<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 10, 1996
REGISTRATION NO. 333-10223
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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MATRIX CAPITAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
COLORADO 6162 84-1233716
(STATE OR OTHER (PRIMARY INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE IDENTIFICATION NO.)
INCORPORATION OR NUMBER)
ORGANIZATION)
1380 LAWRENCE STREET, SUITE 1410 GUY A. GIBSON
DENVER, COLORADO 80204 PRESIDENT
(303) 595-9898 MATRIX CAPITAL CORPORATION
(ADDRESS, INCLUDING ZIP CODE, AND 1380 LAWRENCE STREET, SUITE 1410
TELEPHONE NUMBER, INCLUDING AREA CODE, DENVER, COLORADO 80204
OF REGISTRANT'S PRINCIPAL EXECUTIVE (303) 595-9898
OFFICES AND PRINCIPAL PLACE OF (NAME, ADDRESS, INCLUDING ZIP CODE,
BUSINESS) AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
----------------
COPIES TO:
RONALD J. FRAPPIER, ESQ. GORDON M. BAVA, P.C.
JENKENS & GILCHRIST, A PROFESSIONAL MANATT, PHELPS & PHILLIPS, LLP
CORPORATION 11355 W. OLYMPIC BOULEVARD
1445 ROSS AVENUE, SUITE 3200 LOS ANGELES, CALIFORNIA 90064
DALLAS, TEXAS 75202
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement 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. [X]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THIS PRELIMINARY PROSPECTUS AND THE INFORMATION CONTAINED HEREIN ARE SUBJECT +
+TO COMPLETION OR AMENDMENT. THESE SECURITIES MAY NOT BE SOLD, NOR MAY OFFERS +
+TO BUY BE ACCEPTED, PRIOR TO THE TIME THE PROSPECTUS IS DELIVERED IN FINAL +
+FORM. UNDER NO CIRCUMSTANCES SHALL THIS PRELIMINARY PROSPECTUS CONSTITUTE AN +
+OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY +
+SALE OF THESE SECURITIES, IN ANY JURISDICTION IN WHICH SUCH OFFER, +
+SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION +
+UNDER THE SECURITIES LAWS OF SUCH JURISDICTION. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to completion, dated October 10, 1996
Prospectus
dated , 1996
1,750,000 Shares
[LOGO]
Common Stock
All of the shares of common stock, par value $.0001 per share (the "Common
Stock"), of Matrix Capital Corporation, a Colorado corporation (the "Company"),
offered hereby are being issued and sold by the Company.
Prior to the offering, there has been no public market for the Common Stock. It
is currently estimated that the initial public offering price will be between
$9.00 and $11.00 per share. See "Underwriting" for a discussion of the factors
to be considered in determining the initial public offering price. The Common
Stock has been approved for quotation on the Nasdaq National Market under the
symbol "MTXC."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR OTHERWISE.
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.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
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<S> <C> <C> <C>
Per Share................................... $ $ $
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Total (3)................................... $ $ $
</TABLE>
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities under the Securities Act of 1933, as amended (the "Securities
Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $450,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of 262,500 additional shares of Common Stock solely to cover
over-allotments, if any, at the Price to Public, less Underwriting
Discount. If the Underwriters exercise this option in full, the total Price
to Public, Underwriting Discount and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
The shares of Common Stock are offered by the several Underwriters subject to
prior sale when, as and if delivered to and accepted by the Underwriters and
subject to their right to reject orders in whole or in part. It is expected
that certificates representing such shares of Common Stock will be made
available for delivery at the offices of Piper Jaffray Inc. in Minneapolis,
Minnesota on or about , 1996.
Piper Jaffray inc.
Keefe, Bruyette & Woods, Inc.
Peacock, Hislop, Staley & Given, Inc.
<PAGE>
MATRIX CAPITAL CORPORATION COMBINES THE SPECIALIZED FINANCIAL
SERVICES EXPERTISE OF ITS OPERATING SUBSIDIARIES TO CREATE
REVENUE ENHANCING OPPORTUNITIES WITHIN THE MORTGAGE SERVICING,
MORTGAGE SERVICING BROKERAGE, MORTGAGE BANKING, BANKING AND REAL
ESTATE MANAGEMENT INDUSTRIES.
[LOGO OF UNITED [LOGO OF MATRIX
FINANCIAL] FINANCIAL]
[LOGO OF MATRIX CAPITAL
CORPORATION]
[LOGO OF MATRIX [LOGO OF USS]
BANK]
[LINES GO FROM MATRIX CAPITAL CORPORATION LOGO TO EACH LOGO OF THE
SUBSIDIARIES]
----------------
THE COMPANY INTENDS TO FURNISH ITS SHAREHOLDERS WITH ANNUAL REPORTS
CONTAINING AUDITED FINANCIAL STATEMENTS AND A REPORT THEREON BY INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS.
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET,
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED,
MAY BE DISCONTINUED AT ANY TIME.
<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
otherwise indicated, all information in this Prospectus (i) assumes no exercise
of the Underwriters' over-allotment option and (ii) reflects the 3.75-for-one
split of the Common Stock effected as a dividend that was declared and paid on
September 19, 1996. Unless the context requires otherwise, all references
herein to the "Company" refer to Matrix Capital Corporation ("Matrix Capital")
and its subsidiaries (the "Subsidiaries") and predecessors collectively.
THE COMPANY
OVERVIEW. Matrix Capital Corporation is a specialized financial services
company that, through its Subsidiaries, focuses on mortgage merchant banking by
purchasing and selling residential mortgage loans and residential mortgage
servicing rights; offering brokerage, consulting and analytical services to
other financial services companies and financial institutions; servicing
residential mortgage portfolios for investors; originating residential
mortgages; and providing real estate management and disposition services. Based
upon management's experience within the industries in which the Company
operates, the Company believes that its structure of combining a mortgage
banking firm, a mortgage servicing brokerage and consulting firm, a federally
chartered banking institution and a real estate management and disposition firm
is unique to the financial services industry. This unique structure creates
revenue enhancing relationships among the Subsidiaries.
The Company is a broker of mortgage servicing rights serving a nationwide
client base and in 1995 brokered the sale of mortgage loan servicing portfolios
totaling $32.6 billion in outstanding principal balances. As a result of this
volume of brokerage activity, the Company has access to a wide array of
information relating to the mortgage banking industry, including emerging
market trends, prevailing market prices, pending regulatory changes and changes
in levels of supply and demand. Consequently, the Company is able to identify
certain types of mortgage servicing portfolios that are well suited to its
particular servicing platform and unique corporate structure. The Company, for
example, has focused its mortgage servicing acquisition strategy on seasoned
loans having lower principal and higher custodial escrow balances than newly
originated mortgage loans. Mortgage servicing rights on these types of loans
are generally not attractive to many market participants. However, the Company
believes that given the prevailing pricing for such mortgage servicing rights
and the Company's ability to hold the non-interest bearing custodial escrow
accounts at its federal bank subsidiary, it has been able to achieve attractive
returns on investment in such mortgage servicing rights.
Consolidated net income for the year ended December 31, 1995, and for the six
months ended June 30, 1996, was $3.6 million and $1.2 million, respectively,
resulting in an annualized return on average equity of 51.4% and 25.2%,
respectively. As of June 30, 1996, the Company had consolidated assets of
$204.2 million and shareholders' equity of $10.6 million.
HISTORY OF THE COMPANY. Although Matrix Capital was formed in 1993, the
history of the Company traces back to the formation of United Financial, Inc.
("United Financial") in 1989. United Financial was formed by two of the
Company's principal shareholders to broker mortgage loan servicing rights and
became an approved mortgage loan servicing broker for the Resolution Trust
Corporation (the "RTC"). In 1990, one of the founders of United Financial
divested himself of his interest in United Financial to form Matrix Financial
Services Corporation ("Matrix Financial"), which was established through the
acquisition of an existing mortgage banking company. Matrix Financial initially
focused on the acquisition of mortgage loan servicing portfolios from the RTC
and the Federal Deposit Insurance Corporation (the "FDIC") as part of their
disposition of insolvent thrifts and banks during the early 1990s. In June
1993, Matrix Capital was formed when the founding shareholders of United
Financial and Matrix Financial exchanged all of the outstanding capital stock
of those two entities for shares of Matrix Capital. The Company acquired Matrix
Capital Bank ("Matrix Bank"), a
3
<PAGE>
federal savings bank, in late 1993 in order to capture the benefit of the
custodial escrow account balances relating to the Company's mortgage servicing
portfolio and to engage in the purchase and sale of bulk residential mortgage
loan portfolios. In order to add a source of additional non-interest revenue,
the Company formed United Special Services, Inc. ("USS") in June 1995 to
provide real estate management and disposition services to the Company and
other mortgage companies and financial institutions.
THE SUBSIDIARIES. The Company's core business operations are conducted
through its four principal operating Subsidiaries:
United Financial. United Financial provides brokerage and consulting services
to financial institutions and financial services companies in the mortgage
banking industry. These services include the brokering and analysis of
residential mortgage loan servicing rights, corporate and mortgage loan
servicing portfolio valuations (which includes the complex valuation and
analysis required under the recently-adopted Statement of Financial Accounting
Standards No. 122, Accounting for Mortgage Servicing Rights ("FAS 122")), and,
to a lesser extent, consultation and brokerage services in connection with
mergers and acquisitions of mortgage banking entities. United Financial
provides brokerage services to several of the nation's largest financial
institutions, such as Banc One Mortgage Corporation, Chase Manhattan Mortgage
Corporation and Mellon Mortgage Corporation. During 1995 and the first six
months of 1996, United Financial brokered the sale of 103 and 48 mortgage loan
servicing portfolios totaling $32.6 billion and $12.6 billion in outstanding
mortgage loan principal balances, respectively.
Matrix Financial. Matrix Financial acquires residential mortgage loan
servicing rights on a nationwide basis through purchases in the secondary
market, services the loans underlying these rights and originates mortgage
loans through its wholesale loan origination network. As of June 30, 1996,
Matrix Financial serviced 26,391 borrower accounts representing $1.8 billion in
principal balances (including $439.5 million in subservicing for non-affiliates
of the Company), the majority of which were seasoned loans having lower
principal and higher custodial escrow balances than newly originated mortgage
loans. See "Business--Residential Loan Servicing Activities--Residential
Mortgage Loan Servicing." As a servicer of mortgage loans, Matrix Financial is
required to establish custodial escrow accounts for the deposit of borrowers'
payments, which may include principal, interest, taxes and insurance. These
payments are held at Matrix Bank. During the six months ended June 30, 1996,
the custodial escrow accounts at Matrix Bank averaged $27.6 million in the
aggregate. For the six months ended June 30, 1996, Matrix Financial originated
$373.0 million in wholesale mortgage loans through its regional production
offices located in Atlanta, Denver and Phoenix. The loans originated by Matrix
Financial on a wholesale basis are typically sold in the secondary market.
