Holder's Notes pursuant to the offer described below (the 'Change of
Control Offer') at an offer price in cash equal to 101% of the aggregate
principal amount thereof plus accrued and unpaid interest
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thereon, if any, to the date of purchase (the 'Change of Control Payment').
Within ten days following any Change of Control, the Company will mail a notice
to each Holder describing the transaction or transactions that constitute the
Change of Control and offering to repurchase the Notes on the date specified in
such notice, which date shall be no earlier than the earliest date permitted
under Rule 14e-1 under the Exchange Act ('Rule 14e-1') and no later than 60 days
from the date such notice is mailed (the 'Change of Control Payment Date'),
pursuant to the procedures required by the Indenture and described in such
notice. The Company will comply with the requirements of Rule 14e-1 and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Notes as a
result of a Change of Control. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the covenant
described hereunder, the Company shall comply with the applicable securities
laws and regulations and shall not be deemed to have breached its obligations
under the covenant described hereunder by virtue thereof.
Pursuant to the Indenture, on the Change of Control Payment Date, the
Company will, to the extent lawful, (1) accept for payment all the Notes or
portions thereof properly tendered pursuant to the Change of Control Offer, (2)
deposit with the Paying Agent an amount equal to the Change of Control Payment
in respect of all the Notes or portions thereof so tendered and (3) deliver or
cause to be delivered to the Trustee the Notes so accepted together with an
Officers' Certificate stating the aggregate principal amount of the Notes or
portions thereof being purchased by the Company. The Paying Agent is required to
promptly mail to each Holder of the Notes so tendered the Change of Control
Payment for such Notes, and the Trustee is required to promptly authenticate and
mail (or cause to be transferred by book entry) to each Holder a new Note equal
in principal amount to any unpurchased portion of the Notes surrendered, if any;
provided that each such new Note will be in a principal amount of $1,000 or an
integral multiple thereof. The Company will publicly announce the results of the
Change of Control Offer on or as soon as practicable after the Change of Control
Payment Date.
The Change of Control provisions described above will be applicable whether
or not the covenant described below under '--Certain Covenants--Merger,
Consolidation or Sale of Assets' is applicable. Except as described above with
respect to a Change of Control, the Indenture does not contain provisions that
permit the Holders of the Notes to require that the Company repurchase or redeem
the Notes in the event of a takeover, recapitalization or similar transaction.
The Company's Warehouse Facilities contain, and future Indebtedness of the
Company may contain, prohibitions of certain events that could constitute a
Change of Control. In addition, the financial effect on the Company of the
exercise by the Holders of the Notes of their right to require the Company to
repurchase the Notes could cause a default under outstanding Indebtedness, even
if the Change of Control itself does not. In addition, the Company's ability to
pay cash to the Holders of the Notes upon a repurchase may be limited by the
Company's then existing financial resources.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer and purchases all the
Notes validly tendered and not withdrawn under such Change of Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of 'all or substantially all'
of the assets of the Company and its Restricted Subsidiaries taken as a whole.
Although there is a developing body of case law interpreting the phrase
'substantially all,' there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a Holder of the Notes to
require the Company to repurchase such Notes as a result of a sale, lease,
transfer, conveyance or other disposition of less than all of the assets of the
Company and its Restricted Subsidiaries, taken as a whole, to another Person or
group may be uncertain.
Asset Sales
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by an Officers' Certificate delivered to the Trustee and, with
respect to any Asset Sale involving consideration in excess of $5.0 million, a
resolution of the Company's Board of Directors) of the assets or Equity
Interests issued or sold or
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otherwise disposed of and (ii) at least 85% (or, in the case of the sale or
other disposition of any Residual Receivables (or interest therein), 50%) of the
consideration therefor received by the Company or such Restricted Subsidiary is
in the form of Cash Equivalents; provided that the amount of (x) any liabilities
(as shown on the Company's or such Restricted Subsidiary's most recent balance
sheet) of the Company or any Restricted Subsidiary (other than contingent
liabilities and liabilities that are by their terms subordinated to the Notes or
any Subsidiary Guarantee thereof) that are expressly assumed by the transferee
of any such assets pursuant to a customary novation agreement that releases the
Company or such Restricted Subsidiary from further liability and (y) any
currencies, securities, notes or other obligations received by the Company or
any such Restricted Subsidiary from such transferee that are converted by the
Company or such Restricted Subsidiary into Cash Equivalents within 30 days after
receipt (to the extent of the cash received), shall be deemed to be Cash
Equivalents for purposes of this provision.
The Indenture will permit the Company or the Restricted Subsidiary, as the
case may be, within 180 days after the receipt of any Net Proceeds from an Asset
Sale subject to this covenant, to apply an amount equal to 100% of such Net
Proceeds to (i) an Investment (other than in Receivables that, at the time of
purchase, are not Eligible Receivables), or (ii) the purchase of Receivables
that are, at the time of purchase, Eligible Receivables, or (iii) the making of
any capital expenditure, or (iv) the acquisition of any other tangible assets,
in each case, in or with respect to a Permitted Business. Pending the final
application of any such Net Proceeds, the Company or such Restricted Subsidiary
may temporarily reduce outstanding Indebtedness or otherwise invest such Net
Proceeds in any manner not prohibited by the Indenture. Any Net Proceeds from
Asset Sales not applied or invested as provided in the preceding sentence of
this paragraph will be deemed to constitute 'Excess Proceeds.' When the
aggregate amount of Excess Proceeds exceeds $10.0 million, the Indenture will
require the Company to make an offer to all Holders of the Notes (an 'Asset Sale
Offer') to purchase the maximum principal amount of the Notes that may be
purchased out of the Excess Proceeds, at an offer price in cash in an amount
equal to 100% of the principal amount thereof plus accrued and unpaid interest
thereon to the date of purchase, in accordance with the procedures set forth in
the Indenture.
Notwithstanding the foregoing, the Indenture will further provide that the
Company will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly sell or otherwise convey or dispose of any Residual
Receivables or interest therein for consideration of which less than 85% is in
the form of Cash Equivalents, unless: (i) from and after the Issue Date, upon
the creation of any Senior Residual Receivables by the Company or any Restricted
Subsidiary, the Company shall designate, by an Officers' Certificate delivered
to the Trustee, Senior Residual Receivables with an aggregate book value equal
to 25% of the book value of the Senior Residual Receivables so created as
Retained Residual Receivables ('Retained Residual Receivables') and no such
designation shall have been revoked except as provided below; (ii) none of the
Residual Receivables sold, conveyed or otherwise disposed of constitute Retained
Residual Receivables unless after giving effect to such sale, conveyance or
other disposition the aggregate amount of Senior Residual Receivables of the
Company and its Restricted Subsidiaries which are unencumbered by any Lien (of
which no more than 25% of the aggregate book value thereof shall constitute
Retained Residual Receivables) would be greater than or equal to 250% of all
Senior Indebtedness of the Company and its Restricted Subsidiaries; and (iii)
after giving effect to any such sale, conveyance or other disposition of
Residual Receivables the aggregate amount of Senior Residual Receivables of the
Company and its Restricted Subsidiaries which are unencumbered by any Lien (of
which not more than 25% of the aggregate book value thereof shall constitute
Retained Residual Receivables) would be greater than or equal to 150% of all
Senior Indebtedness of the Company and its Restricted Subsidiaries. The
Indenture will provide that from time to time the Company may revoke the
designation of any Senior Residual Receivable as a Retained Residual Receivable
if the Company simultaneously designates as Retained Residual Receivables (in
addition to any other such designation otherwise required by the Indenture)
Senior Residual Receivables (not subject to any Lien) with an aggregate book
value equal to or greater than that of the Senior Residual Receivables as to
which such designation has been revoked. Any determination of the amount of
Residual Receivables shall be based on the consolidated balance sheet of the
Company and its Restricted Subsidiaries for the most recently ended fiscal
quarter for which financial statements are available, after giving pro forma
effect to the Asset Sale for which such determination is being made and to any
other sale of or Lien on or reduction of Residual Receivables since the date of
such balance sheet.
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To the extent that the aggregate amount of the Notes tendered pursuant to
an Asset Sale Offer is less than the Excess Proceeds, the Company or the
Restricted Subsidiary, as the case may be, may use any remaining Excess Proceeds
for general corporate purposes. If the aggregate principal amount of the Notes
surrendered by Holders thereof exceeds the amount of Excess Proceeds, the
Trustee is required to select the Notes to be purchased on a pro rata basis.
Upon completion of such Asset Sale Offer, the amount of Excess Proceeds shall be
reset at zero.
Under the Indenture, the Asset Sale Offer is required to remain open for
the minimum period of time required by Rule 14e-1 and no longer (the 'Asset Sale
Offer Period'). Under the Indenture, no later than five Business Days after
termination of the Asset Sale Offer Period (the 'Asset Sale Purchase Date'), the
Company is required to purchase the principal amount of the Notes required to be
purchased pursuant to this covenant (the 'Asset Sale Offer Amount') or, if less
than the Asset Sale Offer Amount has been tendered, all the Notes tendered in
response to the Asset Sale Offer.
If the Asset Sale Purchase Date is on or after an interest payment record
date and on or before the related interest payment date, any accrued and unpaid
interest will be paid to the Person in whose name a Note is registered at the
close of business on such record date, and no additional interest will be
payable to Holders who tender the Notes pursuant to the Asset Sale Offer.
Under the Indenture, on or before the Asset Sale Purchase Date, the Company
is required, to the extent lawful, to accept for payment, on a pro rata basis,
to the extent necessary, the Asset Sale Offer Amount of the Notes or portions
thereof tendered pursuant to the Asset Sale Offer, or if less than the Asset
Sale Offer Amount has been tendered, all such Notes tendered, and to deliver to
the Trustee an Officers' Certificate stating that such Notes or portions thereof
were accepted for payment by the Company in accordance with the terms of this
covenant. The Company, the depositary or the Paying Agent, as the case may be,
is required, not later than five days after the Asset Sale Purchase Date, to
mail or deliver to each tendering Holder an amount equal to the purchase price
of the Notes tendered by such Holder and accepted by the Company for purchase,
and the Company is required to issue a new Note, and the Trustee, upon delivery
of an Officers' Certificate from the Company, is required to authenticate and
mail or deliver such new Note to such Holder, in a principal amount equal to any
unpurchased portion of any Note surrendered. Any Note not so accepted is
required to be promptly mailed or delivered by the Company to the Holder
thereof. The Company will publicly announce the results of the Asset Sale Offer
on the Asset Sale Purchase Date.
The Company will comply, to the extent applicable, with the requirements of
Rule 14e-1 and any other securities laws or regulations in connection with the
repurchase of any Notes pursuant to the covenant described hereunder. To the
extent that the provisions of any securities laws or regulations conflict with
the provisions of the covenant described hereunder, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under the covenant described hereunder by virtue
thereof.
CERTAIN COVENANTS
Restricted Payments
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or
pay any dividend or make any other payment or distribution on account of the
Company's or any of its Restricted Subsidiaries' Equity Interests (including,
without limitation, any payment in connection with any merger or consolidation
involving the Company) other than dividends or other payments or distributions
payable in Equity Interests (other than Disqualified Stock) of the Company or
dividends or other payments or distributions payable to the Company or any
Wholly-Owned Restricted Subsidiary of the Company; (ii) purchase, redeem or
otherwise acquire or retire for value (including, without limitation, any
payment in connection with any merger or consolidation involving the Company)
any Equity Interests of the Company (other than any such Equity Interests owned
by any Wholly-Owned Restricted Subsidiary of the Company) or any direct or
indirect parent of the Company; (iii) make any principal payment on or with
respect to, purchase, redeem, defease or otherwise acquire or retire for value
any Indebtedness that is subordinated to the Notes or any Subsidiary Guarantee
(other than intercompany Indebtedness payable to the Company or a Restricted
Subsidiary
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by any Restricted Subsidiary), except at its stated maturity; or (iv) make any
Restricted Investment (all such payments and other actions set forth in clauses
(i) through (iv) above being collectively referred to as 'Restricted Payments'),
unless, at the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto, have been permitted to incur at
least $1.00 of additional Indebtedness pursuant to the test set forth in
the first paragraph of the covenant described below under '--Incurrence of
Indebtedness and Issuance of Preferred Stock'; and
(c) such Restricted Payment, together with the aggregate amount of
all other Restricted Payments made by the Company and its Restricted
Subsidiaries after the Issue Date (excluding Restricted Payments permitted
by clauses (ii) and (iii) of the next succeeding paragraph), is less than
the sum of (i) 25% of the aggregate cumulative Consolidated Net Income of
the Company for the period (taken as one accounting period) from and after
the last day of the first fiscal quarter ending immediately following the
Issue Date to the end of the Company's most recently ended fiscal quarter
for which internal financial statements are available at the time of such
Restricted Payment (or, if such Consolidated Net Income for such period is
a deficit, less 100% of such deficit); plus (ii) 100% of the aggregate net
cash proceeds received by the Company from the issue or sale since the
Issue Date of Equity Interests of the Company (other than Disqualified
Stock) or of Disqualified Stock or Indebtedness represented by securities
of the Company that have been converted into such Equity Interests (other
than Equity Interests (or Disqualified Stock or convertible debt
securities) sold to a Subsidiary of the Company and other than Disqualified
Stock or other Indebtedness represented by securities that have been
converted into Disqualified Stock); plus (iii) to the extent that any
Restricted Investment that was made after the Issue Date is sold for cash
or otherwise liquidated or repaid for cash, the lesser of (A) the cash
return of capital with respect to such Restricted Investment (less the cost
of disposition, if any) and (B) the initial amount of such Restricted
Investment.
The foregoing provisions will not prohibit the following Restricted
Payments: (i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the Indenture; (ii) the purchase, redemption or
other acquisition or retirement for value of any Equity Interests of the Company
in exchange for, or out of the proceeds of, the substantially concurrent sale
(other than to a Subsidiary of the Company) of other Equity Interests of the
Company (other than any Disqualified Stock); provided, that the amount of any
such net cash proceeds that are utilized for such redemption, repurchase,
retirement or other acquisition shall be excluded from clause (c)(ii) of the
preceding paragraph; (iii) the payment of principal on, or purchase, redemption,
defeasance or other acquisition or retirement for value of Indebtedness with the
net cash proceeds from an incurrence of, Permitted Refinancing Indebtedness or
the substantially concurrent sale (other than to a Subsidiary of the Company) of
Equity Interests of the Company (other than Disqualified Stock); provided, that
the amount of any such net cash proceeds from any such sale of Equity Interests
that are utilized for such redemption, repurchase, retirement or other
acquisition shall be excluded from clause (c)(ii) of the preceding paragraph;
(iv) payments in an amount not to exceed $500,000 in the aggregate during any
fiscal year of the Company (plus any such amount not utilized in the preceding
fiscal year) in connection with the repurchase, redemption or other acquisition
or retirement for value of any Equity Interests of the Company held by an
employee or director of the Company or any of its Subsidiaries, related to
compensation or severance arrangements; (v) advances to a Securitization Trust
required to be made by the Company or any Restricted Subsidiary (in its capacity
or the holder of the residual interest in such trust) if such advances rank
senior in right of payment to all other interests in, and Indebtedness of, such
trust; and (vi) the making and consummation of any offer to repurchase any
Indebtedness upon the occurrence of a change of control under and as defined in
the documents governing such Indebtedness; provided, that in connection with
Indebtedness incurred after the Issue Date, the definition of 'change of
control' is the same in all material respects as the definition of 'Change of
Control' set forth in the Indenture and payments pursuant thereto are not
required to be made prior to the date on which the Change of Control Payment is
required to be made under the Indenture and, with respect to any Indebtedness
subordinated in right of payment to the Notes, no sooner than 30 days after the
date such Change of Control Offer is required to be made.
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The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash) in
the Subsidiary so designated will be deemed to be Restricted Payments at the
time of such designation and will reduce the amount available for Restricted
Payments under the first paragraph of this covenant. All such outstanding
Investments will be deemed to constitute Investments in an amount equal to the
fair market value of such Investments at the time of such designation. Such
designation will only be permitted if such Restricted Payment would be permitted
at such time and if such Restricted Subsidiary otherwise meets the definition of
an Unrestricted Subsidiary.
The amount of all Restricted Payments other than cash shall be the fair
market value (evidenced by an Officers' Certificate on the date of the
Restricted Payment) of the asset(s) or securities proposed to be transferred or
issued by the Company or such Restricted Subsidiary, as the case may be,
pursuant to the Restricted Payment. The fair market value of any non-cash
Restricted Payment in excess of $1.0 million shall be determined by the Board of
Directors whose resolution with respect thereto shall be delivered to the
Trustee, such determination to be based upon an opinion or appraisal issued by
an accounting, appraisal or investment banking firm of national standing if such
fair market value exceeds $10.0 million. Not later than the date of making any
Restricted Payment, the Company shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by the covenant 'Restricted
Payments' were computed.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guaranty or otherwise become directly or indirectly liable, contingently
or otherwise, with respect to (collectively, 'incur') any Indebtedness
(including Acquired Debt) or issue Disqualified Stock, and that the Company will
not permit any of its Restricted Subsidiaries to issue any shares of preferred
stock except for preferred stock issued to and held by the Company or any
Wholly-Owned Restricted Subsidiary of the Company, provided that any subsequent
issuance or transfer of Capital Stock that results in such Wholly-Owned
Restricted Subsidiary ceasing to be a Wholly-Owned Restricted Subsidiary of the
Company or any subsequent transfer of such preferred stock (other than to the
Company or any of its Wholly-Owned Restricted Subsidiaries) will be deemed, in
each case, to constitute the issuance of such preferred stock by the issuer
thereof; provided, however, that the Company or any Subsidiary Guarantor may
incur Indebtedness (including Acquired Debt) or issue Disqualified Stock and any
Subsidiary Guarantor may issue preferred stock if, on the date of such
incurrence or issuance and after giving effect thereto, the Consolidated
Leverage Ratio does not exceed 2.0 to 1.0.
The foregoing provisions will not apply to:
(1) the incurrence by the Company or any Restricted Subsidiary of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or purchase money obligations, in each case incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property used in the business of the Company or such
Restricted Subsidiary, in an aggregate principal amount not to exceed $15.0
million in the aggregate since the Issue Date;
(2) the existence of Warehouse Facilities, regardless of amount, and
the incurrence of Permitted Warehouse Debt by the Company or any of its
Restricted Subsidiaries; provided, however, that to the extent any such
Indebtedness of the Company or a Restricted Subsidiary of the Company
ceases to constitute Permitted Warehouse Debt, to such extent such
Indebtedness shall be deemed to be incurred by the Company or such
Restricted Subsidiary of the Company, as the case may be, at such time;
(3) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness owing to the Company or any of
its Restricted Subsidiaries; provided, however, that (i)(A) any subsequent
issuance or transfer of any Capital Stock which results in any such
Indebtedness being held by a Person other than a Restricted Subsidiary of
the Company and (B) any sale or transfer of any such Indebtedness to a
Person that is not either the Company or a Restricted Subsidiary of the
Company, shall be deemed, in each case, to constitute the incurrence of
such Indebtedness by the Company or such Restricted Subsidiary, as the
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case may be, and (ii) any Indebtedness of the Company to any Restricted
Subsidiary is permitted by the covenant described above under '--Restricted
Payments;'
(4) the incurrence by the Company of Indebtedness represented by the
Notes and the incurrence by the Subsidiary Guarantors of Subsidiary
Guarantees;
(5) Indebtedness of the Company and its Restricted Subsidiaries
outstanding on the Issue Date;
(6) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness with respect to
Indebtedness that was permitted by the Indenture to be incurred or that was
outstanding at the Issue Date;
(7) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations directly related to (i) Indebtedness of
the Company or a Restricted Subsidiary of the Company that was permitted by
the Indenture to be incurred, (ii) Receivables held by the Company or a
Restricted Subsidiary pending sale in a Securitization, (iii) Receivables
of the Company or a Restricted Subsidiary that have been sold pursuant to a
Warehouse Facility; or (iv) Receivables that the Company or a Restricted
Subsidiary reasonably expects to purchase or commit to purchase, finance or
accept as collateral; provided, however, that, in the case of each of the
foregoing clauses (i) through (iv), such Hedging Obligations are eligible
to receive hedge accounting treatment in accordance with GAAP as applied by
the Company and its Restricted Subsidiaries on the Issue Date;
(8) the incurrence of Acquired Debt by the Company or any Subsidiary
Guarantor in a principal amount not to exceed $15.0 million in the
aggregate since the Issue Date (reduced by the amount of Acquired Debt
repaid with Net Proceeds of Asset Sales of the Restricted Subsidiary
acquired subject to such Acquired Debt) that is without recourse to the
Company or any of its Restricted Subsidiaries or any of their respective
assets (other than the Subsidiary Guarantor acquired subject to such
Acquired Debt), and is not guaranteed by any such Person;
(9) the Guarantee by the Company or any of the Subsidiary Guarantors
of the Indebtedness of the Company or another Subsidiary Guarantor that was
permitted to be incurred by another provision of this covenant;
(10) the incurrence by the Company and the Subsidiary Guarantors of
Indebtedness in an aggregate principal amount at any time outstanding not
to exceed $10.0 million; and
(11) (A) the incurrence by an Unrestricted Subsidiary of the Company
of Non-Recourse Debt (including, without limitation, Non-Recourse Debt that
would constitute Permitted Warehouse Debt if incurred by a Restricted
Subsidiary of the Company); provided, however, that if any such
Indebtedness ceases to be Non-Recourse Debt of the Unrestricted Subsidiary,
such event shall be deemed to constitute an incurrence of Indebtedness by a
Restricted Subsidiary and (B) the issuance by an Unrestricted Subsidiary of
the Company of preferred stock.
The Indenture will also provide that the Company will not, and will not
permit any Subsidiary Guarantor to, incur any Indebtedness that is contractually
subordinated to any Indebtedness of the Company or any such Subsidiary Guarantor
unless such Indebtedness is also contractually subordinated to the Notes, or the
Subsidiary Guarantee of such Subsidiary Guarantor (as applicable), on
substantially identical terms; provided, however, that no Indebtedness shall be
deemed to be contractually subordinated to any other Indebtedness solely by
virtue of being unsecured or of limited recourse.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Indebtedness described in clauses (1) through (11) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company shall, in its sole discretion, classify such item of Indebtedness in any
manner that complies with this covenant and such item of Indebtedness will be
treated as having been incurred pursuant to only one of such clauses or pursuant
to the first paragraph hereof.
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Liens
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or suffer to exist any Lien on any asset now owned or hereafter acquired,
or any income or profits therefrom or assign or convey any right to receive
income therefrom, except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to (i)(A) pay dividends
or make any other distributions to the Company or any of its Restricted
Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest
or participation in, or measured by, its profits, or (B) pay any indebtedness
owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or
advances to the Company or any of its Restricted Subsidiaries or (iii) transfer
any of its properties or assets to the Company or any of its Restricted
Subsidiaries, except for such encumbrances or restrictions existing under or by
reason of (a) agreements relating to Indebtedness as in effect as of the Issue
Date, and any amendments, modifications, restatements, renewals, increases,
supplements, refundings, additions (including additional Warehouse Facilities),
replacements or refinancings thereof, provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
additions, replacements or refinancings are no more restrictive with respect to
such dividend and other payment restrictions than those contained in the
agreements relating to Indebtedness as in effect on the Issue Date, (b)
applicable law, (c) any instrument governing Acquired Debt or Capital Stock of a
Person acquired by the Company or any of its Restricted Subsidiaries as in
effect at the time of such acquisition (except to the extent such Acquired Debt
was incurred or such Capital Stock was issued or its terms amended in connection
with or in contemplation of such acquisition), which encumbrance or restriction
is not applicable to any Person, or the property or assets of any Person, other
than the Person or the property or assets of the Person, so acquired, provided
that such Person is not taken into account in determining on a pro forma basis
whether such acquisition subject to such Acquired Debt was permitted by the
terms of the Indenture, (d) customary non-assignment provisions in leases
entered into in the ordinary course of business and consistent with past
practices, (e) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in clause
(iii) above on the property so acquired, and (f) Permitted Refinancing
Indebtedness; provided that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are no more restrictive than
those contained in the agreements governing the Indebtedness being refinanced.
Merger, Consolidation or Sale of Assets
The Indenture will provide that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions to, another
Person unless (i) the Company is the surviving corporation or the Person formed
by or surviving any such consolidation or merger (if other than the Company) or
to which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) the
Person formed by or surviving any such consolidation or merger (if other than
the Company) or the Person to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made assumes all the obligations
of the Company under the Notes and the Indenture pursuant to a supplemental
indenture in a form reasonably satisfactory to the Trustee; (iii) immediately
after such transaction no Default or Event of Default exists; and (iv) the
Company or the Person formed by or surviving any such consolidation or merger
(if other than the Company), or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made (A) will have Consolidated
Net Worth immediately after the transaction equal to or greater than the
Consolidated Net Worth of the Company immediately preceding the transaction and
(B) will, at the time of such transaction and after giving pro forma effect
thereto, be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the first paragraph of the covenant described above under
'--Incurrence of Indebtedness and Issuance of Preferred Stock.'
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Transactions with Affiliates
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make or amend any transaction, contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (each of the foregoing actions, considered separately, an
'Affiliate Transaction'), unless (i) such Affiliate Transaction is on terms that
are no less favorable to the Company or the relevant Restricted Subsidiary than
those that would have been obtained in a comparable transaction by the Company
or such Restricted Subsidiary with an unrelated Person and (ii) the Company
delivers to the Trustee (a) with respect to any Affiliate Transaction or series
of related Affiliate Transactions involving aggregate consideration in excess of
$1.0 million, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause (i)
above and that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors and (b) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $5.0 million, an opinion as to the fairness
to the Company or such Restricted Subsidiary of such Affiliate Transaction from
a financial point of view issued by an accounting, appraisal or investment
banking firm of national standing; provided that Affiliate Transactions shall
not include (A) any employment agreement, stock option, employee benefit,
indemnification, compensation (including the payment of reasonable fees to
Directors of the Company or its Restricted Subsidiaries who are not employees of
the Company or its Restricted Subsidiaries), business expense reimbursement or
other employment-related agreement, arrangement or plan entered into by the
Company or any of its Restricted Subsidiaries in the ordinary course of business
of the Company or such Restricted Subsidiary, (B) transactions between or among
the Company and/or its Restricted Subsidiaries not otherwise prohibited by the
Indenture, (C) loans or advances to employees in the ordinary course of business
of the Company or its Restricted Subsidiaries, but in any event not to exceed
$500,000 in aggregate principal amount outstanding at any one time, and (D)
Restricted Payments other than Restricted Investments that are permitted by the
provisions of the Indenture described above under the caption '--Restricted
Payments'.
Business Activities
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any business other than Permitted Businesses.
Payments for Consent
The Indenture will provide that neither the Company nor any of its
Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder of
any of the Notes for or as an inducement to any consent, waiver or amendment of
any of the terms or provisions of the Indenture or the Notes unless such
consideration is offered to be paid or is paid to all Holders of Notes that
consent, waive or agree to amend in the time frame set forth in the solicitation
documents relating to such consent, waiver or agreement.
Reports
The Indenture will provide that, whether or not required by the rules and
regulations of the Commission, so long as any of the Notes are outstanding, the
Company will furnish to the Holders of the Notes (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a 'Management's Discussion and Analysis of Financial Condition
and Results of Operations' that describes the financial condition and results of
operations of the Company and its consolidated Subsidiaries (showing in
reasonable detail, either on the face of the financial statements or in the
notes thereto and in Management's Discussion and Analysis of Financial Condition
and Results of Operations, the financial condition and results of operations of
the Company and its Restricted Subsidiaries separately from the financial
condition and results of operations of the Unrestricted Subsidiaries of the
Company) and, with respect to the annual information only, a report thereon by
the Company's certified independent accountants and (ii) all current reports
that would be required to be filed with the Commission on Form 8-K if the
Company were required to file such reports. In addition, whether or not
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required by the rules and regulations of the Commission, the Company will file a
copy of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request.
EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that each of the following constitutes an Event
of Default: (i) default for 30 days in the payment when due of interest on the
Notes; (ii) default in payment when due of the principal of or premium, if any,
on the Notes; (iii) failure by the Company to comply with the provisions
described above under 'Change of Control,' 'Asset Sales,' 'Restricted Payments,'
'Incurrence of Indebtedness and Issuance of Preferred Stock,' 'Merger,
Consolidation or Sale of Assets' or 'Liens'; (iv) failure by the Company for 30
days after notice to comply with any of its other agreements in the Indenture or
the Notes; (v) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Subsidiaries (or
the payment of which is guaranteed by the Company or any of its Subsidiaries)
whether such Indebtedness or guarantee now exists, or is created after the date
of the Indenture, which default (a) is caused by a failure to pay principal of
or premium, if any, or interest on such Indebtedness prior to the expiration of
the grace period provided in such Indebtedness on the date of such default (a
'Payment Default') or (b) results in the acceleration of such Indebtedness prior
to its express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such Indebtedness
under which there has been a Payment Default or the maturity of which has been
so accelerated, aggregates $5.0 million or more; (vi) failure by the Company or
any of its Subsidiaries to pay final judgments aggregating in excess of $5.0
million, which judgments are not paid, discharged or stayed for a period of 60
days; (vii) certain events of bankruptcy or insolvency with respect to the
Company or any of its Subsidiaries; and (viii) except as permitted by the
Indenture, any Subsidiary Guarantee shall be held in any judicial proceeding to
be invalid or unenforceable or shall cease for any reason to be in full force
and effect or any Subsidiary Guarantor or any Person acting on behalf of any
Subsidiary Guarantor shall deny or disaffirm its obligations under its
Subsidiary Guarantee.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company or any Subsidiary, all
outstanding Notes will become due and payable without further action or notice.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. Subject to certain limitations, Holders of a majority
in principal amount of the then outstanding Notes may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from Holders of the
Notes notice of any continuing Default or Event of Default (except a Default or
Event of Default relating to the payment of principal or interest) if it
determines that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to July
, 2001 by reason of any willful action (or inaction) taken (or not taken) by
or on behalf of the Company with the intention of avoiding the prohibition on
redemption of the Notes prior to July , 2001, then the premium specified in
the Indenture shall also become immediately due and payable to the extent
permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
premium, if any, or interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required, upon
becoming aware of any Default or Event of Default, to deliver to
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the Trustee a statement specifying such Default or Event of Default. The 'Events
of Default and Remedies' provisions described above shall apply to the Notes in
lieu of those described in the accompanying Prospectus.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or a Subsidiary Guarantor, as such, shall have any liability for any obligations
of the Company or the Subsidiary Guarantors under the Notes, the Indenture, the
Subsidiary Guarantees or for any claim based on, in respect of, or by reason of,
such obligations or their creation. Each Holder of the Notes by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ('Legal
Defeasance') except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
on such Notes when such payments are due from the trust referred to below, (ii)
the Company's obligations with respect to the Notes concerning issuing temporary
Notes, registration of the Notes, mutilated, destroyed, lost or stolen Notes and
the maintenance of an office or agency for payment and money for security
payments held in trust, (iii) the rights, powers, trusts, duties and immunities
of the Trustee, and the Company's obligations in connection therewith and (iv)
the Legal Defeasance provisions of the Indenture. In addition, the Company may,
at its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
('Covenant Defeasance') and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under 'Events of Default' will no longer constitute an Event
of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on the outstanding Notes
on the stated maturity or on the applicable redemption date, as the case may be,
and the Company must specify whether the Notes are being defeased to maturity or
to a particular redemption date; (ii) in the case of Legal Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the Holders of the
outstanding Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance had not occurred; (iii) in the
case of the Covenant Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders of the outstanding Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be applied to such
deposit) or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 91st day after the date
of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in
a breach or violation of, or constitute a default under any material agreement
or instrument (other than the Indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company must have delivered to the Trustee an opinion of counsel
to the effect that after the 91st day following the deposit, the trust funds
will not be subject to the effect of any applicable bankruptcy,
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insolvency, reorganization or similar laws affecting creditors' rights
generally; (vii) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders of the Notes over the other creditors of the Company
or the Subsidiary Guarantors with the intent of defeating, hindering, delaying
or defrauding creditors of the Company, the Subsidiary Guarantors or others; and
(viii) the Company must deliver to the Trustee an Officers' Certificate and an
opinion of counsel, each stating that it has complied with all conditions
precedent provided for relating to the Legal Defeasance or the Covenant
Defeasance.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange the Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company is not required to transfer or exchange any Note selected for
redemption. Also, the Company is not required to transfer or exchange any Note
for a period of 15 days before a selection of the Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, the Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for the Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of the Notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed maturity
of any Note or alter the provisions with respect to the redemption of the Notes
(other than provisions relating to the covenants described above under
'Repurchase at the Option of Holders'), (iii) reduce the rate of or change the
time for payment of interest on any Note, (iv) waive a Default or Event of
Default in the payment of principal of or premium, if any, or interest on the
Notes (except a rescission of acceleration of the Notes by the Holders of at
least a majority in aggregate principal amount of the Notes and a waiver of the
payment default that resulted from such acceleration), (v) make any Note payable
in money other than that stated in the Notes, (vi) make any change in the
provisions of the Indenture relating to waivers of past Defaults or the rights
of Holders of the Notes to receive payments of principal of or premium, if any,
or interest on the Notes, (vii) waive a redemption payment with respect to any
Note (other than a payment required by one of the covenants described above
under '--Repurchase at the Option of Holders'), (viii) make any change in the
foregoing amendment and waiver provisions or (ix) release any Subsidiary
Guarantor from its obligations under the Indenture or its Subsidiary Guarantee
of the Notes (other than in accordance with the Indenture).
Notwithstanding the foregoing, without the consent of any Holder of the
Notes, the Company and the Trustee may amend or supplement the Indenture or the
Notes to cure any ambiguity, defect or inconsistency, to provide for
uncertificated Notes in addition to or in place of certificated Notes (provided
that the uncertificated Notes are issued in registered form for purposes of
Section 163(f) of the Code, or in a manner such that the uncertificated Notes
are described in Section 163(f)(2)(B) of the Code), to provide for the
assumption of the Company's obligations to Holders of the Notes in the case of a
merger or consolidation, to make any change that would provide any additional
rights or benefits to the Holders of the Notes or that does not adversely affect
the legal rights under the Indenture of any such Holder, or to comply with
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act.
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CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
'Acquired Debt' means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
'Affiliate' of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, 'control'
(including, with correlative meanings, the terms 'controlling,' 'controlled by'
and 'under common control with'), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided, that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
'Asset Sale' means (i) the sale, lease, conveyance or other disposition of
any assets (including, without limitation, by way of a sale and leaseback and
the sale or other disposition of any Residual Receivables) other than sales of
Receivables in connection with Securitizations or Warehouse Facilities and sales
of foreclosed assets, in each case in the ordinary course of business (provided
that the sale, lease, conveyance or other disposition of all or substantially
all of the assets of the Company and its Restricted Subsidiaries taken as a
whole will be governed by the provisions of the Indenture described above under
the caption 'Change of Control' and/or the provisions described above under
'Merger, Consolidation or Sale of Assets' and not by the provisions of the Asset
Sale covenant), and (ii) the issuance by the Company or any of its Restricted
Subsidiaries of Equity Interests, or the sale by the Company or any Restricted
Subsidiary of any Equity Interests, in each case, of their Subsidiaries (other
than directors qualifying shares), in the case of either clause (i) or (ii),
whether in a single transaction or a series of related transactions (a) that
have a fair market value in excess of $1.0 million or (b) for net proceeds in
excess of $1.0 million. Notwithstanding the foregoing, the following will not be
deemed to be Asset Sales: (i) an issuance of Equity Interests by a Wholly-Owned
Restricted Subsidiary to the Company or to another Wholly-Owned Restricted
Subsidiary; (ii) a Restricted Payment that is permitted by the covenant
described above under 'Restricted Payments'; and (iii) a disposition by a
Restricted Subsidiary to the Company or a Wholly-Owned Restricted Subsidiary or
by the Company to a Wholly-Owned Restricted Subsidiary of the Company.
'Capital Lease Obligation' means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
'Capital Stock' means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership (whether general or limited) or membership interests and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
'Cash Equivalents' means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than one
year from the date of acquisition, (iii) certificates of deposit and Eurodollar
time deposits with maturities of one year or less from the date of acquisition,
bankers' acceptances with maturities not exceeding one year and overnight bank
deposits, in each case with any domestic commercial bank having capital and
surplus in excess of $500.0 million and a Keefe Bank Watch Rating of 'B' or
better, (iv) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (ii) and (iii) above
entered into with any financial institution meeting the qualifications specified
in clause (iii) above, (v) commercial paper having one of the two highest
ratings obtainable from Moody's or Standard & Poor's and
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in each case maturing within nine months after the date of acquisition, and (vi)
money market funds, the portfolios of which are limited to investments described
in clauses (i) through (v) above.
'Change of Control' means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation and excluding sales, leases, transfers, conveyances or
other dispositions pursuant to Securitizations, Warehouse Facilities or Residual
Receivables financing arrangements otherwise permitted by the Indenture entered
into in the ordinary course of business), in one or a series of related
transactions, of all or substantially all of the assets of the Company and its
Restricted Subsidiaries taken as a whole to any 'person' (as such term is used
in Section 13(d)(3) of the Exchange Act) other than a Permitted Holder, (ii) the
adoption of a plan relating to the liquidation or dissolution of the Company,
(iii) the consummation of any transaction (including, without limitation, any
merger or consolidation) the result of which is that any 'person' (as defined
above) other than a Permitted Holder becomes the 'beneficial owner' (as such
term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly
or indirectly, of more than 50% of the Voting Stock of the Company (measured by
general voting power rather than number of shares), (iv) the first day on which
a majority of the members of the Board of Directors of the Company are not
Continuing Directors or (v) the Company consolidates with, or merges with or
into, any Person, or any Person consolidates with, or merges with or into, the
Company, in any such event pursuant to a transaction in which any of the
outstanding Voting Stock of the Company is converted into or exchanged for cash,
securities or other property, other than any such transaction where the Voting
Stock of the Company outstanding immediately prior to such transaction is
converted into or exchanged for Voting Stock (other than Disqualified Stock) of
the surviving or transferee Person constituting a majority of the outstanding
shares of such Voting Stock of such surviving or transferee Person (immediately
after giving effect to such issuance). For purposes of this definition, any
transfer of an equity interest of an entity that was formed for the purpose of
acquiring Voting Stock of the Company will be deemed to be a transfer of such
portion of such Voting Stock as corresponds to the portion of the equity of such
entity that has been so transferred.
'Code' means the Internal Revenue Code of 1986, as amended.