Matrix Bank. With branches in Las Cruces, New Mexico and Sun City, Arizona,
Matrix Bank serves its local communities by providing a broad range of personal
and business depository services, offering residential and consumer loans, and
providing, on a limited basis, commercial real estate loans. Matrix Bank also
holds the non-interest bearing custodial escrow deposits related to the
residential mortgage loan servicing portfolio serviced by Matrix Financial.
These custodial escrow deposits, as well as other traditional deposits, are
used to fund bulk purchases of mortgage loan portfolios throughout the United
States, a substantial portion of which are subserviced by Matrix Financial
following their purchase. Maintaining custodial escrow deposits at Matrix Bank
allows the Company to achieve returns historically greater than could have been
realized had the Company used the custodial escrow deposits as compensating
balances to reduce the effective borrowing cost on its warehouse credit
facilities. As of June 30, 1996, Matrix Bank was deemed to be "well-
capitalized" under applicable regulatory standards and had total assets of
$146.7 million, including loans aggregating $106.4 million. In May 1996, a
subsidiary of Matrix Bank, Sterling Finance Co., Inc. ("Sterling"), purchased
substantially all of the assets of a Denver-based originator and seller of sub-
prime automobile retail installment sales contracts as a means of diversifying
the Company's sources of revenue. Sterling sells substantially all of its
automobile retail installment sales contracts through conduits in the secondary
market within 30 to 60 days after their origination or purchase, thereby
minimizing credit risk to the Company. To date, the operations of Sterling have
not been material to those of the Company.
4
<PAGE>
United Special Services. USS provides real estate management and disposition
services to financial services companies and financial institutions. In
addition to the unaffiliated clients currently served by USS, Matrix Financial
uses USS exclusively in handling the disposition of its foreclosed real estate.
In addition, USS provides limited collateral valuation opinions to clients,
such as the Federal Home Loan Mortgage Corporation, that are interested in
assessing the value of the collateral underlying mortgage loans, as well as to
clients such as Matrix Bank and other third-party mortgage loan buyers
evaluating potential bulk purchases of mortgage loans.
BUSINESS STRATEGY. The Company's business strategy is to:
. cultivate the revenue-enhancing relationships among the Subsidiaries by
sharing knowledge, information and business opportunities;
. expand significantly the residential mortgage loan servicing portfolio of
the Company within identified niches, thereby increasing non-interest
income, improving operational efficiencies and increasing custodial
escrow deposits; and
. diversify its revenue sources through development of new business lines
and potential acquisitions of financial services businesses that
management believes are complementary to its existing business.
To accomplish this strategy, the Company has established an infrastructure,
including management information systems, capable of servicing significantly
more residential mortgage loans than it currently services, formed USS,
purchased the on-going business of an originator and seller of sub-prime
automobile retail installment sales contracts and implemented a new loan
program to complement Matrix Financial's existing wholesale loan origination
capabilities.
OTHER INFORMATION. The Company is a unitary thrift holding company that was
incorporated in Colorado in June 1993. Its principal executive offices are
located at 1380 Lawrence Street, Suite 1410, Denver, Colorado 80204, and its
telephone number is (303) 595-9898.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company...... 1,750,000 shares (1)
Common Stock to be outstanding after the
offering................................ 5,638,939 shares (2)
Use of proceeds.......................... The Company intends to use the net
proceeds from the offering to reduce
the balances outstanding on certain
of the Company's revolving line of
credit facilities. See "Use of
Proceeds."
Nasdaq National Market symbol............ MTXC
</TABLE>
- --------
(1) The Company has committed to direct an aggregate of not more than 150,000
shares of Common Stock to be issued and sold in this offering to certain
directors and/or employees of the Company and to the holders of certain of
the Company's debt instruments. See "Description of Capital Stock--
Registration Rights; Rights of First Refusal."
(2) Excludes an aggregate of (i) 525,000 shares of Common Stock reserved for
issuance under the Company's 1996 Amended and Restated Stock Option Plan
(the "1996 Stock Option Plan"), including 79,500 shares subject to
outstanding options at an exercise price of $5.13 per share and 129,600
shares subject to outstanding options at an exercise price equal to the
Price to Public set forth on the cover page of this Prospectus, (ii)
125,000 shares of Common Stock reserved for issuance under the 1996
Employee Stock Purchase Plan (the "Purchase Plan") and (iii) shares of
Common Stock issuable to certain of the Underwriters upon exercise of
warrants to be issued upon consummation of the offering. See "Management--
Stock Option Plan," "--Employee Stock Purchase Plan" and "Description of
Capital Stock--Underwriters Warrants."
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF AND FOR THE
AS OF AND FOR THE SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------- ----------------------
1993(1) 1994 1995 1995 1996
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<S> <C> <C> <C> <C> <C>
OPERATING DATA
Net interest income be-
fore provision for loan
losses................. $ 944 $ 3,989 $ 3,536 $ 1,662 $ 2,632
Provision for loan loss-
es..................... 15 216 401 85 152
---------- ---------- ---------- ---------- ----------
Net interest income af-
ter provision for loan
losses................. 929 3,773 3,135 1,577 2,480
Non-interest income:
Loan administration.... 6,427 6,926 7,749 3,508 4,632
Brokerage.............. 2,132 4,017 4,787 2,958 1,947
Gain on sale of loans.. 2,361 1,590 3,272 1,320 852
Gain on sale of mort-
gage servicing
rights................ 38 684 1,164 190 1,091
Loan origination(2).... 221 1,294 2,069 440 194
Other.................. 466 487 781 290 408
---------- ---------- ---------- ---------- ----------
Total non-interest in-
come.................. 11,645 14,998 19,822 8,706 9,124
Non-interest expenses... 10,464 14,279 17,136 7,759 9,525
---------- ---------- ---------- ---------- ----------
Income before income
taxes.................. 2,110 4,492 5,821 2,524 2,079
Income taxes(3)......... 404 1,846 2,260 970 840
---------- ---------- ---------- ---------- ----------
Net income.............. $ 1,706 $ 2,646 $ 3,561 $ 1,554 $ 1,239(4)
========== ========== ========== ========== ==========
Net income per common
and common equivalent
share(5)............... $ .71 $ .91 $ .40 $ .32
Pro forma net in-
come(6)................ $ 1,266
Pro forma net income per
common and common
equivalent share(6).... .35
Weighted average common
and common equivalent
shares outstanding..... 3,596,251 3,750,001 3,927,629 3,927,629 3,927,629
Cash dividends.......... $ 88 $ -- $ -- $ -- $ --
BALANCE SHEET DATA
Total assets............ $ 95,747 $ 112,051 $ 175,915 $ 145,445 $ 204,244
Total loans (excluding
allowance for loan
losses)................ 77,034 90,068 138,791 120,198 139,786
Allowance for loan loss-
es..................... 538 728 943 773 1,058
Nonperforming loans(7).. 853 3,314 5,538 5,459 4,092
Mortgage servicing
rights................. 1,818 6,183 13,817 10,586 10,587
Foreclosed real es-
tate(7)................ 726 543 835 534 1,093
Deposits................ 45,517 41,910 48,877 44,852 73,509
Custodial escrow bal-
ances.................. 31,794 24,687 27,011 35,275 26,689
FHLB borrowings......... -- 14,600 19,000 5,200 36,400
Borrowed money.......... 8,791 18,438 65,093 46,494 52,089
Total shareholders' eq-
uity................... 3,030 5,676 9,338 7,331 10,577
OPERATING RATIOS AND
OTHER SELECTED DATA
Return on average as-
sets(8)(9)............. 4.98% 2.69% 2.38% 2.46% 1.23%
Return on average equi-
ty(8)(9)............... 88.44 58.49 51.38 51.11 25.17
Average equity to aver-
age assets(8).......... 5.63 4.60 4.63 4.81 4.88
Net interest mar-
gin(8)(9)(10).......... 4.15 4.63 2.81 3.13 3.08
Operating efficiency ra-
tio(9)(11)............. 83.22 76.07 74.64 75.45 82.08
Total amount of loans
purchased.............. $ 32,231 $ 80,048 $ 91,774 $ 32,367 $ 65,262
Balance of owned servic-
ing portfolio (end of
period)................ 1,007,286 1,041,785 1,596,385 1,392,133 1,362,444
Wholesale loan origina-
tion volume............ 126,200 183,130 388,937 116,329 373,024
LOAN PERFORMANCE RATIOS
Nonperforming
loans/total loans(7)... 1.11% 3.68% 3.99% 4.54% 2.93%
Nonperforming
assets/total as-
sets(7)................ 1.65 3.44 3.62 4.12 2.54
Net loan charge
offs/average
loans(8)(9)............ 0.18 0.03 0.15 0.04 0.02
Allowance for loan
losses/total loans..... 0.70 0.81 0.68 0.64 0.76
Allowance for loan
losses/nonperforming
loans.................. 63.07 21.97 17.03 14.16 25.86
</TABLE>
6
<PAGE>
- --------
(1) The Company acquired all of the outstanding capital stock of Matrix Bank
on September 23, 1993. The operations of Matrix Bank have been included in
the consolidated operations of the Company from the date of acquisition.
(2) On January 1, 1995, the Company adopted FAS 122. Since FAS 122 prohibits
retroactive application, the historical accounting results for 1995 and
1996 are not directly comparable to the results for prior periods. For a
discussion of FAS 122, see "Regulation and Supervision--Miscellaneous--FAS
122."
(3) Prior to the formation of Matrix Capital in June 1993, Matrix Financial
and United Financial had elected for certain periods to be taxed under the
provisions of subchapter "s" of the Internal Revenue Code of 1986, as
amended (the "Code"), and accordingly did not pay income taxes on their
respective earnings; instead the shareholders of Matrix Financial and
United Financial were liable for such taxes. As a result, there is no
income tax provision for earnings during the periods in which subchapter
"s" treatment had been elected.
(4) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Comparison of Results of Operations for the Six
Months Ended June 30, 1996 and 1995--Loan Origination Income" for a
discussion of the impact on net income of a secondary marketing loss
incurred in March 1996.
(5) Net income per common and common equivalent share is based on the weighted
average number of common shares outstanding during each period and the
dilutive effect, if any, of stock options outstanding. There are no other
dilutive securities.
(6) Pro forma net income and pro forma net income per share are presented for
periods in which the Company was not a taxable entity as a result of its
subchapter "s" election. The pro forma net income assumes an effective tax
rate of 40%. Pro forma net income per share is computed by dividing pro
forma net income by the weighted average number of shares of Common Stock
and Common Stock equivalents outstanding during the year.
(7) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Asset and Liability Management--Nonperforming
Assets" for a discussion of the impact of certain bulk purchases of
mortgage loan portfolios on the level of nonperforming loans and
foreclosed real estate.
(8) Calculations are based on average daily balances where available and
monthly averages otherwise.
(9) Ratios for the six months ended June 30, 1995 and 1996 have been
calculated on an annualized basis.
(10) Net interest margin has been calculated by dividing net interest income
before loan loss provision by average interest-earning assets.
(11) The operating efficiency ratio has been calculated by dividing non-
interest expense by operating income (net interest income plus non-
interest income).
7
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risk factors, in addition to the other information contained in this
Prospectus, in evaluating an investment in the Common Stock offered hereby.
LIMITED OPERATING HISTORY
The Company was formed in 1993 to combine the operations of Matrix Financial
and United Financial, which were formed in 1990 and 1989, respectively. The
Company purchased Matrix Bank in 1993, formed USS as a start-up operation in
1995 and purchased the assets relating to Sterling's business operations in
1996. This series of combinations, purchases and formations has involved the
integration of the operations of companies that previously operated
independently or, in the case of USS, not at all. Consequently, the Company
has a limited operating history under its existing corporate structure upon
which prospective investors may base an evaluation of its performance. There
can be no assurance that the Company will not encounter significant
difficulties in integrating operations acquired or commenced in the future,
including the recently acquired sub-prime automobile loan origination
business. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Sub-Prime Automobile Lending."
POTENTIAL ADVERSE IMPACT OF FLUCTUATING INTEREST RATES
RESIDENTIAL MORTGAGE LOAN SERVICING RIGHTS. Owning residential mortgage loan
servicing rights carries interest rate risk because the total amount of
servicing fees earned, as well as the amortization of the investment in the
servicing rights, fluctuates based on loan prepayments (affecting the expected
average life of a portfolio of residential mortgage servicing rights). The
rate of prepayment of mortgage loans may be influenced by changing national
and regional economic trends, such as recessions or depressed real estate
markets, as well as the difference between interest rates on existing mortgage
loans relative to prevailing mortgage rates. During periods of declining
interest rates, many borrowers refinance their mortgage loans. Accordingly,
prepayments of mortgage loans increase and the loan administration fee income
related to the mortgage loan servicing rights corresponding to a mortgage loan
ceases as underlying loans are prepaid. Consequently, the market value of
portfolios of mortgage loan servicing rights tends to decrease during periods
of declining interest rates, since greater prepayments can be expected. The
income derived from and the market value of the Company's servicing portfolio,
therefore, may be adversely affected during periods of declining interest
rates. See "--Risks Associated with General Economic Conditions" and
"Business--Residential Mortgage Loan Origination--Loan Servicing."
ASSET AND LIABILITY MANAGEMENT. The Company's earnings depend in part upon
the level of its net interest income. Net interest income is the difference
between the interest income received from interest-earning assets and the
interest expense incurred in connection with interest-bearing liabilities.
Accordingly, the Company is vulnerable to an increase in interest rates to the
extent that its interest-earning assets, such as mortgage loans, have longer
effective maturities than, or do not adjust as quickly as, its interest-
bearing liabilities. In a rising interest rate environment, such as that
experienced in the early part of 1996, interest rates paid to depositors and
on borrowings of the Company may rise more quickly than rates earned on the
Company's loan portfolio. Under such circumstances, material and prolonged
increases in interest rates generally would materially and adversely affect
net interest income and the value of interest-earning assets, while material
and prolonged decreases in interest rates generally would have a favorable
effect on net interest income and the value of interest-earning assets.
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
mortgage loans held prior to sale and the interest paid by the Company for
funds advanced under the Company's warehouse lines of credit to purchase such
mortgage loans. The process of balancing the maturities of the Company's
assets and liabilities necessarily involves estimates as to how changes in the
general level of interest rates will impact the yields earned on assets and
the rates paid on liabilities. These estimates may prove to be inaccurate. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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PIPELINE LOANS. Secondary marketing losses on sales of originated mortgage
loans may result from changes in interest rates from the time the interest
rate on the customer's mortgage loan application is established to the time
the Company sells the loan. Such a change in interest rates could result in a
loss upon the sale of such loans. In order to hedge this risk and to minimize
the effect of interest rate changes on the sale of originated loans, the
Company commits to sell mortgage loans to investors for delivery at a future
time for a stated price. At any given time, the Company has committed to sell
substantially all of its mortgage loans that are closed and a percentage of
the mortgage loans that are not yet closed but for which the interest rate has
been established ("pipeline loans").
To manage the interest rate risk of the Company's pipeline loans, the
Company continuously projects the percentage of the pipeline loans it expects
to close and, on the basis of such projections, enters into forward
commitments to sell such loans. If an unanticipated change in interest rates
occurs, the actual percentage of mortgage loans that close may differ from the
projected percentage. The resulting mismatch of commitments to originate loans
and commitments to sell loans may have an adverse effect on the results of
operations of the Company. A sudden increase in interest rates can cause a
higher percentage of mortgage loans to close than projected. To the degree
this may not have been anticipated, the Company may not have made commitments
to sell these additional loans and consequently may incur significant losses
upon their sale, adversely affecting results of operations. On the other hand,
if a lower percentage of mortgage loans close than was projected, due to a
sudden decrease in interest rates or otherwise, the Company may have committed
to sell more loans than actually close and as a result may incur significant
losses in fulfilling these commitments, adversely affecting results of
operations. This risk is greatest during times of high interest rate
volatility. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Comparison of Results of Operations for the Six
Months Ended June 30, 1996 and 1995--Loan Origination" and "Business--
Residential Mortgage Loan Origination--Sale of Loan Originations."
In March 1996, a dramatic and sudden increase in interest rates, coupled
with a failure on the part of a former officer of Matrix Financial to adhere
to the hedging policies established by Matrix Financial's board of directors,
resulted in a $1.9 million secondary marketing loss. These established
policies set benchmarks for Matrix Financial's forward commitments to deliver
loans or mortgage backed securities which are to be maintained against the
pipeline of loan commitments made to borrowers. In addition, these policies
stipulate that all closed loans are to be fully hedged with forward
commitments. Neither policy was adhered to, which resulted in a $1.9 million
loss when interest rates increased dramatically in March 1996, thereby causing
the funded loans and pipeline commitments to decline in market value. Had
these policies been followed, the Company would still have recognized a loss,
albeit significantly smaller, since it is difficult for the Company to be
completely hedged when interest rates rapidly and significantly change. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Comparison of Results of Operations for the Six Months Ended June
30, 1996 and 1995--Loan Origination."
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company's financial results are subject to significant quarterly
fluctuations as a result of, among other things, the variance in the number
and magnitude of purchases and sales of mortgage loans and/or mortgage
servicing rights consummated by the Company from time to time. In addition, a
portion of the Company's revenues are derived from brokerage fees, the timing
and receipt of which are unpredictable. Moreover, a law has been passed that
provides for, among other things, a one-time special assessment to be imposed
upon all SAIF (as defined herein) deposits as of March 31, 1995, which
required the Company in the third quarter of 1996 to accrue approximately
$450,000 (pre-tax) to be paid to the federal government in the fourth quarter
of 1996. See "Regulation and Supervision--Federal Savings Bank Operations--
Insurance of Accounts and Regulation by the FDIC." Accordingly, the Company's
results of operations for any particular quarter are not necessarily
indicative of the results that may be achieved for any succeeding quarter or
for the full fiscal year. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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<PAGE>
DIVERSIFICATION IN BUSINESS LINES; MANAGEMENT OF GROWTH
As part of the Company's business strategy, the Company has in the past
diversified, and may in the future diversify, its lines of business into areas
that are not now part of its core business. As a result, the Company must
manage the development of new business lines in which the Company has not
previously participated. Although the Company's strategy is to acquire on-
going businesses and to retain senior management of the entities that the
Company acquires, each new business line, including start-up operations like
USS, requires the investment of additional capital and the significant
involvement of senior management of the Company to acquire or develop a new
line of business and integrate it with the Company's operations. There can be
no assurance that the Company will successfully achieve these objectives.
In addition to entering into new lines of business, the Company's business
strategy also envisions the expansion of its existing lines of business,
particularly in the area of servicing of mortgage loans. The Company believes
that it currently has in place the infrastructure necessary to undertake this
expansion, including management information systems, senior management and
other personnel. However, there can be no assurance that any rapid expansion,
similar to that encountered by the Company over the past several years, would
not unduly burden the Company's infrastructure or that senior management of
the Company could successfully oversee such expansion. See "Business--
Residential Loan Servicing Activities--Residential Mortgage Loan Servicing."
RISKS ASSOCIATED WITH GENERAL ECONOMIC CONDITIONS
Residential mortgage loans comprised approximately 98.9% of the loans
serviced (including loans subserviced for non-affiliates) by the Company and
approximately 88.3% of the loans held by the Company at June 30, 1996. General
economic conditions, whether regional or industry-related or due to a
recession throughout the United States, affect consumers' decisions to buy or
sell residences as well as the number of residential mortgage loan
delinquencies and foreclosures, the value of collateral supporting loan
portfolios, administrative costs in evaluating and processing mortgage loan
applications and the costs and availability of funds that mortgage banking
companies rely upon in order to make or purchase loans. Changes in the level
of consumer confidence, real estate values, prevailing interest rates and
investment returns expected by the financial community could make mortgage
loans of the types purchased, serviced and sold by the Company less attractive
to borrowers or investors.
DEPENDENCE UPON MORTGAGE SERVICING RIGHTS
The Company has relied and expects to continue to rely on the purchase and
sale of mortgage servicing rights for a significant portion of its revenues.