'Consolidated Leverage Ratio' as of any date of determination means the
ratio of (i) the aggregate amount of all consolidated Indebtedness of the
Company and its Restricted Subsidiaries excluding (A) Permitted Warehouse Debt,
and (B) Hedging Obligations permitted to be incurred pursuant to clause (7) of
the covenant described under '--Incurrence of Indebtedness and Issuance of
Preferred Stock' to (ii) the Consolidated Net Worth of the Company.
'Consolidated Net Income' means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
(for such period, on a consolidated basis, determined in accordance with GAAP);
provided, that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly-Owned Restricted
Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to that Restricted Subsidiary or its
stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded, and (iv) the cumulative effect of a change in accounting principles
shall be excluded.
'Consolidated Net Worth' means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such Person
and its consolidated Restricted Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date with
respect to any series of preferred stock (other than Disqualified Stock) that by
its terms is not entitled to the payment of dividends unless such dividends may
be declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern made within 12 months after the acquisition of such
business) subsequent to the date of the Indenture in the book value of any asset
owned by such Person or a consolidated Restricted Subsidiary of
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such Person, (y) all Investments as of such date in unconsolidated Restricted
Subsidiaries and in Persons that are not Restricted Subsidiaries and (z) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
'Continuing Director' means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the Issue Date or (ii) was nominated for election or elected to
such Board of Directors with the approval of a majority of the Directors
constituting Continuing Directors who were members of such Board at the time of
such nomination or election.
'Credit Enhancement Agreements' means, collectively, any documents,
instruments or agreements entered into by the Company or, any of its Restricted
Subsidiaries with any Person exclusively for the purpose of providing credit
support for asset-backed securities issued in connection with Securitizations.
'Default' means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
'Disqualified Stock' means any Capital Stock that either (A) by its terms
(or by the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, (i) matures or is mandatorily
redeemable, in whole or in part, pursuant to a sinking fund obligation or
otherwise or, (ii) is convertible into or exchangeable for Indebtedness or
Disqualified Stock, in whole or in part, or (iii) is redeemable, in whole or in
part, at the option of the Holder thereof at any time, in any such case, on or
prior to the date that is 91 days after the date on which the Notes mature, or
(B) is designated by the Company (in a resolution of the Board of Directors
delivered to the Trustee) as Disqualified Stock.
'Eligible Receivables' means, at the time of determination, Receivables
meeting the sale or loan eligibility criteria set forth in one or more of the
Warehouse Facilities to which the Company or any of its Restricted Subsidiaries
is a party at such time and is eligible for sale in a Securitization.
'Equity Interests' means Capital Stock and all warrants, options or other
rights to acquire such Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, such Capital Stock).
'Excess Spread' means, over the life of a pool of Receivables that have
been sold by the Company or a Restricted Subsidiary in a Securitization, the
rights, other than servicing rights, retained by the Company or such Restricted
Subsidiary at or subsequent to the closing of such Securitization or sale with
respect to such pool, to receive cash flows attributable to such pool.
'fair market value' means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between an informed and willing seller and an informed and willing and able
buyer, neither of whom is under undue pressure or compulsion to complete the
transaction.
'GAAP' means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of 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 have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
'Guarantee' means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness. Notwithstanding the foregoing, the term 'Guarantee' does not
include obligations pursuant to representations, warranties, covenants and
indemnities in connection with a Securitization or Warehouse Facility.
'Hedging Obligations' means, with respect to any Person, the obligations of
such Person under (i) interest rate or currency swap agreements, cap agreements,
collar agreements and related agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in value of
assets owned, financed or sold, or of liabilities incurred or assumed, or of
pre-funding arrangements, in any case in the ordinary course of business of such
Person and not for speculative purposes.
'Indebtedness' means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of (i) borrowed money or evidenced
by bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital
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Lease Obligations or the unpaid deferred balance of the purchase price of any
property or representing any Hedging Obligations, except any such balance that
constitutes an accrued expense or trade payable, if and to the extent any of the
foregoing indebtedness (other than letters of credit and Hedging Obligations)
would appear as a liability upon a balance sheet of such Person prepared in
accordance with GAAP, (ii) all indebtedness of others secured by a Lien on any
asset of such Person (whether or not such indebtedness is assumed by such
Person), (iii) without duplication, all Warehouse Debt, (iv) all obligations of
such Person with respect to the redemption, repayment or other repurchase of any
Disqualified Stock and, in the case of any Subsidiary Guarantor, preferred stock
(but excluding in each case any accrued dividends thereon), and (v) to the
extent not otherwise included, the Guarantee by such Person of any indebtedness
of any other Person to the extent of any Guarantee of such indebtedness provided
by such Person. Except in the case of Warehouse Debt (the amount of which shall
be determined in accordance with the definition thereof) and except in the case
of Hedging Obligations (the amount of which shall be determined on a net basis
after rights of set-off and related positions), the amount of Indebtedness of
any Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and the maximum liability, upon the
occurrence of the contingency giving rise to the obligation, of any contingent
obligations at such date. Notwithstanding the foregoing, the term 'Indebtedness'
does not include obligations pursuant to representations, warranties, covenants
and indemnities in connection with a Securitization or Warehouse Facility.
'Investments' means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including Guarantees of Indebtedness), advances or capital
contributions (excluding commission, travel and similar advances to officers and
employees made in the ordinary course of business), purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP; provided that
an acquisition of Equity Interests or other securities by the Company for
consideration consisting of common equity securities of the Company (other than
Disqualified Stock) shall not be deemed to be an Investment.
'Issue Date' means July , 1997.
'Lien' means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
'Net Income' means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but
not loss), together with any related provision for taxes on such extraordinary
or nonrecurring gain (but not loss).
'Net Proceeds' means the aggregate Cash Equivalent proceeds received by the
Company or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any Cash Equivalent received upon the sale or
other disposition of any non-cash consideration received in any Asset Sale), net
of the direct costs relating to such Asset Sale (including, without limitation,
legal, accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied to
the repayment of Indebtedness secured by a Lien on the asset or assets that were
the subject of such Asset Sale and any reserve for adjustment in respect of the
sale price of such asset or assets established in accordance with GAAP.
'Non-Recourse Debt' means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), or (b) is directly or indirectly liable (as a guarantor or
otherwise); and (ii) as to
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which the lenders have been notified in writing that they will not have any
recourse to the stock or assets of the Company or any of its Restricted
Subsidiaries.
'Permitted Businesses' means any consumer or commercial finance business or
any financial service business.
'Permitted Holder' means any of Messrs. Sidney A. Miller, Hugh Miller, Marc
E. Miller and Lee Miller, any spouse or lineal descendant thereof or any trust
all of the beneficiaries of which are any of the foregoing.
'Permitted Investments' means (a) any Investment in the Company or in a
Restricted Subsidiary that is a Subsidiary Guarantor; (b) any Investment in Cash
Equivalents; (c) any Investment by the Company or any Restricted Subsidiary in a
Person if, as a result of such Investment, (i) such Person becomes a
Wholly-Owned Restricted Subsidiary and a Subsidiary Guarantor that is engaged in
a Permitted Business or (ii) such Person is merged, consolidated or amalgamated
with or into, or transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or a Wholly-Owned Restricted Subsidiary that is a
Subsidiary Guarantor and that is engaged in a Permitted Business; (d) any
Restricted Investment made as a result of the receipt of non-cash consideration
from an Asset Sale that was made pursuant to and in compliance with the covenant
described above under 'Repurchase at the Option of Holders--Asset Sales;' (e)
any Investment in Receivables, Residual Receivables or Servicing Receivables
made in the ordinary course of business; and (f) other Investments in any Person
(other than an Affiliate of the Company that is not also a Subsidiary of the
Company) that do not exceed $10.0 million in the aggregate since the Issue Date.
'Permitted Liens' means (i) Liens on Receivables or other assets (other
than Residual Receivables) securing Warehouse Debt or Hedging Obligations (or
Guarantees of Warehouse Debt or Hedging Obligations); (ii) Liens on Servicing
Receivables, Residual Receivables and on the Capital Stock of Restricted
Subsidiaries of the Company substantially all of the assets of which are
Residual Receivables; provided, however, that, (x) all Retained Residual
Receivables shall remain unencumbered by any Lien unless after giving effect to
such sale, conveyance or other disposition the aggregate amount of Senior
Residual Receivables of the Company and its Restricted Subsidiaries which are
unencumbered by any Lien (of which no more than 25% of the aggregate book value
thereof shall constitute Retained Residual Receivables) would be greater than or
equal to 250% of all Senior Indebtedness of the Company and its Restricted
Subsidiaries; and (y) after giving effect to the incurrence of such Lien the
aggregate amount of Senior Residual Receivables of the Company and its
Restricted Subsidiaries which are unencumbered by any Lien (of which not more
than 25% of the aggregate book value thereof shall constitute Retained Residual
Receivables) would be greater than or equal to 150% of all Senior Indebtedness
of the Company and its Restricted Subsidiaries; (iii) Liens in favor of the
Company or any Restricted Subsidiary; (iv) Liens on property of a Person
existing at the time such Person is merged into or consolidated with the Company
or any Restricted Subsidiary of the Company; provided that such Liens were in
existence prior to the contemplation of such merger or consolidation and do not
extend to any assets other than those of the Person merged into or consolidated
with the Company or such Restricted Subsidiary; (v) Liens on property existing
at the time of acquisition thereof by the Company or any Restricted Subsidiary
of the Company, provided that such Liens were in existence prior to the
contemplation of such acquisition; (vi) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business; (vii)
Liens to secure Indebtedness (including Capital Lease Obligations) permitted by
clause (1) of the second paragraph of the covenant entitled 'Incurrence of
Indebtedness and Issuance of Preferred Stock' covering only the assets acquired
with such Indebtedness; (viii) Liens existing on the Issue Date; (ix) Liens for
taxes, assessments or governmental charges or claims that are not yet delinquent
or that are being contested in good faith by appropriate proceedings, provided
that any reserve or other appropriate provision as shall be required in
conformity with GAAP shall have been made therefor; (x) Liens (including,
without limitation, Liens on Residual Receivables) in favor of a monoline
insurance company or other provider of credit enhancement pursuant to a Credit
Enhancement Agreement; (xi) Liens incurred in the ordinary course of business of
the Company or any Restricted Subsidiary of the Company with respect to
obligations that do not exceed $1.0 million at any one time outstanding and that
(a) are not incurred in connection with the borrowing of money or the obtaining
of advances or credit (other than trade credit in the ordinary course of
business) and (b) do not in the aggregate materially detract from the value of
the property or materially impair the use thereof in the operation of business
by the Company or such Restricted Subsidiary; (xii) Liens imposed by law,
including but not limited to carriers', warehousemen's and mechanics' Liens, in
each case for sums not yet due or being contested in good faith by appropriate
proceedings or, other
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Liens arising out of judgments or awards against the Company or any of its
Restricted Subsidiaries with respect to which the Company or such Restricted
Subsidiary shall then be proceeding with an appeal or other proceedings for
review; (xiii) survey exceptions, easements and other restrictions on the use of
property; (xiv) Liens securing Indebtedness the proceeds of which were utilized
by the Company or a Restricted Subsidiary solely to fund any advances to
Securitization Trusts permitted by clause (v) of the second full paragraph under
the caption '--Certain Covenants--Restricted Payments,' provided that such Liens
encumber no assets other than the contractual right of the Company or such
Restricted Subsidiary, as the case may be, to be reimbursed in respect of any
advances funded by such Indebtedness; (xv) Liens on assets of Unrestricted
Subsidiaries of the Company that secure Non-Recourse Debt of Unrestricted
Subsidiaries of the Company; and (xvi) Liens to secure any Refinancing (or
successive Refinancings), in whole or in part, of any Indebtedness (or
commitment for Indebtedness) existing on the Issue Date; provided, however, that
(x) any such new Lien shall be a Lien on the same asset class or interest
securing the original Lien and (y) the Indebtedness secured by such Lien is not,
solely by virtue of the Refinancing (unless otherwise permitted by the
Indenture), increased to an amount greater than the greater of (A) the
outstanding principal amount of the Indebtedness existing on the Issue Date
secured by such Lien, or (B) if such Lien secures Indebtedness under a line of
credit, the commitment amount of such line of credit existing on the Issue Date.
Any determination of Senior Residual Receivable shall be based on the
consolidated balance sheet of the Company and its Restricted Subsidiaries for
the most recently ended fiscal quarter for which financial statements are
available, after giving pro forma effect to the Lien for which such
determination is being made and to any other sale of or Lien on or reduction of
Residual Receivable since the date of such balance sheet.
'Permitted Refinancing Indebtedness' means any Indebtedness or Disqualified
Stock of the Company or any of its Restricted Subsidiaries issued in exchange
for, or the net proceeds of which are used to extend, refinance, renew, replace,
defease or refund other Indebtedness or Disqualified Stock of the Company or any
of its Restricted Subsidiaries (other than Indebtedness incurred pursuant to
dates (2), (3), (7), (9), (10) and (11) of the second paragraph of the covenant
described under 'Limitation on Incurrence of Indebtedness and Issuance of
Preferred Stock'; provided that: (i) the principal amount (or accreted value, if
applicable) or mandatory redemption amount of such Permitted Refinancing
Indebtedness does not exceed the principal amount of (or accreted value, if
applicable) or mandatory redemption amount, plus accrued interest or dividends
on, the Indebtedness or Disqualified Stock so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of contractual prepayment
charges and reasonable expenses incurred in connection therewith); (ii) such
Permitted Refinancing Indebtedness has a final maturity or final redemption date
later than the final maturity or final redemption date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted Average Life to
Maturity of, the Indebtedness or Disqualified Stock being extended, refinanced,
renewed, replaced, defeased or refunded; (iii) if the Indebtedness or
Disqualified Stock being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the Notes, such Permitted
Refinancing Indebtedness is subordinated in right of payment to, the Notes on
terms at least as favorable to the Holders of the Notes as those contained in
the documentation governing the Indebtedness or Disqualified Stock being
extended, refinanced, renewed, replaced, defeased or refunded; and (iv) such
Indebtedness is incurred or such Disqualified Stock is issued either by the
Company or by the Restricted Subsidiary who is the obligor on the Indebtedness
or Disqualified Stock being extended, refinanced, renewed, replaced, defeased or
refunded.
'Permitted Warehouse Debt' means Warehouse Debt of the Company or a
Restricted Subsidiary outstanding under one or more Warehouse Facilities
(excluding any Guarantees issued by the Company or a Restricted Subsidiary in
connection therewith); provided, however, that (i) the assets purchased with
proceeds of such Warehouse Debt are or, prior to any funding under the Warehouse
Facility with respect to such assets, were eligible to be recorded as held for
sale on the consolidated balance sheet of the Company and its Restricted
Subsidiaries in accordance with GAAP, (ii) such Warehouse Debt will be deemed
Permitted Warehouse Debt (a) in the case of a Purchase Facility, only to the
extent the holder of such Warehouse Debt has no contractual recourse to the
Company or any of its Restricted Subsidiaries to satisfy claims in respect of
such Warehouse Debt in excess of the realizable value of the Eligible
Receivables financed thereby, and (b) in the case of any other Warehouse
Facility, at the time such Warehouse Debt is incurred, only to the extent of the
lesser of (A) the amount advanced by the lender with respect to the Eligible
Receivables financed under such Warehouse Facility, and (B) 100% of the
aggregate principal amount of such Eligible Receivables and (iii) any such
Indebtedness incurred under such Warehouse Facility has not been outstanding in
excess of 364 days.
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'Person' means any individual, corporation, partnership, joint venture,
association, joint stock company, limited liability company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
'Purchase Facility' means any Warehouse Facility in the form of a purchase
and sale facility pursuant to which the Company or a Restricted Subsidiary sells
Receivables to a financial institution, commercial paper facility or conduit and
retains a right of first refusal or other repurchase arrangement upon the
subsequent resale of such Receivables by such financial institution, commercial
paper facility or conduit.
'Receivables' means consumer and commercial loans, leases and receivables
purchased or originated by the Company or any Restricted Subsidiary; provided,
however, that for purposes of determining the amount of a Receivable at any
time, such amount shall be determined in accordance with GAAP, consistently
applied, as of the most recent practicable date.
'Refinance' means, in respect of any Indebtedness, to extend, refinance,
renew, replace, defease, refund, repay, prepay, redeem, or retire, or to issue
other Indebtedness in exchange or replacement for, such Indebtedness.
'Refinanced' and 'Refinancing' shall have correlative meanings.
'Residual Receivables' of the Company means at any time, the capitalized
asset value of Excess Spread of the Company and its Restricted Subsidiaries
(including, without limitation, subordinated, interest-only and residual
certificates of a Securitization Trust), with respect to any Receivable pool of
any Securitization Trust, calculated in accordance with GAAP.
'Restricted Investment' means an Investment other than a Permitted
Investment.
'Restricted Subsidiary' means any Subsidiary other than an Unrestricted
Subsidiary.
'Retained Residual Receivables' has the meaning specified under
'--Repurchase at Option of Holders-Asset Sales.'
'Securitization' means a public or private transfer of Receivables in the
ordinary course of business and by which the Company or a Restricted Subsidiary
directly or indirectly securitizes a pool of specialized Receivables, including
any such transaction involving the sale of specialized Receivables to a
Securitization Trust.
'Securitization Trust' means any Person that is not a Restricted Subsidiary
established exclusively for the purpose of issuing securities in connection with
any Securitization, the obligations of which are without recourse to the Company
or any of its Subsidiaries (other than obligations constituting Indebtedness
incurred in accordance with the first paragraph of the covenant described under
'Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock').
'Senior Indebtedness' means all Indebtedness of any Person that is not
subordinated in right of payment to any other Indebtedness or other obligations
of such Person, excluding Permitted Warehouse Debt and Hedging Obligations
permitted to be incurred under the Indenture and, in the case of Indebtedness
secured by Senior Residual Receivables, the lesser of (x) the amount of such
Indebtedness and (y) the amount of the Senior Residual Receivables securing such
Indebtedness.
'Senior Residual Receivables' means Residual Receivables which have not
been created as the result of or in connection with the sale, securitization or
other disposition of other Residual Receivables.
'Servicing Receivables' means the servicing rights or any interest therein
with respect to any Receivables.
'Subsidiary' means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership or limited liability company (a) the sole
general partner or the managing general partner or managing member of which is
such Person or a Subsidiary of such Person or (b) the only general partners or
managing members of which are such Person or one or more Subsidiaries of such
Person (or any combination thereof).
'Subsidiary Guarantor' means any Subsidiary of the Company that executes a
Subsidiary Guarantee in accordance with the provisions of the Indenture.
'Unrestricted Subsidiary' means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution;
but only to the extent that such Subsidiary: (a) is not
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party to any agreement, contract, arrangement or understanding with the Company
or any Restricted Subsidiary unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary that those that might be obtained at the time from Persons
who are not Affiliates of the Company; (b) is a Person with respect to which
neither the Company nor any of its Restricted Subsidiaries has any direct or
indirect obligation (other than obligations constituting Indebtedness incurred
in accordance with the first paragraph of the covenant described under 'Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock') (x) to
subscribe for additional Equity Interests or (y) to maintain or preserve such
Person's financial condition or to cause such Person to achieve any specified
levels of operating results; and (c) has not guaranteed or otherwise directly or
indirectly provided credit support for any Indebtedness of the Company or any of
its Restricted Subsidiaries. Any such designation by the Board of Directors
shall be evidenced to the Trustee by filing with the Trustee a certified copy of
the Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
conditions and was permitted by the covenant described above under the caption
'Certain Covenants--Restricted Payments.' If, at any time, any Unrestricted
Subsidiary would fail to meet the foregoing requirements as an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the Indenture and any Indebtedness of such Subsidiary shall be
deemed to be incurred by a Restricted Subsidiary of the Company as of such date
(and, if such Indebtedness is not permitted to be incurred as of such date under
the covenant described under the caption 'Incurrence of Indebtedness and
Issuance of Preferred Stock,' the Company shall be in default of such covenant).
The Board of Directors of the Company may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that such designation shall
be deemed to be an incurrence of Indebtedness and issuance of preferred stock by
a Restricted Subsidiary of the Company of any outstanding Indebtedness of such
Unrestricted Subsidiary and such designation shall only be permitted if (i) such
Indebtedness and preferred stock is permitted under the covenant described under
the caption 'Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock,' (ii) such Subsidiary becomes a Subsidiary Guarantor, and (iii)
no Default or Event of Default would exist following such designation.
'Voting Stock' of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote generally in the election of the
Board of Directors of such Person.
'Warehouse Debt' means Indebtedness of the Company or a Restricted
Subsidiary equal to the greater of (x) the consideration received by the Company
or its Restricted Subsidiaries under a Warehouse Facility and (y) in the case of
a Purchase Facility, the book value of the Eligible Receivables financed under
such Warehouse Facility, until such time as such Eligible Receivables are (i)
securitized, (ii) repurchased by the Company or its Restricted Subsidiaries or
(iii) sold by the counterparty under the Warehouse Facility to a Person who is
not an Affiliate of the Company, including any Guarantees issued by the Company
or a Restricted Subsidiary in connection therewith.
'Warehouse Facility' means any funding arrangement, including Purchase
Facilities, with a financial institution or other lender or purchaser or any
conduit or special purpose vehicle used in connection with such funding
arrangement, to the extent (and only to the extent) that the Company or any of
its Restricted Subsidiaries incurs Warehouse Debt thereunder exclusively to
finance or refinance the purchase or origination of Receivables by the Company
or a Restricted Subsidiary prior to securitization.
'Weighted Average Life to Maturity' means, when applied to any Indebtedness
or Disqualified Stock at any date, the number of years obtained by dividing (i)
the sum of the products obtained by multiplying (a) the amount of each then
remaining installment, sinking fund, serial maturity or other required payments
of principal, including payment at final maturity (or final redemption, in the
case of Disqualified Stock), in respect thereof, by (b) the number of years
(calculated to the nearest one-twelfth) that will elapse between such date and
the making of such payment, by (ii) the then outstanding principal amount of
such Indebtedness or mandatory redemption amount of Disqualified Stock.
'Wholly-Owned Restricted Subsidiary' of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly-Owned Restricted
Subsidiaries of such Person.
85
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (the
'Underwriting Agreement'), each of the underwriters named below (the
'Underwriters') has agreed to purchase from the Company and the Company has
agreed to sell to the Underwriters, the aggregate principal amount of the Notes
set forth opposite its name below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITER OF THE NOTES
- -------------------------------------------------------------------------------------- ----------------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation................................... $
Lehman Brothers Inc...................................................................
Smith Barney Inc......................................................................
----------------
Total............................................................................ $150,000,000
----------------
----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase and accept delivery of the Notes offered hereby are
subject to certain conditions precedent. If any of the Notes are purchased by
the Underwriters pursuant to the Underwriting Agreement, all such Notes must be
purchased.
The Underwriters propose initially to offer the Notes directly to the
public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not to exceed
% of the principal amount of the Notes. The Underwriters may allow, and
such dealers may reallow, discounts not to exceed % of the principal
amount of the Notes on sales to certain other dealers. After the initial public
offering of the Notes, the public offering price and concession and reallowance
and other selling terms may be changed by the Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments which the Underwriters may be required to make in respect thereof.
The Notes are a new issue of securities with no existing market and the
Company does not intend to list the Notes on any national securities exchange.
The Underwriters have advised the Company that they currently intend to make a
market in the Notes, but are not obligated to do so and may discontinue any such
market making at any time without notice. Accordingly, no assurance can be given
as to the liquidity of the trading market for the Notes or that an active
trading market for the Notes will develop.
In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Notes. Specifically, the Underwriters may overallot the offering, creating a
syndicate short position. Underwriters may bid for and purchase Notes in the
open market to cover syndicate short positions. In addition, the Underwriters
may bid for and purchase Notes in the open market to stabilize the price of the
Notes. These activities may stabilize or maintain the market price of the Notes
above independent market levels. The Underwriters are not required to engage in
these activities, and may end these activities at any time.
Under the Rules of Fair Practice of the National Association of Securities
Dealers ('NASD'), if more than 10% of the net proceeds of a public offering of
debt securities, not including underwriting compensation, are intended to be
paid to members of the NASD or affiliated or associated persons that are
participating in the distribution of the offering, the yield at which the debt
securities are distributed to the public must be no lower than that recommended
by a 'qualified independent underwriter', as defined in Rule 2720 of the Conduct
Rules of the NASD. Donaldson, Lufkin & Jenrette Securities Corporation and
Lehman Brothers Inc. provide interest-only and residual loans and warehouse
lines of credit which are being repaid in connection with the Offering. See 'Use
of Proceeds.' As a result, Donaldson, Lufkin & Jenrette Securities Corporation
and Lehman Brothers Inc. are expected to receive in the aggregate more than 10%
of the net proceeds of the Offering. Accordingly, Smith
86
<PAGE>
Barney Inc. has agreed to act as the qualified independent underwriter in
connection with this Offering. The yield on the Notes, when sold to the public
at the public offering price set forth on the cover of this Prospectus, will be
no lower than that recommended by Smith Barney Inc.
The Underwriters have informed the Company that they do not expect
discretionary sales by the Underwriters to exceed 5% of the principal amount of
the Notes being offered hereby.
Donaldson, Lufkin & Jenrette Securities Corporation and Lehman Brothers
Inc. have provided, and expect in the future to provide, investment banking
and/or other advisory services to the Company and its subsidiaries.
LEGAL MATTERS
The validity of the issuance of the Notes and the Subsidiary Guarantees
offered hereby will be passed upon for the Company by Stroock & Stroock & Lavan
LLP, New York, New York. Certain legal matters in connection with the Offering
will be passed upon for the Underwriters by Latham & Watkins, Chicago, Illinois.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1995 and 1996 and for each of the years in the three-year period ended December
31, 1996 appearing in this Prospectus and Registration Statement, have been
audited by KPMG Peat Marwick LLP, independent auditors, as set forth in their
report thereon appearing elsewhere in this Prospectus and Registration Statement
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, is required to file reports, proxy statements
and other information with the Commission. Such reports, proxy statements and
other information can be inspected and copied at the Public Reference Section of
the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission's regional offices at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of the reports, proxy statements and
other information can be obtained from the Public Reference Section of the
Commission, Washington, D.C. 20549, at prescribed rates. In addition, all
reports filed by the Company via the Commission's Electronic Data Gathering and
Retrieval System (EDGAR) can be obtained from the Commission's Internet web site
located at (http:\\www.sec.gov). The Common Stock of the Company is traded on
The New York Stock Exchange, and such reports, proxy statements and other
information concerning the Company also can be inspected at the offices of The
New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act, of which this Prospectus forms a part, with
respect to the Notes offered hereby. This Prospectus omits certain information
contained in the Registration Statement, and reference is made to the
Registration Statement for further information with respect to the Company and
the Notes offered hereby. Statements contained herein concerning the provisions
of documents are necessarily summaries of such documents and when any such
document is an exhibit to the Registration Statement, each such statement is
qualified in its entirety by reference to the copy of such document filed with
the Commission. Copies of the Registration Statement may be acquired upon
payment of the prescribed fees or examined without charge at the
above-referenced public reference facilities of the Commission. In addition, the
Registration Statement may be accessed electronically at the Commission's
above-referenced site on the World Wide Web.
The Indenture pursuant to which the Notes will be issued will require the
Company to file with the Commission and, if requested, to distribute to Holders
of the Notes annual reports containing audited financial statements of the
Company and a report thereon audited by independent certified public accountants
and quarterly reports containing unaudited summary financial information for
each of the first three quarters of each fiscal year.
87
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................................................................. F-2
Consolidated Financial Statements of Delta Financial Corporation:
Consolidated Balance Sheets as of December 31, 1995 and 1996 and March 31, 1997 (unaudited)............... F-3
Consolidated Statements of Income for the years ended December 31, 1994, 1995 and 1996 and the three
months ended March 31, 1996 (unaudited) and 1997 (unaudited)........................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1994, 1995 and
1996 and the three months ended March 31, 1997 (unaudited)............................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and the three
months ended March 31, 1996 (unaudited) and 1997 (unaudited)........................................... F-6
Notes to Consolidated Financial Statements.................................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Delta Financial Corporation:
We have audited the accompanying consolidated balance sheets of Delta Financial
Corporation and subsidiary as of December 31, 1995 and 1996, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Delta Financial
Corporation and subsidiary as of December 31, 1995 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
New York, New York
February 19, 1997
F-2
<PAGE>
DELTA FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- MARCH 31,
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and interest bearing deposits.............................. $ 16,635,135 $ 18,741,182 $ 19,111,677
Accounts receivable............................................. 6,845,947 8,654,885 9,362,420
Loans held for sale............................................. 63,816,298 83,677,017 77,768,963
Accrued interest and late charges receivable.................... 15,946,847 20,158,812 21,999,632
Capitalized mortgage servicing rights........................... 3,830,996 11,411,634 13,447,924
Equipment, net.................................................. 1,550,099 2,836,360 3,400,910
Cash held for advance payments.................................. 3,119,558 2,488,218 2,585,208
Real estate owned............................................... 250,908 134,750 134,750
Interest-only and residual certificates......................... 25,309,548 83,072,777 101,858,297
Prepaid and other assets........................................ 1,316,702 1,560,578 1,576,970
Goodwill........................................................ -- -- 6,109,446
Due from stockholders........................................... 990,000 -- --
------------ ------------ ------------
$139,612,038 $232,736,213 $257,356,197
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank payable.................................................... $ 5,100,087 $ 2,294,742 $ 1,695,533
Warehouse financing and other borrowings........................ 82,756,232 95,481,627 112,507,300
Accounts payable and accrued expenses........................... 4,843,719 7,201,674 6,849,065
Investor payable................................................ 14,271,967 22,568,730 20,769,591
Advance payments by borrowers for taxes and insurance........... 2,806,818 2,255,045 2,351,000
Income taxes payable............................................ -- 9,416,784 10,159,467
------------ ------------ ------------
109,778,823 139,218,602 154,331,956
------------ ------------ ------------
Stockholders' equity:
Common stock, $.01 par value. Authorized 49,000,000 shares;
issued and outstanding 10,653,000 shares at December 31,
1995, 15,253,000 shares at December 31, 1996, and
15,372,288 shares at March 31, 1997........................ 106,530 152,530 153,723
Additional paid-in capital...................................... 3,225,615 90,952,737 93,468,544
Retained earnings............................................... 26,501,070 2,412,344 9,401,974
------------ ------------ ------------
Total stockholders' equity................................. 29,833,215 93,517,611 103,024,241
------------ ------------ ------------
$139,612,038 $232,736,213 $257,356,197
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
DELTA FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Net gain on sale of mortgage loans... $ 6,661,163 $15,382,960 $46,525,042 $ 103,391 $17,313,852
Interest............................. 9,839,484 13,587,807 16,372,115 3,966,572 5,558,889
Servicing fees....................... 2,182,568 2,855,642 5,368,488 1,015,295 1,391,633
Other................................ 3,113,692 4,308,985 5,266,109 219,090 3,040,487
----------- ----------- ----------- ----------- -----------
21,796,907 36,135,394 73,531,754 5,304,348 27,304,861
----------- ----------- ----------- ----------- -----------
Expenses:
Payroll and related costs............ 8,815,355 12,875,714 16,508,756 1,373,085 7,495,992
Interest expense..................... 3,734,877 7,963,613 11,298,224 2,400,922 3,170,226
General and administrative........... 7,238,140 10,710,179 12,236,260 1,841,865 4,398,410
----------- ----------- ----------- ----------- -----------
19,788,372 31,549,506 40,043,240 5,615,872 15,064,628
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes and
extraordinary item................... 2,008,535 4,585,888 33,488,514 (311,524) 12,240,233
Provision for income taxes............. -- -- 9,466,381 44,332 5,250,603
----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary
item................................. 2,008,535 4,585,888 24,022,133 (355,856) 6,989,630
Extraordinary item:
Gain on extinguishment of debt....... -- -- 3,167,828 -- --
----------- ----------- ----------- ----------- -----------
Net income (loss).................... $ 2,008,535 $ 4,585,888 $27,189,961 $ (355,856) $ 6,989,630
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Unaudited pro forma information:
Provision for pro forma income taxes
(benefit) before extraordinary
item.............................. 863,670 1,971,932 14,400,061 (133,955) n/a
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Pro forma income (loss) before
extraordinary item................ $ 1,144,865 $ 2,613,956 $19,088,453 $ (177,569) n/a
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Per share data (1):
Earnings (loss) per share............ -- -- -- (0.01) 0.45
Weighted average number of shares
outstanding....................... -- -- -- 12,629,182 15,420,883
</TABLE>
- ------------------
(1) March 31, 1996 is presented on a pro forma basis.
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
DELTA FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995, 1996 AND THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN RETAINED
CAPITAL STOCK(1) CAPITAL(1) EARNINGS TOTAL
---------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993...................... $106,530 $ 3,225,615 $25,018,190 $ 28,350,335
Net income...................................... -- -- 2,008,535 2,008,535
Distributions................................... -- -- (2,195,056) (2,195,056)
---------------- ----------- ----------- ------------
Balance at December 31, 1994...................... 106,530 3,225,615 24,831,669 28,163,814
Net income...................................... -- -- 4,585,888 4,585,888
Distributions................................... -- -- (2,916,487) (2,916,487)
---------------- ----------- ----------- ------------
Balance at December 31, 1995...................... 106,530 3,225,615 26,501,070 29,833,215
Proceeds from initial public offering of common
stock........................................ 46,000 69,655,435 -- 69,701,435
Net income...................................... -- -- 27,189,961 27,189,961
Distributions................................... -- -- (33,207,000) (33,207,000)
Reclassification of undistributed
S corporation earnings....................... -- 18,071,687 (18,071,687) --
---------------- ----------- ----------- ------------
Balance at December 31, 1996...................... 152,530 90,952,737 2,412,344 93,517,611
Issuance of common stock for Fidelity Mortgage
acquisition.................................. 1,193 2,515,807 -- 2,517,000
Net income...................................... -- -- 6,989,630 6,989,630
---------------- ----------- ----------- ------------
Balance at March 31, 1997 (Unaudited)............. $153,723 $93,468,544 $ 9,401,974 $103,024,241
---------------- ----------- ----------- ------------
---------------- ----------- ----------- ------------
</TABLE>
- ------------------
(1) Restated to reflect share exchange in connection with the October 1996
reorganization.
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
DELTA FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
--------------------------------------- --------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................. $ 2,008,535 $ 4,585,888 $27,189,961 $ (355,856) $ 6,989,630
Adjustments to reconcile net income to net
cash used in operating activities:
Provision for loan losses................. 169,867 99,761 101,158 24,940 24,999
Depreciation and amortization............. 277,956 564,310 996,875 148,097 444,068
Capitalized mortgage servicing rights, net
of amortization........................ 1,069,652 (1,409,683) (7,580,638) 296,927 (2,036,290)
Deferred origination fees................. 147,522 (61,239) (2,399,299) (4,421,195) 24,814
Interest-only and residual certificates
received in securitization
transactions, net...................... (5,309,550) (17,795,998) (57,763,229) (7,458) (18,785,520)
Changes in operating assets and liabilities:
Increase in accounts receivable, net...... (2,365,992) (1,136,618) (1,808,938) (358,458) (676,741)
Decrease (increase) in loans held for
sale, net.............................. (7,447,873) (15,021,532) (17,562,578) (103,786,484) 5,858,241
Increase in accrued interest and late
charges receivable..................... (1,783,978) (3,225,276) (4,211,965) (155,685) (1,840,820)
Decrease (increase) in cash held for
advance payments....................... 141,478 166,924 631,340 234,058 (96,990)
Decrease (increase) in real estate
owned.................................. 650,121 448,839 116,158 (42,759) --
Decrease (increase) in prepaid and other
assets................................. 183,781 1,753,633 (243,876) (56,147) 17,447
Decrease in due from stockholders......... 165,000 2,165,000 990,000 -- --
Increase (decrease) in accounts payable
and accrued expenses................... (354,737) 1,901,895 2,357,955 418,137 (430,939)
Increase (decrease) in investor payable... 2,403,676 3,181,005 8,296,763 (633,936) (1,799,139)
Increase (decrease) in advance payments by
borrowers for taxes and insurance...... (115,629) (119,683) (551,773) (184,037) 83,295
Increase in income taxes payable.......... -- -- 9,416,784 -- 786,760
----------- ----------- ----------- ------------ -----------
Net cash used in operating activities......... (10,160,171) (23,902,774) (42,025,302) (108,879,856) (11,437,185)
----------- ----------- ----------- ------------ -----------
Cash flows used in investing activities:
Acquisition of Fidelity Mortgage............ -- -- -- -- (3,674,845)
Purchase of equipment....................... (917,512) (1,207,560) (2,283,136) (227,829) (660,369)
----------- ----------- ----------- ------------ -----------
Net cash used in investing activities......... (917,512) (1,207,560) (2,283,136) (227,829) (4,335,214)
----------- ----------- ----------- ------------ -----------
Cash flows from financing activities:
Net proceeds from initial public offering... -- -- 69,701,435 -- --
Proceeds from warehouse financing and other
borrowings, net........................... 15,710,632 30,265,588 12,725,395 102,208,160 16,793,785
Increase (decrease) in bank payable, net.... (11,954) 4,125,325 (2,805,345) (165,266) (650,891)
Distributions............................... (2,195,056) (2,916,487) (33,207,000) (180,000) --
Payments (made to) received from
affiliates................................ (43,366) 913,870 -- -- --
----------- ----------- ----------- ------------ -----------
Net cash provided by financing activities..... 13,460,256 32,388,296 46,414,485 101,862,894 16,142,894
----------- ----------- ----------- ------------ -----------
Net increase (decrease) in cash............... 2,382,573 7,277,962 2,106,047 (7,244,791) 370,495
Cash at beginning of period................... 6,974,600 9,357,173 16,635,135 16,635,135 18,741,182
----------- ----------- ----------- ------------ -----------
Cash at end of period......................... $ 9,357,173 $16,635,135 $18,741,182 $ 9,390,344 $19,111,677
----------- ----------- ----------- ------------ -----------
----------- ----------- ----------- ------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
DELTA FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995, 1996 AND MARCH 31, 1996 AND 1997 (UNAUDITED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
Delta Financial Corporation (the 'Company') is a Delaware corporation which
was organized in August 1996. On October 31, 1996, the Company acquired all of
the outstanding common stock of Delta Funding Corporation ('Delta Funding'), a
New York corporation and the Company's subsidiary, which had been organized on
January 8, 1982 for the purpose of originating, selling, servicing and investing
in residential first and second mortgages, and completed an initial public
offering (see note 2).