There is no established exchange or trading market for mortgage servicing
rights and no assurance can be given that an active trading market will
develop in the future. The Company believes that it has been able to benefit
from opportunities resulting from inefficiencies in the existing market for
mortgage servicing rights; however, no assurance can be given that such
inefficiencies will continue in the future, and even if continued, that the
Company will be able to benefit from such inefficiencies to the extent it has
in the past, or that if an active trading market for mortgage servicing rights
develops in the future, the Company will be able to benefit from such
developments. See "Business--Residential Loan Servicing Activities--
Acquisition of Servicing Rights." The supply of and demand for mortgage
servicing rights are affected by a number of factors beyond the Company's
control, including, among others, interest rates, regional and national
economic conditions, other factors affecting the housing industry, regulations
affecting the financial services industry and accounting rules and
interpretations related to the accounting treatment of mortgage servicing
rights. Some or all of these factors may adversely affect the Company's
ability to originate, purchase and sell mortgage servicing rights profitably
in the future. See "Business--Residential Loan Servicing Activities."
CONCENTRATION OF LOANS AND SERVICING RIGHTS
The Company's portfolio of residential mortgage loans and mortgage servicing
rights are concentrated in certain geographic areas. Although the geographic
areas in which concentrations exist may vary from time to
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<PAGE>
time, approximately 21.1%, 15.6% and 9.8% of the residential mortgage loans
held by the Company at June 30, 1996 were secured by residential properties
located in California, Texas and New Mexico, respectively. In addition,
approximately 33.2%, 13.1% and 8.8% of the aggregate outstanding principal
balances of the mortgage servicing rights owned by the Company at June 30,
1996 were secured by residential properties located in California, New York
and Arizona, respectively. Consequently, the Company's results of operations
and financial condition are dependent upon general trends in the markets in
which concentrations exist and, more specifically, their respective
residential real estate markets. California in particular has experienced an
economic slowdown or recession over the last several years, which has been
accompanied by a sustained decline in the California real estate market. Such
a decline may adversely affect the values of properties securing the Company's
loans, such that the principal balances of such loans, together with any
primary financing on the mortgaged properties, may equal or exceed the value
of the mortgaged properties, making the Company's ability to recover losses in
the event of a borrower's default extremely unlikely. In addition, California
historically has been vulnerable to certain risks of natural disasters, such
as earthquakes and mudslides, which are not typically covered by standard
hazard insurance policies maintained by borrowers. Uninsured disasters may
adversely impact borrowers' ability to repay loans made by the Company and the
value of collateral underlying such loans, which could have a material adverse
effect on the Company's results of operations and financial condition. See "--
Risks Associated with General Economic Conditions."
DELINQUENCY, FORECLOSURE AND CREDIT RISKS
MORTGAGE LOAN PORTFOLIO. The Company's loan portfolios include loans that
were originated by numerous lenders throughout the United States under various
loan programs and underwriting standards. Many of the loan portfolios include
loans that have had payment delinquencies in the past or, to a lesser extent,
are delinquent at the time of the purchase. As a part of the Company's
business strategy, portfolios of mortgage loans with varying degrees of
current and past delinquencies are purchased at discounts. Although the
Company performs extensive due diligence procedures at the time loans are
purchased, the risk of continuing or recurrent delinquency remains. The
Company assumes substantially all risk of loss associated with its loan
portfolio in the case of foreclosure. This risk includes the cost of the
foreclosure, the loss of interest, and the potential loss of principal to the
extent that the value of the underlying collateral is not sufficient to cover
the Company's investment in the loan. See "Business--Purchase and Sale of Bulk
Loan Portfolios."
SERVICING PORTFOLIO. The Company also is affected by mortgage loan
delinquencies and defaults on mortgage loans that it services. Under many
types of mortgage servicing contracts, even when mortgage loan payments are
delinquent, the servicer must forward all or part of the scheduled payments to
the owner of the mortgage loan. Also, to protect their liens on mortgaged
properties, owners of mortgage loans usually require the servicer to advance
mortgage and hazard insurance and tax payments on schedule even though
sufficient escrow funds may not be available. Typically, the servicer will
ultimately be reimbursed by the mortgage loan owner or from foreclosure
proceeds for payments advanced that the servicer is unable to recover from the
borrower. However, in the interim, the servicer must absorb the cost of funds
advanced during the time such advance is outstanding. Further, the servicer
must bear the increased costs of attempting to collect on delinquent and
defaulted mortgage loans. Although these increased costs are somewhat reduced
through the receipt of late fees and the reimbursement of certain direct
expenses out of foreclosure proceeds, the Company believes that increased
delinquencies and defaults generally increase the costs of the servicing
function. In addition, the Company is required to forego servicing income from
the time a loan becomes delinquent to the time the mortgage loan is
foreclosed. See "Business--Residential Loan Servicing Activities--Residential
Mortgage Loan Servicing."
POSSIBLE INADEQUACY OF ALLOWANCE FOR LOAN LOSSES
The Company's allowance for loan losses is maintained at a level considered
adequate by management to absorb anticipated losses. The amount of future
losses is susceptible to changes in economic, operating and other conditions,
including changes in interest rates, that may be beyond the Company's control,
and such losses may
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<PAGE>
exceed current estimates. Although management believes that the Company's
allowance for loan losses is adequate to absorb any losses on existing loans
that may become uncollectible, there can be no assurance that the allowance
will prove sufficient to cover actual loan losses on existing loans in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Asset and Liability Management--Analysis of Allowance
for Loan Losses."
LEGAL PROCEEDINGS
Matrix Financial is currently named as a defendant in two lawsuits. These
lawsuits, one of which has been filed in federal court and one of which has
been filed in state court, involve similar sets of underlying facts and
questions of law, and the plaintiffs in each of these suits seek class action
status. The plaintiffs, on behalf of a purported class, have claimed among
other things that Matrix Financial breached the plaintiffs' promissory notes
and mortgages by imposing certain charges at the time the class of plaintiffs
prepaid their notes. In addition to these two suits, 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 contract and
fiduciary obligations, misrepresentations, errors and omissions of employees,
officers and agents of the Company, incomplete documentation and failures by
the Company to comply with various laws and regulations applicable to its
business, including federal and state banking and consumer lending laws. There
can be no assurance that any liability with respect to these current legal
actions, or ones that might be instituted in the future, would not be material
to the Company's consolidated results of operations, financial condition or
cash flows. See "--Liabilities Under Representations and Warranties,"
"Business--Legal Proceedings" and "Regulation and Supervision."
LIABILITIES UNDER REPRESENTATIONS AND WARRANTIES
In the ordinary course of business, the Company makes representations and
warranties to the purchasers and insurers of mortgage loans and the purchasers
of mortgage servicing rights regarding compliance with laws, regulations and
program standards and as to the accuracy of certain information. Under certain
circumstances, the Company may become liable for damages or may be required to
repurchase a loan if there has been a breach of these representations or
warranties. The Company generally receives similar representations and
warranties from the originators and sellers from whom it purchases mortgage
loans and servicing rights. However, in the event of breaches of such
representations and warranties, the Company is subject to the risk that an
originator may not have the financial capacity to repurchase loans when called
upon to do so by the Company or otherwise respond to demands made by the
Company. During 1995 and the first six months of 1996, the Company recognized
losses of $205,000 and $40,000, respectively, on loan repurchases resulting
from a particular servicing portfolio purchased by the Company and the Company
has accrued a liability of $460,000 for additional losses as of June 30, 1996.
The Company believes that it has recourse against the seller of these mortgage
servicing rights, but does not expect to make any significant recovery due to
the current financial condition of the seller. The Company anticipates selling
this mortgage servicing portfolio and does not anticipate any future material
losses in connection with this portfolio or as a result of additional mortgage
loan repurchases due to breaches in representations and warranties; however,
there can be no assurance that the Company will not experience such losses.
See "Business--Residential Loan Servicing Activities--Servicing Sales."
IMPACT OF REGULATION
GENERAL. The operations of the Company are subject to extensive regulation
by federal and state governmental authorities and are subject to various laws
and regulations and judicial and administrative decisions that, among other
things, establish licensing requirements, regulate credit extension, establish
maximum interest rates and insurance coverages, require specific disclosures
to customers, prohibit discrimination in mortgage lending activities, govern
secured transactions, establish collection, repossession and claims handling
procedures and other trade practices and, in certain states, require payment
of interest on servicing-related custodial escrow deposits. In particular,
Matrix Bank is subject to extensive regulation, examination and supervision by
the Office of Thrift Supervision (the "OTS"), as its chartering agency, and
the FDIC, as insurer of deposits held at Matrix
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<PAGE>
Bank. Matrix Bank is a member of the Federal Home Loan Bank (the "FHLB")
system and its deposits are insured by the FDIC up to the applicable limits of
the Savings Association Insurance Fund (the "SAIF"). In addition, in certain
instances the ability of Matrix Financial and Matrix Bank to pay dividends to
Matrix Capital could be restricted due to regulatory requirements. There can
be no assurance that more restrictive laws, rules or regulations will not be
adopted in the future, or that existing or proposed laws will not be changed
to the detriment of the Company. Any change in such laws and regulations or
the adoption of more restrictive laws and regulations, whether by the OTS, the
FDIC or the Congress of the United States, could have a material adverse
effect on the Company and its financial condition or results of operations.
See "Regulation and Supervision."
PROPOSED LEGISLATION. The Congress of the United States adopted a bill that
did not become law, but which would have required federal savings banks to
convert to national banks. In the event of such a conversion, subject to
limited grandfathering, thrift holding companies, such as Matrix Capital,
would have become regulated by the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board"). The Federal Reserve Board requires bank
holding companies to maintain a leverage ratio of 5.0% with the aggregate
amount of purchased mortgage servicing rights not to exceed 50.0% of Tier I
capital (the numerator of the leverage ratio). Had Matrix Capital been subject
to the Federal Reserve Board's capital regulations as of June 30, 1996, its
consolidated leverage ratio would have been approximately 2.7% (assuming no
other adjustments). There is considerable uncertainty regarding whether such
legislation will be adopted. See "Regulation and Supervision."
FEDERAL PROGRAMS. The Company's ability to sell mortgage loans is largely
dependent upon the continuation of programs administered by the Federal
National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage
Corporation ("FHLMC") and the Government National Mortgage Association
("GNMA"), which facilitate the sale of mortgage loans and the pooling of such
loans into mortgage-backed securities, as well as the Company's continued
eligibility to participate in such programs. The discontinuation of, or a
significant reduction in, the operation of such programs would have an adverse
effect on the Company's operations. The Company expects that it will continue
to remain eligible to participate in such programs, but any significant
impairment of such eligibility would adversely affect its operations because
seller/servicer status is vital to its servicing business. In addition, the
products offered under such programs may be changed from time to time. The
profitability of specific products may vary depending on a number of factors,
including the administrative costs to the Company of originating or acquiring
such products. See "Business--Residential Mortgage Loan Origination--Sale of
Loan Originations" and "Regulation and Supervision."
POTENTIAL LIMITATIONS ON AVAILABILITY OF FUNDING SOURCES
Funding for the Company's mortgage banking activities, including the
acquisition of mortgage servicing rights and the acquisition and origination
of mortgage loans, is provided primarily through lines of credit and
sale/repurchase facilities from various financial institutions and from FHLB
borrowings. The Company's business plan entails, and the profitable use of the
proceeds of the offering depends, in part, on the Company's ability to
maintain existing credit facilities and negotiate additional credit facilities
for the acquisition of mortgage servicing rights and other purposes. There can
be no assurance that existing credit facilities will be renewed, or if
renewed, that the terms will be favorable to the Company. Furthermore, there
can be no assurance that additional credit lines will be available, or if
available, that the terms will be favorable to the Company. Unavailability of
funding on terms favorable to the Company, or at all, would have an adverse
effect on the Company's business and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
COMPETITION
The industries in which the Company competes are highly competitive. The
Company competes with other mortgage banking companies, servicing brokers,
commercial banks, savings associations, credit unions, other financial
institutions, and various other lenders. A number of these competitors have
substantially greater financial resources, greater operating efficiencies and
longer operating histories than the Company. Customers distinguish between
product and service providers in the industries in which the Company operates
for various
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reasons, including convenience in obtaining the product or service, overall
customer service, marketing and distribution channels and pricing (primarily
in the form of prevailing interest rates). Because of its emphasis on mortgage
banking activities, competition for the Company is affected particularly by
fluctuations in interest rates. During periods of rising rates, competitors of
the Company who have locked in lower borrowing costs may have a competitive
advantage. During periods of declining rates, competitors may solicit the
Company's customers to refinance their loans. During economic slowdowns or
recessions, credit-impaired borrowers may have new financial difficulties and
may be receptive to offers by the Company's competitors. See "Business--
Competition."
RELIANCE ON SYSTEMS AND CONTROLS
The Company depends heavily upon its systems and controls, many of which are
designed specifically for its business. These systems and controls support the
evaluation, acquisition, monitoring, collection and administration of the
Company's mortgage loan and servicing portfolios, as well as support the
consulting and brokerage functions performed by the Company and the
depository, general accounting and other management functions of the Company.
For example, in order to track information on its mortgage servicing
portfolio, the Company utilizes a data processing system provided by Alltel
Information Services Inc. ("Alltel"), formerly known as Computer Power
Incorporated or CPI. There can be no assurance that Alltel or the Company's
other providers can continue to provide the systems and controls on which the
Company relies or that the Company's systems and controls, including those
specially designed and built for the Company, are adequate or will continue to
be adequate to support the Company's growth. A failure of the automated
systems, including a failure of data integrity or accuracy, could have a
material adverse effect upon the Company's business and financial condition.
CONCENTRATION OF VOTING CONTROL IN MANAGEMENT
After completion of the offering, the Company's executive officers will
beneficially own an aggregate of approximately 68.1% of the outstanding Common
Stock (approximately 65.1% if the Underwriters' over-allotment option is
exercised in full). Therefore, the Company's management, acting together, will
be able to elect the entire Board of Directors of Matrix Capital and generally
will be able to approve or disapprove all matters submitted to shareholders
for a vote. See "Principal Shareholders" and "Description of Capital Stock."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the continued services of Guy A. Gibson,
Richard V. Schmitz, D. Mark Spencer and the Company's other executive
officers. While the Company believes that it could find replacements for its
executive officers, the loss of their services could have an adverse effect on
the Company's financial condition or results of operations. None of the
Company's executive officers named above have entered into employment
agreements with the Company, but each has a significant equity interest in the
Company. The Company does not maintain key-man life insurance on any of its
executive officers. See "Management--Employment Agreements" and "Principal
Shareholders."
ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price will be determined through
negotiations between the Company and the Underwriters. See "Underwriting" for
a discussion of factors that will be considered in establishing the initial
public offering price. There can be no assurance that an active trading market
will develop after the offering or, if developed, that such market will be
sustained. The market price for shares of Common Stock may be significantly
affected by such factors as quarter-to-quarter variations in the Company's
results of operations, which may be due to, among other things, the variance
in the number and magnitude of purchases and sales of mortgage loans and/or
servicing rights consummated by the Company from period to period, as well as
by news announcements or changes in general market or industry conditions.
There can be no assurance that shares of Common Stock purchased in the
offering may be later sold at or in excess of the price paid. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The 1,750,000 shares of Common Stock sold in the offering will be freely
tradeable by persons other than "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act, without restriction under the
Securities Act. In addition, 90 days after the date of this Prospectus,
approximately 3,750,001 shares of Common Stock will become eligible for sale
pursuant to the provisions of Rule 144 if the other restrictions enumerated in
that rule are met. And on January 1, 1997, approximately 138,938 shares of
Common Stock will become eligible for sale pursuant to the provisions of Rule
144. The holders of all of such 3,888,939 shares, however, have agreed with
the Underwriters not to offer such shares for sale for a period of 180 days
from the date of this Prospectus without the consent of Piper Jaffray Inc.
Sales of substantial numbers of such shares in the public market, or the
perception that such sales could occur, could adversely affect the market
price of the Common Stock. See "Shares Eligible for Future Sale" and
"Underwriting."
EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of the Company's Amended and Restated Articles of
Incorporation (the "Articles of Incorporation") and Bylaws, as amended (the
"Bylaws"), could delay or frustrate the removal of incumbent directors and
could make difficult a merger, tender offer or proxy contest involving the
Company, even if such events could be viewed as beneficial by the Company's
shareholders. For example, the Articles of Incorporation divide the members of
the Board of Directors into three different classes of directors who are
elected by holders of the Common Stock and who serve three-year staggered
terms, require advance notice of shareholder proposals and nominations of
directors and authorize the issuance of "blank check" preferred stock without
a shareholder vote. See "Description of Capital Stock--Certain Charter and
Bylaws Provisions."
DILUTION
Based upon an assumed initial public offering price of $10.00 per share,
purchasers of the Common Stock offered hereby will suffer an immediate and
substantial dilution in the pro forma net tangible book value per share of the
Common Stock from the initial public offering price in the amount of $5.32 per
share. See "Dilution."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,750,000 shares of
Common Stock offered hereby are estimated to be $15,825,000 ($18,266,250 if
the Underwriters' over-allotment option is exercised in full), assuming an
initial public offering price of $10.00 per share, after deducting the
underwriting discount and estimated offering expenses.
The Company intends to use the net proceeds to reduce the balances
outstanding on certain of its revolving line of credit facilities with two
banks (the "Revolving Credit Facilities") (an aggregate of approximately $25.5
million was outstanding as of September 30, 1996 and approximately $29.8
million is expected to be outstanding upon the consummation of the offering),
which amounts will then become available to the Company under the Revolving
Credit Facilities. Subject to certain collateral limitations, the Company
intends to use future borrowings under the Revolving Credit Facilities to
purchase portfolios of mortgage loan servicing rights as opportunities become
available; however, such use may change if the Company is presented with an
opportunity for a strategic acquisition in a complementary financial services-
related area or for the purchase of a financial institution or a branch by
Matrix Bank. The Company has had preliminary discussions for the purchase of a
certain financial services company, although the Company has no agreements or
understandings related to this or any other such acquisitions of financial
institutions, branches, deposits or other financial services-related
companies, and there can be no assurance that any acquisitions will occur.
The Revolving Credit Facilities are secured by mortgage loans, mortgage
servicing rights, eligible servicing advance receivables and eligible
delinquent mortgage loans held by the Company. The Revolving Credit Facilities
bear interest at rates ranging from 1.0% to 2.25% over the federal funds rate
(which was 5.25% at the date hereof) and mature in July 1997. Advances under
the Revolving Credit Facilities were incurred primarily during the last year
to originate residential mortgage loans on a wholesale basis, to fund
acquisitions of mortgage servicing rights and to fund servicing advances. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DIVIDEND POLICY
Since its organization in June 1993, Matrix Capital has not paid any
dividends on its Common Stock, except for an aggregate of $88,000 in dividends
paid to the shareholders of the Company in 1993. The Company expects that it
will retain all available earnings generated by its operations for the
development and growth of its business and does not anticipate paying any cash
dividends in the foreseeable future. Any future determination as to dividend
policy will be made at the discretion of the Board of Directors of the Company
and will depend on a number of factors, including the future earnings, capital
requirements, financial condition and future prospects of the Company and such
other factors as the Board of Directors may deem relevant. Under the terms of
the Company's 13% Senior Subordinated Notes issued in August 1995 (the "13%
Senior Subordinated Notes"), the Company's ability to pay cash dividends to
its shareholders is limited. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." In addition, the ability of Matrix Financial and Matrix Bank to
pay dividends to Matrix Capital may be restricted in certain instances,
including covenants under Matrix Financial's existing warehouse facilities.
See "Regulation and Supervision" and Note 7 to the Consolidated Financial
Statements included elsewhere herein.
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CAPITALIZATION
The following table sets forth as of June 30, 1996 (i) the capitalization of
the Company and (ii) the capitalization of the Company as adjusted to give
effect to the sale of the shares of Common Stock offered by the Company hereby
at an assumed initial public offering price of $10.00 per share and the
application of the estimated net proceeds to the Company therefrom as
described under "Use of Proceeds." This information is qualified in its
entirety by, and should be read in conjunction with, the Consolidated
Financial Statements of the Company and Notes thereto appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES
Deposits.................................................. $ 73,509 $ 73,509
Custodial escrow balances................................. 26,689 26,689
FHLB borrowings........................................... 36,400 36,400
Borrowed money (1)........................................ 52,089 36,264
-------- --------
Total................................................... 188,687 172,862
SHAREHOLDERS' EQUITY
Preferred Stock, $0.0001 par value; 5,000,000 shares
authorized; no shares outstanding; no shares outstanding
as adjusted.............................................. -- --
Common Stock, $0.0001 par value; 50,000,000 shares
authorized;
3,888,939 shares outstanding; 5,638,939 shares
outstanding as adjusted (2).............................. -- 1
Additional paid-in capital................................ 2,626 18,450
Retained earnings......................................... 7,951 7,951
-------- --------
Total shareholders' equity.............................. 10,577 26,402
-------- --------
Total capitalization.................................... $199,264 $199,264
======== ========
</TABLE>
- --------
(1) Includes indebtedness outstanding under the Revolving Credit Facilities,
an aggregate of $29.8 million of which is expected to be outstanding upon
the consummation of the offering.