(b) Principles of Consolidation
The consolidated financial statements include the accounts of Delta
Financial Corporation and its wholly-owned subsidiary. All significant
intercompany accounts and transactions have been eliminated.
(c) Origination Fees
The Company accounts for origination fee income on mortgages held for sale
in conformity with Statement of Financial Accounting Standards (SFAS) No. 91.
This Statement requires that origination fees be offset by their direct loan
costs and the net deferred fees be recognized over the life of the loan or upon
sale of the loan, if earlier.
(d) Loans held for sale
Loans held for sale are carried at the lower of cost or market, determined
on a net aggregate basis. Adjustments to market are made by charges or credits
to income.
(e) Income Taxes
Through October 30, 1996, the Company elected for both Federal and State
income tax purposes to be treated as an S corporation (effective July 1, 1985).
As an S corporation, the net earnings of the Company were taxed directly to the
stockholders rather than the Company.
On October 31, 1996, the Company became a C corporation. All income earned
from that date is subject to corporate tax at statutory rates for both Federal
and State income tax purposes. The Company accounts for income taxes from that
date in conformity with SFAS No. 109, 'Accounting for Income Taxes,' which
requires an asset and liability approach for accounting and reporting of income
taxes.
(f) Sale of Mortgage Loans
The Company sells whole loans with servicing retained. Gains or losses on
such sales are recognized at the time of sale and are determined by the
differences between net sales proceeds and the unpaid principal balance of the
loans sold adjusted for the present value of any yield differential.
(g) Securitization
The Company sells pools of loans on a servicing retained basis. Gains or
losses are determined at the time of sale by the differences between the net
sales proceeds and the present value of the future stream of servicing fees,
adjusted for estimated losses and prepayments. The Company continues to service
these loans for a normal servicing fee.
Included in the gain on sale of loans is gain on securitization
representing the fair value of the interest-only and residual certificates
received by the Company. Fair value of these certificates is determined based on
various
F-7
<PAGE>
DELTA FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
economic factors, including loan types, sizes, interest rates, dates of
origination, terms and geographic locations. The Company also uses other
available information such as reports on prepayment rates, collateral value,
discount rates, economic forecasts and historical default and prepayment rates
of the portfolio under review. The Company reviews these factors and, if
necessary, adjusts the remaining assets to the fair value of the interest-only
and residual certificates.
(h) Real Estate Acquired Through Foreclosure
Properties acquired through foreclosure or a deed in lieu of foreclosure
are recorded at the lower of the unpaid loan balance, or fair value, at the date
of acquisition. The carrying value of the individual properties is subsequently
adjusted to the extent it exceeds estimated fair value less costs to sell, at
which time a provision for losses on such real estate is charged to operations.
(i) Equipment
Equipment, including leasehold improvements, is stated at cost, less
accumulated depreciation and amortization. Depreciation of equipment is computed
using the straight-line or accelerated method over the estimated useful lives of
three to five years. Leasehold improvements are amortized over the lesser of the
terms of the lease or the estimated useful lives of the improvements.
Expenditures for betterments and major renewals are capitalized and ordinary
maintenance and repairs are charged to operations as incurred.
(j) Interest-Only and Residual Certificates
Interest-only and residual certificates are carried at fair value in
accordance with SFAS No. 115, 'Accounting for Certain Investments in Debt and
Equity Securities.' Unrealized gains and losses are included in the statement of
operations.
(k) Capitalized Mortgage Servicing Rights
Effective January 1, 1995 the Company adopted SFAS No. 122 'Accounting for
Mortgage Servicing Rights.' The Statement amends SFAS No. 65 to require that a
mortgage banking enterprise recognize as separate assets the rights to service
mortgage loans for others, however those servicing rights are acquired. The
Statement requires the assessment of capitalized Mortgage Servicing Rights for
impairment. Mortgage Servicing Rights are amortized in proportion to and over
the period of the estimated net servicing income.
Effective January 1, 1997, the Company adopted SFAS No. 125, 'Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities,' which supersedes SFAS No. 122, 'Accounting for Mortgage Servicing
Rights' and amends SFAS No. 65, 'Accounting for Certain Mortgage Banking
Activities.' SFAS No. 125 requires that a mortgage banking enterprise
distinguish between the transfer of financial assets that are sale transactions
from the transfer of financial assets that are secured borrowings. Because
Delta's transfers of loans made in connection with its securitizations qualify
as sales under SFAS No. 125, the required accounting is an allocation of basis
approach.
SFAS No. 125 also requires impairment evaluations of all amounts
capitalized as servicing rights, including those purchased before the adoption
of SFAS No. 125, based upon the fair value of the underlying servicing rights.
The Company periodically performs these evaluations on a disaggregated basis.
The continuing effects of SFAS No. 125 on the Company's financial position and
results of operations will depend on several factors, including, among other
things, the amount of acquired or originated loans sold or securitized, the
type, term and credit quality of loans and estimates of future prepayment rates.
F-8
<PAGE>
DELTA FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(l) Fair Value of Financial Instruments
SFAS No. 107, 'Disclosure About Fair Value of Financial Instruments'
requires the Company to disclose the fair value of financial instruments for
which is practicable to estimate fair value. Fair value is defined as the amount
at which a financial instrument could be exchanged in a current transaction
between willing parties, other than in a forced sale or liquidation and is best
evidenced by a quoted market price. Other than interest-only and residual
certificates, substantially all the Company's assets and liabilities deemed to
be financial instruments are carried at cost, which approximates their fair
value.
(m) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(n) Servicing Income
Servicing income includes servicing fees, prepayment penalties and late
payment charges earned for servicing mortgage loans owned by investors. All fees
and charges are recognized into income when earned.
(o) Earnings Per Share
Earnings per share data for periods prior to October 31, 1996 have not been
presented in the accompanying consolidated financial statements because the
Company was not a public company.
Earnings per share data for the period November 1, 1996 to December 31,
1996 have not been presented in the accompanying consolidated financial
statements because management believes that such data would not be meaningful
given the relatively short period and the impact of the recognition of a
deferred tax liability in connection with the change in tax status.
(p) Stock Option Plan
During 1996, the Company adopted SFAS No. 123, 'Accounting for Stock-Based
Compensation,' which permits entities to continue to apply the provisions of APB
Opinion No. 25, 'Accounting for Stock Issued to Employees,' and provide pro
forma net income and pro forma earnings per share disclosures for employee stock
option grants as if the fair-value based method defined in SFAS No. 123 had been
applied. The Company elected to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123 (see Note 15).
(q) Unaudited Pro Forma Information
The pro forma financial information has been presented to show what the
significant effects on the historical results of operations before extraordinary
item might have been had the Company been treated as a C corporation for income
tax purposes as of the beginning of the earliest period presented and assumes an
effective tax rate of 43%.
(r) Unaudited Interim Financial Information
The accompanying unaudited consolidated financial statements for the three
months ended March 31, 1997 and 1996 have been prepared in accordance with
generally accepted accounting principles for interim financial information and
the instructions to Form 10-Q and do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments consisting
of normal recurring accruals, considered necessary for a fair presentation of
the results for the interim period have been included.
F-9
<PAGE>
DELTA FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) REORGANIZATION AND INITIAL PUBLIC OFFERING
On October 31, 1996, the Company acquired all of the outstanding stock of
Delta Funding in exchange for 10,653,000 shares of common stock of the Company.
Prior to the exchange, Delta Funding was treated for Federal income tax purposes
as an S corporation under Subchapter S of the Internal Revenue Code, and as
such, the historical earnings of Delta Funding through October 31, 1996 were
taxed directly to the stockholders of Delta Funding. As a result of the
exchange, the Company and Delta Funding, which became a wholly-owned subsidiary
of the Company, became subject to Federal and State income taxes and the Company
recorded a deferred tax liability on its balance sheet relating to the tax
effect of temporary differences between book and tax accounting, principally
relating to recognition of gain on sale of mortgage loans.
On November 1, 1996, the Company completed an initial public offering (IPO)
of 4,600,000 shares of common stock at an offering price of $16.50 per share.
The net proceeds of the offering to the Company, exclusive of underwriting
discounts and commissions and other expenses, was $69,701,435. In November 1996,
$32,607,000 of the proceeds raised in the offering was distributed to the former
S corporation shareholders with respect to declared distributions of
undistributed S corporation earnings. Remaining undistributed S corporation
earnings of $18,071,687 were reclassified to additional paid-in capital.
(3) LOANS HELD FOR SALE
The Company owns first and second mortgages which had a weighted average
interest rate of 11.2% at December 31, 1996. These mortgages are being held as
inventory for future sale at the lower of cost or market. Certain of these
mortgages are pledged as collateral for a portion of the warehouse financing and
other borrowings.
Included in loans held for sale are deferred origination fees and purchase
premiums in the amount of $1,013,658, $3,412,957 and $3,388,143 and an allowance
for loan losses of $750,000, $850,000 and $874,999 at December 31, 1995, 1996
and March 31, 1997 (unaudited), respectively.
Mortgages are payable in monthly installments of principal and interest and
have due dates varying from five to thirty years.
The changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------- THREE MONTHS ENDED
1994 1995 1996 MARCH 31, 1997
--------- -------- -------- ------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance at beginning of period......................... $ 650,000 $700,000 $750,000 $850,000
Provisions............................................. 169,867 99,761 101,158 24,999
Charge-offs............................................ (119,867) (49,761) (1,158) --
--------- -------- -------- ------------------
Balance at end of period............................... $ 700,000 $750,000 $850,000 $874,999
--------- -------- -------- ------------------
--------- -------- -------- ------------------
</TABLE>
(4) ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1997
------------------------ --------------
1995 1996 (UNAUDITED)
---------- ----------
<S> <C> <C> <C>
Securitization....................................................... $3,168,100 $4,390,694 $4,374,025
Escrow receivable.................................................... 662,572 764,381 988,631
Insurance premiums................................................... 1,003,285 1,244,130 1,304,578
Other................................................................ 2,011,990 2,255,680 2,695,186
---------- ---------- --------------
$6,845,947 $8,654,885 $9,362,420
---------- ---------- --------------
---------- ---------- --------------
</TABLE>
F-10
<PAGE>
DELTA FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) WAREHOUSE FINANCING AND OTHER BORROWINGS
The Company has two warehouse credit facilities for a combined amount of
$350,000,000. These lines are collateralized by specific mortgage receivables,
which are equal or greater than the outstanding balances under the line at any
point in time. Both of these lines expire in February 1998.
The first warehouse line of credit is in the aggregate amount of
$250,000,000. At December 31, 1996 and March 31, 1997 (unaudited), the interest
rate was 0.80% and 0.75% above LIBOR, respectively. At December 31, 1995 and
1996, the Company had $0 and $45,813,382 outstanding under this agreement,
respectively. At March 31, 1997 (unaudited), the Company had $51,762,974
outstanding under this agreement.
The second warehouse line of credit is in the aggregate amount of
$100,000,000. At December 31, 1996 the interest rate was 1% above LIBOR. On
February 14, 1997, this warehouse line of credit was increased to $200,000,000
and the interest rate was changed to 0.75% above LIBOR. At December 31, 1995 and
1996, the Company had $30,132,844 and $0 outstanding under this agreement,
respectively. At March 31, 1997 (unaudited), the Company had $0 outstanding
under this agreement.
The Company had a warehouse line of credit in the aggregate amount of
$45,000,000. The line was collateralized by specific mortgage receivables, which
were equal to or greater than the outstanding balances under the line at any
point in time. The interest rate was 2% above LIBOR. At December 31, 1995, the
Company had $30,498,168 outstanding. In May 1996 the Company extinguished this
line of credit at a discount. An extraordinary gain of $3,167,828 was recorded
in connection with this extinguishment of debt.
At December 31, 1995, the Company had lines of credit in the aggregate
amount of $3,500,000 with separate banks. The individual lines available, and
their interest rates, were as follows: $2,500,000 at 1/2% above prime and
$1,000,000 at 2.9% above the 30-day dealer commercial paper rate. At December
31, 1995, the Company had $2,500,000 and $981,843, drawn down from these
sources. During 1996, the $2,500,000 line of credit expired and, at the
Company's option, was not renewed. At December 31, 1996, the Company had $5,367
outstanding on the $1,000,000 line of credit. At March 31, 1997 (unaudited), the
Company had $0 outstanding on this line.
At December 31, 1995 and 1996, the Company had a term loan with $879,710
and $486,710 outstanding, respectively. The interest rate is 1% above New York
Prime (as defined in the loan agreement) and the loan matures in April 1998. At
March 31, 1997 (unaudited), the Company had $388,460 outstanding.
At December 31, 1995 and 1996, the Company had $1,586,935 and $2,160,990
outstanding, respectively, from two leasing companies for financing of capital
assets. At March 31, 1997 (unaudited), the Company had $2,023,753 outstanding.
These capital leases are amortized at fixed rates ranging from 7.11% to 10.41%
and mature between September 1998 and August 2001.
The Company has obtained financing facilities for its interest-only and
residual certificates. As of December 31, 1995 and 1996, the aggregate
outstanding balance on these facilities was $16,176,732 and $47,015,178,
respectively. At March 31, 1997 (unaudited), the aggregate balance was
$57,454,193. These facilities have variable interest rates which ranged from
6.44% to 7.75% at December 31, 1996 and mature between October 1997 and December
1999, and ranged from 6.44% to 7.94% at March 31, 1997 (unaudited) and mature
between October 1997 and March 2000.
(6) BANK PAYABLE
In order to maximize its cash management practices, the Company has
instituted a procedure whereby checks written against its operating account are
covered as they are presented to the bank for payment, either by drawing down
its lines of credit or from subsequent deposits of operating cash.
F-11
<PAGE>
DELTA FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) INVESTOR PAYABLE
Investor payable represent the collection of mortgage payments by the
Company, from mortgagors, which were remitted to investors subsequent to the
period end.
(8) CAPITALIZED MORTGAGE SERVICING RIGHTS
The Company sells mortgage loans to generate servicing income and provide
funds for additional investment and lending activities. Prior to January 1,
1995, the Company accounted for the sale of mortgage loans in conformity with
SFAS No. 65, 'Accounting for Certain Mortgage Banking Activities.' Effective
January 1, 1995, the Company adopted SFAS No. 122, 'Accounting for Mortgage
Servicing Rights' which prospectively changed the methodology for capitalized
Mortgage Servicing Rights and the methodology used to measure impairment of its
capitalized Mortgage Servicing Rights asset. These Statements require that the
gain on sale be recognized at the time of sale, using the present value of the
future servicing cash flows. The cash flow has been computed over the average
estimated life of the mortgages, adjusted for prepayments and recorded as
capitalized Mortgage Servicing Rights.
The Company measures impairment of its servicing rights on a disaggregate
basis based on the predominate risk characteristics of the portfolio and
discounts the asset's estimated future cash flow using a current market rate.
The Company has determined the predominant risk characteristics to be prepayment
risk and interest rate risk. The fair value of the existing Mortgage Servicing
Rights as of December 31, 1995 and 1996 and March 31, 1997 (unaudited)
approximated its book value and did not require a valuation allowance to be
established. To determine the fair value of Mortgage Servicing Rights, the
Company estimates the expected future net servicing revenue based on common
industry assumptions, as well as on the Company's historical experience.
SFAS No. 122 was superseded on January 1, 1997 by SFAS No. 125, 'Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities'. The Company adopted SFAS No. 125 on January 1, 1997.
SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, and is to
be applied prospectively. SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial-components approach
that focuses on control. SFAS No. 125 distinguishes transfers of financial
assets that are sales from transfers that are secured borrowings.
SFAS No. 125 requires mortgage banking entities that acquire or originate
loans and subsequently sell or securitize those loans and retain the Mortgage
Servicing Rights to allocate the total cost of the loans to the Mortgage
Servicing Rights and the mortgage loans without the Mortgage Servicing Rights.
The Company determines fair value based upon the present value of estimated net
future servicing revenues less the estimated cost that would fairly compensate a
substitute servicer to service the loans. The servicing asset is then recorded
on the balance sheet and accounted for under SFAS No. 125 using the allocation
of cost relative to fair value approach. The assumptions used to calculate fair
value are the same assumptions used to determine the fair value of the
interest-only certificates. The cost allocated to the servicing rights is
amortized in proportion to and over the period of estimated net future cash
flows related to servicing income.
(9) INTEREST-ONLY AND RESIDUAL CERTIFICATES
The interests that the Company receives upon the sales through
securitizations are in the form of interest-only and residual mortgage
securities which are classified as interest-only and residual certificates.
In accordance with SFAS No. 115, the Company classifies the interest-only
and residual certificates as 'trading securities' and, as such, they are
recorded at their fair value. Fair value of these certificates has been
determined by the Company based on various economic factors, including loan
type, sizes, interest rates, dates of origination, terms and geographic
locations. The Company also uses other available information such as reports
F-12
<PAGE>
DELTA FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
on prepayment rates, interest rates, collateral value, economic forecasts and
historical default and prepayment rates of the portfolio under review. If the
fair value of the interest-only and residual certificates is different from the
recorded value, the unrealized gain or loss will be reflected on the statement
of operations.
In connection with loans sold through these securitization vehicles, the
Company has recorded interest-only and residual certificates totaling $25.3
million, $83.1 million and 101.9 million which represents their fair market
value at December 31, 1995 and 1996 and March 31, 1997 (unaudited),
respectively.
Although the Company believes it has made reasonable estimates of the fair
value of the interest-only and residual certificates likely to be realized, the
rate of prepayments and the amount of defaults utilized by the Company are
estimates and actual experience may vary from its estimate. The gain on
securitization recognized by the Company upon the sale of loans through
securitizations will have been overstated if prepayments or losses are greater
than anticipated. Higher than anticipated rates of loan prepayments or losses
would require the Company to write down the fair value of the interest-only and
residual certificates, adversely impacting earnings. Similarly, if
delinquencies, liquidations or interest rates were to be greater than was
initially assumed, the fair value of the interest-only and residual certificates
would be negatively impacted which would have an adverse effect on income for
the period in which such events occurred. Should the estimated loan life assumed
for this purpose be shorter than the actual life, the amount of cash actually
received over the lives of the loans would exceed the gain previously recognized
at the time the loans were sold through securitizations and would result in
additional income.
The activity in the interest-only and residual certificates is summarized
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31, 1997
---------------------------------------- ---------------------------
1994 1995 1996 1996 1997
---------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period......... $2,204,000 $ 7,513,550 $25,309,548 $25,309,548 $ 83,072,777
Additions............................ 4,159,550 16,750,157 57,456,342 -- 21,902,393
Cash remittances, accretion of
discount and fair value
adjustments, net................... 1,150,000 1,045,841 306,887 7,458 (3,116,873)
---------- ----------- ----------- ----------- ------------
Balance, end of period............... $7,513,550 $25,309,548 $83,072,777 $25,317,006 $101,858,297
---------- ----------- ----------- ----------- ------------
---------- ----------- ----------- ----------- ------------
</TABLE>
(10) HEDGING TRANSACTIONS
The Company regularly securitizes and sells fixed rate mortgage loans. To
offset the effects of interest rate fluctuations on the value of its fixed-rate
loans held for sale, the Company in certain cases will hedge its interest rate
risk related to loans held for sale through the use of treasury rate lock
contracts, which function similar to a short sale of U.S. Treasury securities.
The Company accounts for these contracts as hedges of specific loans held for
sale. The gains or losses derived from these contracts are deferred and
recognized as an adjustment to gains on sales of loans when the loans are sold
or securitized.
As of December 31, 1994, 1995 and 1996, the Company had no open hedge
positions. The Company included gains (losses) of $137,871, ($1,721,860) and
($519,192) on the short sale of U.S. Treasury securities as part of gains on
sale of loans in 1994, 1995 and 1996, respectively.
As of March 31, 1996 (unaudited) and 1997 (unaudited), the Company had open
hedge positions of $105 million and $30 million, respectively. The Company
included gains (losses) of $0 and $931,082 on the short sale of U.S. Treasury
securities as part of gains on sale of loans for the three months ended March
31, 1996 (unaudited) and 1997 (unaudited), respectively.
F-13
<PAGE>
DELTA FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) RELATED PARTY TRANSACTIONS
The Company had notes due from stockholders in the amount of $990,000 at
December 31, 1995. These notes were repaid during 1996.
(12) EMPLOYEE BENEFIT PLANS
The Company has an employee profit-sharing plan covering all eligible
employees, as defined, with at least 30 months of service. The Company
contributed $90,000, $120,000, and $220,000 to the plan for the years ended
December 31, 1994, 1995 and 1996, respectively.
The Company sponsors a 401(k) Retirement Savings Plan. Substantially all
employees of the Company are eligible to participate in the plan after
completing one year of service and who are at least 21 years old. Contributions
are made from employees' elected salary deferrals. The Company may elect to make
a discretionary contribution to the Plan each year. There were no contributions
to the plan by the Company in 1994, 1995 or 1996.
(13) COMMITMENTS AND CONTINGENCIES
The Company has repurchase agreements with certain institutions that have
purchased mortgages. Currently, some of the agreements provide for the
repurchase by the Company of any of the mortgage loans that go to actual
foreclosure sale. At the foreclosure sale, the Company will repurchase the
mortgage, if necessary, and make the institution whole. The dollar amount of the
Company's exposure is approximately $20.0 million at December 31, 1996 and $18.0
million at March 31, 1997 (unaudited).
The Company previously subleased its Woodbury, New York offices from an
affiliated company. In August 1996, the lease was assigned to the Company. This
lease provides for rent to be paid on a month-to-month basis. Rental expense,
net of sublease income, for the years ended December 31, 1994, 1995 and 1996
amounted to $382,702, $476,674 and $967,258, respectively.
Minimum future rentals under non-cancelable operating leases as of December
31, 1996 and March 31, 1997 are as follows:
<TABLE>
<CAPTION>
AMOUNT (000'S)
---------------------------
DECEMBER 31, MARCH 31,
------------ -----------
(UNAUDITED)
-----------
<S> <C> <C>
1997.......................................... $1,138 $ 1,071
1998.......................................... 1,151 1,405
1999.......................................... 1,179 1,331
2000.......................................... 1,219 1,240
2001.......................................... 1,224 1,224
Thereafter.................................... 2,695 2,695
------------ -----------
Total....................................... $8,606 $ 8,966
------------ -----------
------------ -----------
</TABLE>
In the normal course of business, the Company is subject to various legal
proceedings and claims, the resolution of which, in management's opinion, will
not have a material adverse effect on the financial position or the results of
operations of the Company.
Several class-action lawsuits have been filed recently against a number of
consumer finance companies alleging that the compensation of mortgage brokers
through the payment of yield spread premiums violates various federal and state
consumer protection laws. On March 18, 1997 (unaudited), the Company received
notice that it had been named in a lawsuit filed in Federal District Court,
E.D.N.Y., alleging that the Company's compensation of mortgage brokers by means
of yield spread premiums violates, among other things, the Federal Real Estate
Settlement Procedures Act. The complaint seeks (i) certification of a class of
plaintiffs, (ii) an
F-14
<PAGE>
DELTA FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
injunction against payment of yield spread premiums by the Company and (iii)
unspecified compensatory and punitive damages (including attorney's fees).
Management believes the Company has meritorious defenses and intends to defend
this suit, but the Company has not yet answered the complaint and cannot
estimate with any certainty its ultimate legal or financial liability, if any,
with respect to the alleged claims. On May 2, 1997, the Company filed a motion
to dismiss for failure to join a necessary party.
(14) SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid $3,796,047, $7,659,000 and $10,452,616 for interest during
the years ended December 31, 1994, 1995 and 1996, respectively. The Company paid
$1,855,922 and $3,901,246 for interest during the three months ended March 31,
1996 (unaudited) and 1997 (unaudited), respectively.
The Company paid $4,463,843 for income taxes during the three months ended
March 31, 1997 (unaudited).
During the three months ended March 31, 1997 (unaudited), in connection
with the acquisition of Fidelity Mortgage, the Company issued 119,288 shares of
common stock, valued at $2.5 million, to the former owners of Fidelity Mortgage.
(15) STOCK OPTION PLAN
On October 4, 1996, the board of directors ratified the 1996 Stock Option
Plan and authorized the reserve of 2,200,000 shares of authorized but unissued
common stock for issuance pursuant to the plan. The majority of options issued
during 1996 in connection with the IPO vest over a five year period at 20% per
year and the expiration dates range from five to seven years from grant date.
As of December 31, 1996, there were 466,850 options granted at an exercise
price of $16.50. Of the options granted, 6,000 were exercisable at the end of
the year. No options were exercised, forfeited or expired during the year.
The Company applies APB Opinion No. 25, 'Accounting for Stock Issued to
Employees,' and related interpretations in accounting for its stock option plan.
There was no intrinsic value of the options granted as the exercise price was
equal to the quoted market price at grant date. Accordingly, no compensation
cost has been recognized for the year ended December 31, 1996.
Had compensation cost for the stock option plan been determined based on
the fair value at the grant dates for awards under that plan consistent with the
method of SFAS No. 123, 'Accounting for Stock-Based Compensation,' the Company's
net income for 1996 would have been $25,481,126.
The weighted-average fair value of options granted during 1996 was $6.31.
For purposes of the pro forma calculation under SFAS No. 123, the fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used for
the 1996 grant:
<TABLE>
<CAPTION>
1996
-------
<S> <C>
Dividend yield.................................................. 0%
Expected volatility............................................. 51%
Risk-free interest rate......................................... 6%
Expected life................................................... 5 years
</TABLE>
On March 4, 1997 (unaudited), the board of directors ratified the grant of
an additional 165,000 shares to various employees under the 1996 Stock Option
Plan. The options granted vest over a five year period at 20% per year and have
an expiration date of seven years from grant date. There was no intrinsic value
of the options granted as the exercise price was equal to the quoted market
price at grant date. Accordingly, no compensation cost has been recognized for
the quarter ending March 31, 1997.
F-15
<PAGE>
DELTA FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(16) INCOME TAXES
The income tax provision for the year ended December 31, 1996 is comprised
of the following components:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
Ordinary tax provision
Federal............................................................... $3,305,242 $ 825,832 $4,131,074
State................................................................. 1,150,463 284,348 1,434,811
---------- ---------- ----------
4,455,705 1,110,180 5,565,885
---------- ---------- ----------
Change in tax status
Federal............................................................... -- 2,901,470 2,901,470
State................................................................. -- 999,026 999,026
---------- ---------- ----------
-- 3,900,496 3,900,496
---------- ---------- ----------
Total tax provision................................................ $4,455,705 $5,010,676 $9,466,381
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
As discussed in Note 1, the Company was an S corporation through October
30, 1996 pursuant to the Internal Revenue Code of 1986, as amended, and as such
did not incur any federal income tax expense. The Company was liable for New
York State minimum tax and that provision is included above under current state
provision.
On October 31, 1996, the Company became a C corporation for federal and
state income tax purposes and as such is subject to federal and state income tax
on its taxable income for the months of November and December 1996. In
connection with the change in tax status from an S corporation to a C
corporation, the Company incurred deferred income tax expense of $3,900,496 as
of October 31, 1996.
The liability for income taxes at December 31, 1996 reflected on the
consolidated balance sheet includes a deferred tax liability of $5,010,676. This
represents the tax effect of differences between the tax basis and financial
statement carrying amounts of assets and liabilities. The major sources of
temporary differences and their deferred tax effect at December 31, 1996 are as
follows:
<TABLE>
<S> <C>
Deferred tax liabilities:
Capitalized cost of future servicing income............... $4,814,213
Book/tax difference in interest-only residual certificate
valuation.............................................. 966,481
----------
Total deferred tax liabilities.............................. 5,780,694
----------
----------
Deferred tax assets:
Book over tax depreciation................................ 86,291
Book over tax basis in mortgage servicing asset........... 326,906
Loss reserves............................................. 356,821
----------
Total deferred tax assets................................... 770,018
----------
Net deferred tax liability.................................. $5,010,676
----------
----------
</TABLE>
F-16
<PAGE>
DELTA FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of the statutory income tax provision to the effective income
tax provision, as applied to income for the period November 1, 1996 to December
31, 1996, is as follows:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
Tax at statutory rate....................................... $4,161,394
Change in tax status........................................ 3,900,000
State and local taxes....................................... 835,127
S corporation state and local tax........................... 150,000
Non-deductible expenses and other........................... 419,860
----------
Total provision........................................... $9,466,381
----------
----------
</TABLE>
(17) ACQUISITIONS (UNAUDITED)
In February 1997, the Company acquired Fidelity Mortgage, Inc. and Fidelity
Mortgage (Florida), Inc. (together referred to herein as 'Fidelity Mortgage')
for a combination of cash and stock. These transactions were accounted for under
the purchase method of accounting. Accordingly, the results of operations of
Fidelity Mortgage starting from the date of purchase have been included in the
Company's consolidated financial statements. In connection with these
acquisitions the Company recorded goodwill of approximately $6.3 million, which
is being amortized on a straight-line basis over seven years. The acquired
operations will continue to operate as separate legal entities under the names
Fidelity Mortgage, Inc. and Fidelity Mortgage (Florida), Inc.
F-17
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY
PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------------
TABLE OF CONTENTS
---------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................. 3
Summary Consolidated Financial
Data......................................... 9
Risk Factors................................... 11
Use of Proceeds................................ 21
Capitalization................................. 22
Selected Consolidated Financial Data........... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 26
Business....................................... 39
Management..................................... 56
Certain Relationships and Related Party
Transactions................................. 62
Principal Stockholders......................... 64
Description of the Notes....................... 65
Underwriting................................... 86
Legal Matters.................................. 87
Experts........................................ 87
Additional Information......................... 87
Index to Consolidated Financial Statements..... F-1
</TABLE>
================================================================================
================================================================================
$150,000,000
DELTA FINANCIAL
CORPORATION
[LOGO]
% SENIOR NOTES
DUE 2004
------------------------
PROSPECTUS
------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
LEHMAN BROTHERS
SMITH BARNEY INC.
, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Registrants estimates that expenses payable by them in connection with
the offering described in this registration statement (other than the
underwriting discount and commissions) will be as follows:
<TABLE>
<S> <C>
SEC registration fee.......................................... $ 45,455
Legal fees and expenses....................................... 200,000
Accounting fees and expenses.................................. 65,000
Printing and engraving........................................ 150,000
Blue sky qualification fees and expenses...................... 11,000
Rating Agency fees and expenses............................... 150,000
Trustee's fees................................................ 4,000
NASD fees and expenses........................................ 15,500
Miscellaneous................................................. 9,045
--------
Total....................................................... $650,000
--------
--------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Certificates of Incorporation of each of Delta Financial Corporation,
DF Special Holdings Corporation, Fidelity Mortgage, Inc. and Fidelity Mortgage
(Florida), Inc. eliminates, to the fullest extent permitted by the law of the
State of Delaware, personal liability of directors and officers to those
companies and their stockholders for monetary damages for breach of fiduciary
duty as directors.
Section 145(a) of the Delaware General Corporation Law ('DGCL') provides in
relevant part that 'a corporation may indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.'
With respect to derivative actions, Section 145(b) of the DGCL provides in
relevant part that '[a] corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor. . . [by reason of his service in one of the capacities
specified in the preceding sentence] against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement or such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.'
Article NINTH of the Certificate of Incorporation of Delta Financial
Corporation provides:
'To the full extent permitted by the Delaware General Corporation Law
or any other applicable law currently or hereafter in effect, no Director
of the Company will be personally liable to the Company or its stockholders
for or with respect to any acts or omissions in the performance of his or
her duties as a Director of the Company. Any repeal or modification of this
Article Ninth will not adversely affect any right or protection of a
Director of the Company existing prior to such repeal or modification.'
II-1
<PAGE>
Article TENTH of the Certificate of Incorporation of Delta Financial
Corporation provides:
'Each person who is or was or had agreed to become a Director or
officer of the Company, and each such person who is or was serving or who
had agreed to serve at the request of the Board or an officer of the
Company as an employee or agent of the Company or as a director, officer,
employee, or agent of another corporation, partnership, joint venture,
trust, or other entity, whether for profit or not for profit (including the
heirs, executors, administrators, or estate of such person), will be
indemnified by the Company to the full extent permitted by the Delaware
General Corporation Law or any other applicable law as currently or
hereafter in effect. The right of indemnification provided in this Article
Tenth (a) will not be exclusive of any other rights to which any person
seeking indemnification may otherwise be entitled, including without
limitation pursuant to any contract approved by a majority of the Whole
Board (whether or not the Directors approving such contract are or are to
be parties to such contract or similar contracts), and (b) will be
applicable to matters otherwise within its scope whether or not such
matters arose or arise before or after the adoption of this Article Tenth.
Without limiting the generality or the effect of the foregoing, the Company
may adopt By-Laws, or enter into one or more agreements with any person,
which provide for indemnification greater or different than that provided
in this Article Tenth or the DGCL. Notwithstanding anything contained in
this Certificate of Incorporation to the contrary, the amendment or repeal
of, or adoption of any provision inconsistent with, this Article Tenth will
require the affirmative vote of the holders of at least 70% of the Voting
Stock, voting together as a single class. Any amendment or repeal of, or
adoption of any provision inconsistent with, this Article Tenth will not
adversely affect any right or protection existing hereunder prior to such
amendment, repeal, or adoption.'
Article EIGHTH of the Certificates of Incorporation of each of Fidelity
Mortgage, Inc. and Fidelity Mortgage (Florida), Inc. provides:
'To the fullest extent that the General Corporation Law of the State
of Delaware, as it exists on the date hereof or as it may hereafter be
amended, permits the limitation or elimination of the liability of
directors, no director of this Corporation shall be personally liable to
this Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director. Notwithstanding the foregoing, a director
shall be liable to the extent provided by applicable law (1) for any breach
of the directors' duty of loyalty to the Corporation or its stockholders,
(2) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (3) under Section 174 of the
General Corporation Law of the State of Delaware, or (4) for any
transaction from which the director derived any improper personal benefit.
Neither the amendment or repeal of this Article, nor the adoption of any
provision of this Certificate of Incorporation inconsistent with this
Article shall adversely affect any right or protection of a director of the
Corporation existing at the time of such amendment, repeal or adoption.'
Article NINTH of the Certificates of Incorporation of each of Fidelity
Mortgage, Inc. and Fidelity Mortgage (Florida), Inc. provides:
'The Corporation shall, to the fullest extent permitted by Section 145
of the General Corporation Law of the State of Delaware, as the same may be
amended and supplemented, or by any successor thereto, indemnify any and
all persons whom it shall have power to indemnify under said section from
and against any and all of the expenses, liabilities or other matters
referred to in or covered by said section. The Corporation shall advance
expenses to the fullest extent permitted by said section. Such right to
indemnification and advancement of expenses shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure
to the benefit of the heirs, executors and administrators of such a person.
The indemnification and advancement of expenses provided for herein shall
not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any
By-Law, agreement, vote of stockholders or disinterested directors or
otherwise.'
Article 12 of the Certificate of Incorporation of DF Special Holdings
Corporation provides:
'No director shall have any personal liability to the Corporation or
its stockholders for any monetary damages for breach of fiduciary duty as a
director, except that this Article 12 shall not eliminate or limit the
liability of each director (i) for any breach of such director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a
II-2
<PAGE>
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which such director
derived an improper personal benefit. If the Delaware General Corporation
Law is amended to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of a
director of the corporation shall be eliminated or limited to the fullest
extent permitted by the Delaware General Corporation Law, as so amended.
Any repeal or modification of this provision shall not adversely affect any
right or protection of a director of the Corporation existing at the time
of such repeal or modification.'
With respect to Delta Funding Corporation, the New York Business
Corporation Law ('NYBCL') authorizes a New York corporation to indemnify any
person who is, or is threatened to be made, a party in any civil or criminal
proceeding (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another entity, against judgments,
fines, amounts paid in settlement and reasonable expenses (including attorneys'
fees), actually and reasonably incurred by such person as a result of such
action or proceeding or any appeal therein. With respect to actions by or in the
rights of the corporation, the NYBCL authorizes indemnification of such person
against reasonable expenses, including attorneys' fee and amounts paid in
settlement. To be entitled to indemnification, a person must have acted in good
faith and in a manner he reasonably believed to be in, or not opposed to, the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. Court
approval is required as a prerequisite to indemnification of expenses in respect
of any claim as to which a person has been adjudged liable to the corporation.
The NYBCL requires indemnification against expenses actually and reasonably
incurred by any director, officer, employee or agent in connection with a
proceeding against such person for action in such capacity to the extent that
the person has been successful on the merits or otherwise. Advancement of
expenses (i.e., payment prior to a determination on the merits) is permitted,
but not required, by the NYBCL, which further requires that any director or
officer must undertake to repay such expenses if it is ultimately determined
that he is not entitled to indemnification. The disinterested members of the
board of directors (or independent legal counsel or the shareholders) must
determine, in each instance where indemnification is not required by the NYBCL,
that such director, officer, employee or agent is entitled to indemnification.
The NYBCL provides that the indemnification provided by statute is not
exclusive.
Delta Financial Corporation's directors and officers are covered by
insurance policies indemnifying them against certain civil liabilities,
including liabilities under the federal securities laws, which might be incurred
by them in such capacity.
The Underwriting Agreement filed as Exhibit 1.1 provides that the
Underwriters named therein will indemnify and hold harmless the Company and each
director, officer or controlling person of the Company from and against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
and the Underwriting Agreement will provide that such Underwriters will
contribute to certain liabilities of such persons under the Securities Act of
1933, as amended.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On June 5, 1997, Sidney A. Miller, the Sidney A. Miller Grantor Retained
Annuity Trust, Rona V. Miller and the Rona V. Miller Grantor Retained Annuity
Trust each transfered 58,000 shares of Common Stock of the Registrant to an
exchange fund in a non-taxable transfer.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
*1. -- Form of Underwriting Agreement
+3.1 -- Certificate of Incorporation of Delta Financial Corporation
+3.2 -- Bylaws of Delta Financial Corporation
***3.3 -- Certificate of Incorporation of Delta Funding Corporation
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
***3.4 -- Bylaws of Delta Funding Corporation
*3.5 -- Certificate of Incorporation of Fidelity Mortgage, Inc.
*3.6 -- Bylaws of Fidelity Mortgage, Inc.
*3.7 -- Certificate of Incorporation of Fidelity Mortgage (Florida), Inc.
*3.8 -- Bylaws of Fidelity Mortgage (Florida), Inc.