(2) Excludes an aggregate of (i) 525,000 shares of Common Stock reserved for
issuance under the 1996 Stock Option Plan, including 79,500 shares subject
to outstanding options at an exercise price of $5.13 per share and 129,600
shares subject to outstanding options at an exercise price equal to the
Price to Public set forth on the cover page of this Prospectus, (ii)
125,000 shares of Common Stock reserved for issuance under the Purchase
Plan and (iii) shares of Common Stock issuable to certain of the
Underwriters upon exercise of warrants to be issued upon consummation of
the offering. See "Management--Stock Option Plan," "--Employee Stock
Purchase Plan" and "Description of Capital Stock--Underwriters Warrants."
17
<PAGE>
DILUTION
The net tangible book value of the Company as of June 30, 1996 was $10.6
million, or $2.72 per share of Common Stock. Net tangible book value per share
represents shareholders' equity, less intangible assets, if any, divided by
the number of shares of Common Stock outstanding. After giving effect to the
sale by the Company of the shares of Common Stock offered hereby at an assumed
initial public offering price of $10.00 per share and application of the
estimated net proceeds therefrom, the net tangible book value of the Company
as of June 30, 1996 would have been $26.4 million, or $4.68 per share. This
represents an immediate increase in net tangible book value of $1.96 per share
to existing investors and an immediate dilution of $5.32 per share to new
public investors purchasing Common Stock in the offering, as illustrated in
the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $10.00
Net tangible book value per share as of June 30, 1996......... $2.72
Increase per share attributable to new public investors....... 1.96
-----
Net tangible book value per share after the offering............ 4.68
------
Dilution per share to new public investors...................... $ 5.32
======
</TABLE>
The following table sets forth, as of June 30, 1996, the difference between
existing shareholders and the new public investors with respect to the total
number of shares purchased from the Company, the total consideration paid and
the average price paid per share, assuming an initial public offering price of
$10.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C>
Existing shareholders...... 3,888,939 69.0% $10,577,000 37.7% $ 2.72
New public investors....... 1,750,000 31.0 17,500,000 62.3 10.00
--------- ----- ----------- -----
Total.................... 5,638,939 100.0% $28,077,000 100.0%
========= ===== =========== =====
</TABLE>
The information and tables above exclude the effect of (i) 79,500 shares of
Common Stock subject to outstanding options at an exercise price of $5.13 per
share, (ii) 129,600 shares subject to outstanding options at an exercise price
equal to the Price to Public set forth on the cover page of this Prospectus,
(iii) options to purchase up to an additional 315,900 shares of Common Stock
available for issuance under the 1996 Stock Option Plan, (iv) 125,000 shares
of Common Stock available for issuance under the Purchase Plan and (v) shares
issuable upon exercise of warrants to be issued to certain of the Underwriters
upon consummation of the offering. To the extent that any of such stock
options become exercisable and are exercised, there will be further and
corresponding dilution to new investors. See "Management--Stock Option Plan,"
"Employee Stock Purchase Plan" and "Description of Capital Stock--Underwriters
Warrants."
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The balance sheet data as of December 31, 1994 and 1995 and the operating
data for the years ended December 31, 1993, 1994 and 1995 have been derived
from, and are qualified by reference to, the Consolidated Financial Statements
and Notes thereto, which have been audited by Ernst & Young LLP, independent
auditors, as indicated in their report included elsewhere herein. The balance
sheet data as of December 31, 1993 have been derived from audited consolidated
financial statements of the Company, which are not included in this
Prospectus. The balance sheet and operating data as of June 30, 1995 and 1996
and for the six-month periods then ended and as of December 31, 1991 and 1992
and for the years then ended, have been derived from unaudited consolidated
financial statements of the Company. The financial data as of December 31,
1991 and 1992 and for the years then ended reflects the combined operations of
United Financial and Matrix Financial. The unaudited consolidated financial
statements include all adjustments, consisting of normal recurring
adjustments, which the Company considers necessary for a fair presentation of
its financial position as of such dates and the results of operations and cash
flows for such periods. Operating results for the six months ended June 30,
1996 are not necessarily indicative of the results that may be expected for
the entire year ending December 31, 1996. The selected financial data should
be read in conjunction with the Consolidated Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF AND FOR THE
AS OF AND FOR THE SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------------------------- ---------------------
1991 1992 1993(1) 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Net interest income
(loss) before provision
for loan losses........ $ (230) $ (554) $ 944 $ 3,989 $ 3,536 $ 1,662 $ 2,632
Provision for loan
losses................. -- -- 15 216 401 85 152
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income
(loss) after provision
for loan losses........ (230) (554) 929 3,773 3,135 1,577 2,480
Non-interest income:
Loan administration.... 1,787 6,025 6,427 6,926 7,749 3,508 4,632
Brokerage.............. 1,268 1,842 2,132 4,017 4,787 2,958 1,947
Gain on sale of loans.. 1,532 546 2,361 1,590 3,272 1,320 852
Gain on sale of
mortgage servicing
rights................ 41 348 38 684 1,164 190 1,091
Loan origination(2).... -- -- 221 1,294 2,069 440 194
Other.................. 44 186 466 487 781 290 408
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total non-interest
income................ 4,672 8,947 11,645 14,998 19,822 8,706 9,124
Non-interest expense.... 2,916 8,281 10,464 14,279 17,136 7,759 9,525
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income
taxes.................. 1,526 112 2,110 4,492 5,821 2,524 2,079
Income taxes(3)......... 460 -- 404 1,846 2,260 970 840
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income.............. $ 1,066 $ 112 $ 1,706 $ 2,646 $ 3,561 $ 1,554 $ 1,239(4)
========== ========== ========== ========== ========== ========== ==========
Net income per common
and common equivalent
share(5)............... $ .71 $ .91 $ .40 $ .32
Pro forma net
income(6).............. $ 916 $ 67 $ 1,266
Pro forma net income per
common and common
equivalent share(6).... .27 .02 .35
Weighted average common
and common equivalent
shares outstanding..... 3,442,501 3,442,501 3,596,251 3,750,001 3,927,629 3,927,629 3,927,629
Cash dividends.......... $ -- $ -- $ 88 $ -- $ -- $ -- $ --
BALANCE SHEET DATA
Total assets............ $ 9,176 $ 10,140 $ 95,747 $ 112,051 $ 175,915 $ 145,445 $ 204,244
Total loans (excluding
allowance for loan
losses)................ -- 497 77,034 90,068 138,791 120,198 139,786
Allowance for loan loss-
es..................... -- -- 538 728 943 773 1,058
Nonperforming loans(7).. -- -- 853 3,314 5,538 5,459 4,092
Mortgage servicing
rights................. 7,138 6,200 1,818 6,183 13,817 10,586 10,587
Foreclosed real es-
tate(7)................ 90 69 726 543 835 534 1,093
Deposits................ -- -- 45,517 41,910 48,877 44,852 73,509
Custodial escrow bal-
ances.................. -- -- 31,794 24,687 27,011 35,275 26,689
FHLB borrowings......... -- -- -- 14,600 19,000 5,200 36,400
Borrowed money.......... 4,859 5,347 8,791 18,438 65,093 46,494 52,089
Total shareholders' eq-
uity................... 1,424 1,369 3,030 5,676 9,338 7,331 10,577
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE
AS OF AND FOR THE SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------- --------------------
1991 1992 1993(1) 1994 1995 1995 1996
------- ------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RATIOS AND
OTHER SELECTED DATA
Return on average as-
sets(8)(9)............. -- 1.13% 4.98% 2.69% 2.38% 2.46% 1.23%
Return on average equi-
ty(8)(9)............... -- 7.73 88.44 58.49 51.38 51.11 25.17
Average equity to aver-
age assets(8).......... -- 14.57 5.63 4.60 4.63 4.81 4.88
Net interest mar-
gin(8)(9)(10).......... -- -- 4.15 4.63 2.81 3.13 3.08
Operating efficiency ra-
tio(9)(11)............. 65.65% 98.67 83.22 76.07 74.64 75.45 82.08
Total amount of loans
purchased.............. $ -- $ -- $ 32,231 $ 80,048 $ 91,774 $ 32,367 $ 65,262
Balance of owned
servicing portfolio
(end of period)........ 863,931 855,506 1,007,286 1,041,785 1,596,385 1,392,133 1,362,444
Wholesale loan origina-
tion volume............ -- -- 126,200 183,130 388,937 116,329 373,024
LOAN PERFORMANCE RATIOS
Nonperforming
loans/total loans(7)... -- -- 1.11% 3.68% 3.99% 4.54% 2.93%
Nonperforming
assets/total as-
sets(7)................ -- -- 1.65 3.44 3.62 4.12 2.54
Net loan charge
offs/average
loans(8)(9)............ -- -- 0.18 0.03 0.15 0.04 0.02
Allowance for loan
losses/total loans..... -- -- 0.70 0.81 0.68 0.64 0.76
Allowance for loan
losses/nonperforming
loans.................. -- -- 63.07 21.97 17.03 14.16 25.86
</TABLE>
- --------
(1) The Company acquired all of the outstanding capital stock of Matrix Bank
on September 23, 1993. The operations of Matrix Bank have been included
in the consolidated operations of the Company from the date of
acquisition.
(2) On January 1, 1995, the Company adopted FAS 122. Since FAS 122 prohibits
retroactive application, the historical accounting results for 1995 and
1996 are not directly comparable to the results for prior periods. For a
discussion of FAS 122, see "Regulation and Supervision--Miscellaneous--
FAS 122."
(3) Prior to the formation of Matrix Capital in June 1993, Matrix Financial
and United Financial had elected for certain periods to be taxed under
the provisions of subchapter "s" of the Code and accordingly did not pay
income taxes on their respective earnings; instead the shareholders of
Matrix Financial and United Financial were liable for such taxes. As a
result, there is no income tax provision for earnings during the periods
in which subchapter "s" treatment had been elected.
(4) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Comparison of Results of Operations for the Six
Months Ended June 30, 1996 and 1995--Loan Origination Income" for a
discussion of the impact on net income of a secondary marketing loss
incurred in March 1996.
(5) Net income per common and common equivalent share is based on the
weighted average number of common shares outstanding during each period
and the dilutive effect, if any, of stock options outstanding. There are
no other dilutive securities.