*3.9 -- Certificate of Incorporation of DF Special Holdings Corporation
*3.10 -- Bylaws of DF Special Holdings Corporation
**4.1 -- Form of Indenture between Delta Financial Corporation and The Bank of New York
**4.2 -- Form of Subsidiary Guarantee by Delta Funding Corporation, Fidelity Mortgage, Inc.,
Fidelity Mortgage (Florida), Inc. and DF Special Holdings Corporation
**5. -- Opinion of Stroock & Stroock & Lavan LLP
+10.1 -- Employment Agreement dated October 1, 1996 between the Registrant and Sidney A. Miller
+10.2 -- Employment Agreement dated October 1, 1996 between the Registrant and Hugh Miller
+10.3 -- Employment Agreement dated October 1, 1996 between the Registrant and Christopher Donnelly
+10.4 -- Employment Agreement dated October 1, 1996 between the Registrant and Randall F. Michaels
++10.5 -- Employment Agreement dated March 4, 1997 between the Registrant and Richard Blass
+10.6 -- Lease Agreement between Delta Funding Corporation and the Tilles Investment Company
+10.7 -- 1996 Stock Option Plan of Delta Financial Corporation
**23.1 -- Consent of KPMG Peat Marwick LLP
**23.2 -- Consent of Stroock & Stroock & Lavan LLP (contained in 5.)
*24. -- Power of Attorney (included in the signature page)
**25. -- Statement of Eligibility and Qualification of Trustee (Form T-1)
</TABLE>
- ------------------
* Previously filed
** Filed herewith
*** Incorporated by reference from Delta Funding Corporation's Registration
Statement on Form S-3 (File No. 333-3418) filed with the Commission on
August 5, 1996.
+ Incorporated by reference from the Company's Registration Statement on Form
S-1 (No. 333-11289) filed with the Commission on October 9, 1996.
++ Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997 (File No. 1-12109) filed with the
Commission on May 15, 1997.
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrants pursuant to the foregoing provisions, or otherwise,
the Registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrants of expenses incurred or paid by a director, officer
or controlling person of the Registrants in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, each of the
Registrants will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question
II-4
<PAGE>
whether such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(b) Each of the undersigned Registrants hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the Registrants
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
Act of 1933 shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANTS HAVE DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON THEIR
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE STATE OF NEW YORK
ON THE 17TH DAY OF JULY, 1997.
DELTA FINANCIAL CORPORATION ('DFC')
and the Guarantors listed on Annex A
(the 'Guarantors')
By: /s/ HUGH MILLER
----------------------------------
Hugh Miller
President and Chief Executive
Officer of DFC
and each of the Guarantors
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSON IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- ------------------------------------------ ------------------------------------------------- --------------
<S> <C> <C>
* Chairman of the Board of Directors of DFC July 17, 1997
- ------------------------------------------
Sidney A. Miller
/s/ HUGH MILLER Director, Chief Executive Officer and President July 17, 1997
- ------------------------------------------ of DFC and each of the Guarantors (Principal
Hugh Miller Executive Officer)
* Director, Chief Financial Officer, Senior Vice July 17, 1997
- ------------------------------------------ President and Treasurer (Principal Accounting
Richard Blass Officer) of DFC, Treasurer (Principal Accounting
Officer) of DF Special Holdings Corporation and
Director of each of the Guarantors
* Director of DFC July 17, 1997
- ------------------------------------------
Martin D. Payson
* Director of DFC July 17, 1997
- ------------------------------------------
Arnold B. Pollard
* Director of all Guarantors and Vice President, July 17, 1997
- ------------------------------------------ Secretary and Treasurer (Principal Accounting
Marc E. Miller Officer) of Fidelity Mortgage, Inc. and Fidelity
Mortgage (Florida), Inc.
* Director of Fidelity Mortgage, Inc. and Fidelity July 17, 1997
- ------------------------------------------ Mortgage (Florida), Inc.
Jonathan New
</TABLE>
II-6
<PAGE>
<TABLE>
<S> <C> <C>
* Director of DF Special Holdings Corporation July 17, 1997
- ------------------------------------------
Lee Miller
* Director of DF Special Holdings Corporation July 17, 1997
- ------------------------------------------
William J. Horan
*By: /s/ HUGH MILLER
----------------------------------
Hugh Miller
Attorney-in-Fact
</TABLE>
II-7
<PAGE>
ANNEX A
Delta Funding Corporation
DF Special Holdings Corporation
Fidelity Mortgage, Inc.
Fidelity Mortgage (Florida), Inc.
A-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------- ----------- -----------
<S> <C> <C> <C>
*1. -- Form of Underwriting Agreement
+3.1 -- Certificate of Incorporation of Delta Financial Corporation
+3.2 -- Bylaws of Delta Financial Corporation
***3.3 -- Certificate of Incorporation of Delta Funding Corporation
***3.4 -- Bylaws of Delta Funding Corporation
*3.5 -- Certificate of Incorporation of Fidelity Mortgage, Inc.
*3.6 -- Bylaws of Fidelity Mortgage, Inc.
*3.7 -- Certificate of Incorporation of Fidelity Mortgage (Florida), Inc.
*3.8 -- Bylaws of Fidelity Mortgage (Florida), Inc.
*3.9 -- Certificate of Incorporation of DF Special Holdings Corporation
*3.10 -- Bylaws of DF Special Holdings Corporation
**4.1 -- Form of Indenture between Delta Financial Corporation and The Bank of New York
**4.2 -- Form of Subsidiary Guarantee by Delta Funding Corporation, Fidelity Mortgage,
Inc., Fidelity Mortgage (Florida), Inc. and DF Special Holdings Corporation
**5. -- Opinion of Stroock & Stroock & Lavan LLP
+10.1 -- Employment Agreement dated October 1, 1996 between the Registrant and Sidney A. Miller
+10.2 -- Employment Agreement dated October 1, 1996 between the Registrant and Hugh Miller
+10.3 -- Employment Agreement dated October 1, 1996 between the Registrant and Christopher
Donnelly
+10.4 -- Employment Agreement dated October 1, 1996 between the Registrant and Randall F. Michaels
++10.5 -- Employment Agreement dated March 4, 1997 between the Registrant and Richard Blass
+10.6 -- Lease Agreement between Delta Funding Corporation and the Tilles Investment Company
+10.7 -- 1996 Stock Option Plan of Delta Financial Corporation
**23.1 -- Consent of KPMG Peat Marwick LLP
**23.2 -- Consent of Stroock & Stroock & Lavan LLP (contained in 5.)
*24. -- Power of Attorney (included in the signature page)
**25. -- Statement of Eligibility and Qualification of Trustee (Form T-1)
</TABLE>
- ------------------
* Previously filed
** Filed herewith
*** Incorporated by reference from Delta Funding Corporation's Registration
Statement on Form S-3 (File No. 333-3418) filed with the Commission on
August 5, 1996.
+ Incorporated by reference from the Company's Registration Statement on Form
S-1 (No. 333-11289) filed with the Commission on October 9, 1996.
++ Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997 (File No. 1-12109) filed with the
Commission on May 15, 1997.
<PAGE>
================================================================================
DELTA FINANCIAL CORPORATION
and
DELTA FUNDING CORPORATION
DF SPECIAL HOLDINGS CORPORATION
FIDELITY MORTGAGE, INC.
FIDELITY MORTGAGE (FLORIDA), INC.
$150,000,000
___% SENIOR NOTES DUE 2004
-----------------
INDENTURE
Dated as of July ___, 1997
-----------------
-----------------
THE BANK OF NEW YORK
-----------------
Trustee
================================================================================
<PAGE>
CROSS-REFERENCE TABLE*
<TABLE>
<CAPTION>
Trust Indenture
Act Section Indenture Section
<S> <C>
310 (a)(1)..................................................................... 7.10
(a)(2).................................................................... 7.10
(a)(3) ................................................................... N.A.
(a)(4).................................................................... N.A.
(a)(5).................................................................... 7.10
(b) ...................................................................... 7.10
(c) ...................................................................... N.A.
311 (a) ....................................................................... 7.11
(b) ...................................................................... 7.11
(c) ...................................................................... N.A.
312 (a)........................................................................ 2.05
(b)....................................................................... 11.03
(c) ...................................................................... 11.03
313 (a) ....................................................................... 7.06
(b)(1) ...................................................................
10.03
(b)(2) ...................................................................
7.07
(c) ...................................................................... 7.06;11.02
(d)....................................................................... 7.06
314 (a) ....................................................................... 4.03;11.02
(b) ...................................................................... 10.02
(c)(1) ................................................................... 11.04
(c)(2) ................................................................... 11.04
(c)(3) ................................................................... N.A.
(d).....................................................................10.03, 10.04, 10.05
(e) ..................................................................... 11.05
(f)....................................................................... N.A.
315 (a)........................................................................ 7.01
(b)....................................................................... 7.05,11.02
(c) ..................................................................... 7.01
(d)....................................................................... 7.01
(e)....................................................................... 6.11
316 (a)(last sentence) ........................................................ 2.09
(a)(1)(A)................................................................. 6.05
(a)(1)(B) ................................................................ 6.04
(a)(2) ................................................................... N.A.
(b) ...................................................................... 6.07
(c) ...................................................................... 2.12
317 (a)(1) .................................................................... 6.08
(a)(2).................................................................... 6.09
(b) ...................................................................... 2.04
<PAGE>
318 (a)........................................................................ 11.01
(b)....................................................................... N.A.
(c)....................................................................... 11.01
</TABLE>
N.A. means not applicable.
*This Cross-Reference Table is not part of the Indenture.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE 1
DEFINITIONS AND INCORPORATION
BY REFERENCE
Section 1.1. Definitions....................................................... 1
Section 1.2. Other Definitions................................................. 13
Section 1.3. Incorporation by Reference of Trust Indenture Act................. 14
Section 1.4. Rules of Construction............................................. 14
ARTICLE 2
THE NOTES
Section 2.1. Form and Dating................................................... 15
Section 2.2. Execution and Authentication...................................... 15
Section 2.3. Registrar and Paying Agent........................................ 16
Section 2.4. Paying Agent to Hold Money in Trust............................... 16
Section 2.5. Holder Lists...................................................... 17
Section 2.6. Transfer and Exchange............................................. 17
Section 2.7. Replacement Notes................................................. 17
Section 2.8. Outstanding Notes................................................. 18
Section 2.9. Treasury Notes.................................................... 18
Section 2.10. Temporary Notes................................................... 18
Section 2.11. Cancellation...................................................... 19
Section 2.12. Defaulted Interest................................................ 19
Section 2.13. Cusip Number...................................................... 19
ARTICLE 3
REDEMPTION
Section 3.1. Notices to Trustee................................................ 19
Section 3.2. Selection of Notes to Be Redeemed................................. 20
Section 3.3. Notice of Redemption.............................................. 20
Section 3.4. Effect of Notice of Redemption.................................... 21
Section 3.5. Deposit of Redemption Price....................................... 21
Section 3.6. Notes Redeemed in Part............................................ 21
Section 3.7. Optional Redemption............................................... 21
Section 3.8. Mandatory Redemption.............................................. 22
Section 3.9. Offer to Purchase by Application of Excess Proceeds............... 22
ARTICLE 4
COVENANTS
Section 4.1. Payment of Notes.................................................. 24
Section 4.2. Maintenance of Office or Agency................................... 24
Section 4.3. Reports........................................................... 25
Section 4.4. Compliance Certificate............................................ 25
Section 4.5. Taxes............................................................. 26
Section 4.6. Stay, Extension and Usury Laws.................................... 26
Section 4.7. Restricted Payments............................................... 26
Section 4.8. Dividend and Other Payment Restrictions Affecting
Subsidiaries...................................................... 28
Section 4.9. Incurrence of Indebtedness and Issuance of Preferred Stock........ 29
Section 4.10. Asset Sales....................................................... 31
Section 4.11. Transactions with Affiliates...................................... 32
i
<PAGE>
Section 4.12. Liens............................................................ 34
Section 4.13. Business Activities.............................................. 34
Section 4.14. Payments for Consent............................................. 34
Section 4.15. Corporate Existence.............................................. 34
Section 4.16. Offer to Repurchase Upon Change of Control....................... 34
Section 4.18. Additional Subsidiary Guaranties................................. 35
ARTICLE 5
SUCCESSORS
Section 5.1. Merger, Consolidation, or Sale of Assets......................... 35
Section 5.2. Successor Corporation Substituted................................ 36
ARTICLE 6
DEFAULTS AND REMEDIES
Section 6.1. Events of Default................................................. 36
Section 6.2. Acceleration...................................................... 39
Section 6.3. Other Remedies.................................................... 39
Section 6.4. Waiver of Past Defaults........................................... 40
Section 6.5. Control by Majority............................................... 40
Section 6.6. Limitation on Suits............................................... 41
Section 6.7. Rights of Holders of Notes to Receive Payment..................... 41
Section 6.8. Collection Suit by Trustee........................................ 41
Section 6.9. Trustee May File Proofs of Claim.................................. 41
Section 6.10. Priorities........................................................ 42
Section 6.11. Undertaking for Costs............................................. 42
ARTICLE 7
TRUSTEE
Section 7.1. Duties of Trustee................................................. 42
Section 7.2. Rights of Trustee................................................. 43
Section 7.3. Individual Rights of Trustee...................................... 44
Section 7.4. Trustee's Disclaimer.............................................. 44
Section 7.5. Notice of Defaults................................................ 44
Section 7.6. Reports by Trustee to Holders..................................... 44
Section 7.7. Compensation and Indemnity........................................ 45
Section 7.8. Replacement of Trustee............................................ 46
Section 7.9. Successor Trustee by Merger, etc.................................. 47
Section 7.10. Eligibility; Disqualification..................................... 47
Section 7.11. Preferential Collection of Claims Against Company................. 47
ARTICLE 8
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Section 8.1. Option to Effect Legal Defeasance or Covenant Defeasance.......... 47
Section 8.2. Legal Defeasance and Discharge.................................... 47
Section 8.3. Covenant Defeasance............................................... 48
Section 8.4. Conditions to Legal or Covenant Defeasance........................ 48
Section 8.5. Deposited Money and Government Securities to be Held in
Trust; Other Miscellaneous Provisions............................. 50
Section 8.6. Repayment to the Company.......................................... 50
Section 8.7. Reinstatement..................................................... 51
ii
<PAGE>
ARTICLE 9
AMENDMENT, SUPPLEMENT AND WAIVER
Section 9.1. Without Consent of Holders of Notes............................... 51
Section 9.2. With Consent of Holders of Notes.................................. 52
Section 9.3. Compliance with Trust Indenture Act............................... 53
Section 9.4. Revocation and Effect of Consents................................. 53
Section 9.5. Notation on or Exchange of Notes.................................. 54
Section 9.6. Trustee to Sign Amendments, etc................................... 54
ARTICLE 10
SUBSIDIARY GUARANTEE
Section 10.1. Subsidiary Guarantee.............................................. 54
Section 10.2. Execution and Delivery of Subsidiary Guarantee.................... 55
Section 10.3. Guarantors May Consolidate, etc., on Certain Terms................ 55
Section 10.4. Releases Following Sale of Assets................................. 56
Section 10.5. "Trustee" to Include Paying Agent................................. 57
ARTICLE 11
MISCELLANEOUS
Section 11.1. Trust Indenture Act Controls...................................... 57
Section 11.2. Notices........................................................... 57
Section 11.3. Communication by Holders with Other Holders....................... 58
Section 11.4. Certificate and Opinion as to Conditions Precedent................ 58
Section 11.5. Statements Required in Certificate or Opinion..................... 59
Section 11.6. Rules by Trustee and Agents....................................... 59
Section 11.7. No Personal Liability of Directors, Officers, Employees
and Stockholders.................................................. 59
Section 11.8. Governing Law..................................................... 59
Section 11.9. No Adverse Interpretation of Other Agreements..................... 59
Section 11.10. Successors and Assigns............................................ 60
Section 11.11. Severability...................................................... 60
Section 11.12. Legal Holidays.................................................... 60
Section 11.13. Counterpart Originals............................................. 60
Section 11.14. Table of Contents, Headings, etc.................................. 60
</TABLE>
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EXHIBITS
Exhibit A FORM OF NOTE
Exhibit B FORM OF CERTIFICATE OF TRANSFER
Exhibit C FORM OF CERTIFICATE OF EXCHANGE
Exhibit D FORM OF SUBSIDIARY GUARANTEE
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INDENTURE dated as of July ______, 1997 among Delta Financial
Corporation, a Delaware corporation (the "Company"), as issuer, each of Delta
Funding Corporation, a New York corporation, DF Special Holdings Corporation, a
Delaware corporation, Fidelity Mortgage, Inc., a Delaware corporation, and
Fidelity Mortgage (Florida), Inc., a Delaware corporation (collectively, the
"Subsidiary Guarantors"), and The Bank of New York, as trustee (the "Trustee").
The Company, the Subsidiary Guarantors and the Trustee agree
as follows for the benefit of each other and for the equal and ratable benefit
of the Holders of the Company's _____% Senior Notes due 2004 (the "Notes"):
ARTICLE 1
DEFINITIONS AND INCORPORATION
BY REFERENCE
SECTION 1.1. DEFINITIONS.
"Acquired Debt" means, with respect to any specified Person,
(i) Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"controlled by" and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether through the ownership of voting securities, by agreement or otherwise;
provided, that, for purposes of Section 4.11, beneficial ownership of 10% or
more of the voting securities of a Person shall be deemed to be control.
"Agent" means any Registrar, Paying Agent or coregistrar.
"Asset Sale" means (i) the sale, lease, conveyance or other
disposition of any assets (including, without limitation, by way of a sale and
leaseback and the sale or other disposition of any Residual Receivables) other
than sales of Receivables in connection with Securitizations or Warehouse
Facilities and sales of foreclosed assets, in each case in the ordinary course
of business (provided that the sale, lease, conveyance or other disposition of
all or substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole will be governed by the provisions of Section 4.16
hereof and/or the provisions Article V and not by the provisions of Section
4.10), and (ii) the issuance by the Company or any of its Restricted
Subsidiaries of Equity Interests, or the sale by the Company or any Restricted
Subsidiary of any Equity Interests, in each case, of their Subsidiaries (other
than directors qualifying shares), in the case of either clause (i) or (ii),
whether in a single transaction or a series of related transactions (a) that
have a fair market value in excess of $1.0 million or (b) for net proceeds in
excess of $1.0 million. Notwithstanding the foregoing, the following will not be
deemed to be Asset Sales: (i) an issuance of Equity Interests by a Wholly-Owned
Restricted Subsidiary to the Company or to another Wholly-Owned Restricted
Subsidiary; (ii) a Restricted Payment that is permitted by Section 4.7; and
(iii) a disposition by a Restricted Subsidiary to the Company or a Wholly-Owned
Restricted Subsidiary or by the Company to a Wholly-Owned Restricted Subsidiary
of the Company.
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"Board of Directors" means, with respect to any Person, the
Board of Directors of such Person or any authorized committee thereof.
"Business Day" means any day other than a Legal Holiday.
"capital lease" means, at the time any determination thereof
is to be made, any lease of property, real or personal, in respect of which the
present value of the minimum rental commitment would be capitalized on a balance
sheet of the lessee in accordance with GAAP.
"Capital Lease Obligation" means, at the time any
determination thereof is to be made, the amount of the liability in respect of a
capital lease that would at such time be required to be capitalized on a balance
sheet in accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation,
corporate stock, (ii) in the case of an association or business entity, any and
all shares, interests, participations, rights or other equivalents (however
designated) of corporate stock, (iii) in the case of a partnership or limited
liability company, partnership (whether general or limited) or membership
interests and (iv) any other interest or participation that confers on a Person
the right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii)
securities issued or directly and fully guaranteed or insured by the United
States government or any agency or instrumentality thereof having maturities of
not more than one year from the date of acquisition, (iii) certificates of
deposit and Eurodollar time deposits with maturities of one year or less from
the date of acquisition, bankers' acceptances with maturities not exceeding one
year and overnight bank deposits, in each case with any domestic commercial bank
having capital and surplus in excess of $500.0 million and a Keefe Bank Watch
Rating of "B" or better, (iv) repurchase obligations with a term of not more
than seven days for underlying securities of the types described in clauses (ii)
and (iii) above entered into with any financial institution meeting the
qualifications specified in clause (iii) above, (v) commercial paper having one
of the two highest ratings obtainable from Moody's or Standard & Poor's and in
each case maturing within nine months after the date of acquisition, and (vi)
money market funds, the portfolios of which are limited to investments described
in clauses (i) through (v) above.
"Change of Control" means the occurrence of any of the
following: (i) the sale, lease, transfer, conveyance or other disposition (other
than by way of merger or consolidation and excluding sales, leases, transfers,
conveyances or other dispositions pursuant to Securitizations, Warehouse
Facilities or Residual Receivables financing arrangements otherwise permitted by
this Indenture entered into in the ordinary course of business), in one or a
series of related transactions, of all or substantially all of the assets of the
Company and its Restricted Subsidiaries taken as a whole to any "person" (as
such term is used in Section 13(d)(3) of the Exchange Act) other than a
Permitted Holder, (ii) the adoption of a plan relating to the liquidation or
dissolution of the Company, (iii) the consummation of any transaction
(including, without limitation, any merger or consolidation) the result of which
is that any "person" (as defined above) other than a Permitted Holder becomes
the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5
under the Exchange Act), directly or indirectly, of more than 50% of the Voting
Stock of the Company (measured by general voting power rather than number of
shares), (iv) the
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first day on which a majority of the members of the Board of Directors of the
Company are not Continuing Directors or (v) the Company consolidates with, or
merges with or into, any Person, or any Person consolidates with, or merges with
or into, the Company, in any such event pursuant to a transaction in which any
of the outstanding Voting Stock of the Company is converted into or exchanged
for cash, securities or other property, other than any such transaction where
the Voting Stock of the Company outstanding immediately prior to such
transaction is converted into or exchanged for Voting Stock (other than
Disqualified Stock) of the surviving or transferee Person constituting a
majority of the outstanding shares of such Voting Stock of such surviving or
transferee Person (immediately after giving effect to such issuance). For
purposes of this definition, any transfer of an equity interest of an entity
that was formed for the purpose of acquiring Voting Stock of the Company will be
deemed to be a transfer of such portion of such Voting Stock as corresponds to
the portion of the equity of such entity that has been so transferred.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Leverage Ratio" as of any date of determination
means the ratio of (i) the aggregate amount of all consolidated Indebtedness of
the Company and its Restricted Subsidiaries excluding (A) Permitted Warehouse
Debt, and (B) Hedging Obligations permitted to be incurred pursuant to Section
4.9(b)(vii) to (ii) the Consolidated Net Worth of the Company.
"Consolidated Net Income" means, with respect to any Person
for any period, the aggregate of the Net Income of such Person and its
Restricted Subsidiaries (for such period, on a consolidated basis, determined in
accordance with GAAP); provided, that (i) the Net Income (but not loss) of any
Person that is not a Restricted Subsidiary or that is accounted for by the
equity method of accounting shall be included only to the extent of the amount
of dividends or distributions paid in cash to the referent Person or a
Wholly-Owned Restricted Subsidiary thereof, (ii) the Net Income of any
Restricted Subsidiary shall be excluded to the extent that the declaration or
payment of dividends or similar distributions by that Restricted Subsidiary of
that Net Income is not at the date of determination permitted without any prior
governmental approval (that has not been obtained) or, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary or its stockholders, (iii) the Net Income of any Person
acquired in a pooling of interests transaction for any period prior to the date
of such acquisition shall be excluded, and (iv) the cumulative effect of a
change in accounting principles shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as
of any date, the sum of (i) the consolidated equity of the common stockholders
of such Person and its consolidated Restricted Subsidiaries as of such date plus
(ii) the respective amounts reported on such Person's balance sheet as of such
date with respect to any series of preferred stock (other than Disqualified
Stock) that by its terms is not entitled to the payment of dividends unless such
dividends may be declared and paid only out of net earnings in respect of the
year of such declaration and payment, but only to the extent of any cash
received by such Person upon issuance of such preferred stock, less (x) all
write-ups (other than write-ups resulting from foreign currency translations and
write-ups of tangible assets of a going concern made within 12 months after the
acquisition of such business) subsequent to the date of this Indenture in the
book value of any asset owned by such Person or a consolidated Restricted
Subsidiary of such Person,
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(y) all Investments as of such date in unconsolidated Restricted Subsidiaries
and in Persons that are not Restricted Subsidiaries and (z) all unamortized debt
discount and expense and unamortized deferred charges as of such date, all of
the foregoing determined in accordance with GAAP.
"Continuing Director" means, as of any date of determination,
any member of the Board of Directors of the Company who (i) was a member of such
Board of Directors on the Issue Date or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Directors constituting Continuing Directors who were members of such Board at
the time of such nomination or election.
"Corporate Trust Office of the Trustee" shall be at the
address of the Trustee specified in Section 11.2 or such other address as the
Trustee may give notice to the Company.
"Credit Enhancement Agreements" means, collectively, any
documents, instruments or agreements entered into by the Company or, any of its
Restricted Subsidiaries with any Person exclusively for the purpose of providing
credit support for asset-backed securities issued in connection with
Securitizations.
"Default" means any event that is or with the passage of time
or the giving of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that either (A)
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event, (i) matures
or is mandatorily redeemable, in whole or in part, pursuant to a sinking fund
obligation or otherwise or, (ii) is convertible into or exchangeable for
Indebtedness or Disqualified Stock, in whole or in part, or (iii) is redeemable,
in whole or in part, at the option of the Holder thereof at any time, in any
such case, on or prior to the date that is 91 days after the date on which the
Notes mature, or (B) is designated by the Company (in a resolution of the Board
of Directors delivered to the Trustee) as Disqualified Stock.
"Eligible Receivables" means, at the time of determination,
Receivables meeting the sale or loan eligibility criteria set forth in one or
more of the Warehouse Facilities to which the Company or any of its Restricted
Subsidiaries is a party at such time and is eligible for sale in a
Securitization.
"Equity Interests" means Capital Stock and all warrants,
options or other rights to acquire such Capital Stock (but excluding any debt
security that is convertible into, or exchangeable for, such Capital Stock).
"Excess Spread" means, over the life of a pool of Receivables
that have been sold by the Company or a Restricted Subsidiary in a
Securitization, the rights, other than servicing rights, retained by the Company
or such Restricted Subsidiary at or subsequent to the closing of such
Securitization or sale with respect to such pool, to receive cash flows
attributable to such pool.
"fair market value" means, with respect to any asset or
property, the price which could be negotiated in an arm's-length, free market
transaction, for cash, between an informed and willing
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seller and an informed and willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction.
"GAAP" means generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
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 have been approved by a significant segment
of the accounting profession, which are in effect from time to time.
"Guarantee" means a guarantee (other than by endorsement of
negotiable instruments for collection in the ordinary course of business),
direct or indirect, in any manner (including, without limitation, letters of
credit and reimbursement agreements in respect thereof), of all or any part of
any Indebtedness. Notwithstanding the foregoing, the term "Guarantee" does not
include obligations pursuant to representations, warranties, covenants and
indemnities in connection with a Securitization or Warehouse Facility.
"Hedging Obligations" means, with respect to any Person, the
obligations of such Person under (i) interest rate or currency swap agreements,
cap agreements, collar agreements and related agreements and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in value of assets owned, financed or sold, or of liabilities incurred or
assumed, or of pre-funding arrangements, in any case in the ordinary course of
business of such Person and not for speculative purposes.
"Holder" means a person in whose name a Note is registered.
"Indebtedness" means, with respect to any Person, any
indebtedness of such Person, whether or not contingent, in respect of (i)
borrowed money or evidenced by bonds, notes, debentures or similar instruments
or letters of credit (or reimbursement agreements in respect thereof) or
banker's acceptances or representing Capital Lease Obligations or the unpaid
deferred balance of the purchase price of any property or representing any
Hedging Obligations, except any such balance that constitutes an accrued expense
or trade payable, if and to the extent any of the foregoing indebtedness (other
than letters of credit and Hedging Obligations) would appear as a liability upon
a balance sheet of such Person prepared in accordance with GAAP, (ii) all
indebtedness of others secured by a Lien on any asset of such Person (whether or
not such indebtedness is assumed by such Person), (iii) without duplication, all
Warehouse Debt, (iv) all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock and, in the
case of any Subsidiary Guarantor, preferred stock (but excluding in each case
any accrued dividends thereon), and (v) to the extent not otherwise included,
the Guarantee by such Person of any indebtedness of any other Person to the
extent of any Guarantee of such indebtedness provided by such Person. Except in
the case of Warehouse Debt (the amount of which shall be determined in
accordance with the definition thereof) and except in the case of Hedging
Obligations (the amount of which shall be determined on a net basis after rights
of set-off and related positions), the amount of Indebtedness of any Person at
any date shall be the outstanding balance at such date of all unconditional
obligations as described above and the maximum liability, upon the occurrence of
the contingency giving rise to the obligation, of any contingent obligations at
such date. Notwithstanding the
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foregoing, the term "Indebtedness" does not include obligations pursuant to
representations, warranties, covenants and indemnities in connection with a
Securitization or Warehouse Facility.
"Indenture" means this Indenture as amended or supplemented
from time to time.
"Investments" means, with respect to any Person, all
investments by such Person in other Persons (including Affiliates) in the forms
of direct or indirect loans (including Guarantees of Indebtedness), advances or
capital contributions (excluding commission, travel and similar advances to
officers and employees made in the ordinary course of business), purchases or
other acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP; provided that
an acquisition of Equity Interests or other securities by the Company for
consideration consisting of common equity securities of the Company (other than
Disqualified Stock) shall not be deemed to be an Investment.
"Issue Date" means July __, 1997.
"Legal Holiday" means a Saturday, a Sunday or a day on which
banking institutions in the City of New York or at a place of payment are
authorized by law, regulation or executive order to remain closed. If a payment
date is a Legal Holiday at a place of payment, payment may be made at that place
on the next succeeding day that is not a Legal Holiday, and no interest shall
accrue for the intervening period.
"Lien" means, with respect to any asset, any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind in respect of such
asset, whether or not filed, recorded or otherwise perfected under applicable
law (including any conditional sale or other title retention agreement, any
lease in the nature thereof, any option or other agreement to sell or give a
security interest in and any filing of or agreement to give any financing
statement under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Net Income" means, with respect to any Person, the net income
(loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however, (i) any
gain (but not loss), together with any related provision for taxes on such gain
(but not loss), realized in connection with (a) any Asset Sale (including,
without limitation, dispositions pursuant to sale and leaseback transactions) or
(b) the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but
not loss), together with any related provision for taxes on such extraordinary
or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate Cash Equivalent proceeds
received by the Company or any of its Restricted Subsidiaries in respect of any
Asset Sale (including, without limitation, any Cash Equivalent received upon the
sale or other disposition of any non-cash consideration received in any Asset
Sale), net of the direct costs relating to such Asset Sale (including, without
limitation, legal, accounting and investment banking fees, and sales
commissions) and any relocation expenses incurred as a result thereof, taxes
paid or payable as a result thereof (after taking into account any available tax
credits or
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deductions and any tax sharing arrangements), amounts required to be applied to
the repayment of Indebtedness secured by a Lien on the asset or assets that were
the subject of such Asset Sale and any reserve for adjustment in respect of the
sale price of such asset or assets established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness (i) as to which neither
the Company nor any of its Restricted Subsidiaries (a) provides credit support
of any kind (including any undertaking, agreement or instrument that would
constitute Indebtedness), or (b) is directly or indirectly liable (as a
guarantor or otherwise); and (ii) as to which the lenders have been notified in
writing that they will not have any recourse to the stock or assets of the
Company or any of its Restricted Subsidiaries.
"Note" or "Notes" means the Notes described above issued under
this Indenture.
"Obligations" means any principal, interest, penalties, fees
and other liabilities payable under the documentation governing any
Indebtedness.
"Officer" means, with respect to any Person, the Chairman of
the Board, the Chief Executive Officer, the President, the Chief Financial
Officer, the Treasurer, any Assistant Treasurer, the Controller, the Secretary
or any Vice President of such Person.
"Officers' Certificate" means a certificate signed on behalf
of the Company by two Officers of the Company, one of whom must be the principal
executive officer, the principal financial officer, the treasurer or the
principal accounting officer of the Company, that meets the requirements of
Section 11.5 hereof.
"Opinion of Counsel" means an opinion from legal counsel who
is acceptable to the Trustee. The counsel may be an employee of or counsel to
the Company or the Trustee. See Sections 11.4 and 11.5 hereof.
"Permitted Businesses" means any consumer or commercial
finance business or any financial service business.
"Permitted Holder" means any of Messrs. Sidney A. Miller, Hugh
Miller, Marc E. Miller and Lee Miller, any spouse or lineal descendant thereof
or any trust all of the beneficiaries of which are any of the foregoing.
"Permitted Investments" means (a) any Investment in the
Company or in a Restricted Subsidiary that is a Subsidiary Guarantor; (b) any
Investment in Cash Equivalents; (c) any Investment by the Company or any
Restricted Subsidiary in a Person if, as a result of such Investment, (i) such
Person becomes (x) a Wholly-Owned Restricted Subsidiary and (y) a Subsidiary
Guarantor that is engaged in a Permitted Business or (ii) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys substantially
all of its assets to, or is liquidated into, the Company or a Wholly-Owned
Restricted Subsidiary that is a Subsidiary Guarantor and that is engaged in a
Permitted Business; (d) any Restricted Investment made as a result of the
receipt of non-cash consideration from an Asset Sale that was made pursuant to
and in compliance with the covenant described above under Section 4.10
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hereof; (e) any Investment in Receivables, Residual Receivables or Servicing
Receivables made in the ordinary course of business; and (f) other Investments
in any Person (other than an Affiliate of the Company that is not also a
Subsidiary of the Company) that do not exceed $10.0 million in the aggregate
since the Issue Date.
"Permitted Liens" means (i) Liens on Receivables or other
assets (other than Residual Receivables) securing Warehouse Debt or Hedging
Obligations (or Guarantees of Warehouse Debt or Hedging Obligations); (ii) Liens
on Servicing Receivables, Residual Receivables and on the Capital Stock of
Restricted Subsidiaries of the Company substantially all of the assets of which
are Residual Receivables; provided, however, that, (x) all Retained Residual
Receivables shall remain unencumbered by any Lien unless after giving effect to
such sale, conveyance or other disposition the aggregate amount of Senior
Residual Receivables of the Company and its Restricted Subsidiaries which are
unencumbered by any Lien (of which no more than 25% of the aggregate book value
thereof shall constitute Retained Residual Receivables) would be greater than or
equal to 250% of all Senior Indebtedness of the Company and its Restricted
Subsidiaries, and (y) after giving effect to the incurrence of such Lien the
aggregate amount of Senior Residual Receivables of the Company and its
Restricted Subsidiaries which are unencumbered by any Lien (of which not more
than 25% of the aggregate book value thereof shall constitute Retained Residual
Receivables) would be greater than or equal to 150% of all Senior Indebtedness
of the Company and its Restricted Subsidiaries; (iii) Liens in favor of the
Company or any Restricted Subsidiary; (iv) Liens on property of a Person
existing at the time such Person is merged into or consolidated with the Company
or any Restricted Subsidiary of the Company; provided that such Liens were in
existence prior to the contemplation of such merger or consolidation and do not
extend to any assets other than those of the Person merged into or consolidated
with the Company or such Restricted Subsidiary; (v) Liens on property existing
at the time of acquisition thereof by the Company or any Restricted Subsidiary
of the Company, provided that such Liens were in existence prior to the
contemplation of such acquisition; (vi) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business; (vii)
Liens to secure Indebtedness (including Capital Lease Obligations) permitted by
Section 4.9(b)(i) hereof covering only the assets acquired with such
Indebtedness; (viii) Liens existing on the Issue Date; (ix) Liens for taxes,
assessments or governmental charges or claims that are not yet delinquent or
that are being contested in good faith by appropriate proceedings, provided that
any reserve or other appropriate provision as shall be required in conformity
with GAAP shall have been made therefor; (x) Liens (including, without
limitation, Liens on Residual Receivables) in favor of a monoline insurance
company or other provider of credit enhancement pursuant to a Credit Enhancement
Agreement; (xi) Liens incurred in the ordinary course of business of the Company
or any Restricted Subsidiary of the Company with respect to obligations that do
not exceed $1.0 million at any one time outstanding and that (a) are not
incurred in connection with the borrowing of money or the obtaining of advances
or credit (other than trade credit in the ordinary course of business) and (b)
do not in the aggregate materially detract from the value of the property or
materially impair the use thereof in the operation of business by the Company or
such Restricted Subsidiary; (xii) Liens imposed by law, including but not
limited to carriers', warehousemen's and mechanics' Liens, in each case for sums
not yet due or being contested in good faith by appropriate proceedings or,
other Liens arising out of judgments or awards against the Company or any of its
Restricted Subsidiaries with respect to which the Company or such Restricted
Subsidiary shall then be proceeding with an appeal or other proceedings for
review; (xiii) survey exceptions, easements and other restrictions on the use of
property; (xiv) Liens securing Indebtedness the
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proceeds of which were utilized by the Company or a Restricted Subsidiary solely
to fund any advances to Securitization Trusts permitted by clause (v) of the
second paragraph of Section 4.7 hereof, provided that such Liens encumber no
assets other than the contractual right of the Company or such Restricted
Subsidiary, as the case may be, to be reimbursed in respect of any advances
funded by such Indebtedness; (xv) Liens on assets of Unrestricted Subsidiaries
of the Company that secure Non-Recourse Debt of Unrestricted Subsidiaries of the
Company; and (xvi) Liens to secure any Refinancing (or successive Refinancings),
in whole or in part, of any Indebtedness (or commitment for Indebtedness)
existing on the Issue Date; provided, however, that (x) any such new Lien shall
be a Lien on the same asset class or interest securing the original Lien and (y)
the Indebtedness secured by such Lien is not, solely by virtue of the
Refinancing (unless otherwise permitted by this Indenture), increased to an
amount greater than the greater of (A) the outstanding principal amount of the
Indebtedness existing on the Issue Date secured by such Lien, or (B) if such
Lien secures Indebtedness under a line of credit, the commitment amount of such
line of credit existing on the Issue Date. Any determination of Senior Residual
Receivable shall be based on the consolidated balance sheet of the Company and
its Restricted Subsidiaries for the most recently ended fiscal quarter for which
financial statements are available, after giving pro forma effect to the Lien
for which such determination is being made and to any other sale of or Lien on
or reduction of Residual Receivable since the date of such balance sheet.
"Permitted Refinancing Indebtedness" means any Indebtedness or
Disqualified Stock of the Company or any of its Restricted Subsidiaries issued
in exchange for, or the net proceeds of which are used to extend, refinance,
renew, replace, defease or refund other Indebtedness or Disqualified Stock of
the Company or any of its Restricted Subsidiaries (other than Indebtedness
incurred pursuant to Sections 4.9(b)(ii), (iii), (vii), (ix), (x) and (xi));
provided that: (i) the principal amount (or accreted value, if applicable) or
mandatory redemption amount of such Permitted Refinancing Indebtedness does not
exceed the principal amount of (or accreted value, if applicable) or mandatory
redemption amount, plus accrued interest or dividends on, the Indebtedness or
Disqualified Stock so extended, refinanced, renewed, replaced, defeased or
refunded (plus the amount of contractual prepayment charges and reasonable
expenses incurred in connection therewith); (ii) such Permitted Refinancing
Indebtedness has a final maturity or final redemption date later than the final
maturity or final redemption date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of, the
Indebtedness or Disqualified Stock being extended, refinanced, renewed,
replaced, defeased or refunded; (iii) if the Indebtedness or Disqualified Stock
being extended, refinanced, renewed, replaced, defeased or refunded is
subordinated in right of payment to the Notes, such Permitted Refinancing
Indebtedness is subordinated in right of payment to, the Notes on terms at least
as favorable to the Holders of the Notes as those contained in the documentation
governing the Indebtedness or Disqualified Stock being extended, refinanced,
renewed, replaced, defeased or refunded; and (iv) such Indebtedness is incurred
or such Disqualified Stock is issued either by the Company or by the Restricted
Subsidiary who is the obligor on the Indebtedness or Disqualified Stock being
extended, refinanced, renewed, replaced, defeased or refunded.
"Permitted Warehouse Debt" means Warehouse Debt of the Company
or a Restricted Subsidiary outstanding under one or more Warehouse Facilities
(excluding any Guarantees issued by the Company or a Restricted Subsidiary in
connection therewith); provided, however, that (i) the assets purchased with
proceeds of such Warehouse Debt are or, prior to any funding under the Warehouse
Facility with respect to such assets, were eligible to be recorded as held for
sale on the consolidated
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balance sheet of the Company and its Restricted Subsidiaries in accordance with
GAAP, (ii) such Warehouse Debt will be deemed Permitted Warehouse Debt (a) in
the case of a Purchase Facility, only to the extent the holder of such Warehouse
Debt has no contractual recourse to the Company or any of its Restricted
Subsidiaries to satisfy claims in respect of such Warehouse Debt in excess of
the realizable value of the Eligible Receivables financed thereby, and (b) in
the case of any other Warehouse Facility, at the time such Warehouse Debt is
incurred, only to the extent of the lesser of (A) the amount advanced by the
lender with respect to the Eligible Receivables financed under such Warehouse
Facility, and (B) 100% of the aggregate principal amount of such Eligible
Receivables and (iii) any such Indebtedness incurred under such Warehouse
Facility has not been outstanding in excess of 364 days.
"Person" means any individual, corporation, partnership, joint
venture, association, joint stock company, limited liability company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"principal" of a debt security means the principal of the
security plus the premium, if any, on the security.
"Purchase Facility" means any Warehouse Facility in the form
of a purchase and sale facility pursuant to which the Company or a Restricted
Subsidiary sells Receivables to a financial institution, commercial paper
facility or conduit and retains a right of first refusal or other repurchase
arrangement upon the subsequent resale of such Receivables by such financial
institution, commercial paper facility or conduit.
"Receivables" means consumer and commercial loans, leases and
receivables purchased or originated by the Company or any Restricted Subsidiary;
provided, however, that for purposes of determining the amount of a Receivable
at any time, such amount shall be determined in accordance with GAAP,
consistently applied, as of the most recent practicable date.
"Refinance" means, in respect of any Indebtedness, to extend,
refinance, renew, replace, defease, refund, repay, prepay, redeem, or retire, or
to issue other Indebtedness in exchange or replacement for, such Indebtedness.
"Refinanced" and "Refinancing" shall have correlative meanings.
"Residual Receivables" of the Company means at any time, the
capitalized asset value of Excess Spread of the Company and its Restricted
Subsidiaries (including, without limitation, subordinated, interest-only and
residual certificates of a Securitization Trust), with respect to any Receivable
pool of any Securitization Trust, calculated in accordance with GAAP.
"Responsible Officer," when used with respect to the Trustee,
means any officer within the Corporate Trust Administration of the Trustee (or
any successor group of the Trustee) or any other officer of the Trustee
customarily performing functions similar to those performed by any of the above
designated officers and also means, with respect to a particular corporate trust
matter, any other officer to whom such matter is referred because of his
knowledge of and familiarity with the particular subject.
"Restricted Investment" means an Investment other than a
Permitted Investment.
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"Restricted Subsidiary" means any Subsidiary other than an
Unrestricted Subsidiary.
"Retained Residual Receivables" has the meaning specified in
Section 4.10.
"SEC" means the Securities and Exchange Commission.
"Securitization" means a public or private transfer of
Receivables in the ordinary course of business and by which the Company or a
Restricted Subsidiary directly or indirectly securitizes a pool of specialized
Receivables, including any such transaction involving the sale of specialized
Receivables to a Securitization Trust.
"Securitization Trust" means any Person that is not a
Restricted Subsidiary established exclusively for the purpose of issuing
securities in connection with any Securitization, the obligations of which are
without recourse to the Company or any of its Subsidiaries (other than
obligations constituting Indebtedness incurred in accordance with Section 4.9(a)
hereof).
"Senior Indebtedness" means all Indebtedness of any Person
that is not subordinated in right of payment to any other Indebtedness or other
obligations of such Person, excluding Permitted Warehouse Debt and Hedging
Obligations permitted to be incurred under this Indenture and, in the case of
Indebtedness secured by Senior Residual Receivables, the lesser of (x) the
amount of such Indebtedness and (y) the amount of the Senior Residual
Receivables securing such Indebtedness.
"Senior Residual Receivables" means Residual Receivables which
have not been created as the result of or in connection with the sale,
securitization or other disposition of other Residual Receivables.
"Servicing Receivables" means the servicing rights or any
interest therein with respect to any Receivables.
"Significant Subsidiary" means any subsidiary that would be a
"significant subsidiary" as defined in Rule 1-02 of Regulation S-X under the
Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as
amended.
"Subsidiary" means, with respect to any Person, (i) any
corporation, association or other business entity of which more than 50% of the
total voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers or
trustees thereof is at the time owned or controlled, directly or indirectly, by
such Person or one or more of the other Subsidiaries of that Person (or a
combination thereof) and (ii) any partnership or limited liability company (a)
the sole general partner or the managing general partner or managing member of
which is such Person or a Subsidiary of such Person or (b) the only general
partners or managing members of which are such Person or one or more
Subsidiaries of such Person (or any combination thereof).
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"Subsidiary Guarantee" means the Guarantees, substantially in
the form attached as Exhibit B hereto, of (i) the Subsidiary Guarantors and (ii)
any other Person that executes such a Guarantee in accordance with the
provisions of the Indenture, and their respective successors and assigns.
"Subsidiary Guarantor" means any Subsidiary of the Company
that executes a Subsidiary Guarantee in accordance with the provisions of this
Indenture and their respective successors and assigns.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. ss.ss.
77aaa-77bbbb) as in effect on the date on which this Indenture is qualified
under the TIA, except as provided in Section 9.1 hereof.
"Trustee" means the party named as such above until a
successor replaces it in accordance with the applicable provisions of this
Indenture and thereafter means the successor serving hereunder.
"Trust Officer" means the Chairman of the Board, the
President, any Vice President or any other officer or assistant officer of the
Trustee assigned by the Trustee to administer its corporate trust matters.
"Unrestricted Subsidiary" means any Subsidiary that is
designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a
Board Resolution; but only to the extent that such Subsidiary: (a) is not party
to any agreement, contract, arrangement or understanding with the Company or any
Restricted Subsidiary unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary that those that might be obtained at the time from Persons
who are not Affiliates of the Company; (b) is a Person with respect to which
neither the Company nor any of its Restricted Subsidiaries has any direct or
indirect obligation (other than obligations constituting Indebtedness incurred
in accordance with Section 4.9 hereof) (x) to subscribe for additional Equity
Interests or (y) to maintain or preserve such Person's financial condition or to
cause such Person to achieve any specified levels of operating results; and (c)
has not guaranteed or otherwise directly or indirectly provided credit support
for any Indebtedness of the Company or any of its Restricted Subsidiaries. Any
such designation by the Board of Directors shall be evidenced to the Trustee by
filing with the Trustee a certified copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions and was permitted Section 4.7
hereof. If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease
to be an Unrestricted Subsidiary for purposes of this Indenture and any
Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted
Subsidiary of the Company as of such date (and, if such Indebtedness is not
permitted to be incurred as of such date under the covenant in Section 4.9
hereof, the Company shall be in default of such covenant). The Board of
Directors of the Company may at any time designate any Unrestricted Subsidiary
to be a Restricted Subsidiary; provided that such designation shall be deemed to
be an incurrence of Indebtedness and issuance of preferred stock by a Restricted
Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted
Subsidiary and such designation shall only be permitted if (i) such Indebtedness
and preferred stock is permitted under Section 4.9 hereof (ii) such Subsidiary
becomes a Subsidiary Guarantor, and (iii) no Default or Event of Default would
exist following such designation.
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"Voting Stock" of any Person as of any date means the Capital
Stock of such Person that is at the time entitled to vote generally in the
election of the Board of Directors of such Person.
"Warehouse Debt" means Indebtedness of the Company or a
Restricted Subsidiary equal to the greater of (x) the consideration received by
the Company or its Restricted Subsidiaries under a Warehouse Facility and (y) in
the case of a Purchase Facility, the book value of the Eligible Receivables
financed under such Warehouse Facility, until such time as such Eligible
Receivables are (i) securitized, (ii) repurchased by the Company or its
Restricted Subsidiaries or (iii) sold by the counterparty under the Warehouse
Facility to a Person who is not an Affiliate of the Company, including any
Guarantees issued by the Company or a Restricted Subsidiary in connection
therewith.
"Warehouse Facility" means any funding arrangement, including
Purchase Facilities, with a financial institution or other lender or purchaser
or any conduit or special purpose vehicle used in connection with such funding
arrangement, to the extent (and only to the extent) that the Company or any of
its Restricted Subsidiaries incurs Warehouse Debt thereunder exclusively to
finance or refinance the purchase or origination of Receivables by the Company
or a Restricted Subsidiary prior to securitization.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness or Disqualified Stock at any date, the number of years obtained by
dividing (i) the sum of the products obtained by multiplying (a) the amount of
each then remaining installment, sinking fund, serial maturity or other required
payments of principal, including payment at final maturity (or final redemption,
in the case of Disqualified Stock), in respect thereof, by (b) the number of
years (calculated to the nearest one-twelfth) that will elapse between such date
and the making of such payment, by (ii) the then outstanding principal amount of
such Indebtedness or mandatory redemption amount of Disqualified Stock.
"Wholly-Owned Restricted Subsidiary" of any Person means a
Restricted Subsidiary of such Person all of the outstanding Capital Stock or
other ownership interests of which (other than directors' qualifying shares)
shall at the time be owned by such Person or by one or more Wholly-Owned
Restricted Subsidiaries of such Person.
SECTION 1.2. OTHER DEFINITIONS.
<TABLE>
<CAPTION>
Term Defined in Section
---- ------------------
<S> <C>
"Affiliate Transaction"..........................................................................4.11
"Asset Sale Offer"...............................................................................4.10
"Asset Sale Offer Amount".........................................................................3.9
"Asset Sale Offer Period".........................................................................3.9
"Bankruptcy Law"..................................................................................6.1
"Change of Control Offer"........................................................................4.16
"Change of Control Payment"......................................................................4.16
"Change of Control Payment Date"................................................................ 4.16
"Covenant Defeasance".............................................................................8.3
"Custodian".......................................................................................6.1
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"Event of Default"................................................................................6.1
"Incur"...........................................................................................4.9
"Legal Defeasance"................................................................................8.2
"Paying Agent"....................................................................................2.3
"Registrar".......................................................................................2.3
"Restricted Payments".............................................................................4.7
</TABLE>
SECTION 1.3. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.
Whenever this Indenture refers to a provision of the TIA, the
provision is incorporated by reference in and made a part of this Indenture.
The following TIA terms used in this Indenture have the
following meanings:
"indenture securities" means the Notes;
"indenture security holder" means a Holder;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the
Trustee;
"obligor" on the Notes means the Company and the Subsidiary
Guarantors.
All other terms used in this Indenture that are defined by the
TIA, defined by TIA reference to another statute or defined by SEC rule under
the TIA have the meanings so assigned to them.
SECTION 1.4. RULES OF CONSTRUCTION.
Unless the context otherwise requires:
(a) a term has the meaning assigned to it;
(b) an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP;
(c) "or" is not exclusive;
(d) words in the singular include the plural, and in the
plural include the singular;
(e) provisions apply to successive events and transactions;
and
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(f) the words "he," "his," and "him" refer to both the
masculine and feminine gender.
ARTICLE 2
THE NOTES
SECTION 2.1. FORM AND DATING.
The Notes and the Trustee's certificate of authentication
shall be substantially in the form of Exhibit A hereto, which is part of this
Indenture. The Notes may have notations, legends or endorsements required by law
or usage or required by a securities exchange. Each Note shall be dated the date
of its authentication. The Notes shall be in denominations of $1,000 and
integral multiples thereof.
The terms and provisions contained in the Notes and the
Subsidiary Guarantees shall constitute, and are hereby expressly made, a part of
this Indenture and the Company, the Subsidiary Guarantors and the Trustee, by
their execution and delivery of this Indenture, expressly agree to such terms
and provisions and to be bound thereby. However, to the extent any provision of
any Note or Subsidiary Guarantee conflicts with the express provisions of this
Indenture, the provisions of this Indenture shall govern and be controlling.
SECTION 2.2. EXECUTION AND AUTHENTICATION.
Two Officers of the Company shall sign the Notes for the
Company by manual or facsimile signature. An officer of each Subsidiary
Guarantor shall sign the Subsidiary Guarantee for such Subsidiary Guarantor by
manual or facsimile signature.
If an Officer of the Company or a Subsidiary Guarantor whose
signature is on a Note or a Subsidiary Guarantee no longer, as the case may be,
holds that office at the time the Note is authenticated, the Note or the
Subsidiary Guarantee, as the case may be, shall nevertheless be valid.
A Note shall not be valid until authenticated by the manual
signature of the Trustee. The Trustee's signature shall be conclusive evidence
that the Note has been authenticated under this Indenture.
The Trustee shall authenticate Notes for original issue up to
the aggregate principal amount stated in the Notes, upon a written order of the
Company signed by two Officers. The aggregate principal amount of Notes
outstanding at any time may not exceed the amount set forth in the Notes except
as provided in Section 2.7 hereof.
The Trustee may appoint an authenticating agent acceptable to
the Company to authenticate Notes. An authenticating agent may authenticate
Notes whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent.
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An authenticating agent has the same rights as an Agent to deal with the Company
or an Affiliate of the Company.
SECTION 2.3. REGISTRAR AND PAYING AGENT.
The Company shall maintain an office or agency where Notes may
be presented for registration of transfer or for exchange ("Registrar") and an
office or agency where Notes may be presented for payment ("Paying Agent"). The
Registrar shall keep a register of the Notes and of their transfer and exchange.
The Company may appoint one or more coregistrars and one or more additional
paying agents. The term "Registrar" includes any co-registrar and the term
"Paying Agent" includes any additional paying agent. The Company may change any
Paying Agent or Registrar without notice to any Holder. The Company shall notify
the Trustee of the name and address of any Agent not a party to this Indenture.
If the Company fails to appoint or maintain another entity as Registrar or
Paying Agent, the Trustee shall act as such. The Company or any of its
Subsidiaries may act as Paying Agent, Registrar or coregistrar.
The Company initially appoints the Trustee to act as the
Registrar and Paying Agent and to act as agent for service of notices and
demands in connection with the Notes and the Subsidiary Guarantees.
SECTION 2.4. PAYING AGENT TO HOLD MONEY IN TRUST.
The Company shall require each Paying Agent other than the
Trustee to agree in writing that the Paying Agent will hold in trust for the
benefit of Holders or the Trustee all money held by the Paying Agent for the
payment of principal, premium, if any, or interest on the Notes, and will notify
the Trustee of any default by the Company or a Subsidiary Guarantor in making
any such payment. While any such default continues, the Trustee may require a
Paying Agent to pay all money held by it to the Trustee. The Company at any time
may require a Paying Agent to pay all money held by it to the Trustee. Upon
payment over to the Trustee, the Paying Agent (if other than the Company or a
Subsidiary of the Company) shall have no further liability for the money
delivered to the Trustee. If the Company or a Subsidiary of the Company acts as
Paying Agent, it shall segregate and hold in a separate trust fund for the
benefit of the Holders all money held by it as Paying Agent. Upon any bankruptcy
or reorganization proceedings relating to the Company, the Trustee shall serve
as Paying Agent for the Notes.
SECTION 2.5. HOLDER LISTS.
The Trustee shall preserve in as current a form as is
reasonably practicable the most recent list available to it of the names and
addresses of all Holders and shall otherwise comply with TIA ss. 312(a). If the
Trustee is not the Registrar, the Company shall furnish to the Trustee at least
seven Business Days before each interest payment date and at such other times as
the Trustee may request in writing, a list in such form and as of such date as
the Trustee may reasonably require of the names and addresses of Holders and the
Company shall otherwise comply with TIA ss. 312(a).
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SECTION 2.6. TRANSFER AND EXCHANGE.
When Notes are presented to the Registrar with a request to
register the transfer or to exchange them for an equal principal amount of Notes
of other denominations, the Registrar shall register the transfer or make the
exchange if its requirements for such transactions are met; provided, however,
that any Note presented or surrendered for registration of transfer or exchange
shall be duly endorsed or accompanied by a written instruction of transfer in
form satisfactory to the Registrar and the Trustee duly executed by the Holder
thereof or by his attorney duly authorized in writing. To permit registrations
of transfer and exchanges, the Company shall issue and the Trustee shall
authenticate Notes at the Registrar's request, subject to such rules as the
Trustee may reasonably require.
Neither the Company nor the Registrar shall be required (i) to
issue, register the transfer of or exchange Notes during a period beginning at
the opening of business on a Business Day 15 days before the day of any
selection of Notes for redemption under Section 3.2 and ending at the close of
business on the day of selection, (ii) to register the transfer of or exchange
any Note so selected for redemption in whole or in part, being redeemed in part
or (iii) to register the transfer or exchange of a Note between the record date
and the next succeeding interest payment date.
No service charge shall be charged to any Holder of a Note for
any registration of transfer or exchange (except as otherwise expressly
permitted herein), but the Company or the Trustee may require payment of a sum
sufficient to cover any transfer tax or similar governmental charge payable in
connection therewith (other than such transfer tax or similar governmental
charge payable upon exchanges pursuant to Sections 2.10, 3.6, or 9.5 hereof,
which shall be paid by the Company).
Prior to due presentment to the Trustee for registration of
the transfer of any Note, the Trustee, any Agent, the Company or any Subsidiary
Guarantor may deem and treat the Person in whose name any Note is registered as
the absolute owner of such Note for the purpose of receiving payment of
principal of, or premium, if any, on such Note and for all other purposes
whatsoever, whether or not such Note is overdue, and neither the Trustee, any
Agent, the Company or any Subsidiary Guarantor shall be affected by notice to
the contrary.
SECTION 2.7. REPLACEMENT NOTES.
If any mutilated Note is surrendered to the Trustee, and the
Company and the Trustee receive evidence to their satisfaction of the
destruction, loss or theft of any Note, the Company shall issue, and the
Trustee, upon the written order of the Company signed by two Officers, shall
authenticate a replacement Note if the Trustee's requirements are met. If
required by the Trustee or the Company, an indemnity bond must be supplied by
the Holder that is sufficient in the judgment of the Trustee and the Company to
protect the Company, the Trustee, any Agent or any authenticating agent from any
loss that any of them may suffer if a Note is replaced. The Company may charge
for its expenses in replacing a Note.
Every replacement Note is an additional obligation of the
Company and shall be entitled to all of the benefits of this Indenture equally
and proportionately with all other Notes duly issued hereunder.
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<PAGE>
SECTION 2.8. OUTSTANDING NOTES.
The Notes outstanding at any time are all the Notes
authenticated by the Trustee, except for those cancelled by it, those delivered
to it for cancellation and those described in this Section 2.8 as not
outstanding. Except as set forth in Section 2.9 hereof, a Note does not cease to
be outstanding because the Company or an Affiliate of the Company holds the
Note.
If a Note is replaced pursuant to Section 2.7 hereof, it
ceases to be outstanding unless the Trustee receives proof satisfactory to it
that the replaced Note is held by a bona fide purchaser.
If the principal amount of any Note is considered paid under
Section 4.1 hereof, it ceases to be outstanding and interest on it ceases to
accrue.
If the Paying Agent (other than the Company, a Subsidiary of
the Company or an Affiliate of any thereof) holds, on a redemption date or
maturity date, money sufficient to pay Notes payable on that date, then on and
after that date such Notes shall be deemed to be no longer outstanding and shall
cease to accrue interest.
SECTION 2.9. TREASURY NOTES.
In determining whether the Holders of the required principal
amount of Notes have concurred in any direction, waiver or consent, Notes owned
by the Company, any Subsidiary of the Company or any of their respective
Affiliates shall be considered as though not outstanding, except that for the
purposes of determining whether the Trustee shall be protected in relying on any
such direction, waiver or consent, only Notes that a Trustee knows are so owned
shall be so disregarded. Notwithstanding the foregoing, Notes that are to be
acquired by the Company, any Subsidiary of the Company or any Affiliate of the
Company pursuant to an exchange offer, tender offer or other agreement shall not
be deemed to be owned by the Company, a Subsidiary of the Company or an
Affiliate of the Company until legal title to such Notes passes to the Company,
such Subsidiary or such Affiliate, as the case may be.
SECTION 2.10. TEMPORARY NOTES.
Until definitive Notes are ready for delivery, the Company may
prepare and the Trustee shall authenticate temporary Notes upon a written order
of the Company signed by two Officers of the Company. Temporary Notes shall be
substantially in the form of definitive Notes but may have variations that the
Company considers appropriate for temporary Notes and as shall be reasonably
acceptable to the Trustee. Without unreasonable delay, the Company shall prepare
and the Trustee, upon a written order of the Company signed by two Officers of
the Company, shall authenticate definitive Notes in exchange for temporary
Notes.
Holders of temporary Notes shall be entitled to all of the
benefits of this Indenture.
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SECTION 2.11. CANCELLATION.
The Company at any time may deliver Notes to the Trustee for
cancellation. The Registrar and Paying Agent shall forward to the Trustee any
Notes surrendered to them for registration of transfer, exchange or payment. The
Trustee and no one else shall cancel all Notes surrendered for registration of
transfer, exchange, payment, replacement or cancellation and shall destroy
cancelled Notes (subject to the record retention requirement of the Exchange
Act). Certification of the destruction of all cancelled Notes shall be delivered
to the Company promptly following any such destruction. The Company may not
issue new Notes to replace Notes that it has paid or that have been delivered to
the Trustee for cancellation.
SECTION 2.12. DEFAULTED INTEREST.
If the Company defaults in a payment of interest on the Notes,
it shall pay the defaulted interest in any lawful manner plus, to the extent
lawful, interest payable on the defaulted interest, to the Persons who are
Holders on a subsequent special record date, in each case at the rate provided
in the Notes and in Section 4.1 hereof. The Company shall notify the Trustee in
writing of the amount of defaulted interest proposed to be paid on each Note and
the date of the proposed payment. The Company shall fix or cause to be fixed
each such special record date and payment date, provided that no such special
record date shall be less than 10 days prior to the related payment date for
such defaulted interest. At least 15 days before the special record date, the
Company (or, upon the written request of the Company, the Trustee in the name
and at the expense of the Company) shall mail or cause to be mailed to Holders a
notice that states the special record date, the related payment date and the
amount of such interest to be paid.
SECTION 2.13. CUSIP NUMBER.
The Company in issuing the Notes may use a "CUSIP" number and,
if it does so, the Trustee shall use the CUSIP number in notices of redemption
or exchange as a convenience to Holders; provided that any such notice may state
that no representation is made as to the correctness or accuracy of the CUSIP
number printed in the notice or on the Notes and that reliance may be placed
only on the other identification numbers printed on the Notes. The Company will
promptly notify the Trustee of any change in the CUSIP number.
ARTICLE 3
REDEMPTION
SECTION 3.1. NOTICES TO TRUSTEE.
If the Company elects to redeem Notes pursuant to the optional
redemption provisions of Section 3.7 hereof, it shall furnish to the Trustee at
least 30 days but not more than 60 days before a redemption date, an Officers'
Certificate setting forth (i) the clause of this Indenture pursuant to which the
redemption shall occur, (ii) the redemption date, (iii) the principal amount of
Notes to be redeemed and (iv) the redemption price.
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SECTION 3.2. SELECTION OF NOTES TO BE REDEEMED.
If less than all of the Notes are to be redeemed at any time,
the Trustee shall select the Notes to be redeemed among the Holders of the Notes
on a pro rata basis or by lot or in accordance with any other method the Trustee
considers fair and appropriate. In the event of partial redemption by lot, the
particular Notes to be redeemed shall be selected, unless otherwise provided
herein, not less than 30 nor more than 60 days prior to the redemption date by
the Trustee from the outstanding Notes not previously called for redemption.
The Trustee shall promptly notify the Company in writing of
the Notes selected for redemption and, in the case of any Note selected for
partial redemption, the principal amount thereof to be redeemed. Notes and
portions of Notes selected shall be in amounts of $1,000 or whole multiples of
$1,000; except that if all of the Notes of a Holder are to be redeemed, the
entire outstanding amount of Notes held by such Holder, even if not a multiple
of $1,000, shall be redeemed. Except as provided in the preceding sentence,
provisions of this Indenture that apply to Notes called for redemption also
apply to portions of Notes called for redemption.
SECTION 3.3. NOTICE OF REDEMPTION.
Subject to the provisions of Section 3.9 hereof, at least 30
days but not more than 60 days before a redemption date, the Company shall mail
or cause to be mailed, by first class mail, a notice of redemption to each
Holder whose Notes are to be redeemed at its registered address.
The notice shall identify the Notes to be redeemed and shall
state:
(a) the redemption date;
(b) the redemption price;
(c) if any Note is being redeemed in part, the portion of the
principal amount of such Note to be redeemed and that, after the
redemption date, upon surrender of such Note, a new Note or Notes in
principal amount equal to the unredeemed portion will be issued upon
cancellation of the original Note;
(d) the name and address of the Paying Agent;
(e) that Notes called for redemption must be surrendered to
the Paying Agent to collect the redemption price;
(f) that, unless the Company defaults in making such
redemption payment, interest on Notes called for redemption ceases to
accrue on and after the redemption date;
(g) the paragraph of the Notes and/or Section of this
Indenture pursuant to which the Notes called for redemption are being
redeemed; and
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(h) that no representation is made as to the correctness or
accuracy of the CUSIP number, if any, listed in such notice or printed
on the Notes.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at its expense; provided, however, that the
Company shall deliver to the Trustee, at least 15 days prior to the redemption
date, an Officers' Certificate requesting that the Trustee give such notice and
setting forth the information to be stated in such notice as provided in the
preceding paragraph.
SECTION 3.4. EFFECT OF NOTICE OF REDEMPTION.
Once notice of redemption is mailed in accordance with Section
3.3 hereof, Notes called for redemption become irrevocably due and payable on
the redemption date at the redemption price. A notice of redemption may not be
conditional.
SECTION 3.5. DEPOSIT OF REDEMPTION PRICE.
One Business Day prior to the redemption date, the Company
shall deposit with the Trustee or with the Paying Agent money sufficient to pay
the redemption price of and accrued interest on all Notes to be redeemed on that
date. The Trustee or the Paying Agent shall promptly return to the Company any
money deposited with the Trustee or the Paying Agent by the Company in excess of
the amounts necessary to pay the redemption price of, and accrued interest on,
all Notes to be redeemed.
If the Company complies with the provisions of the preceding
paragraph, on and after the redemption date, interest shall cease to accrue on
the Notes or the portions of Notes called for redemption. If a Note is redeemed
on or after an interest record date but on or prior to the related interest
payment date, then any accrued and unpaid interest shall be paid to the Person
in whose name such Note was registered at the close of business on such record
date. If any Note called for redemption shall not be so paid upon surrender for
redemption because of the failure of the Company to comply with the preceding
paragraph, interest shall be paid on the unpaid principal, from the redemption
date until such principal is paid, and to the extent lawful on any interest not
paid on such unpaid principal, in each case at the rate provided in the Notes
and in Section 4.1 hereof.
SECTION 3.6. NOTES REDEEMED IN PART.
Upon surrender of a Note that is redeemed in part, the Company
shall issue and, upon the Company's request, the Trustee shall authenticate for
the Holder at the expense of the Company a new Note equal in principal amount to
the unredeemed portion of the Note surrendered.
SECTION 3.7. OPTIONAL REDEMPTION.
The Company shall not have the option to redeem the Notes
pursuant to this Section 3.7 prior to _________, 2001. Thereafter, the Company
shall have the option to redeem the Notes, in whole or in part, at any time or
from time to time, upon not less than 30 nor more than 60 days' prior notice to
each Holder, at the following redemption prices (expressed as percentages of
principal amount) plus
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accrued and unpaid interest thereon to the applicable redemption date, if
redeemed during the twelve-month period beginning on ___________ of the years
indicated below:
Year Percentage
---- ----------
2001................................... %
2002................................... %
2003 and thereafter ................... %
Any redemption pursuant to this Section 3.7 shall be made
pursuant to the provisions of Sections 3.1 through 3.6 hereof.
SECTION 3.8. MANDATORY REDEMPTION
The Company shall not be required to make mandatory redemption
or sinking fund payments with respect to the Notes.
SECTION 3.9. OFFER TO REDEEM BY APPLICATION OF EXCESS PROCEEDS.
In the event that, pursuant to Section 4.10 hereof, the
Company shall be required to commence an Asset Sale Offer, it shall follow the
procedures specified below.
The Asset Sale Offer shall remain open for a period of 20
Business Days following its commencement, except to the extent that a longer
period is required by applicable law (the "Asset Sale Offer Period"). No later
than five Business Days after the termination of the Asset Sale Offer Period
(the "Asset Sale Purchase Date"), the Company shall purchase the principal
amount of Notes required to be purchased pursuant to Section 4.10 hereof (the
"Asset Sale Offer Amount") or, if less than the Asset Sale Offer Amount has been
tendered, all Notes tendered in response to the Asset Sale Offer. Payment for
any Notes so purchased shall be made in the same manner as interest payments are
made.
If the Asset Sale Purchase Date is on or after an interest
record date and on or before the related interest payment date, any accrued and
unpaid interest shall be paid to the Person in whose name a Note is registered
at the close of business on such record date, and no additional interest shall
be payable to Holders who tender Notes pursuant to the Asset Sale Offer.
Upon the commencement of an Asset Sale Offer, the Company
shall send, by first class mail, a notice to the Trustee and each of the
Holders, with a copy to the Trustee. The notice shall contain all instructions
and materials necessary to enable such Holders to tender Notes pursuant to the
Asset Sale Offer. The Asset Sale Offer shall be made to all Holders. The notice,
which shall govern the terms of the Asset Sale Offer, shall state:
(a) that the Asset Sale Offer is being made pursuant to this
Section 3.9 and Section 4.10 hereof and the length of time the Asset
Sale Offer shall remain open;
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(b) the Asset Sale Offer Amount, the purchase price and the
Asset Sale Purchase Date;
(c) that any Note not tendered or accepted for payment shall
continue to accrue interest;
(d) that, unless the Company defaults in making such payment,
any Note accepted for payment pursuant to the Asset Sale Offer shall
cease to accrete or accrue interest after the Asset Sale Purchase Date;
(e) that Holders electing to have a Note purchased pursuant to
an Asset Sale Offer may only elect to have all of such Note purchased
and may not elect to have only a portion of such Note purchased;
(f) that Holders electing to have a Note purchased pursuant to
any Asset Sale Offer shall be required to surrender the Note, with the
form entitled "Option of Holder to Elect Purchase" on the reverse of
the Note completed, or transfer by book-entry transfer, to the Company,
a depositary, if appointed by the Company, or a Paying Agent at the
address specified in the notice at least three days before the Asset
Sale Purchase Date;
(g) that Holders shall be entitled to withdraw their election
if the Company, the depositary or the Paying Agent, as the case may be,
receives, not later than the expiration of the Asset Sale Offer Period,
a telegram, telex, facsimile transmission or letter setting forth the
name of the Holder, the principal amount of the Note the Holder
delivered for purchase and a statement that such Holder is withdrawing
his election to have such Note purchased;
(h) that, if the aggregate principal amount of Notes
surrendered by Holders exceeds the Asset Sale Offer Amount, the Company
shall select the Notes to be purchased on a pro rata basis (with such
adjustments as may be deemed appropriate by the Company so that only
Notes in denominations of $1,000, or integral multiples thereof, shall
be purchased); and
(i) that Holders whose Notes were purchased only in part shall
be issued new Notes equal in principal amount to the unpurchased
portion of the Notes surrendered (or transferred by book-entry
transfer).
On or before the Asset Sale Purchase Date, the Company shall,
to the extent lawful, accept for payment, on a pro rata basis, to the extent
necessary, the Asset Sale Offer Amount of Notes or portions thereof tendered
pursuant to the Asset Sale Offer, or if less than the Asset Sale Offer Amount
has been tendered, all such Notes tendered, and shall deliver to the Trustee an
Officers' Certificate stating that such Notes or portions thereof were accepted
for payment by the Company in accordance with the terms of this Section 3.9. The
Company, the depositary or the Paying Agent, as the case may be, shall promptly
(but in any case not later than five days after the Asset Sale Purchase Date)
mail or deliver to each tendering Holder an amount equal to the purchase price
of the Notes tendered by such Holder and accepted by the Company for purchase,
and the Company shall promptly issue a new Note, and the Trustee, upon written
request from the Company shall authenticate and mail or deliver such new Note to
such Holder, in a principal amount equal to any unpurchased portion of any Note
surrendered. Any
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Note not so accepted shall be promptly mailed or delivered by the Company to the
Holder thereof. The Company shall publicly announce the results of the Asset
Sale Offer on the Purchase Date.
The Company shall comply, to the extent applicable, with the
requirements of Rule 14e-1 under the Exchange Act ("Rule 14e-1") and any other
securities laws or regulations in connection with the repurchase of any Notes
pursuant to this Section 3.9. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of this Section 3.9,
the Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under this Section 3.9 by
virtue thereof.
Other than as specifically provided in this Section 3.9, any
purchase pursuant to this Section 3.9 shall be made pursuant to the provisions
of Sections 3.1 through 3.6 hereof.
ARTICLE 4
COVENANTS
SECTION 4.1. PAYMENT OF NOTES.
The Company shall pay or cause to be paid the principal of,
premium, if any, and interest on the Notes on the dates and in the manner
provided in the Notes. Principal, premium, if any, and interest shall be
considered paid on the date due if the Paying Agent, if other than the Company
or a Subsidiary thereof, holds, as of 10:00 a.m. Eastern Time on the due date,
money deposited by the Company in immediately available funds and designated for
and sufficient to pay all principal, premium, if any, and interest then due.
SECTION 4.2. MAINTENANCE OF OFFICE OR AGENCY.
The Company shall maintain in the Borough of Manhattan, The
City of New York, an office or agency (which may be an office of the Trustee,
Registrar or coregistrar) where Notes may be surrendered for registration of
transfer or exchange and where notices and demands to or upon the Company in
respect of the Notes and this Indenture may be served. The Company shall give
prompt written notice to the Trustee of the location, and any change in the
location, of such office or agency. If at any time the Company shall fail to
maintain any such required office or agency or shall fail to furnish the Trustee
with the address thereof, such presentations, surrenders, notices and demands
may be made or served at the Corporate Trust Office of the Trustee.
The Company may also from time to time designate one or more
other offices or agencies where the Notes may be presented or surrendered for
any or all such purposes and may from time to time rescind such designations;
provided, however, that no such designation or rescission shall in any manner
relieve the Company of its obligation to maintain an office or agency in the
Borough of Manhattan, The City of New York for such purposes. The Company shall
give prompt written notice to the Trustee of any such designation or rescission
and of any change in the location of any such other office or agency.
The Company hereby designates the Corporate Trust Office of
the Trustee as one such office or agency of the Company in accordance with
Section 2.3.
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SECTION 4.3. REPORTS.
Whether or not required by the rules and regulations of the
SEC, so long as any of the Notes are outstanding, the Company will furnish to
the Holders of the Notes (i) all quarterly and annual financial information that
would be required to be contained in a filing with the SEC on Forms 10-Q and
10-K if the Company were required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" that
describes the financial condition and results of operations of the Company and
the consolidated Subsidiaries of the Company (showing in reasonable detail,
either on the face of the financial statements or in the notes thereto and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, if applicable, the financial condition and results of operations of
the Company and its Restricted Subsidiaries separately from the financial
condition and results of operations of the Unrestricted Subsidiaries of the
Company) and, with respect to the annual information only, a report thereon by
the Company's certified independent accountants and (ii) all current reports
that would be required to be filed with the SEC on Form 8-K if the Company were
required to file such reports. In addition, whether or not required by the rules
and regulations of the SEC, the Company will file a copy of all such information
and reports with the SEC for public availability (unless the SEC will not accept
such a filing) and make such information available to securities analysts and
prospective investors upon request.
SECTION 4.4. COMPLIANCE CERTIFICATE.
(a) The Company shall deliver to the Trustee, within 90 days
after the end of each fiscal year of the Company (which ends on December 31 of
each year), an Officers' Certificate stating that a review of the activities of
the Company and its Subsidiaries during the preceding fiscal year has been made
under the supervision of the signing Officers with a view to determining whether
the Company and its Subsidiaries have kept, observed, performed and fulfilled
their obligations under this Indenture, and further stating, as to each such
Officer signing such certificate, that to the best of his or her knowledge the
Company and each of its Subsidiaries has kept, observed, performed and fulfilled
each and every covenant contained in this Indenture and is not in default in the
performance or observance of any of the terms, provisions and conditions hereof
(or, if a Default or Event of Default shall have occurred, describing all such
Defaults or Events of Default of which he may have knowledge and what action the
Company is taking or proposes to take with respect thereto) and that, to the
best of his knowledge, no event has occurred and remains in existence by reason
of which payments on account of the principal of or interest, if any, on the
Notes are prohibited or if such event has occurred, a description of the event
and what action the Company is taking or proposes to take with respect thereto.