(6) Pro forma net income and pro forma net income per share are presented for
periods in which the Company was not a taxable entity as a result of its
subchapter "s" election. The pro forma net income assumes an effective
tax rate of 40%. Pro forma net income per share is computed by dividing
pro forma net income by the weighted average number of shares of Common
Stock and Common Stock equivalents outstanding during the year.
(7) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Asset and Liability Management--Nonperforming
Assets" for a discussion of the impact of certain bulk purchases of
mortgage loan portfolios on the level of nonperforming loans and
foreclosed real estate.
(8) Calculations are based on average daily balances where available and
monthly averages otherwise.
(9) Ratios for the six months ended June 30, 1995 and 1996 have been
calculated on an annualized basis.
(10) Net interest margin has been calculated by dividing net interest income
before loan loss provision by average interest-earning assets.
(11) The operating efficiency ratio has been calculated by dividing non-
interest expense by operating income (net interest income plus non-
interest income).
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis of the financial
condition and results of operations of the Company should be read in
conjunction with the preceding "Selected Consolidated Financial and Operating
Information." Additionally, the Company's Consolidated Financial Statements
and the Notes thereto, as well as other data included in this Prospectus,
should be read and analyzed in combination with the analysis below.
GENERAL
The Company's principal activities consist of the purchase and sale of
portfolios of mortgage loans and mortgage servicing rights, administration of
portfolios of mortgage loans, consulting and brokerage activities involving
mortgage loan servicing and deposit generation. These activities are conducted
through the Company's wholly owned subsidiaries, Matrix Financial, United
Financial and Matrix Bank. More recently, the Company commenced real estate
management and disposition services and the financing of sub-prime automobile
retail installment sales contracts through its wholly owned subsidiaries USS
and Sterling, respectively. While USS and Sterling have not generated material
amounts of revenue or expenses during their limited operating history,
management anticipates that they will make a larger contribution to the
Company's revenues and expenses in the future.
The principal components of the Company's revenues consist primarily of net
interest income recorded by Matrix Bank and Matrix Financial, loan
administration fees generated by Matrix Financial, brokerage fees realized by
United Financial and loan origination fees and gains on sales of mortgage
loans and mortgage servicing rights generated by Matrix Financial and Matrix
Bank. Consistent growth in each of these revenues categories, as well as in
net income, has been achieved over the three full years since the formation of
Matrix Capital. In particular, net interest income increased significantly in
1994 as compared to 1993 due to the inclusion of a full year of operations for
Matrix Bank in the Company's results of operations for 1994, as opposed to
only three months of operations for 1993. It is not anticipated that increases
of this magnitude in these revenue categories will be experienced in the
normal course of business over the foreseeable future. The Company's results
of operations are likely to be influenced by changes in interest rates and the
effect of these changes on the volume of loan originations, mortgage loan
prepayments and the value of mortgage servicing portfolios. See "Risk
Factors--Potential Adverse Impact of Fluctuating Interest Rates."
HISTORY
The Company was formed in June 1993 when the founding shareholders of two of
its Subsidiaries, Matrix Financial and United Financial, exchanged all of the
outstanding capital stock of those two entities for shares of the Company in a
series of transactions that were each accounted for as a pooling of interests.
As a result, the Company's financial results for 1993 reflect a full 12 months
of operations for Matrix Financial and United Financial. Prior to the
acquisition of Matrix Financial and United Financial by the Company in 1993,
Matrix Financial and United Financial were operated as independent subchapter
"s" corporations.
In September 1993, the Company acquired Matrix Bank, formerly named Dona Ana
Savings Bank, FSB and Dona Ana Savings and Loan Association, F.A. The
acquisition was accounted for using the purchase method of accounting and all
of the assets and liabilities were recorded at their estimated fair value as
of the date of acquisition. The Company's consolidated financial results for
1993, therefore, reflect only three months of operations for Matrix Bank.
In June 1995, the Company formed USS. The financial results for USS for the
six months ended June 30, 1996 and for the year ended 1995 reflect a start-up
operation with minimal revenue, as 1995 and the first quarter of 1996 were
utilized primarily to develop marketing material and establish investor
relationships.
In May 1996, the Company formed Sterling, which subsequently acquired for
$47,000 in cash substantially all of the assets of an originator of sub-prime
automobile retail installment sales contracts. As of June 30, 1996,
21
<PAGE>
the total assets of Sterling were $3.2 million. To date, the operations of
Sterling have not been material to those of the Company.
RELATIONSHIPS AMONG THE SUBSIDIARIES
Management believes that the synergies within the Company's corporate
structure, and the opportunities resulting from those synergies, make the
Company unique in the financial services industry. United Financial, which is
primarily a broker of mortgage servicing rights and a consultant to the
mortgage banking industry, provides significant benefits to the other
Subsidiaries. Through United Financial's daily contact with businesses in the
mortgage banking industry, Matrix Financial is able to gain insight into the
mortgage banking industry in which it competes. For example, although Matrix
Financial does not buy mortgage servicing rights brokered by United Financial
in competitive bid situations, United Financial provides market intelligence
to Matrix Financial as to the current market for the purchase and sale of
mortgage loan servicing rights in the secondary market, including the buyers
and sellers in the marketplace at any given time. United Financial also
provides Matrix Financial with mortgage loan servicing valuation capabilities,
puts Matrix Financial in direct contact with sellers of servicing portfolios
and apprises Matrix Financial of the emerging trends in the industry. All
mortgage loan servicing rights that are sold by the Company are brokered
through United Financial, which allows all brokerage fees paid by Matrix
Financial to be retained within the Company.
United Financial's affiliation with Matrix Bank provides both Matrix Bank
and United Financial with what management believes to be a competitive
advantage. United Financial provides Matrix Bank with market contacts for the
purchase of mortgage loan portfolios that it may not otherwise have
identified. The most significant advantage for both companies, however, is the
financing opportunities that United Financial is able to refer to Matrix Bank
directly from United Financial's clients. The opportunity for United Financial
to refer its clients to an affiliate for financing provides Matrix Bank with
an increased pipeline of lending opportunities and enables United Financial to
provide more comprehensive services than many of its competitors.
United Financial's affiliation with USS provides both companies with
significant benefits. Disposition of foreclosed real estate on an outsourced
basis through USS is another service that United Financial can provide its
clients. Management considers the referrals and contacts that United Financial
provides USS to be a marketing advantage, which has allowed USS to develop a
client base more quickly than it could have otherwise. In addition, Matrix
Financial outsources all of the disposition of foreclosed real estate that it
services to USS. This affiliation with USS allows Matrix Financial to reduce
its overhead and has turned the disposition function from a net cost to the
Company to a revenue producer.
Another strategic affiliation within the Company is the one that exists
between Matrix Financial and Matrix Bank. Prior to the acquisition of Matrix
Bank, the custodial escrow deposits related to Matrix Financial's mortgage
loan servicing portfolio were used as compensating balances with the Company's
warehouse lenders, which reduced the interest rate on the amounts outstanding
under the warehouse lines of credit to the extent of the compensating balances
or the Company's loan balances outstanding, whichever was less. The benefit of
the custodial escrow deposits, therefore, was limited to the amounts
outstanding under the warehouse lines and the reduction in interest negotiated
for the use of these compensating balances. Since its acquisition, Matrix Bank
has acted as the depository institution for all of Matrix Financial's
custodial escrow deposits. This relationship allows the Company to derive the
full benefit from these custodial escrow deposits. The deposits are invested
in interest-earning residential mortgage loans at returns greater than
historically had been realized by depositing these sums as compensating
balances with the Company's warehouse lenders. Prior to the acquisition of
Matrix Bank, Matrix Financial also purchased and sold bulk residential
mortgage loan packages, a function that is now handled primarily through
Matrix Bank. This activity as previously conducted by Matrix Financial was
limited due to the lack of availability and expensive cost of the short-term
financing needed to purchase and carry such portfolios. If financing was not
available, Matrix Financial attempted to arrange the simultaneous purchase and
sale of the same portfolio. Transactions executed in this manner prohibited
the Company from earning interest income during the period between the
purchase and corresponding sale and also resulted in an inefficient execution
on the purchase and sale. With Matrix Bank's funding capabilities, the Company
is able to react to
22
<PAGE>
mortgage loan purchase opportunities more quickly and, once the mortgage loan
portfolio has been purchased, the Company is able to hold the portfolio at
lower cost than would otherwise be possible.
In addition to servicing its own portfolio of mortgage servicing rights,
Matrix Financial performs the servicing function for all of Matrix Bank's
mortgage servicing portfolio. Because of the economics of scale achieved with
Matrix Financial's management information systems and its experience in the
servicing industry, management believes that these loans are serviced more
efficiently and at less cost than could normally be achieved by an institution
of Matrix Bank's size. Moreover, Matrix Financial's expertise in the servicing
arena facilitates the purchase by Matrix Bank of bulk loan portfolios
throughout the country.
Matrix Financial's servicing portfolio includes mortgage loans owned by more
than 200 private investors. Matrix Financial routinely contacts these
investors to determine their interest in selling their loan portfolios. In
those instances where a private investor expresses interest in selling a loan
portfolio, Matrix Financial is able to make a referral to Matrix Bank. In many
cases, this referral puts Matrix Bank in a position of purchasing loans
without having to participate in a competitive bid process. In addition, with
Matrix Financial acting as servicer for these loan portfolios, Matrix Bank is
able to perform due diligence on the portfolios more efficiently and at a
lower cost than transactions executed in the open market.
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
1995
NET INCOME; RETURN ON AVERAGE EQUITY. Net income decreased $315,000, or
20.3%, to $1.2 million for the six months ended June 30, 1996, as compared to
$1.6 million for the six months ended June 30, 1995. The decrease in net
income reflects a $1.9 million secondary marketing loss that occurred in March
1996. See "--Loan Origination." Return on average equity decreased to 25.2%
for the six months ended June 30, 1996, as compared to 51.1% for the six
months ended June 30, 1995. Return on average equity decreased due to the
decrease in net income and due to the Company's policy of retaining all of its
earnings, thereby increasing its equity base.