(b) So long as not contrary to the then current
recommendations of the American Institute of Certified Public Accountants, the
year-end financial statements delivered pursuant to Section 4.3 above shall be
accompanied by a written statement of the Company's independent public
accountants (who shall be a firm of established national reputation) that in
making the examination necessary for certification of such financial statements
nothing has come to their attention that would lead them to believe that the
Company has violated any provisions of Article 4 or Article 5 of this Indenture
or, if any such violation has occurred, specifying the nature and period of
existence thereof, it being understood that such accountants shall not be liable
directly or indirectly to any person for any failure to obtain knowledge of any
such violation.
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(c) The Company shall, so long as any of the Notes are
outstanding, deliver to the Trustee, forthwith upon any Officer becoming aware
of any Default or Event of Default an Officers' Certificate specifying such
Default or Event of Default what action the Company is taking or proposes to
take with respect thereto.
SECTION 4.5. TAXES.
The Company shall pay, and shall cause each of its
Subsidiaries to pay, prior to delinquency, all material taxes, assessments, and
governmental levies, except such as are contested in good faith and by
appropriate proceedings or where the failure to effect such payment, in the
Company's sole determination, is not adverse in any material respect to the
Holders of the Notes.
SECTION 4.6. STAY, EXTENSION AND USURY LAWS.
The Company and each of the Subsidiary Guarantors covenants
(to the extent that they may lawfully do so) that it shall not at any time
insist upon, plead, or in any manner whatsoever claim or take the benefit or
advantage of, any stay, extension or usury law wherever enacted, now or at any
time hereafter in force, that may affect the covenants or the performance of
this Indenture; and the Company and each of the Subsidiary Guarantors (to the
extent that they may lawfully do so) hereby expressly waives all benefit or
advantage of any such law, and covenants that it shall not, by resort to any
such law, hinder, delay or impede the execution of any power herein granted to
the Trustee, but shall suffer and permit the execution of every such power as
though no such law has been enacted.
SECTION 4.7. RESTRICTED PAYMENTS.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution on account of the Company's
or any of its Restricted Subsidiaries' Equity Interests (including, without
limitation, any payment in connection with any merger or consolidation involving
the Company) other than dividends or other payments or distributions payable in
Equity Interests (other than Disqualified Stock) of the Company or dividends or
other payments or distributions payable to the Company or any Wholly-Owned
Restricted Subsidiary of the Company; (ii) purchase, redeem or otherwise acquire
or retire for value (including, without limitation, any payment in connection
with any merger or consolidation involving the Company) any Equity Interests of
the Company (other than any such Equity Interests owned by any Wholly-Owned
Restricted Subsidiary of the Company) or any direct or indirect parent of the
Company; (iii) make any principal payment on or with respect to, purchase,
redeem, defease or otherwise acquire or retire for value any Indebtedness that
is subordinated to the Notes or any Guarantee (other than intercompany
Indebtedness payable to the Company or a Restricted Subsidiary by any Restricted
Subsidiary), except at its stated maturity; or (iv) make any Restricted
Investment (all such payments and other actions set forth in clauses (i) through
(iv) above being collectively referred to as "Restricted Payments"), unless, at
the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
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(b) the Company would, at the time of such Restricted Payment
and after giving pro forma effect thereto, have been permitted to incur
at least $1.00 of additional Indebtedness pursuant to the test set
forth in Section 4.9(a) hereof; and
(c) such Restricted Payment, together with the aggregate
amount of all other Restricted Payments made by the Company and its
Restricted Subsidiaries after the Issue Date (excluding Restricted
Payments permitted by clauses (ii) and (iii) of the next succeeding
paragraph), is less than the sum of (i) 25% of the aggregate cumulative
Consolidated Net Income of the Company for the period (taken as one
accounting period) from and after the last day of the first fiscal
quarter ending immediately following the Issue Date to the end of the
Company's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted
Payment (or, if such Consolidated Net Income for such period is a
deficit, less 100% of such deficit); plus (ii) 100% of the aggregate
net cash proceeds received by the Company from the issue or sale since
the Issue Date of Equity Interests of the Company (other than
Disqualified Stock) or of Disqualified Stock or Indebtedness
represented by securities of the Company that have been converted into
such Equity Interests (other than Equity Interests (or Disqualified
Stock or convertible debt securities) sold to a Subsidiary of the
Company and other than Disqualified Stock or other Indebtedness
represented by securities that have been converted into Disqualified
Stock); plus (iii) to the extent that any Restricted Investment that
was made after the Issue Date is sold for cash or otherwise liquidated
or repaid for cash, the lesser of (A) the cash return of capital with
respect to such Restricted Investment (less the cost of disposition, if
any) and (B) the initial amount of such Restricted Investment.
The provisions of this Section 4.7 shall not prohibit the
following Restricted Payments:
(i) the payment of any dividend within 60 days after
the date of declaration thereof, if at said date of declaration such
payment would have complied with the provisions of this Indenture;
(ii) the purchase, redemption or other acquisition or
retirement for value of any Equity Interests of the Company in exchange
for, or out of the proceeds of, the substantially concurrent sale
(other than to a Subsidiary of the Company) of other Equity Interests
of the Company (other than any Disqualified Stock); provided, that the
amount of any such net cash proceeds that are utilized for such
redemption, repurchase, retirement or other acquisition shall be
excluded from clause (c)(ii) of the preceding paragraph;
(iii) the payment of principal on, or purchase,
redemption, defeasance or other acquisition or retirement for value of
Indebtedness with the net cash proceeds from an incurrence of,
Permitted Refinancing Indebtedness or the substantially concurrent sale
(other than to a Subsidiary of the Company) of Equity Interests of the
Company (other than Disqualified Stock); provided, that the amount of
any such net cash proceeds from any such sale of Equity Interests that
are utilized for such redemption, repurchase, retirement or other
acquisition shall be excluded from clause (c)(ii) of the preceding
paragraph;
(iv) payments in an amount not to exceed $500,000 in
the aggregate during any fiscal year of the Company (plus any such
amount not utilized in the preceding fiscal year)
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in connection with the repurchase, redemption or other acquisition or
retirement for value of any Equity Interests of the Company held by an
employee or director of the Company or any of its Subsidiaries, related
to compensation or severance arrangements;
(v) advances to a Securitization Trust required to be
made by the Company or any Restricted Subsidiary (in its capacity or
the holder of the residual interest in such trust) if such advances
rank senior in right of payment to all other interests in, and
Indebtedness of, such trust; and
(vi) the making and consummation of any offer to
repurchase any Indebtedness upon the occurrence of a change of control
under and as defined in the documents governing such Indebtedness;
provided, that in connection with Indebtedness incurred after the Issue
Date, the definition of "change of control" is the same in all material
respects as the definition of "Change of Control" set forth in this
Indenture and payments pursuant thereto are not required to be made
prior to the date on which the Change of Control Payment is required to
be made under this Indenture and, with respect to any Indebtedness
subordinated in right of payment to the Notes, no sooner than 30 days
after the date such Change of Control Offer is required to be made.
The Board of Directors may designate any Restricted Subsidiary
to be an Unrestricted Subsidiary if such designation would not cause a Default.
For purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash) in
the Subsidiary so designated will be deemed to be Restricted Payments at the
time of such designation and will reduce the amount available for Restricted
Payments under the first paragraph of this Section 4.7. All such outstanding
Investments will be deemed to constitute Investments in an amount equal to the
fair market value of such Investments at the time of such designation. Such
designation will only be permitted if such Restricted Payment would be permitted
at such time and if such Restricted Subsidiary otherwise meets the definition of
an Unrestricted Subsidiary.
The amount of all Restricted Payments other than cash shall be
the fair market value (evidenced by an Officers' Certificate on the date of the
Restricted Payment) of the asset(s) or securities proposed to be transferred or
issued by the Company or such Restricted Subsidiary, as the case may be,
pursuant to the Restricted Payment. The fair market value of any non-cash
Restricted Payment in excess of $1.0 million shall be determined by the Board of
Directors whose resolution with respect thereto shall be delivered to the
Trustee, such determination to be based upon an opinion or appraisal issued by
an accounting, appraisal or investment banking firm of national standing if such
fair market value exceeds $10.0 million. Not later than the date of making any
Restricted Payment, the Company shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by this Section 4.7 were
computed.
SECTION 4.8. DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to (i)(A) pay dividends or make any other
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distributions to the Company or any of its Restricted Subsidiaries (1) on its
Capital Stock or (2) with respect to any other interest or participation in, or
measured by, its profits, or (B) pay any indebtedness owed to the Company or any
of its Restricted Subsidiaries, (ii) make loans or advances to the Company or
any of its Restricted Subsidiaries or (iii) transfer any of its properties or
assets to the Company or any of its Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (a) agreements
relating to Indebtedness as in effect as of the Issue Date, and any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
additions (including additional Warehouse Facilities), replacements or
refinancings thereof, provided that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, additions,
replacements or refinancings are no more restrictive with respect to such
dividend and other payment restrictions than those contained in the agreements
relating to Indebtedness as in effect on the Issue Date, (b) applicable law, (c)
any instrument governing Acquired Debt or Capital Stock of a Person acquired by
the Company or any of its Restricted Subsidiaries as in effect at the time of
such acquisition (except to the extent such Acquired Debt was incurred or such
Capital Stock was issued or its terms amended in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the property or assets of any Person, other than
the Person or the property or assets of the Person, so acquired, provided that
such Person is not taken into account in determining on a pro forma basis
whether such acquisition subject to such Acquired Debt was permitted by the
terms of this Indenture, (d) customary non-assignment provisions in leases
entered into in the ordinary course of business and consistent with past
practices, (e) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in clause
(iii) above on the property so acquired, and (f) Permitted Refinancing
Indebtedness; provided that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are no more restrictive than
those contained in the agreements governing the Indebtedness being refinanced.
SECTION 4.9. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK.
(a) The Company shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, create, incur, issue, assume, guaranty
or otherwise become directly or indirectly liable, contingently or otherwise,
with respect to (collectively, "incur") any Indebtedness (including Acquired
Debt) or issue Disqualified Stock, and the Company shall not permit any of its
Restricted Subsidiaries to issue any shares of preferred stock except for
preferred stock issued to and held by the Company or any Wholly-Owned Restricted
Subsidiary of the Company, provided that any subsequent issuance or transfer of
Capital Stock that results in such Wholly-Owned Restricted Subsidiary ceasing to
be a Wholly-Owned Restricted Subsidiary of the Company or any subsequent
transfer of such preferred stock (other than to the Company or any of its
Wholly-Owned Restricted Subsidiaries) will be deemed, in each case, to
constitute the issuance of such preferred stock by the issuer thereof; provided,
however, that the Company or any Subsidiary Guarantor may incur Indebtedness
(including Acquired Debt) or issue Disqualified Stock and any Subsidiary
Guarantor may issue preferred stock if, on the date of such incurrence or
issuance and after giving effect thereto, the Consolidated Leverage Ratio does
not exceed 2.0 to 1.0.
(b) The foregoing provisions will not apply to:
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(i) the incurrence by the Company or any Restricted Subsidiary
of Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvement of property used in the business of the
Company or such Restricted Subsidiary, in an aggregate principal amount
not to exceed $15.0 million in the aggregate since the Issue Date;
(ii) the existence of Warehouse Facilities, regardless of
amount, and the incurrence of Permitted Warehouse Debt by the Company
or any of its Restricted Subsidiaries; provided, however, that to the
extent any such Indebtedness of the Company or a Restricted Subsidiary
of the Company ceases to constitute Permitted Warehouse Debt, to such
extent such Indebtedness shall be deemed to be incurred by the Company
or such Restricted Subsidiary of the Company, as the case may be, at
such time;
(iii) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness owing to the Company or any
of its Restricted Subsidiaries; provided, however, that (x)(A) any
subsequent issuance or transfer of any Capital Stock which results in
any such Indebtedness being held by a Person other than a Restricted
Subsidiary of the Company and (B) any sale or transfer of any such
Indebtedness to a Person that is not either the Company or a Restricted
Subsidiary of the Company, shall be deemed, in each case, to constitute
the incurrence of such Indebtedness by the Company or such Restricted
Subsidiary, as the case may be, and (y) any Indebtedness of the Company
to any Restricted Subsidiary is permitted by Section 4.7 hereof;
(iv) the incurrence by the Company of Indebtedness represented
by the Notes and the incurrence by the Subsidiary Guarantors of
Guarantees;
(v) Indebtedness of the Company and its Restricted
Subsidiaries outstanding on the Issue Date;
(vi) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness with respect to
Indebtedness that was permitted by this Indenture to be incurred or
that was outstanding at the Issue Date;
(vii) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations directly related to (w)
Indebtedness of the Company or a Restricted Subsidiary of the Company
that was permitted by this Indenture to be incurred, (x) Receivables
held by the Company or a Restricted Subsidiary pending sale in a
Securitization, (y) Receivables of the Company or a Restricted
Subsidiary that have been sold pursuant to a Warehouse Facility; or (z)
Receivables that the Company or a Restricted Subsidiary reasonably
expects to purchase or commit to purchase, finance or accept as
collateral; provided, however, that, in the case of each of the
foregoing clauses (w) through (z), such Hedging Obligations are
eligible to receive hedge accounting treatment in accordance with GAAP
as applied by the Company and its Restricted Subsidiaries on the Issue
Date;
(viii) the incurrence of Acquired Debt by the Company or any
Subsidiary Guarantor in a principal amount not to exceed $15.0 million
in the aggregate since the Issue Date (reduced by the amount of
Acquired Debt repaid with Net Proceeds of Asset Sales of the Restricted
Subsidiary
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acquired subject to such Acquired Debt) that is without recourse to the
Company or any of its Restricted Subsidiaries or any of their respective
assets (other than the Subsidiary Guarantor acquired subject to such
Acquired Debt), and is not guaranteed by any such Person;
(ix) the Guarantee by the Company or any of the Subsidiary
Guarantors of the Indebtedness of the Company or another Subsidiary
Guarantor that was permitted to be incurred by another provision of
this Section 4.9;
(x) the incurrence by the Company and the Subsidiary
Guarantors of Indebtedness in an aggregate principal amount at any time
outstanding not to exceed $10.0 million; and
(xi) (A) the incurrence by an Unrestricted Subsidiary of the
Company of Non-Recourse Debt (including, without limitation,
Non-Recourse Debt that would constitute Permitted Warehouse Debt if
incurred by a Restricted Subsidiary of the Company); provided, however,
that if any such Indebtedness ceases to be Non-Recourse Debt of the
Unrestricted Subsidiary, such event shall be deemed to constitute an
incurrence of Indebtedness by a Restricted Subsidiary and (B) the
issuance by an Unrestricted Subsidiary of the Company of preferred
stock.
(c) The Company shall not, and shall not permit any Subsidiary
Guarantor to, incur any Indebtedness that is contractually subordinated to any
Indebtedness of the Company or any such Subsidiary Guarantor unless such
Indebtedness is also contractually subordinated to the Notes, or the Subsidiary
Guarantee of such Subsidiary Guarantor (as applicable), on substantially
identical terms; provided, however, that no Indebtedness shall be deemed to be
contractually subordinated to any other Indebtedness solely by virtue of being
unsecured or of limited recourse.
(d) For purposes of determining compliance with this covenant,
in the event that an item of Indebtedness meets the criteria of more than one of
the categories of Indebtedness described in clauses (i) through (xi) of Section
4.9(b) above or is entitled to be incurred pursuant to Section 4.9(a), the
Company shall, in its sole discretion, classify such item of Indebtedness in any
manner that complies with this covenant and such item of Indebtedness will be
treated as having been incurred pursuant to only one of such clauses or pursuant
to Section 4.9(a).
SECTION 4.10. ASSET SALES.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company (or
the Restricted Subsidiary, as the case may be) receives consideration at the
time of such Asset Sale at least equal to the fair market value (evidenced by an
Officers' Certificate delivered to the Trustee and, with respect to any Asset
Sale involving consideration in excess of $5.0 million, a resolution of the
Company's Board of Directors) of the assets or Equity Interests issued or sold
or otherwise disposed of and (ii) at least 85% (or, in the case of the sale or
other disposition of any Residual Receivables (or interest therein), 50%) of the
consideration therefor received by the Company or such Restricted Subsidiary is
in the form of Cash Equivalents; provided that the amount of (x) any liabilities
(as shown on the Company's or such Restricted Subsidiary's most recent balance
sheet) of the Company or any Restricted Subsidiary (other than contingent
liabilities and liabilities that are by their terms subordinated to the Notes or
any Guarantee
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thereof) that are expressly assumed by the transferee of any such assets
pursuant to a customary novation agreement that releases the Company or such
Restricted Subsidiary from further liability and (y) any currencies, securities,
notes or other obligations received by the Company or any such Restricted
Subsidiary from such transferee that are converted by the Company or such
Restricted Subsidiary into Cash Equivalents within 30 days after receipt (to the
extent of the cash received), shall be deemed to be Cash Equivalents for
purposes of this provision.
Within 180 days after the receipt of any Net Proceeds from an
Asset Sale subject to this covenant, the Company or the Restricted Subsidiary,
as the case may be, may apply an amount equal to 100% of such Net Proceeds to
(i) an Investment (other than in Receivables that, at the time of purchase, are
not Eligible Receivables), or (ii) the purchase of Receivables that are, at the
time of purchase, Eligible Receivables, or (iii) the making of any capital
expenditure, or (iv) the acquisition of any other tangible assets, in each case,
in or with respect to a Permitted Business. Pending the final application of any
such Net Proceeds, the Company or such Restricted Subsidiary may temporarily
reduce outstanding Indebtedness or otherwise invest such Net Proceeds in any
manner not prohibited by this Indenture. Any Net Proceeds from Asset Sales not
applied or invested as provided in the preceding sentence of this paragraph will
be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess
Proceeds exceeds $10.0 million, Company shall make an offer to all Holders of
the Notes (an "Asset Sale Offer") to purchase the maximum principal amount of
the Notes that may be purchased out of the Excess Proceeds, at an offer price in
cash in an amount equal to 100% of the principal amount thereof plus accrued and
unpaid interest thereon to the date of purchase, in accordance with the
procedures set forth in this Indenture.
Notwithstanding the foregoing, the Company shall not, and
shall not permit any of its Restricted Subsidiaries to, directly or indirectly
sell or otherwise convey or dispose of any Residual Receivables or interest
therein for consideration of which less than 85% is in the form of Cash
Equivalents, unless: (i) from and after the Issue Date, upon the creation of any
Senior Residual Receivables by the Company or any Restricted Subsidiary, the
Company shall designate, by an Officers' Certificate delivered to the Trustee,
Senior Residual Receivables with an aggregate book value equal to 25% of the
book value of the Senior Residual Receivables so created as Retained Residual
Receivables ("Retained Residual Receivables") and no such designation shall have
been revoked except as provided below; (ii) none of the Residual Receivables
sold, conveyed or otherwise disposed of constitute Retained Residual Receivables
unless after giving effect to such sale, conveyance or other disposition the
aggregate amount of Senior Residual Receivables of the Company and its
Restricted Subsidiaries which are unencumbered by any Lien (of which no more
than 25% of the aggregate book value thereof shall constitute Retained Residual
Receivables) would be greater than or equal to 250% of all Senior Indebtedness
of the Company and its Restricted Subsidiaries; and (iii) after giving effect to
any such sale, conveyance or other disposition of Residual Receivables the
aggregate amount of Senior Residual Receivables of the Company and its
Restricted Subsidiaries which are unencumbered by any Lien (of which not more
than 25% of the aggregate book value thereof shall constitute Retained Residual
Receivables) would be greater than or equal to 150% of all Senior Indebtedness
of the Company and its Restricted Subsidiaries. From time to time, the Company
may revoke the designation of any Senior Residual Receivable as a Retained
Residual Receivable if the Company simultaneously designates as Retained
Residual Receivables (in addition to any other such designation otherwise
required by this Indenture) Senior Residual Receivables (not subject to any
Lien) with an aggregate book value equal to
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or greater than that of the Senior Residual Receivables as to which such
designation has been revoked. Any determination of the amount of Residual
Receivables shall be based on the consolidated balance sheet of the Company and
its Restricted Subsidiaries for the most recently ended fiscal quarter for which
financial statements are available, after giving pro forma effect to the Asset
Sale for which such determination is being made and to any other sale of or Lien
on or reduction of Residual Receivables since the date of such balance sheet.
To the extent that the aggregate amount of the Notes tendered
pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company or
the Restricted Subsidiary, as the case may be, may use any remaining Excess
Proceeds for general corporate purposes. If the aggregate principal amount of
the Notes surrendered by Holders thereof exceeds the amount of Excess Proceeds,
the Trustee shall select the Notes to be purchased on a pro rata basis. Upon
completion of such Asset Sale Offer, the amount of Excess Proceeds shall be
reset at zero.
SECTION 4.11. TRANSACTIONS WITH AFFILIATES.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, sell, lease, transfer or otherwise dispose of any of its
properties or assets to, or purchase any property or assets from, or enter into
or make or amend any transaction, contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any Affiliate (each of the
foregoing an "Affiliate Transaction"), unless (i) such Affiliate Transaction is
on terms that are no less favorable to the Company or the relevant Subsidiary
than those that would have been obtained in a comparable transaction by the
Company or such Subsidiary with an unrelated Person and (ii) the Company
delivers to the Trustee (a) with respect to any Affiliate Transaction involving
aggregate consideration in excess of $1.0 million, a resolution of the Board of
Directors set forth in an Officers' Certificate certifying that such Affiliate
Transaction complies with clause (i) above and that such Affiliate Transaction
has been approved by a majority of the disinterested members of the Board of
Directors and (b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $5.0
million, an opinion as to the fairness to the Company or such Restricted
Subsidiary of such Affiliate Transaction from a financial point of view issued
by an accounting, appraisal or investment banking firm of national standing;
provided that Affiliate Transactions shall not include (A) any employment
agreement, stock option, employee benefit, indemnification, compensation
(including the payment of reasonable fees to Directors of the Company or its
Restricted Subsidiaries who are not employees of the Company or its Restricted
Subsidiaries), business expense reimbursement or other employment-related
agreement, arrangement or plan entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business of the Company or
such Restricted Subsidiary, (B) transactions between or among the Company and/or
its Restricted Subsidiaries not otherwise prohibited by this Indenture, (C)
loans or advances to employees in the ordinary course of business of the Company
or its Restricted Subsidiaries, but in any event not to exceed $500,000 in
aggregate principal amount outstanding at any one time, and (D) Restricted
Payments other than Restricted Investments that are permitted by Section 4.7
hereof.
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SECTION 4.12. LIENS.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly, create, incur, assume or
suffer to exist any Lien on any asset now owned or hereafter acquired, or any
income or profits therefrom or assign or convey any right to receive income
therefrom, except Permitted Liens.
SECTION 4.13. BUSINESS ACTIVITIES.
The Company shall not, and shall not permit any Restricted
Subsidiary to, engage in any business other than Permitted Businesses.
SECTION 4.14. PAYMENTS FOR CONSENT.
Neither the Company nor any of its Subsidiaries shall,
directly or indirectly, pay or cause to be paid any consideration, whether by
way of interest, fee or otherwise, to any Holder of any of the Notes for or as
an inducement to any consent, waiver or amendment of any of the terms or
provisions of this Indenture, the Notes or any Subsidiary Guarantee unless such
consideration is offered to be paid or is paid to all Holders of Notes that
consent, waive or agree to amend in the time frame set forth in the solicitation
documents relating to such consent, waiver or agreement.
SECTION 4.15. CORPORATE EXISTENCE.
Subject to Article 5 hereof, the Company shall do or cause to
be done all things necessary to preserve and keep in full force and effect (i)
its corporate existence, and the corporate, partnership or other existence of
each of its Subsidiaries, in accordance with the respective organizational
documents (as the same may be amended from time to time) of the Company or any
such Subsidiary and (ii) the rights (charter and statutory), licenses and
franchises of the Company and its Subsidiaries; provided, however, that the
Company shall not be required to preserve any such right, license or franchise,
or the corporate, partnership or other existence of any of its Subsidiaries, if
the Board of Directors shall determine that the preservation thereof is no
longer desirable in the conduct of the business of the Company and its
Subsidiaries, taken as a whole, and that the loss thereof is not adverse in any
material respect to the Holders of the Notes.
SECTION 4.16. OFFER TO REPURCHASE UPON CHANGE OF CONTROL.
(a) Upon the occurrence of a Change of Control, each Holder of
the Notes will have the right to require the Company to repurchase all or any
part (equal to $1,000 or an integral multiple thereof) of such Holder's Notes
pursuant to the offer described below (the "Change of Control Offer") at an
offer price in cash equal to 101% of the aggregate principal amount thereof plus
accrued and unpaid interest thereon, if any, to the date of purchase (the
"Change of Control Payment"). Within ten days following any Change of Control,
the Company shall mail a notice to each Holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
the Notes on the date specified in such notice, which date shall be no earlier
than the earliest date permitted under Rule 14e-1 and no later than 60 days from
the date such notice is mailed (the "Change of Control Payment
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Date"), pursuant to the procedures required by this Indenture and described in
such notice. The Company shall comply with the requirements of Rule 14e-1 and
any other securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Notes as a
result of a Change of Control. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of this Section
4.16, the Company shall comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations under this
Section 4.16 by virtue thereof.
(b) On the Change of Control Payment Date, the Company shall,
to the extent lawful, (1) accept for payment all the Notes or portions thereof
properly tendered pursuant to the Change of Control Offer, (2) deposit with the
Paying Agent an amount equal to the Change of Control Payment in respect of all
the Notes or portions thereof so tendered and (3) deliver or cause to be
delivered to the Trustee the Notes so accepted together with an Officers'
Certificate stating the aggregate principal amount of the Notes or portions
thereof being purchased by the Company. The Paying Agent shall promptly mail to
each Holder of the Notes so tendered the Change of Control Payment for such
Notes, and the Trustee shall promptly authenticate and mail (or cause to be
transferred by book entry) to each Holder a new Note equal in principal amount
to any unpurchased portion of the Notes surrendered, if any; provided that each
such new Note will be in a principal amount of $1,000 or an integral multiple
thereof. The Company shall publicly announce the results of the Change of
Control Offer on or as soon as practicable after the Change of Control Payment
Date.
(c) The Company shall not be required to make a Change of
Control Offer upon a Change of Control if a third party makes the Change of
Control Offer in the manner, at the times and otherwise in compliance with the
requirements set forth in this Indenture applicable to a Change of Control Offer
and purchases all the Notes validly tendered and not withdrawn under such Change
of Control Offer.
SECTION 4.17. ADDITIONAL SUBSIDIARY GUARANTEES.
If the Company or any of its Subsidiaries shall acquire or
create another Subsidiary after the date of this Indenture, then the Company
shall cause such newly acquired or created Subsidiary to execute a Subsidiary
Guarantee and deliver an Opinion of Counsel, in accordance with the terms of
this Indenture, except this Section 4.17 shall not apply to any Subsidiaries
that have properly been designated as Unrestricted Subsidiaries in accordance
with this Indenture for so long as they continue to constitute Unrestricted
Subsidiaries.
ARTICLE 5
SUCCESSORS
SECTION 5.1. MERGER, CONSOLIDATION OR SALE OF ASSETS.
The Company shall not consolidate, or merge with or into
(whether or not the Company is the surviving corporation) or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions, to another
corporation,
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Person or entity unless (i) the Company is the surviving corporation or the
entity or the Person formed by or surviving any such consolidation, or merger
(if other than the Company) or to which such sale, assignment, transfer, lease,
conveyance or other disposition shall have been made is a corporation organized
or existing under the laws of the United States, any state thereof or the
District of Columbia; (ii) the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company) or the entity or Person to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made assumes all the obligations of the Company under the Notes
and this Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (iii) immediately after such transaction, no
Default or Event of Default exists; (iv) each of the Subsidiary Guarantors
confirms its obligations under the Subsidiary Guarantees and this Indenture
pursuant to a supplemental indenture in a form reasonably satisfactory to the
Trustee and (v) except in the case of a merger of the Company with or into a
Wholly Owned Subsidiary of the Company, the Company or the entity or Person
formed by or surviving any such consolidation or merger (if other than the
Company), or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made (A) will have Consolidated Net Worth
immediately after the transaction equal to or greater than the Consolidated Net
Worth of the Company immediately preceding the transaction and (B) will, at the
time of such transaction and after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable four-quarter period,
be permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first paragraph of Section
4.9.(a)
SECTION 5.2. SUCCESSOR CORPORATION SUBSTITUTED.
Upon any consolidation or merger, or any sale, assignment,
transfer, lease, conveyance or other disposition of all or substantially all of
the assets of the Company in accordance with Section 5.1 hereof, the successor
corporation formed by such consolidation or into or with which the Company is
merged or to which such sale, assignment, transfer, lease, conveyance or other
disposition is made shall succeed to, and be substituted for (so that from and
after the date of such consolidation, merger, sale, lease, conveyance or other
disposition, the provisions of this Indenture referring to the "Company" shall
refer instead to the successor corporation and not to the Company) and may
exercise every right and power of the Company under this Indenture with the same
effect as if such successor Person had been named as the Company herein;
provided, however, that the predecessor Company shall not be relieved from the
obligation to pay the principal of and interest on the Notes except in the case
of a sale of all of the Company's assets that meet the requirements of Section
5.1 hereof.
ARTICLE 6
DEFAULTS AND REMEDIES
SECTION 6.1. EVENTS OF DEFAULT.
An "Event of Default" occurs if:
(a) the Company defaults in the payment when due of interest
on the Notes and such default continues for a period of 30 days;
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(b) the Company defaults in the payment when due of principal
of or premium, if any, on the Notes when the same becomes due and
payable at maturity, upon redemption (including in connection with an
offer to purchase) or otherwise;
(c) the Company fails to comply with any of the provisions of
Section 4.7, 4.9, 4.10, 4.12, 4.16 or 5.1 hereof;
(d) the Company fails to observe or perform any other
covenant, representation, warranty or other agreement in this
Indenture, the Notes for 30 days after notice to the Company by the
Trustee or the Holders of at least 25% in aggregate principal amount of
the Notes then outstanding;
(e) a default occurs under any mortgage, indenture or
instrument under which there may be issued or by which there may be
secured or evidenced any Indebtedness for money borrowed by the Company
or any of its Subsidiaries (or the payment of which is guaranteed by
the Company or any of its Subsidiaries), whether such Indebtedness or
guarantee now exists, or is created after the date of this Indenture,
which default (a) is caused by a failure to pay principal of or
premium, if any, or interest on such Indebtedness prior to the
expiration of the grace period provided in such Indebtedness on the
date of such default (a "Payment Default") or (b) results in the
acceleration of such Indebtedness prior to its express maturity and, in
each case, the principal amount of any such Indebtedness under which
there has been a Payment Default or, together with the principal amount
of any other such Indebtedness the maturity of which has been so
accelerated, aggregates $5.0 million or more;
(f) a final judgment or final judgments for the payment of
money are entered by a court or courts of competent jurisdiction
against the Company or any of its Significant Subsidiaries or any group
of Subsidiaries that, taken as a whole, would constitute a Significant
Subsidiary and such judgment or judgments remain undischarged for a
period (during which execution shall not be effectively stayed) of 60
days, provided that the aggregate of all such undischarged judgments
exceeds $5.0 million;
(g) the Company or any of its Significant Subsidiaries or any
group of Subsidiaries that, taken as a whole, would constitute a
Significant Subsidiary pursuant to or within the meaning of Bankruptcy
Law:
(i) commences a voluntary case,
(ii) consents to the entry of an order for relief
against it in an involuntary case,
(iii) consents to the appointment of a Custodian of
it or for all or substantially all of its property,
(iv) makes a general assignment for the benefit of
its creditors, or
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(v) generally is not paying its debts as they become
due; or
(h) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(i) is for relief against the Company or any of its
Significant Subsidiaries or any group of Subsidiaries that,
taken as a whole, would constitute a Significant Subsidiary in
an involuntary case;
(ii) appoints a Custodian of the Company or any of
its Significant Subsidiaries or any group of Subsidiaries
that, taken as a whole, would constitute a Significant
Subsidiary or for all or substantially all of the property of
the Company or any of its Significant Subsidiaries or any
group of Subsidiaries that, taken as a whole, would constitute
a Significant Subsidiary; or
(iii) orders the liquidation of the Company or any of
its Significant Subsidiaries or any group of Subsidiaries
that, taken as a whole, would constitute a Significant
Subsidiary;
and the order or decree remains unstayed and in effect for 60
consecutive days; or
(i) any Subsidiary Guarantee shall be held in any judicial
proceeding to be invalid or unenforceable or shall cease for any reason
to be in full force and effect or any Subsidiary Guarantor or any
Person acting on behalf of any Subsidiary Guarantor shall deny or
disaffirm its obligations under its Guarantee.
The term "Bankruptcy Law" means title 11, U.S. Code or any
similar Federal or state law for the relief of debtors. The term "Custodian"
means any receiver, trustee, assignee, liquidator or similar official under any
Bankruptcy Law.
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SECTION 6.2. ACCELERATION.
If any Event of Default (other than an Event of Default
specified in clause (g) or (h) of Section 6.1 hereof with respect to the
Company, any Significant Subsidiary or any group of Significant Subsidiaries
that, taken as a whole, would constitute a Significant Subsidiary) occurs and is
continuing, the Trustee or the Holders of at least 25% in principal amount of
the then outstanding Notes may declare all the Notes to be due and payable
immediately. Upon any such declaration, the Notes shall become due and payable
immediately. Notwithstanding the foregoing, if an Event of Default specified in
clause (g) or (h) of Section 6.1 hereof occurs with respect to the Company, any
of its Significant Subsidiaries or any group of Subsidiaries that, taken as a
whole, would constitute a Significant Subsidiary, all outstanding Notes shall be
due and payable immediately without further action or notice. The Holders of a
majority in aggregate principal amount of the then outstanding Notes by written
notice to the Trustee may on behalf of all of the Holders rescind an
acceleration and its consequences if the rescission would not conflict with any
judgment or decree and if all existing Events of Default (except nonpayment of
principal, interest or premium that has become due solely because of the
acceleration) have been cured or waived.
If an Event of Default occurs on or after ________ __, 2001,
by reason of any willful action (or inaction) taken (or not taken) by or on
behalf of the Company with the intention of avoiding payment of the premium that
the Company would have had to pay if the Company then had elected to redeem the
Notes pursuant to Section 3.7 hereof, then, upon acceleration of the Notes, an
equivalent premium shall also become and be immediately due and payable, to the
extent permitted by law, anything in this Indenture or in the Notes to the
contrary notwithstanding. If an Event of Default occurs prior to _______ __,
2001, by reason of any willful action (or inaction) taken (or not taken) by or
on behalf of the Company with the intention of avoiding the prohibition on
redemption of the Notes prior to such date, then, upon acceleration of the
Notes, an additional premium shall also become and be immediately due and
payable in an amount, for each of the years beginning on ______ of the years set
forth below, as set forth below (expressed as a percentage of the Accreted Value
to the date of payment that would otherwise be due but for the provisions of
this sentence):
Year Percentage
---- ----------
1997...................................... _______%
1998...................................... _______%
1999...................................... _______%
2000...................................... _______%
2001...................................... _______%
SECTION 6.3. OTHER REMEDIES.
If an Event of Default occurs and is continuing, the Trustee may
pursue any available remedy to collect the payment of principal or interest on
the Notes, to enforce the performance of any provision of the Notes, this
Indenture or the Subsidiary Guarantees.
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The Trustee may maintain a proceeding even if it does not possess any
of the Notes or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Holder of a Note in exercising any right or
remedy accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. All remedies are
cumulative to the extent permitted by law.
SECTION 6.4. WAIVER OF PAST DEFAULTS.
Holders of not less than a majority in aggregate principal amount of
the then outstanding Notes by notice to the Trustee may on behalf of the Holders
of all of the Notes waive an existing Default or Event of Default and its
consequences hereunder, except a continuing Default or Event of Default in the
payment of the principal of, premium, if any, or interest on, the Notes
(including in connection with an offer to purchase) (provided, however, that the
Holders of a majority in aggregate principal amount of the then outstanding
Notes may rescind an acceleration and its consequences, including any related
payment default that resulted from such acceleration). Upon any such waiver,
such Default shall cease to exist, and any Event of Default arising therefrom
shall be deemed to have been cured for every purpose of this Indenture; but no
such waiver shall extend to any subsequent or other Default or impair any right
consequent thereon.
SECTION 6.5. CONTROL BY MAJORITY.
Holders of a majority in principal amount of the then outstanding
Notes may direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
it. However, the Trustee may refuse to follow any direction that conflicts with
law or this Indenture, that the Trustee determines may be unduly prejudicial to
the rights of other Holders of Notes, or that may involve the Trustee in
personal liability.
SECTION 6.6. LIMITATION ON SUITS.
A Holder may pursue a remedy with respect to this Indenture or
the Notes only if:
(a) the Holder gives to the Trustee written notice of a
continuing Event of Default;
(b) the Holders of at least 25% in principal amount of the
then outstanding Notes make a written request to the Trustee to pursue
the remedy;
(c) such Holder or Holders offer and, if requested, provide to
the Trustee indemnity satisfactory to the Trustee against any loss,
liability or expense;
(d) the Trustee does not comply with the request within 60
days after receipt of the request and the offer and, if requested, the
provision of indemnity; and
(e) during such 60-day period the Holders of a majority in
principal amount of the then outstanding Notes do not give the Trustee
a direction inconsistent with the request.
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A Holder may not use this Indenture to prejudice the rights of another Holder or
to obtain a preference or priority over another Holder. Holders of the Notes may
not enforce this Indenture or the Notes except as provided in this Indenture.
SECTION 6.7. RIGHTS OF HOLDERS TO RECEIVE PAYMENT.
Notwithstanding any other provision of this Indenture, the right
of any Holder of a Note to receive payment of principal, premium, if any, and
interest on the Note, on or after the respective due dates expressed in the Note
including in connection with an offer to purchase, or to bring suit for the
enforcement of any such payment on or after such respective dates, shall not be
impaired or affected without the consent of such Holder.
SECTION 6.8. COLLECTION SUIT BY TRUSTEE.
If an Event of Default specified in Section 6.1(a) or (b) occurs
and is continuing, the Trustee is authorized to recover judgment in its own name
and as trustee of an express trust against the Company for the whole amount of
principal of, premium, if any, and interest remaining unpaid on the Notes and
interest on overdue principal and, to the extent lawful, interest and such
further amount as shall be sufficient to cover the costs and expenses of
collection, including the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel.
SECTION 6.9. TRUSTEE MAY FILE PROOFS OF CLAIM.
The Trustee is authorized to file such proofs of claim and other
papers or documents as may be necessary or advisable in order to have the claims
of the Trustee (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel) and the
Holders of the Notes allowed in any judicial proceedings relative to the Company
(or any other obligor upon the Notes), its creditors or its property and shall
be entitled and empowered to collect, receive and distribute any money or other
property payable or deliverable on any such claims and any custodian in any such
judicial proceeding is hereby authorized by each Holder to make such payments to
the Trustee, and in the event that the Trustee shall consent to the making of
such payments directly to the Holders, to pay to the Trustee any amount due to
it for the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 7.7 hereof. To the extent that the payment of any such compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel, and
any other amounts due the Trustee under Section 7.7 hereof out of the estate in
any such proceeding, shall be denied for any reason, payment of the same shall
be secured by a Lien on, and shall be paid out of, any and all distributions,
dividends, money, securities and other properties that the Holders may be
entitled to receive in such proceeding whether in liquidation or under any plan
of reorganization or arrangement or otherwise. Nothing herein contained shall be
deemed to authorize the Trustee to authorize or consent to or accept or adopt on
behalf of any Holder any plan of reorganization, arrangement, adjustment or
composition affecting the Notes or the rights of any Holder, or to authorize the
Trustee to vote in respect of the claim of any Holder in any such proceeding.
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SECTION 6.10. PRIORITIES.
If the Trustee collects any money pursuant to this Article, it
shall pay out the money in the following order:
First: to the Trustee, its agents and attorneys for amounts
due under Section 7.7 hereof, including payment of all compensation,
expense and liabilities incurred, and all advances made, by the Trustee
and the costs and expenses of collection;
Second: to Holders of Notes for amounts due and unpaid on the
Notes for principal, premium, if any, and interest, ratably, without
preference or priority of any kind, according to the amounts due and
payable on the Notes for principal, premium, if any and interest,
respectively; and
Third: to the Company or to such party as a court of competent
jurisdiction shall direct.
The Trustee may fix a record date and payment date for any
payment to Holders of Notes pursuant to this Section 6.10.
SECTION 6.11. UNDERTAKING FOR COSTS.
In any suit for the enforcement of any right or remedy under
this Indenture or in any suit against the Trustee for any action taken or
omitted by it as a Trustee, a court in its discretion may require the filing by
any party litigant in the suit of an undertaking to pay the costs of the suit,
and the court in its discretion may assess reasonable costs, including
reasonable attorneys' fees, against any party litigant in the suit, having due
regard to the merits and good faith of the claims or defenses made by the party
litigant. This Section does not apply to a suit by the Trustee, a suit by a
Holder of a Note pursuant to Section 6.7 hereof, or a suit by Holders of more
than 10% in principal amount of the then outstanding Notes.
ARTICLE 7
TRUSTEE
SECTION 7.1. DUTIES OF TRUSTEE.
(a) If an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in its exercise, as a
prudent man would exercise or use under the circumstances in the conduct of his
own affairs.
(b) Except during the continuance of an Event of Default:
(i) the duties of the Trustee shall be determined solely by
the express provisions of this Indenture and the Trustee need perform
only those duties that are specifically set forth in this Indenture and
no others, and no implied covenants or obligations shall be read into
this Indenture against the Trustee; and
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(ii) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements of
this Indenture. However, the Trustee shall examine the certificates and
opinions to determine whether or not they conform to the requirements
of this Indenture.
(c) The Trustee may not be relieved from liabilities for its
own negligent action, its own negligent failure to act, or its own willful
misconduct, except that:
(i) this paragraph does not limit the effect of paragraph (b)
of this Section;
(ii) the Trustee shall not be liable for any error of judgment
made in good faith by a Responsible Officer, unless it is proved that
the Trustee was negligent in ascertaining the pertinent facts; and
(iii) the Trustee shall not be liable with respect to any
action it takes or omits to take in good faith in accordance with a
direction received by it pursuant to Section 6.5 hereof.
(d) Whether or not therein expressly so provided, every
provision of this Indenture that in any way relates to the Trustee is subject to
paragraphs (a), (b), and (c) of this Section.
(e) No provision of this Indenture shall require the Trustee
to expend or risk its own funds or incur any liability. The Trustee shall be
under no obligation to exercise any of its rights and powers under this
Indenture at the request of any Holders, unless such Holder shall have offered
to the Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
(f) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with the Company.
Money held in trust by the Trustee need not be segregated from other funds
except to the extent required by law.
SECTION 7.2. RIGHTS OF TRUSTEE.
(a) The Trustee may conclusively rely upon any document
believed by it to be genuine and to have been signed or presented by the proper
Person. The Trustee need not investigate any fact or matter stated in the
document.
(b) Before the Trustee acts or refrains from acting, it may
require an Officers' Certificate or an Opinion of Counsel or both. The Trustee
shall not be liable for any action it takes or omits to take in good faith in
reliance on such Officers' Certificate or Opinion of Counsel. The Trustee may
consult with counsel and the written advice of such counsel or any Opinion of
Counsel shall be full and complete authorization and protection from liability
in respect of any action taken, suffered or omitted by it hereunder in good
faith and in reliance thereon.
(c) The Trustee may act through its attorneys and agents and
shall not be responsible for the misconduct or negligence of any agent appointed
with due care.
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(d) The Trustee shall not be liable for any action it takes or
omits to take in good faith that it believes to be authorized or within the
rights or powers conferred upon it by this Indenture.
(e) Unless otherwise specifically provided in this Indenture,
any demand, request, direction or notice from the Company shall be sufficient if
signed by an Officer of the Company.
(f) The Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Indenture at the request or
direction of any of the Holders unless such Holders shall have offered to the
Trustee reasonable security or indemnity against the costs, expenses and
liabilities that might be incurred by it in compliance with such request or
direction.
SECTION 7.3. INDIVIDUAL RIGHTS OF TRUSTEE.
The Trustee in its individual or any other capacity may become
the owner or pledgee of Notes and may otherwise deal with the Company or any
Affiliate of the Company with the same rights it would have if it were not
Trustee. However, in the event that the Trustee acquires any conflicting
interest it must eliminate such conflict within 90 days, apply to the SEC for
permission to continue as trustee or resign. Any Agent may do the same with like
rights and duties. The Trustee is also subject to Sections 7.10 and 7.11 hereof.
SECTION 7.4. TRUSTEE'S DISCLAIMER.
The Trustee shall not be responsible for and makes no
representation as to the validity or adequacy of this Indenture or the Notes, it
shall not be accountable for the Company's use of the proceeds from the Notes or
any money paid to the Company or upon the Company's direction under any
provision of this Indenture, it shall not be responsible for the use or
application of any money received by any Paying Agent other than the Trustee,
and it shall not be responsible for any statement herein or any statement in the
Notes or any other document in connection with the sale of the Notes or pursuant
to this Indenture other than its certificate of authentication.
SECTION 7.5. NOTICE OF DEFAULTS.
If a Default or Event of Default occurs and is continuing and
if it is known to the Trustee, the Trustee shall mail to Holders of Notes a
notice of the Default or Event of Default within 90 days after it occurs. Except
in the case of a Default or Event of Default in payment of principal of,
premium, if any, or interest on any Note, the Trustee may withhold the notice if
and so long as a committee of its Responsible Officers in good faith determines
that withholding the notice is in the interests of the Holders of the Notes.
SECTION 7.6. REPORTS BY TRUSTEE TO HOLDERS.
Within 60 days after each ________ beginning with the _______
following the date of this Indenture, and for so long as Notes remain
outstanding, the Trustee shall mail to the Holders of the Notes a brief report
dated as of such reporting date that complies with TIA ss. 313(a) (but if no
event described
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in TIA ss. 313(a) has occurred within the twelve months preceding the reporting
date, no report need be transmitted). The Trustee also shall comply with TIA ss.
313(b)(2). The Trustee shall also transmit by mail all reports as required by
TIA ss. 313(c).
A copy of each report at the time of its mailing to the
Holders of Notes shall be mailed to the Company and filed with the SEC in
accordance with TIA ss. 313(d).
SECTION 7.7. COMPENSATION AND INDEMNITY.
The Company shall pay to the Trustee from time to time
reasonable compensation for its acceptance of this Indenture and services
hereunder. The Trustee's compensation shall not be limited by any law on
compensation of a trustee of an express trust. The Company shall reimburse the
Trustee promptly upon request for all reasonable disbursements, advances and
expenses incurred or made by it in addition to the compensation for its
services. Such expenses shall include the reasonable compensation, disbursements
and expenses of the Trustee's agents and counsel.
The Company shall indemnify the Trustee against any and all
losses, liabilities or expenses incurred by it arising out of or in connection
with the acceptance or administration of its duties under this Indenture,
including the costs and expenses of enforcing this Indenture against the Company
(including this Section 7.7) and defending itself against any claim (whether
asserted by the Company or any Holder or any other person) or liability in
connection with the exercise or performance of any of its powers or duties
hereunder, except to the extent any such loss, liability or expense may be
attributable to its negligence or bad faith. The Trustee shall notify the
Company promptly of any claim for which it may seek indemnity. Failure by the
Trustee to so notify the Company shall not relieve the Company of its
obligations hereunder. The Company shall defend the claim and the Trustee shall
cooperate in the defense. The Trustee may have separate counsel and the Company
shall pay the reasonable fees and expenses of such counsel. The Company need not
pay for any settlement made without its consent, which consent shall not be
unreasonably withheld.
The obligations of the Company under this Section 7.7 shall
survive the satisfaction and discharge of this Indenture.
To secure the Company's payment obligations in this Section,
the Trustee shall have a Lien prior to the Notes on all money or property held
or collected by the Trustee, except that held in trust to pay principal and
interest on particular Notes. Such Lien shall survive the satisfaction and
discharge of this Indenture.
When the Trustee incurs expenses or renders services after an
Event of Default specified in Section 6.1(g) or (h) hereof occurs, the expenses
and the compensation for the services (including the fees and expenses of its
agents and counsel) are intended to constitute expenses of administration under
any Bankruptcy Law.
The Trustee shall comply with the provisions of TIA ss.
313(b)(2) to the extent applicable.
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SECTION 7.8. REPLACEMENT OF TRUSTEE.
A resignation or removal of the Trustee and appointment of a
successor Trustee shall become effective only upon the successor Trustee's
acceptance of appointment as provided in this Section.
The Trustee may resign in writing at any time and be
discharged from the trust hereby created by so notifying the Company. If an
instrument of acceptance by a successor Trustee shall not have been delivered to
the Trustee within 30 days after the giving of such notice of resignation, the
resigning Trustee may petition any court of competent jurisdiction for the
appointment of a successor Trustee. The Holders of Notes of a majority in
principal amount of the then outstanding Notes may remove the Trustee at any
time by so notifying the Trustee and the Company in writing. The Company may
remove the Trustee if:
(a) the Trustee fails to comply with Section 7.10 hereof;
(b) the Trustee is adjudged a bankrupt or an insolvent or an
order for relief is entered with respect to the Trustee under any
Bankruptcy Law;
(c) a Custodian or public officer takes charge of the Trustee
or its property; or
(d) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in
the office of Trustee for any reason, the Company shall promptly appoint a
successor Trustee. Within one year after the successor Trustee takes office, the
Holders of a majority in principal amount of the then outstanding Notes may
appoint a successor Trustee to replace the successor Trustee appointed by the
Company.
If a successor Trustee does not take office within 60 days
after the retiring Trustee resigns or is removed, the retiring Trustee, the
Company, or the Holders of Notes of at least 10% in principal amount of the then
outstanding Notes may petition any court of competent jurisdiction for the
appointment of a successor Trustee.
If the Trustee, after written request by any Holder of a Note
who has been a Holder of a Note for at least six months, fails to comply with
Section 7.10, such Holder of a Note may petition any court of competent
jurisdiction for the removal of the Trustee and the appointment of a successor
Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon, the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Holders of the Notes. The retiring Trustee shall promptly transfer
all property held by it as Trustee to the successor Trustee, provided all sums
owing to the Trustee hereunder have been paid and subject to the Lien provided
for in Section 7.7 hereof. Notwithstanding replacement of the Trustee pursuant
to this Section 7.8, the Company's obligations under Section 7.7 hereof shall
continue for the benefit of the retiring Trustee.
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SECTION 7.9. SUCCESSOR TRUSTEE BY MERGER, ETC.
If the Trustee consolidates, merges or converts into, or
transfers all or substantially all of its corporate trust business to, another
corporation, the successor corporation without any further act shall be the
successor Trustee, provided that such corporation shall be otherwise qualified
and eligible under this Article 7. In case any Notes shall have been
authenticated, but not delivered by the Trustee then in office, any successor by
merger, conversion or consolidation to such authenticating Trustee may adopt
such authentication and deliver the Notes so authenticated with the same effect
as if such successor Trustee had itself authenticated such Notes.
SECTION 7.10. ELIGIBILITY; DISQUALIFICATION.
There shall at all times be a Trustee hereunder that is a
corporation organized and doing business under the laws of the United States of
America or of any state thereof that is authorized under such laws to exercise
corporate trustee power, that is subject to supervision or examination by
federal or state authorities and that has a combined capital and surplus of at
least $100.0 million as set forth in its most recent published annual report of
condition.
This Indenture shall always have a Trustee who satisfies the
requirements of TIA ss. 310(a)(1), (2) and (5). The Trustee is subject to TIA
ss. 310(b). If at any time the Trustee shall cease to be eligible in accordance
with the provisions of this Section 7.10, it shall resign immediately in the
manner provided for in this Article.
SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.
The Trustee is subject to TIA ss. 311(a), excluding any
creditor relationship listed in TIA ss. 311(b). A Trustee that has resigned or
been removed shall be subject to TIA ss. 311(a) to the extent indicated therein.
ARTICLE 8
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
SECTION 8.1. OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE.
The Company may, at the option of its Board of Directors
evidenced by a resolution set forth in an Officers' Certificate, at any time,
elect to have either Section 8.2 or 8.3 hereof be applied to all outstanding
Notes upon compliance with the conditions set forth below in this Article 8.
SECTION 8.2. LEGAL DEFEASANCE AND DISCHARGE.
Upon the Company's exercise under Section 8.1 hereof of the
option applicable to this Section 8.2, the Company shall, subject to the
satisfaction of the conditions set forth in Section 8.4 hereof, be deemed to
have been discharged from its obligations with respect to all outstanding Notes
on the date the conditions set forth below are satisfied (hereinafter, "Legal
Defeasance"). For this purpose,
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Legal Defeasance means that the Company shall be deemed to have paid and
discharged the entire Indebtedness represented by the outstanding Notes, which
shall thereafter be deemed to be "outstanding" only for the purposes of Section
8.5 hereof and the other Sections of this Indenture referred to in (a) and (b)
below, and to have satisfied all its other obligations under such Notes and this
Indenture (and the Trustee, on demand of and at the expense of the Company,
shall execute proper instruments acknowledging the same), except for the
following provisions which shall survive until otherwise terminated or
discharged hereunder: (a) the rights of Holders of outstanding Notes to receive
solely from the trust fund described in Section 8.4 hereof, and as more fully
set forth in such Section, payments in respect of the principal of, premium, if
any, and interest on such Notes when such payments are due, (b) the Company's
obligations with respect to such Notes under Article 2 and Section 4.2 hereof,
(c) the rights, powers, trusts, duties and immunities of the Trustee hereunder
and the Company's obligations in connection therewith and (d) this Article 8.
Subject to compliance with this Article 8, the Company may exercise its option
under this Section 8.2 notwithstanding the prior exercise of its option under
Section 8.3 hereof.
SECTION 8.3. COVENANT DEFEASANCE.
Upon the Company's exercise under Section 8.1 hereof of the
option applicable to this Section 8.3, the Company shall, subject to the
satisfaction of the conditions set forth in Section 8.4 hereof, be released from
its obligations under the covenants contained in Sections 4.7, 4.8, 4.9, 4.10,
4.11, 4.12, 4.13, 4.16 and 5.1 hereof with respect to the outstanding Notes on
and after the date the conditions set forth below are satisfied (hereinafter,
"Covenant Defeasance"), and the Notes shall thereafter be deemed not
"outstanding" for the purposes of any direction, waiver, consent or declaration
or act of Holders (and the consequences of any thereof) in connection with such
covenants, but shall continue to be deemed "outstanding" for all other purposes
hereunder (it being understood that such Notes shall not be deemed outstanding
for accounting purposes). For this purpose, Covenant Defeasance means that, with
respect to the outstanding Notes, the Company may omit to comply with and shall
have no liability in respect of any term, condition or limitation set forth in
any such covenant, whether directly or indirectly, by reason of any reference
elsewhere herein to any such covenant or by reason of any reference in any such
covenant to any other provision herein or in any other document and such
omission to comply shall not constitute a Default or an Event of Default under
Section 6.1 hereof, but, except as specified above, the remainder of this
Indenture and such Notes shall be unaffected thereby. In addition, upon the
Company's exercise under Section 8.1 hereof of the option applicable to this
Section 8.3 hereof, subject to the satisfaction of the conditions set forth in
Section 8.4 hereof, Sections 6.1(c) through 6.1(f) hereof shall not constitute
Events of Default.
SECTION 8.4. CONDITIONS TO LEGAL OR COVENANT DEFEASANCE.
The following shall be the conditions to the application of
either Section 8.02 or 8.03 hereof to the outstanding Notes:
In order to exercise either Legal Defeasance or Covenant
Defeasance:
(a) the Company must irrevocably deposit or cause to be
deposited with the Trustee, in trust, for the benefit of the Holders,
cash in United States dollars, non-callable Government
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Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if
any, and interest on the outstanding Notes on the stated date for
payment thereof or on the applicable redemption date, as the case may
be, and the Company must specify whether the Notes are being defeased
to maturity or to a particular redemption date;
(b) in the case of an election under Section 8.2 hereof, the
Company shall have delivered to the Trustee an Opinion of Counsel in
the United States reasonably acceptable to the Trustee confirming that
(A) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or (B) since the date of this
Indenture, there has been a change in the applicable federal income tax
law, in either case to the effect that, and based thereon such Opinion
of Counsel shall confirm that, the Holders of the outstanding Notes
will not recognize income, gain or loss for federal income tax purposes
as a result of such Legal Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Legal Defeasance had not
occurred;
(c) in the case of an election under Section 8.3 hereof, the
Company shall have delivered to the Trustee an Opinion of Counsel in
the United States reasonably acceptable to the Trustee confirming that
the Holders of the outstanding Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been
the case if such Covenant Defeasance had not occurred;
(d) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event
of Default resulting from the incurrence of Indebtedness all or a
portion of the proceeds of which will be used to defease the Notes
pursuant to this Article 8 concurrently with such incurrence) or
insofar as Sections 6.1(g) or 6.1(h) hereof is concerned, at any time
in the period ending on the 91st day after the date of deposit;
(e) such Legal Defeasance or Covenant Defeasance shall not
result in a breach or violation of, or constitute a default under, any
material agreement or instrument (other than this Indenture) to which
the Company or any of its Subsidiaries is a party or by which the
Company or any of its Subsidiaries is bound;
(f) the Company shall have delivered to the Trustee an opinion
of counsel to the effect that after the 91st day following the deposit,
the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally;
(g) the Company shall have delivered to the Trustee an
Officers' Certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders over any other
creditors of the Company or the Subsidiary Guarantors with the intent
of defeating, hindering, delaying or defrauding creditors of the
Company, the Subsidiary Guarantors or others; and
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(h) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that all
conditions precedent provided for or relating to the Legal Defeasance
or the Covenant Defeasance have been complied with.
SECTION 8.5. DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN TRUST;
OTHER MISCELLANEOUS PROVISIONS.
Subject to Section 8.6 hereof, all money and non-callable
Government Securities (including the proceeds thereof) deposited with the
Trustee (or other qualifying trustee, collectively for purposes of this Section
8.5, the "Trustee") pursuant to Section 8.4 hereof in respect of the outstanding
Notes shall be held in trust and applied by the Trustee, in accordance with the
provisions of such Notes and this Indenture, to the payment, either directly or
through any Paying Agent (including the Company acting as Paying Agent) as the
Trustee may determine, to the Holders of such Notes of all sums due and to
become due thereon in respect of principal, premium, if any, and interest, but
such money need not be segregated from other funds except to the extent required
by law.
The Company shall pay and indemnify the Trustee against any
tax, fee or other charge imposed on or assessed against the cash or non-callable
Government Securities deposited pursuant to Section 8.4 hereof or the principal
and interest received in respect thereof other than any such tax, fee or other
charge which by law is for the account of the Holders of the outstanding Notes.
Anything in this Article 8 to the contrary notwithstanding,
the Trustee shall deliver or pay to the Company from time to time upon the
request of the Company any money or non-callable Government Securities held by
it as provided in Section 8.4 hereof which, in the opinion of a nationally
recognized firm of independent public accountants expressed in a written
certification thereof delivered to the Trustee (which may be the opinion
delivered under Section 8.4(a) hereof), are in excess of the amount thereof that
would then be required to be deposited to effect an equivalent Legal Defeasance
or Covenant Defeasance.
SECTION 8.6. REPAYMENT TO THE COMPANY.
Any money deposited with the Trustee or any Paying Agent, or
then held by the Company, in trust for the payment of the principal of, premium,
if any, or interest on any Note and remaining unclaimed for two years after such
principal, and premium, if any, or interest has become due and payable shall be
paid to the Company on its request or (if then held by the Company) shall be
discharged from such trust; and the Holder of such Note shall thereafter, as a
secured creditor, look only to the Company for payment thereof, and all
liability of the Trustee or such Paying Agent with respect to such trust money,
and all liability of the Company as trustee thereof, shall thereupon cease;
provided, however, that the Trustee or such Paying Agent, before being required
to make any such repayment, may at the expense of the Company cause to be
published once, in the New York Times and The Wall Street Journal (national
edition), notice that such money remains unclaimed and that, after a date
specified therein, which shall not be less than 30 days from the date of such
notification or publication, any unclaimed balance of such money then remaining
will be repaid to the Company.
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SECTION 8.7. REINSTATEMENT.
If the Trustee or Paying Agent is unable to apply any United
States dollars or non-callable Government Securities in accordance with Section
8.2 or 8.3 hereof, as the case may be, by reason of any order or judgment of any
court or governmental authority enjoining, restraining or otherwise prohibiting
such application, then the Company's obligations under this Indenture and the
Notes shall be revived and reinstated as though no deposit had occurred pursuant
to Section 8.2 or 8.3 hereof until such time as the Trustee or Paying Agent is
permitted to apply all such money in accordance with Section 8.2 or 8.3 hereof,
as the case may be; provided, however, that, if the Company makes any payment of
principal of, premium, if any, or interest on any Note following the
reinstatement of its obligations, the Company shall be subrogated to the rights
of the Holders of such Notes to receive such payment from the money held by the
Trustee or Paying Agent.
ARTICLE 9
AMENDMENT, SUPPLEMENT AND WAIVER
SECTION 9.1. WITHOUT CONSENT OF HOLDERS OF NOTES.
Notwithstanding Section 9.2 of this Indenture, the Company,
the Subsidiary Guarantors and the Trustee may amend or supplement this
Indenture, the Subsidiary Guarantees or the Notes without the consent of any
Holder:
(a) to cure any ambiguity, defect or inconsistency, provided
that such action shall not adversely affect the interests of the
Holders in any material respect;
(b) to provide for uncertificated Notes in addition to or in
place of certificated Notes (provided that the uncertificated Notes are
issued in registered form for purposes of Section 163(f) of the Code,
or in a manner such that the uncertificated Notes are described in
Section 163(f)(2)(B) of the Code) or to alter the provisions of Article
2 hereof (including the related definitions) in a manner that does not
materially adversely affect any Holder;
(c) to provide for the assumption of the Company's and the
Subsidiary Guarantors' obligations to the Holders in the case of a
merger or consolidation not prohibited by this Indenture;
(d) to make any change that would provide any additional
rights or benefits to the Holders or that does not adversely affect the
legal rights hereunder of any Holder; or
(e) to comply with requirements of the SEC in order to effect
or maintain the qualification of this Indenture under the TIA.
Upon the request of the Company accompanied by a resolution of
its Board of Directors authorizing the execution of any such amended or
supplemental Indenture, and upon receipt by the Trustee of the documents
described in Section 7.2 hereof, the Trustee shall join with the Company in the
execution of any amended or supplemental Indenture authorized or permitted by
the terms of this Indenture and to make any further appropriate agreements and
stipulations that may be therein contained,
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but the Trustee shall not be obligated to enter into such amended or
supplemental Indenture that adversely affects its own rights, duties or
immunities under this Indenture or otherwise.
SECTION 9.2. WITH CONSENT OF HOLDERS OF NOTES.
Except as provided below in this Section 9.2, the Company, the
Subsidiary Guarantors and the Trustee may amend or supplement this Indenture
(including Section 3.9, 4.10 and 4.16 hereof) and the Subsidiary Guarantees and
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including
consents obtained in connection with a tender offer or exchange offer for the
Notes), and, subject to Sections 6.4 and 6.7 hereof, any existing Default or
Event of Default (other than a Default or Event of Default in the payment of the
principal of, premium, if any, or interest on the Notes, except a payment
default resulting from an acceleration that has been rescinded) or compliance
with any provision of this Indenture, the Subsidiary Guarantees or the Notes may
be waived with the consent of the Holders of a majority in principal amount of
the then outstanding Notes (including consents obtained in connection with a
tender offer or exchange offer for the Notes).
Upon the request of the Company and each Subsidiary Guarantor
accompanied by a resolution of its Board of Directors authorizing the execution
of any such amended or supplemental Indenture, and upon the filing with the
Trustee of evidence satisfactory to the Trustee of the consent of the Holders of
Notes as aforesaid, and upon receipt by the Trustee of the documents described
in Section 7.2 hereof, the Trustee shall join with the Company and the
Subsidiary Guarantors in the execution of such amended or supplemental Indenture
unless such amended or supplemental Indenture affects the Trustee's own rights,
duties or immunities under this Indenture or otherwise, in which case the
Trustee may in its discretion, but shall not be obligated to, enter into such
amended or supplemental Indenture.
It shall not be necessary for the consent of the Holders of
Notes under this Section 9.2 to approve the particular form of any proposed
amendment or waiver, but it shall be sufficient if such consent approves the
substance thereof.
After an amendment, supplement or waiver under this Section
becomes effective, the Company shall mail to the Holders of Notes affected
thereby a notice briefly describing the amendment, supplement or waiver. Any
failure of the Company to mail such notice, or any defect therein, shall not,
however, in any way impair or affect the validity of any such amended or
supplemental Indenture or waiver. Subject to Sections 6.4 and 6.7 hereof, the
Holders of a majority in aggregate principal amount of the Notes then
outstanding may waive compliance in a particular instance by the Company or the
Subsidiary Guarantors with any provision of this Indenture, the Subsidiary
Guarantees or the Notes. However, without the consent of each Holder affected,
an amendment or waiver may not (with respect to any Notes held by a
non-consenting Holder):
(a) reduce the percentage in principal amount of Notes, the
consent of whose Holders is required for an amendment, supplement or
waiver;
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(b) reduce the principal of or change the fixed maturity of
any Note or alter or waive any of the provisions with respect to the
redemption of the Notes except as provided above with respect to
Sections 3.9, 4.10 and 4.16 hereof;
(c) reduce the rate of or change the time for payment of
interest, including default interest, on any Note;
(d) waive a Default or Event of Default in the payment of
principal of or premium, if any, or interest on the Notes (except a
rescission of acceleration of the Notes by the Holders of at least a
majority in aggregate principal amount of the then outstanding Notes
and a waiver of the payment default that resulted from such
acceleration);
(e) make any Note payable in currency other than that stated
in the Notes;
(f) make any change in the provisions of this Indenture
relating to waivers of past Defaults or the rights of Holders of Notes
to receive payments of principal or premium, if any, or interest on the
Notes;
(g) waive a redemption payment with respect to any Note (other
than a payment required by Sections 4.10 or 4.16 hereof);
(h) release any Subsidiary Guarantor from its obligations
under this Indenture or its Guarantee of the Notes (other than in
accordance with this Indenture);
(g) make any change in Section 6.04 or 6.07 hereof or in the
foregoing amendment and waiver provisions; or
(i) modify the provisions of this Section 9.2.
SECTION 9.3. COMPLIANCE WITH TRUST INDENTURE ACT.
Every amendment or supplement to this Indenture or the Notes
shall be set forth in an amended or supplemental Indenture that complies with
the TIA as then in effect.
SECTION 9.4. REVOCATION AND EFFECT OF CONSENTS.
Until an amendment, supplement or waiver becomes effective, a
consent to it by a Holder of a Note is a continuing consent by the Holder of a
Note and every subsequent Holder of a Note or portion of a Note that evidences
the same debt as the consenting Holder's Note, even if notation of the consent
is not made on any Note. However, any such Holder of a Note or subsequent Holder
of a Note may revoke the consent as to its Note if the Trustee receives written
notice of revocation before the date the waiver, supplement or amendment becomes
effective. An amendment, supplement or waiver becomes effective in accordance
with its terms and thereafter binds every Holder.
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SECTION 9.5. NOTATION ON OR EXCHANGE OF NOTES.
The Trustee may place an appropriate notation about an
amendment, supplement or waiver on any Note thereafter authenticated. The
Company in exchange for all Notes may issue and the Trustee shall authenticate
new Notes that reflect the amendment, supplement or waiver.
Failure to make the appropriate notation or issue a new Note
shall not affect the validity and effect of such amendment, supplement or
waiver.
SECTION 9.6. TRUSTEE TO SIGN AMENDMENTS, ETC.
The Trustee shall sign any amended or supplemental Indenture
authorized pursuant to this Article Nine if the amendment or supplement does not
adversely affect the rights, duties, liabilities or immunities of the Trustee.
The Company may not sign an amendment or supplemental Indenture until the Board
of Directors approves it. In executing any amended or supplemental indenture,
the Trustee shall be entitled to receive and (subject to Section 7.1) shall be
fully protected in relying upon, an Officer's Certificate and an Opinion of
Counsel stating that the execution of such amended or supplemental indenture is
authorized or permitted by this Indenture.
ARTICLE 10
SUBSIDIARY GUARANTEES
SECTION 10.1. SUBSIDIARY GUARANTEE.
Each of the Subsidiary Guarantors hereby, jointly and
severally, fully and unconditionally guarantees to each Holder of a Note
authenticated and delivered by the Trustee and to the Trustee and its successors
and assigns, irrespective of the validity and enforceability of this Indenture,
the Notes or the obligations of the Company hereunder or thereunder, that: (a)
the principal of and interest on the Notes will be promptly paid in full when
due, whether at maturity, by acceleration, redemption or otherwise, and interest
on the overdue principal of and interest on the Notes, if any, if lawful, and
all other obligations of the Company to the Holders or the Trustee hereunder or
thereunder will be promptly paid in full or performed, all in accordance with
the terms hereof and thereof; and (b) in case of any extension of time of
payment or renewal of any Notes or any of such other obligations, the principal
of and interest on the Notes will be promptly paid in full when due or performed
in accordance with the terms of the extension or renewal, whether at stated
maturity, by acceleration or otherwise. Failing payment when due of any amount
so guaranteed or any performance so guaranteed for whatever reason, the
Subsidiary Guarantors will be jointly and severally obligated to pay the same
immediately. The Subsidiary Guarantors hereby agree that their obligations
hereunder shall be unconditional, irrespective of the validity, regularity or
enforceability of the Notes or this Indenture, the absence of any action to
enforce the same, any waiver or consent by any Holder of the Notes with respect
to any provisions hereof or thereof, the recovery of any judgment against the
Company, any action to enforce the same or any other circumstance which might
otherwise constitute a legal or equitable discharge or defense of a Subsidiary
Guarantor. Each Subsidiary Guarantor hereby waives diligence, presentment,
demand of payment, filing of claims with a court in the event of insolvency or
bankruptcy of the Company, any right to require a proceeding first against the
Company, protest, notice and all demands whatsoever and
54
<PAGE>
covenant that this Subsidiary Guarantee will not be discharged except by
complete performance of the obligations contained in the Notes and this
Indenture. If any Holder or the Trustee is required by any court or otherwise to
return to the Company or Subsidiary Guarantors, or any Custodian, Trustee,
liquidator or other similar official acting in relation to either the Company or
Subsidiary Guarantors, any amount paid by any such entity to the Trustee or such
Holder, this Subsidiary Guarantee, to the extent theretofore discharged, shall
be reinstated in full force and effect. Each Subsidiary Guarantor agrees that it
shall not be entitled to any right of subrogation in relation to the Holders in
respect of any obligations guaranteed hereby until payment in full of all
obligations guaranteed hereby. Each Subsidiary Guarantor further agrees that, as
between the Subsidiary Guarantors, on the one hand, and the Holders and the
Trustee, on the other hand, (x) the maturity of the obligations guaranteed
hereby may be accelerated as provided in Article 6 for the purposes of the
Subsidiary Guarantee, notwithstanding any stay, injunction or other prohibition
preventing such acceleration in respect of the obligations guaranteed hereby,
and (y) in the event of any declaration of acceleration of such obligations as
provided in Article 6, such obligations (whether or not due and payable) shall
forthwith become due and payable by the Subsidiary Guarantors for the purpose of
this Subsidiary Guarantee. The Subsidiary Guarantors shall have the right to
seek contribution from any non-paying Subsidiary Guarantor so long as the
exercise of such right does not impair the rights of the Holders under the
Subsidiary Guarantee.
SECTION 10.2. EXECUTION AND DELIVERY OF SUBSIDIARY GUARANTEE.
To evidence its Subsidiary Guarantee set forth in Section
10.1, each Subsidiary Guarantor hereby agrees that a notation on such Subsidiary
Guarantee substantially in the form of Exhibit B, which is part of this
Indenture, shall be endorsed by an officer of such Subsidiary Guarantor on each
Note authenticated and delivered by the Trustee and that this Indenture shall be
executed on behalf of such Subsidiary Guarantor by its President or one of its
Vice Presidents.
Each Subsidiary Guarantor hereby agrees that its Subsidiary
Guarantee set forth in Section 10.1 shall remain in full force and effect
notwithstanding any failure to endorse on each Note a notation of such Note
Guarantee.
If an Officer whose signature is on this Indenture or on the
Subsidiary Guarantee no longer holds that office at the time the Trustee
authenticates the Note on which a Subsidiary Guarantee is endorsed, the
Subsidiary Guarantee shall be valid nevertheless.
The delivery of any Note by the Trustee, after the
authentication thereof hereunder, shall constitute due delivery of the
Subsidiary Guarantee set forth in this Indenture on behalf of the Subsidiary
Guarantors.
SECTION 10.3. GUARANTORS MAY CONSOLIDATE, ETC., ON CERTAIN TERMS.
(a) Except as set forth in Articles 4 and 5, nothing contained
in this Indenture or in any of the Notes shall prevent any consolidation or
merger of a Subsidiary Guarantor with or into the Company or another Subsidiary
Guarantor, or shall prevent any sale or conveyance of the property of a
Guarantor as an entirety, or substantially as an entirety, to the Company,
unless immediately after giving effect to such transaction, a Default or Event
of Default exists.
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(b) Except as set forth in Articles 4 and 5, nothing contained
in this Indenture or in any of the Notes shall prevent any consolidation or
merger of a Subsidiary Guarantor with or into (whether or not such Subsidiary
Guarantor is the surviving Person) another corporation, Person or entity,
whether or not affiliated with such Subsidiary Guarantor, or successive
consolidations or mergers in which a Subsidiary Guarantor or its successor or
successors shall be a party or parties, or shall prevent any sale or conveyance
of the property of a Subsidiary Guarantor as an entirety or substantially as an
entirety or any sale or other disposition of all the capital stock of any
Subsidiary Guarantor, to a corporation other than the Company (whether or not
affiliated with the Subsidiary Guarantor) authorized to acquire and operate the
same if immediately after giving effect to such transaction, no Default or Event
of Default exists; provided, however, that each Subsidiary Guarantor hereby
covenants and agrees that, upon any such consolidation, merger, sale or
conveyance, the Subsidiary Guarantee endorsed on the Notes, and the due and
punctual performance and observance of all of the covenants and conditions of
this Indenture to be performed by such Subsidiary Guarantor, shall be expressly
assumed (in the event that the Subsidiary Guarantor is not the surviving
corporation in the merger), by supplemental indenture satisfactory in form and
substance to the Trustee, executed and delivered to the Trustee, by the
corporation formed by such consolidation or into which the Subsidiary Guarantor
shall have been merged, or by the corporation which shall have acquired such
property. In case of any such consolidation, merger, sale or conveyance and upon
the assumption by the successor corporation, by supplemental indenture, executed
and delivered to the Trustee and satisfactory in form and substance to the
Trustee, of the Subsidiary Guarantee endorsed upon the Notes and the due and
punctual performance of all of the covenants and conditions of this Indenture to
be performed by the Subsidiary Guarantor, such successor corporation shall
succeed to and be substituted for the Subsidiary Guarantor with the same effect
as if it had been named herein as a Subsidiary Guarantor. Such successor
corporation thereupon may cause to be signed any or all of the Subsidiary
Guarantees to be endorsed upon all of the Notes issuable hereunder which
theretofore shall not have been signed by the Company and delivered to the
Trustee. All the Subsidiary Guarantees so issued shall in all respects have the
same legal rank and benefit under this Indenture as the Subsidiary Guarantees
theretofore and thereafter issued in accordance with the terms of this Indenture
as though all of such Subsidiary Guarantees had been issued at the date of the
execution hereof.
SECTION 10.4. RELEASES FOLLOWING SALE OF ASSETS.
If the assets sold in any Asset Sale permitted by this
Indenture include all or substantially all of the assets of any Subsidiary
Guarantor or all of the capital stock of any Subsidiary Guarantor, then such
Subsidiary Guarantor (in the event of a sale or other disposition of all of the
capital stock of such Subsidiary Guarantor) or the corporation acquiring the
property (in the event of a sale or other disposition of all or substantially
all of the assets of a Subsidiary Guarantor) shall be released and relieved of
its obligations under its Subsidiary Guarantee made to any Person that is not an
Affiliate of the Company; provided that in the event of such an Asset Sale, the
Net Proceeds from such sale or other disposition are treated in accordance with
the provisions of Section 4.10 hereof. Upon delivery by the Company to the
Trustee of an Officers' Certificate and an Opinion of Counsel to the effect that
such sale or other disposition was made by the Company in accordance with the
provisions of this Indenture, including without limitation Section 4.10 hereof,
the Trustee shall execute any documents reasonably required in order to evidence
the release of any Subsidiary Guarantor from its obligations under its
Subsidiary Guarantee. Any Subsidiary Guarantor not released from its obligations
under its Subsidiary Guarantee
56
<PAGE>
shall remain liable for the full amount of principal of and interest on the
Notes and for the other obligations of any Subsidiary Guarantor under this
Indenture as provided in this Article 10.
SECTION 10.5. "TRUSTEE" TO INCLUDE PAYING AGENT.
In case at any time any Paying Agent other than the Trustee
shall have been appointed by the Company and be then acting hereunder, the term
"Trustee" as used in this Article 10 shall in such case (unless the context
shall otherwise require) be construed as extending to and including such Paying
Agent within its meaning as fully and for all intents and purposes as if such
Paying Agent were named in this Article 10 in place of the Trustee.
ARTICLE 11
MISCELLANEOUS
SECTION 11.1. TRUST INDENTURE ACT CONTROLS.
If any provision of this Indenture limits, qualifies or
conflicts with the duties imposed by TIA ss.318(c), the imposed duties shall
control.
SECTION 11.2. NOTICES.
Any notice or communication by the Company or the Trustee to
the other is duly given if in writing and delivered in person or mailed by first
class mail (registered or certified, return receipt requested), telex,
telecopier or overnight air courier guaranteeing next day delivery, to the
other's address:
If to the Company:
Delta Financial Corporation
1000 Woodbury Road, Suite 200
Woodbury, New York 11797-9003
Attention: Marc E. Miller
Telecopier No.: (516) 364-9450
If to the Trustee:
The Bank of New York
101 Barclay Street
New York, New York 10286
Attention:
Telex No.:
Telecopier No.:
The Company or the Trustee, by notice to the others may
designate additional or different addresses for subsequent notices or
communications.
57
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All notices and communications (other than those sent to
Holders) shall be deemed to have been duly given: at the time delivered by hand,
if personally delivered; five Business Days after being deposited in the mail,
postage prepaid, if mailed; when answered back, if telexed; when receipt
acknowledged, if telecopied; and the next Business Day after timely delivery to
the courier, if sent by overnight air courier guaranteeing next day delivery.
Any notice or communication to a Holder shall be mailed by
first class mail, certified or registered, return receipt requested, or by
overnight air courier guaranteeing next day delivery to its address shown on the
register kept by the Registrar. Any notice or communication shall also be so
mailed to any Person described in TIA ss. 313(c), to the extent required by the
TIA. Failure to mail a notice or communication to a Holder or any defect in it
shall not affect its sufficiency with respect to other Holders.
If a notice or communication is mailed in the manner provided
above within the time prescribed, it is duly given, whether or not the addressee
receives it.
If the Company mails a notice or communication to Holders, it
shall mail a copy to the Trustee and each Agent at the same time.
Where this Indenture provides for notice in any manner, such
notice may be waived in writing by the Person entitled to receive such notice,
either before or after the event, and such waiver shall be the equivalent of
such notice. Waivers of notice by Holders shall be filed with the Trustee, but
such filing shall not be a condition precedent to the validity of any action
taken in reliance upon such waiver.
SECTION 11.3. COMMUNICATION BY HOLDERS WITH OTHER HOLDERS.
Holders may communicate pursuant to TIA ss. 312(b) with other
Holders with respect to their rights under this Indenture or the Notes. The
Company, the Trustee, the Registrar and anyone else shall have the protection of
TIA ss. 312(c).
SECTION 11.4. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.
Upon any request or application by the Company to the Trustee
to take any action under this Indenture, the Company shall furnish to the
Trustee:
(a) an Officers' Certificate in form and substance reasonably
satisfactory to the Trustee (which shall include the statements set
forth in Section 11.5 hereof) stating that, in the opinion of the
signers, all conditions precedent and covenants, if any, provided for
in this Indenture relating to the proposed action have been satisfied;
and
(b) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee (which shall include the statements set
forth in Section 11.5 hereof) stating that, in the opinion of such
counsel, all such conditions precedent and covenants have been
satisfied.
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SECTION 11.5. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION.
Each certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture (other than a certificate
provided pursuant to TIA ss. 314(a)(4)) shall comply with the provisions of TIA
ss. 314(e) and shall include:
(a) a statement that the Person making such certificate or
opinion has read such covenant or condition;
(b) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(c) a statement that, in the opinion of such Person, he has
made such examination or investigation as is necessary to enable him to
express an informed opinion as to whether or not such covenant or
condition has been satisfied; and
(d) a statement as to whether or not, in the opinion of such
Person, such condition or covenant has been satisfied.
SECTION 11.6. RULES BY TRUSTEE AND AGENTS.
The Trustee may make reasonable rules for action by or at a
meeting of Holders. The Registrar or Paying Agent may make reasonable rules and
set reasonable requirements for its functions.
SECTION 11.7. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND
STOCKHOLDERS.
No director, officer, employee, incorporator or stockholder of
the Company or a Subsidiary Guarantor, as such, shall have any liability for any
obligations of the Company or the Subsidiary Guarantors under the Notes, this
Indenture, the Guarantees or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of the Notes by accepting a
Note waives and releases all such liability. The waiver and release are part of
the consideration for issuance of the Notes.
SECTION 11.8. GOVERNING LAW.
THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE
USED TO CONSTRUE THIS INDENTURE, THE NOTES AND THE SUBSIDIARY GUARANTEES.
SECTION 11.9. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS .
This Indenture may not be used to interpret any other
indenture, loan or debt agreement of the Company or its Subsidiaries or of any
other Person. Any such indenture, loan or debt agreement may not be used to
interpret this Indenture.
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SECTION 11.10. SUCCESSORS AND ASSIGNS.
All agreements of the Company in this Indenture and the Notes
shall bind its successors and assigns. All agreements of the Trustee in this
Indenture shall bind its successors and assigns.
SECTION 11.11. SEVERABILITY.
In case any provision in this Indenture or in the Notes shall
be invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
SECTION 11.12. LEGAL HOLIDAYS.
In any case where any interest payment date, redemption date,
purchase date or stated maturity of any Note shall not be a Business Day, then
(notwithstanding any other provision of this Indenture or the Notes) payment of
interest or principal and premium, if any, need not be made on such date, but
may be made on the next succeeding Business Day with the same force and effect
as if made on the interest payment date, redemption date, purchase date or at
the stated maturity, provided that no interest shall accrue for the period from
and after such interest payment date, redemption date, purchase date or at the
stated maturity, as the case may be.
SECTION 11.13. COUNTERPART ORIGINALS.
The parties may sign any number of copies of this Indenture.
Each signed copy shall be an original, but all of them together represent the
same agreement.
SECTION 11.14. TABLE OF CONTENTS, HEADINGS, ETC.
The Table of Contents, Cross-Reference Table and Headings of
the Articles and Sections of this Indenture have been inserted for convenience
of reference only, are not to be considered a part of this Indenture and shall
in no way modify or restrict any of the terms or provisions hereof.
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SIGNATURES
DATED AS OF JULY __, 1997 DELTA FINANCIAL CORPORATION
BY:
---------------------------------
NAME:
TITLE:
DATED AS OF JULY __, 1997 DELTA FUNDING CORPORATION
BY:
---------------------------------
NAME:
TITLE:
DATED AS OF JULY __, 1997 DF SPECIAL HOLDINGS CORPORATION
BY:
---------------------------------
NAME:
TITLE:
DATED AS OF JULY __, 1997 FIDELITY MORTGAGE, INC.
BY:
---------------------------------
NAME:
TITLE:
<PAGE>
DATED AS OF JULY __, 1997 FIDELITY MORTGAGE (FLORIDA), INC.
BY:
---------------------------------
NAME:
TITLE:
DATED AS OF JULY __, 1997 THE BANK OF NEW YORK
BY:
---------------------------------
NAME:
TITLE:
<PAGE>
EXHIBIT A
(Face of Note)
================================================================================
CUSIP/CINS ____________
____% Senior Notes due 2004
REGISTERED REGISTERED
No. ___ $___________
DELTA FINANCIAL CORPORATION
promises to pay to _________________________________________________
or registered assigns,
the principal sum of $______________ (__________________________ DOLLARS)
on ___________, 2004.
Interest Payment Dates: __________, and __________
Record Dates: __________, and __________
Dated:
DELTA FINANCIAL CORPORATION
BY:
---------------------------------
NAME:
TITLE:
This is one of the Global
Notes referred to in the
within-mentioned Indenture:
THE BANK OF NEW YORK,
as Trustee
By:__________________________________
================================================================================
A-1
<PAGE>
(Back of Note)
DELTA FINANCIAL CORPORATION
___% Senior Notes due 2004
Capitalized terms used herein shall have the meanings assigned to them
in the Indenture referred to below unless otherwise indicated.
1. INTEREST. Delta Financial Corporation, a Delaware corporation (the
"Company"), promises to pay interest on the principal amount of this Note at
___% per annum from July, 1997 until maturity. The Company will pay interest
semi-annually on ___________ and ___________ of each year, or if any such day is
not a Business Day, on the next succeeding Business Day (each an "Interest
Payment Date"). Interest on the Notes will accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the date of
issuance; provided that if there is no existing Default in the payment of
interest, and if this Note is authenticated between a record date referred to on
the face hereof and the next succeeding Interest Payment Date, interest shall
accrue from such next succeeding Interest Payment Date; provided, further, that
the first Interest Payment Date shall be _____________, 199__. Interest will be
computed on the basis of a 360-day year of twelve 30-day months.
2. METHOD OF PAYMENT. The Company will pay interest on the Notes
(except defaulted interest) to the Persons who are registered Holders of Notes
at the close of business on the ___________ or ___________ next preceding the
Interest Payment Date, even if such Notes are cancelled after such record date
and on or before such Interest Payment Date, except as provided in Section 2.12
of the Indenture with respect to defaulted interest. The Notes will be payable
as to principal, premium, if any, and interest at the office or agency of the
Company maintained for such purpose within or without the City and State of New
York, or, at the option of the Company, payment of interest may be made by check
mailed to the Holders at their addresses set forth in the register of Holders,
and provided that payment by wire transfer of immediately available funds will
be required with respect to principal of and interest, premium on, all Notes and
all other Notes the Holders of which shall have provided wire transfer
instructions to the Company or the Paying Agent. Such payment shall be in such
coin or currency of the United States of America as at the time of payment is
legal tender for payment of public and private debts.
3. PAYING AGENT AND REGISTRAR. Initially, _____________, the Trustee
under the Indenture, will act as Paying Agent and Registrar. The Company may
change any Paying Agent or Registrar without notice to any Holder. The Company
or any of its Subsidiaries may act in any such capacity.
4. INDENTURE. The Company issued the Notes under an Indenture dated as
of July, __ 1997 ("Indenture") between the Company, the Subsidiary Guarantors
and the Trustee. The terms of the Notes include those stated in the Indenture
and those made part of the Indenture by reference to the Trust Indenture Act of
1939, as amended (15 U.S. Code ss.ss. 77aaa-77bbbb). The Notes are subject to
all such terms, and Holders are referred to the Indenture and such Act for a
statement of such terms. To the extent any provision of this Note conflicts with
the express provisions of the Indenture, the provisions of the indenture shall
govern and be controlling. The Notes are obligations of the Company limited to
$150,000,000.00 in aggregate principal amount.
A-2
<PAGE>
5. OPTIONAL REDEMPTION. The Company shall not have the option to redeem
the Notes pursuant to Section 3.7 of the Indenture prior to _________, 2001.
Thereafter, the Company shall have the option to redeem the Notes, in whole or
in part, at any time or from time to time, upon not less than 30 nor more than
60 days' prior notice to each Holder, at the following redemption prices
(expressed as percentages of principal amount) plus accrued and unpaid interest
thereon to the applicable redemption date, if redeemed during the twelve-month
period beginning on ___________ of the years indicated below:
Year Percentage
---- ----------
2001.............................................. %
2002.............................................. %
2003 and thereafter .............................. %
Any redemption pursuant to Section 3.7 of the Indenture shall
be made pursuant to the provisions of Sections 3.1 through 3.6 thereof.
6. MANDATORY REDEMPTION. The Company shall not be required to make
mandatory redemption or sinking fund payments with respect to the Notes.
7. REPURCHASE AT OPTION OF HOLDER.
(a) Upon the occurrence of a Change of Control, each Holder of the
Notes will have the right to require the Company to repurchase all or any part
(equal to $1,000 or an integral multiple thereof) of such Holder's Notes (the
"Change of Control Offer") at an offer price in cash equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest thereon, if
any, to the date of purchase. Within ten days following any Change of Control,
the Company shall mail a notice to each Holder setting forth the procedures
governing the Change of Control Offer as required by the Indenture.
(b) If the Company or a Restricted Subsidiary consummates any Asset
Sales, within five days of each date on which the aggregate amount of Excess
Proceeds exceeds $10.0 million, the Company shall commence an offer to all
Holders of Notes (as "Asset Sale Offer") pursuant to Section 3.9 of the
Indenture to purchase the maximum principal amount of Notes that may be
purchased out of the Excess Proceeds at an offer price in cash in an amount
equal to 100% of the principal amount thereof plus accrued and unpaid interest
thereon to the date of purchase, in accordance with the procedures set forth in
the Indenture. To the extent that the aggregate amount of Notes tendered
pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company
(or the Restricted Subsidiary) may use such deficiency for general corporate
purposes. If the aggregate principal amount of Notes surrendered by Holders
thereof exceeds the amount of Excess Proceeds, the Trustee shall select the
Notes to be purchased on a pro rata basis. Holders of Notes that are the subject
of an offer to purchase will receive an Asset Sale Offer from the Company prior
to any related purchase date and may elect to have such Notes purchased by
completing the form entitled "Option of Holder to Elect Purchase" on the reverse
of the Notes.
8. NOTICE OF REDEMPTION. Notice of redemption will be mailed at least
30 days but not more than 60 days before the redemption date to each Holder
whose Notes are to be redeemed at its registered address. Notes in denominations
larger than $1,000 may be redeemed in part but only in whole multiples
A-3
<PAGE>
of $1,000, unless all of the Notes held by a Holder are to be redeemed. On and
after the redemption date interest ceases to accrue on Notes or portions thereof
called for redemption.
9. DENOMINATIONS, TRANSFER, EXCHANGE. The Notes are in registered form
without coupons in denominations of $1,000 and integral multiples of $1,000. The
transfer of Notes may be registered and Notes may be exchanged as provided in
the Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company need not exchange or register the
transfer of any Note or portion of a Note selected for redemption, except for
the unredeemed portion of any Note being redeemed in part. Also, it need not
exchange or register the transfer of any Notes for a period of 15 days before a
selection of Notes to be redeemed or during the period between a record date and
the corresponding Interest Payment Date.
10. PERSONS DEEMED OWNERS. The registered Holder of a Note may be
treated as its owner for all purposes.
11. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain exceptions,
the Indenture or the Notes may be amended or supplemented with the consent of
the Holders of at least a majority in principal amount of the then outstanding
Notes, and any existing default or compliance with any provision of the
Indenture or the Notes may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding Notes. Without the consent
of any Holder of a Note, the Indenture or the Notes may be amended or
supplemented to cure any ambiguity, defect or inconsistency, to provide for
uncertificated Notes in addition to or in place of certificated Notes, to
provide for the assumption of the Company's obligations to Holders of the Notes
in case of a merger or consolidation, to make any change that would provide any
additional rights or benefits to the Holders of the Notes or that does not
adversely affect the legal rights under the Indenture of any such Holder, or to
comply with the requirements of the SEC in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
12. DEFAULTS AND REMEDIES. Events of Default include: (i) default for
30 days in the payment when due of interest on the Notes; (ii) default in
payment when due of principal of or premium, if any, on the Notes when the same
becomes due and payable at maturity, upon redemption (including in connection
with an offer to purchase) or otherwise, (iii) failure by the Company to comply
with Section 4.7, 4.9, 4.10, 4.12, 4.16 or 5.01 of the Indenture; (iv) failure
by the Company for 30 days after notice to the Company by the Trustee or the
Holders of at least 25% in principal amount of the Notes then outstanding to
comply with certain other agreements in the Indenture or the Notes; (v) default
under certain other agreements relating to Indebtedness of the Company which
default constitutes a Payment Default or results in the acceleration of such
Indebtedness prior to its express maturity; (vi) certain final judgments for the
payment of money that remain undischarged for a period of 60 days; (vii) certain
events of bankruptcy or insolvency with respect to the Company or any of its
Significant Subsidiaries; and (viii) certain events relating to the failure of
any Subsidiary Guarantee. If any Event of Default occurs and is continuing, the
Trustee or the Holders of at least 25% in principal amount of the then
outstanding Notes may declare all the Notes to be due and payable.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, all outstanding Notes will become
due and payable without further action or notice. Holders may not enforce the
Indenture or the Notes except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the then outstanding
Notes may direct the Trustee in its exercise of any trust or power. The Trustee
may withhold from Holders of the Notes notice of any continuing Default or Event
of Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest. The Holders of a majority in aggregate
A-4
<PAGE>
principal amount of the Notes then outstanding by notice to the Trustee may on
behalf of the Holders of all of the Notes waive any existing Default or Event of
Default and its consequences under the Indenture except a continuing Default or
Event of Default in the payment of interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement regarding
compliance with the Indenture, and the Company is required upon becoming aware
of any Default or Event of Default, to deliver to the Trustee a statement
specifying such Default or Event of Default.
13. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its individual or
any other capacity, may make loans to, accept deposits from, and perform
services for the Company or its Affiliates, and may otherwise deal with the
Company or its Affiliates, as if it were not the Trustee.
14. NO RECOURSE AGAINST OTHERS. A director, officer, employee,
incorporator or stockholder, of the Company, as such, shall not have any
liability for any obligations of the Company under the Notes or the Indenture or
for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each Holder by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for the issuance
of the Notes.
15. AUTHENTICATION. This Note shall not be valid until authenticated by
the manual signature of the Trustee or an authenticating agent.
16. ABBREVIATIONS. Customary abbreviations may be used in the name of a
Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts
to Minors Act).
17. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Company has caused
CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers
in notices of redemption as a convenience to Holders. No representation is made
as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
The Company will furnish to any Holder upon written request and without
charge a copy of the Indenture. Requests may be made to:
DELTA FINANCIAL CORPORATION
1000 WOODBURY ROAD, SUITE 200
WOODBURY, NEW YORK 11797-9003
ATTENTION: HUGH MILLER
A-5
<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below: (I) or (we) assign and
transfer this Note to
- --------------------------------------------------------------------------------
(Insert assignee's soc. sec. or tax I.D. no.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint
--------------------------------------------------------
to transfer this Note on the books of the Company. The agent may substitute
another to act for him.
Date:
--------------------------------------------------------------------------
Your Signature:
--------------------------------------------
(Sign exactly as your name appears on the face of this Note)
Signature Guarantee:*
The signature on this assignment must correspond with the name as it
appears upon the face of the within Note in every particular, without alteration
or enlargement or any change whatever and must be guaranteed. The signature(s)
should be guaranteed by an eligible guarantor institution (banks, stockholders,
savings and loan associations and credit unions with membership in an approved
signature guarantee medallion program), pursuant to Rule 17Ad-15 of the
Securities Exchange Act of 1934, as amended.
A-6
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company
pursuant to Section 4.10 or 4.16 of the Indenture, check the box below:
/ / Section 4.10 / / Section 4.16
If you want to elect to have only part of the Note purchased by the
Company pursuant to Section 4.10 or Section 4.16 of the Indenture, state the
amount you elect to have purchased:
$
-----------------------
Date: Your Signature:
----------------------- --------------------------------
(Sign exactly as your name appears on the Note)
Tax Identification No.:
------------------------
Signature Guarantee:*
The signature on this assignment must correspond with the name as it
appears upon the face of the within Note in every particular, without alteration
or enlargement or any change whatever and must be guaranteed. The signature(s)
should be guaranteed by an eligible guarantor institution (banks, stockholders,
savings and loan associations and credit unions with membership in an approved
signature guarantee medallion program), pursuant to Rule 17Ad-15 of the
Securities Exchange Act of 1934, as amended.
A-7
<PAGE>
EXHIBIT B
(Form of Subsidiary Guarantee)
SUBSIDIARY GUARANTEE
For value received, each Subsidiary Guarantor, hereby, jointly and
severally with the other Subsidiary Guarantors, fully and unconditionally
guarantees to each Holder of Notes authenticated and delivered by the Trustee
and to the Trustee and its successors and assigns, irrespective of the validity
and enforceability of the Indenture, the Notes or the Obligations of the Company
to the Holders or the Trustee under the Notes or under the Indenture, that: (a)
the principal of, and premium, if any, and interest on the Notes shall be
promptly paid in full when due, whether at maturity, by acceleration, redemption
or otherwise, and interest on overdue principal of interest on the Note, if any,
if lawful and all other Obligations of the Company to the Holders or the Trustee
under the Indenture or under the Notes shall be promptly paid in full or
performed, all in accordance with the terms thereof; and (b) in case of any
extension of time of payment or renewal of any Notes or any of such other
Obligations, the same will be promptly paid in full when due in accordance with
the terms of the extension or renewal, whether at stated maturity, by
acceleration or otherwise. Failing payment when due of any amount so guaranteed,
for whatever reason, the Subsidiary Guarantors will be jointly and severally
obligated to pay the same immediately.
The Obligations of the Subsidiary Guarantors to the Holders and to the
Trustee pursuant to this Subsidiary Guarantee and the Indenture are expressly
set forth in Article 10 of the Indenture, and reference is hereby made to such
Indenture for the precise terms of this Subsidiary Guarantee. The terms of
Article 10 of the Indenture are incorporated herein by reference.
No director, officer, employee, incorporator or stockholder, as such,
past, present or future, of the Subsidiary Guarantor shall have any personal
liability under this Subsidiary Guarantee by reason of his or its status as such
director, officer, employee, incorporator or stockholder.
This is a continuing Subsidiary Guarantee and shall remain in full
force and effect and shall be binding upon each Subsidiary Guarantor and its
respective successors and assigns to the extent set forth in the Indenture until
full and final payment of all of the Company' Obligations under the Notes and
the Indenture and shall inure to the benefit of the successors and assigns of
the Trustee and the Holders and, in the event of any transfer or assignment of
rights by any Holder of or the Trustee, the rights and privileges herein
conferred upon that party shall automatically extend to and be vested in such
transferee or assignee, all subject to the terms and conditions hereof. This a
Subsidiary Guarantee of payment and not a guarantee of collection.
A-8
<PAGE>
In certain circumstances more fully described in the Indenture, any
Subsidiary Guarantor may be released from its liability under this Subsidiary
Guarantee, and any such release will be effective whether or not noted hereon.
This Subsidiary Guarantee shall not be valid or obligatory for any
purpose until the certificate of authentication on the Note upon which this
Subsidiary Guarantee is noted shall have been executed by the Trustee under the
Indenture by the manual signature of one of its authorized officers.
For purposes hereof, each Subsidiary Guarantor's liability will be that
amount from time to time equal to the aggregate liability of such Subsidiary
Guarantor hereunder, but shall be limited to the lesser of (i) the aggregate
amount of the Obligations of the Company under the Notes and the Indenture and
(ii) the amount, if any, which would not have (A) rendered such Subsidiary
Guarantor "insolvent" (as such term is defined in the federal Bankruptcy Law and
in the Debtor and Creditor Law of the State of New York) or (B) left it with
unreasonably small capital at the time its Subsidiary Guarantee of the Notes was
entered into, after giving effect to the incurrence of existing Indebtedness
immediately prior to such time; provided that, it shall be a presumption in any
lawsuit or other proceeding in which such Subsidiary Guarantor is a party that
the amount guaranteed pursuant to its Subsidiary Guarantee is the amount set
forth in clause (i) above unless any creditor, or representative of creditors of
such Subsidiary Guarantor, or debtor in possession or trustee in bankruptcy of
such Subsidiary Guarantor, otherwise proves in such a lawsuit that the aggregate
liability of such Subsidiary Guarantor is limited to the amount set forth in
clause (ii). The Indenture provides that, in making any determination as to the
solvency or sufficiency of capital of a Subsidiary Guarantor in accordance with
the previous sentence, the right of such Subsidiary Guarantor to contribution
from other Subsidiary Guarantors and any other rights such Subsidiary Guarantor
may have, contractual or otherwise, shall be taken into account.
Capitalized terms used herein have the same meanings given in the
Indenture unless otherwise indicated.
A-9
<PAGE>
SIGNATURES
DATED AS OF JULY __, 1997 DELTA FUNDING CORPORATION
BY:
---------------------------------
NAME:
TITLE:
DATED AS OF JULY __, 1997 DF SPECIAL HOLDINGS CORPORATION
BY:
---------------------------------
NAME:
TITLE:
DATED AS OF JULY __, 1997 FIDELITY MORTGAGE, INC.
BY:
---------------------------------
NAME:
TITLE:
<PAGE>
DATED AS OF JULY __, 1997 FIDELITY MORTGAGE (FLORIDA), INC.
BY:
---------------------------------
NAME:
TITLE:
<PAGE>
[Form of Subsidiary Guarantee]
DELTA FUNDING CORPORATION
DF SPECIAL HOLDINGS
FIDELITY MORTGAGE, INC.
FIDELITY MORTGAGE (FLORIDA), INC.
SUBSIDIARY GUARANTEE
For value received, each of Delta Funding Corporation, a Delaware
corporation, DF Special Holdings Corporation, a New York corporation, Fidelity
Mortgage, Inc., a Delaware corporation, and Fidelity Morgage (Florida), Inc., a
Delaware corporation (each a "Subsidiary Guarantor," and together, the
"Subsidiary Guarantors"), hereby, jointly and severally with the other
Subsidiary Guarantors, fully and unconditionally guarantees to each Holder of
Notes authenticated and delivered by the Trustee and to the Trustee and its
successors and assigns, irrespective of the validity and enforceability of the
Indenture, the Notes or the Obligations of the Company to the Holders or the
Trustee under the Notes or under the Indenture, that: (a) the principal of, and
premium, if any, and interest on the Notes shall be promptly paid in full when
due, whether at maturity, by acceleration, redemption or otherwise, and interest
on overdue principal of interest on the Note, if any, if lawful and all other
Obligations of the Company to the Holders or the Trustee under the Indenture or
under the Notes shall be promptly paid in full or performed, all in accordance
with the terms thereof; and (b) in case of any extension of time of payment or
renewal of any Notes or any of such other Obligations, the same will be promptly
paid in full when due in accordance with the terms of the extension or renewal,
whether at stated maturity, by acceleration or otherwise. Failing payment when
due of any amount so guaranteed, for whatever reason, the Subsidiary Guarantors
will be jointly and severally obligated to pay the same immediately.
The Obligations of the Subsidiary Guarantors to the Holders and to the
Trustee pursuant to this Subsidiary Guarantee and the Indenture are expressly
set forth in Article 10 of the Indenture, and reference is hereby made to such
Indenture for the precise terms of this Subsidiary Guarantee. The terms of
Article 10 of the Indenture are incorporated herein by reference.
No director, officer, employee, incorporator or stockholder, as such,
past, present or future, of the Subsidiary Guarantor shall have any personal
liability under this Subsidiary Guarantee by reason of his or its status as such
director, officer, employee, incorporator or stockholder.
This is a continuing Subsidiary Guarantee and shall remain in full
force and effect and shall be binding upon each Subsidiary Guarantor and its
respective successors and assigns to the extent set forth in the Indenture until
full and final payment of all of the Company' Obligations under the Notes and
the Indenture and shall inure to the benefit of the successors and assigns of
the Trustee and the Holders and, in the event of any transfer or assignment of
rights by any Holder of or the Trustee, the rights and privileges herein
conferred upon that party shall automatically extend to and be vested in such
transferee or assignee, all subject to the terms and conditions hereof. This a
Subsidiary Guarantee of payment and not a guarantee of collection.
In certain circumstances more fully described in the Indenture, any
Subsidiary Guarantor may be released from its liability under this Subsidiary
Guarantee, and any such release will be effective whether or not noted hereon.
<PAGE>
This Subsidiary Guarantee shall not be valid or obligatory for any
purpose until the certificate of authentication on the Note upon which this
Subsidiary Guarantee is noted shall have been executed by the Trustee under the
Indenture by the manual signature of one of its authorized officers.
For purposes hereof, each Subsidiary Guarantor's liability will be that
amount from time to time equal to the aggregate liability of such Subsidiary
Guarantor hereunder, but shall be limited to the lesser of (i) the aggregate
amount of the Obligations of the Company under the Notes and the Indenture and
(ii) the amount, if any, which would not have (A) rendered such Subsidiary
Guarantor "insolvent" (as such term is defined in the federal Bankruptcy Law and
in the Debtor and Creditor Law of the State of New York) or (B) left it with
unreasonably small capital at the time its Subsidiary Guarantee of the Notes was
entered into, after giving effect to the incurrence of existing Indebtedness
immediately prior to such time; provided that, it shall be a presumption in any
lawsuit or other proceeding in which such Subsidiary Guarantor is a party that
the amount guaranteed pursuant to its Subsidiary Guarantee is the amount set
forth in clause (i) above unless any creditor, or representative of creditors of
such Subsidiary Guarantor, or debtor in possession or trustee in bankruptcy of
such Subsidiary Guarantor, otherwise proves in such a lawsuit that the aggregate
liability of such Subsidiary Guarantor is limited to the amount set forth in
clause (ii). The Indenture provides that, in making any determination as to the
solvency or sufficiency of capital of a Subsidiary Guarantor in accordance with
the previous sentence, the right of such Subsidiary Guarantor to contribution
from other Subsidiary Guarantors and any other rights such Subsidiary Guarantor
may have, contractual or otherwise, shall be taken into account.
Capitalized terms used herein have the same meanings given in the
Indenture unless otherwise indicated.
<PAGE>
SIGNATURES
DATED AS OF JULY __, 1997 DELTA FUNDING CORPORATION
BY:
-----------------------------------
NAME:
TITLE:
DATED AS OF JULY __, 1997 DF SPECIAL HOLDINGS CORPORATION
BY:
-----------------------------------
NAME:
TITLE:
DATED AS OF JULY __, 1997 FIDELITY MORTGAGE, INC.
BY:
-----------------------------------
NAME:
TITLE:
<PAGE>
DATED AS OF JULY __, 1997 FIDELITY MORTGAGE (FLORIDA), INC.
BY:
-----------------------------------
NAME:
TITLE:
<PAGE>
July 17, 1997
Delta Financial Corporation
1000 Woodbury Road, Suite 200
Woodbury, New York 11797
and the Guarantors listed
on Schedule A
Re: Registration Statement on Form S-1 (No. 333-28643)
Ladies and Gentlemen:
We have acted as counsel to Delta Financial Corporation, a Delaware corporation
(the "Corporation"), and the Guarantors listed on Schedule A hereto (the
"Guarantors") in connection with the preparation and filing of the
above-captioned Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended, relating to the
registration (i) by the Corporation of $150,000,000 aggregate principal amount
of its unsecured senior notes (the "Notes") and (ii) by each of the Guarantors
of certain guarantees of the Notes (each, a "Subsidiary Guarantee" and together
with the Notes, the "Securities"). This opinion letter is Exhibit 5 to the
Registration Statement.
We have examined copies of the Certificate of Incorporation and the Bylaws of
the Corporation and each of the Guarantors, each as amended to date, the
Registration Statement (including the exhibits thereto), the minutes of various
meetings of the Board of Directors of the Corporation and each of the
Guarantors, and the originals, copies or certified copies of all such records of
the Corporation and each of the Guarantors, and all such agreements,
certificates of public officials, certificates of officers and representatives
of the Corporation, each of the Guarantors or others, and such other documents,
papers, statutes and authorities as we have deemed necessary to form the basis
of the opinion hereinafter expressed. In such examination, we have assumed the
genuineness of signatures and the conformity to original documents of the
documents supplied to us as copies. As to various questions of fact material to
such opinion, we have relied upon statements and certificates of officers of the
Corporation, each of the Guarantors and others.
Attorneys involved in the preparation of this opinion are admitted to practice
law in the State of New York and we do not express any opinion herein concerning
any law other than the laws of the State of New York, the federal laws of the
United States of America and the General Corporation Law of the State of
Delaware.
Based upon and subject to the foregoing, we are of the opinion that the
Securities, when sold in accordance with the Registration Statement, will be
validly issued and outstanding.
<PAGE>
July 17, 1997
Page 2
We hereby consent to the reference to our firm under the caption "Legal Matters"
in the Prospectus. We further consent to your filing a copy of this opinion as
an exhibit to the Registration Statement. In giving such consent, we do not
admit hereby that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the rules
and regulations of the Commission thereunder.
Very truly yours,
STROOCK & STROOCK & LAVAN LLP
<PAGE>
SCHEDULE A
Delta Funding Corporation
1000 Woodbury Road, Suite 200
Woodbury, New York 11797
DF Special Holdings Corporation
1000 Woodbury Road, Suite 200
Woodbury, New York 11797
Fidelity Mortgage, Inc.
c/o 1000 Woodbury Road, Suite 200
Woodbury, New York 11797
Fidelity Mortgage (Florida), Inc.
c/o 1000 Woodbury Road, Suite 200
Woodbury, New York 11797
<PAGE>
Consent of KPMG Peat Marwick LLP
The Board of Directors
Delta Financial Corporation:
We consent to the use of our report included herein and to the reference to our
firm under the headings "Selected Consolidated Financial Data" and "Experts" in
the registration statement.
KPMG Peat Marwick LLP
New York, New York
July 17, 1997
<PAGE>
EX-25
================================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) |__|
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
48 Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
------------------------
DELTA FINANCIAL CORPORATION
DELTAL FUNDING CORPORATION
FIDELITY MORTGAGE, INC.
FIDELITY MORTGAGE (FLORIDA), INC.
DF SPECIAL HOLDINGS CORPORATION
(Exact name of obligor as specified in its charter)
Delaware 11-3336165
New York 11-2609517
Delaware 11-3360263
Delaware 11-3360266
Delaware 11-3374284
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1000 Woodbury Road, Suite 200
Woodbury, New York 11797-9003
(Address of principal executive offices) (Zip code)
----------------------
% Senior Notes due 2004
(Title of the indenture securities)
================================================================================
<PAGE>
1. General information. Furnish the following information as to the Trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
- --------------------------------------------------------------------------
Name Address
- --------------------------------------------------------------------------
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y. 12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
2. Affiliations with Obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
16. List of Exhibits.
Exhibits identified in parentheses below, on file with the Commission,
are incorporated herein by reference as an exhibit hereto, pursuant to
Rule 7a-29 under the Trust Indenture Act of 1939 (the "Act") and 17
C.F.R. 229.10(d).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which
contains the authority to commence business and a grant of
powers to exercise corporate trust powers. (Exhibit 1 to
Amendment No. 1 to Form T-1 filed with Registration Statement
No. 33-6215, Exhibits 1a and 1b to Form T-1 filed with
Registration Statement No. 33-21672 and Exhibit 1 to Form T-1
filed with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to
Form T-1 filed with Registration Statement No. 33-31019.)
-2-
<PAGE>
6. The consent of the Trustee required by Section 321(b) of the
Act. (Exhibit 6 to Form T-1 filed with Registration
Statement No. 33-44051.)
7. A copy of the latest report of condition of the Trustee
published pursuant to law or to the requirements of its
supervising or examining authority.
-3-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New
York, a corporation organized and existing under the laws of the State of New
York, has duly caused this statement of eligibility to be signed on its behalf
by the undersigned, thereunto duly authorized, all in The City of New York, and
State of New York, on the 16th day of July, 1997.
THE BANK OF NEW YORK
By: /s/ Walter N. Gitlin
---------------------------
Name: Walter N. Gitlin
Title: Vice President
-4-
<PAGE>
Consolidated Report of Condition of
THE BANK OF NEW YORK
of 48 Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business March 31, 1997,
published in accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act.
Dollar Amounts
ASSETS in Thousands
Cash and balances due from depos-
itory institutions:
Noninterest-bearing balances and
currency and coin .................. $ 8,249,820
Interest-bearing balances .......... 1,031,026
Securities:
Held-to-maturity securities ........ 1,118,463
Available-for-sale securities ...... 3,005,838
Federal funds sold and Securities pur-
chased under agreements to resell...... 3,100,281
Loans and lease financing
receivables:
Loans and leases, net of unearned
income .................32,895,077
LESS: Allowance for loan and
lease losses ..............633,877
LESS: Allocated transfer risk
reserve........................429
Loans and leases, net of unearned
income, allowance, and reserve 32,260,771
Assets held in trading accounts ...... 1,715,214
Premises and fixed assets (including
capitalized leases) ................ 684,704
Other real estate owned .............. 21,738
Investments in unconsolidated
subsidiaries and associated
companies .......................... 195,761
Customers' liability to this bank on
acceptances outstanding ............ 1,152,899
Intangible assets .................... 683,503
Other assets ......................... 1,526,113
-----------
Total assets ......................... $54,746,131
===========
LIABILITIES
Deposits:
In domestic offices ................ $25,614,961
Noninterest-bearing ......10,564,652
Interest-bearing .........15,050,309
In foreign offices, Edge and
Agreement subsidiaries, and IBFs ... 15,103,615
Noninterest-bearing .........560,944
Interest-bearing .........14,542,671
Federal funds pruchased and Securities
sold under agreements to repurchase. 2,093,286
Demand notes issued to the U.S.
Treasury ........................... 239,354
Trading liabilities .................. 1,399,064
Other borrowed money:
With remaining maturity of one year
or less .......................... 2,075,092
With remaining maturity of more than
one year ......................... 20,679
Bank's liability on acceptances exe-
cuted and outstanding .............. 1,160,012
Subordinated notes and debentures .... 1,014,400
Other liabilities .................... 1,840,245
-----------
Total liabilities .................... 50,560,708
-----------
EQUITY CAPITAL
Common stock ........................ 942,284
Surplus ............................. 731,319
Undivided profits and capital
reserves .......................... 2,544,303
Net unrealized holding gains
(losses) on available-for-sale
securities ........................ ( 19,449)
Cumulative foreign currency transla-
tion adjustments .................. ( 13,034)
------------
Total equity capital ................ 4,185,423
-----------
Total liabilities and equity
capital ........................... $54,746,131
===========
I, Robert E. Keilman, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of Governors
of the Federal Reserve System and is true to the best of my knowledge and
belief.
Robert E. Keilman
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
Alan R. Griffith )
J. Carter Bacot )Directors
Thomas A. Renyi )