NET INTEREST INCOME. The Company's earnings depend in part upon the level of
its net interest income. Net interest income is the difference between
interest income, principally derived from the Company's loan portfolios, and
interest expense, principally derived from customer deposits and Company
borrowings. Changes in net interest income result primarily from changes in
volume and spread. Volume refers to the average dollar amount of interest-
earning assets and interest-bearing liabilities. Spread refers to the
difference between the average yield on interest-earning assets and the
average cost of interest-bearing liabilities. Net interest income before
provision for loan losses increased $970,000, or 58.4%, to $2.6 million for
the six months ended June 30, 1996, as compared to $1.7 million for the six
months ended June 30, 1995. The increase was attributable primarily to the
increase in the interest rate spread, which increased to 2.54% for the six
months ended June 30, 1996, as compared to 1.56% for the six months ended June
30, 1995. The increase in the interest rate spread was a result of an increase
in the yield on interest-earning assets to 9.40% for the six months ended June
30, 1996, as compared to 7.99% for the six months ended June 30, 1995. The
increase in the yield on interest-earning assets was primarily due to an
increase in short-term interest rates, which resulted in an increased yield on
the Company's adjustable rate loan portfolio. The effect of the increase in
the yield on interest-earning assets was partially offset by an increase in
the cost on interest-bearing liabilities to 6.86% for the six months ended
June 30, 1996, as compared to 6.43% for the six months ended June 30, 1995.
The increase in the cost of interest-bearing liabilities was due primarily to
an increase in the balance and cost of certificates of deposit at Matrix Bank
and the 13% Senior Subordinated Notes issued in the last quarter of 1995.
The increase in interest income attributable to the increase in interest
rate spread was partially offset by a change in volume of interest-earning
assets and interest-bearing liabilities. The average balance of interest-
bearing liabilities increased $76.9 million, or 95.8%, to $157.3 million for
the six months ended June 30, 1996, as compared to $80.4 million for the six
months ended June 30, 1995. The increase in the average balance of interest-
bearing liabilities was primarily attributable to the increase in FHLB
borrowings and borrowed money. The proceeds from the FHLB borrowings were used
to fund growth at Matrix Bank and the proceeds from
23
<PAGE>
borrowed money were used to fund an increase in wholesale originations. The
increase in the average balance of interest-bearing liabilities was partially
offset by an increase in the average balance of interest-earning assets of
$64.7 million, or 60.9%, to $170.9 million for the six months ended June 30,
1996, as compared to $106.2 million for the six months ended June 30, 1995.
The increase in the average balance of interest-earning assets was due to an
increase in the volume of wholesale loan originations and an increase in the
aggregate outstanding principal balances of loans held by Matrix Bank, which
was consistent with the Company's objective of growing the assets of Matrix
Bank. For a tabular presentation of the changes in net interest income due to
changes in volume of interest-earning assets and changes in interest rates,
see "--Analysis of Changes in Net Interest Income Due to Changes in Interest
Rates and Volumes."
PROVISION FOR LOAN LOSSES. The provision for loan losses is an amount
charged to expense to provide for estimated losses that may occur in the
future on existing loans. In order to determine the amount of the provision,
the Company conducts a monthly review of its loan portfolio and a quarterly
evaluation of the adequacy of its valuation reserves. This systematic
evaluation includes an allocation of the valuation reserve to each loan
category, based on pre-determined loss reserve factors. For example, a higher
loss reserve factor is applied against commercial real estate loans than
residential loans. Within each loan category, the loans are further stratified
by delinquency. Loss reserve factors are higher on delinquent loans than
performing loans. This evaluation also takes into consideration current
economic and market conditions, loan portfolio growth, monthly loan losses and
recoveries, changes in non-performing loans and the current loan collateral
values. The provision for loan losses increased $67,000, or 78.8%, to $152,000
for the six months ended June 30, 1996, as compared to $85,000 for the six
months ended June 30, 1995. This increase was primarily attributable to the
increase in the size of the Company's loan portfolio during the six months
ended June 30, 1996. For a discussion of the Company's allowance for loan
losses as it relates to nonperforming assets, see "--Asset and Liability
Management--Nonperforming Assets."
LOAN ADMINISTRATION. Loan administration fees represent service fees and
other income earned from servicing loans for various investors. Loan
administration fees include service fees that are based on a contractual
percentage of the outstanding principal balance on loans serviced plus late
fees and other ancillary charges. Income is recognized when the related
payments are received. Loan administration fees increased $1.1 million, or
32.0%, to $4.6 million for the six months ended June 30, 1996, as compared to
$3.5 million for the six months ended June 30, 1995. This increase resulted
primarily from the increase in the average outstanding principal balances
underlying the Company's mortgage servicing rights portfolio for the six
months ended June 30, 1996, as compared to the six months ended June 30, 1995.
BROKERAGE. Brokerage fees decreased $1.1 million, or 34.2%, to $1.9 million
for the six months ended June 30, 1996, as compared to $3.0 million for the
six months ended June 30, 1995. This decrease was attributable primarily to
the implementation by the mortgage banking industry of FAS 122, effective
January 1, 1996. For a discussion of FAS 122, see "Regulation and
Supervision--FAS 122." The volume of residential mortgage servicing portfolios
brokered, in terms of aggregate unpaid principal balances on the underlying
loans, decreased $5.9 billion, or 31.9%, to $12.6 billion for the six months
ended June 30, 1996, as compared to $18.5 billion for the six months ended
June 30, 1995. The decrease occurred in the first quarter of 1996, as mortgage
banking firms and financial institutions deferred servicing sales pending
their review of the impact of FAS 122 on their operations. Beginning with the
second quarter of 1996, the Company experienced increased volume of sales of
servicing and does not anticipate that FAS 122 will have a significant effect
on the Company's brokerage activities in the foreseeable future.
GAIN ON SALE OF LOANS AND MORTGAGE-BACKED SECURITIES. Gain on sale of
mortgage loans and mortgage-backed securities decreased by $468,000, or 35.5%,
to $852,000 for the six months ended June 30, 1996, as compared to $1.3
million for the six months ended June 30, 1995. The decrease of $468,000 was
primarily attributable to the mix and the amount of the loan portfolios that
the Company sold. Gain on sale of loans can fluctuate significantly from
quarter to quarter and from year to year based on a variety of factors, such
as the current interest rate environment, the supply of loan portfolios in the
market, the mix of loan portfolios available
24
<PAGE>
in the market, the type of loan portfolios the Company purchases and the
particular loan portfolios the Company elects to sell. The gains from loan
sales occur predominantly at Matrix Bank. The Company's strategy has been and
will continue to be to attempt to match its purchases and sales while managing
its desired growth. The strategy of matching the Company's purchases and sales
while growing the assets of Matrix Bank allows the Company to leverage the
bank's capital and increase net interest income. See "Business--Purchase and
Sale of Bulk Loan Portfolios."
GAIN ON SALE OF MORTGAGE SERVICING RIGHTS. Gain on sale of mortgage
servicing rights increased $901,000, or 474.2%, to $1.1 million for the six
months ended June 30, 1996, as compared to $190,000 for the six months ended
June 30, 1995. This increase resulted primarily from the sale of two
portfolios of servicing rights that occurred in June 1996. In terms of
aggregate outstanding principal balances of mortgage loans underlying such
servicing rights, the Company sold $390.5 million in purchased mortgage
servicing rights for the six months ended June 30, 1996 as compared to $15.6
million in mortgage servicing rights for the six months ended June 30, 1995.
The sales in June 1996 were undertaken primarily to generate cash flow and
revenue in order to partially offset the secondary marketing loss incurred in
March 1996. See "--Loan Origination."
LOAN ORIGINATION. Loan origination income includes all mortgage loan
origination fees, secondary marketing activity on new loan originations,
servicing released premiums on new originations sold, net of outside
origination costs. Loan origination income decreased $246,000, or 55.9%, to
$194,000 for the six months ended June 30, 1996, as compared to $440,000 for
the six months ended June 30, 1995.
The decrease in loan origination income of $246,000 for the six months ended
June 30, 1996, as compared to the six months ended June 30, 1995, was
attributable primarily to a $1.9 million secondary marketing loss that
occurred in March 1996, partially offset by an increase in other loan
origination income resulting from an increase in loan origination volume of
$256.7 million, or 220.7%, to $373.0 million for the six months ended June 30,
1996, as compared to $116.3 million for the six months ended June 30, 1995.
The secondary marketing loss was attributable to the failure of a former
officer of Matrix Financial to adhere to the hedging policies established by
Matrix Financial's board of directors. These policies establish benchmarks for
Matrix Financial's forward commitments to deliver loans or mortgage backed
securities which are to be maintained against the pipeline and funded loans.
In addition, these policies stipulate that all closed loans are to be fully
hedged with forward commitments. The Company's hedging policies were not
adhered to, resulting in certain of such closed loans not being adequately
hedged, which resulted in a $1.9 million loss when interest rates increased
dramatically in March 1996, thereby causing the funded loans and pipeline
commitments to decline in market value. Had these policies been followed, the
Company would still have recognized a loss, albeit significantly smaller,
since it is difficult for the Company to be completely hedged when interest
rates rapidly and significantly change. See "Risk Factors--Potential Adverse
Effect of Fluctuating Interest Rates--Pipeline Loans."
The Company has implemented several management and reporting changes to help
ensure that the hedging policies established by Matrix Financial's board of
directors are adhered to so as to mitigate secondary marketing losses in
volatile interest rate markets. The management and reporting changes were made
in two major areas. First, there was a reorganization of the reporting
structure for the production division related to the Company's secondary
marketing activities. A new Chief Lending Officer was hired to manage loan
production and the related operations for Matrix Financial, and a new
secondary marketing manager was hired to focus specifically on managing the
interest rate risk of this business line. Second, the Company developed and
implemented additional policies and procedures for production and secondary
marketing activities to decrease the interest rate risk exposure of the
Company.
The Company also divided the reporting hierarchy for the production and
secondary marketing responsibilities. The secondary marketing department has
been relocated from Atlanta to Phoenix and reports directly to the finance
division of Matrix Financial. This reduces the production pressures on
secondary marketing and allows the Company to focus specifically on interest
rate risk management. The reorganization and centralization of the secondary
marketing department has been supplemented by the development of more
25
<PAGE>
formalized pipeline, interest rate risk management, hedging policies and
procedures to further reduce secondary marketing risks. The secondary
marketing manager provides daily analysis of loan pipeline, hedge positions
and mark to market valuations to insure the Company's hedging policies are
being followed. This analysis is reviewed daily with the Chief Financial
Officer of Matrix Financial and a weekly summary is provided to the executive
officers of Matrix Capital. New procedures and policies regarding loan lock
policy, lock tracking and authorizations for lock extensions and pricing
exceptions have been implemented. With these changes, the Company believes it
has reduced the risk of significant secondary marketing losses such as the one
experienced in March 1996.
NON-INTEREST EXPENSE. Non-interest expense increased $1.8 million, or 22.8%,
to $9.5 million for the six months ended June 30, 1996, as compared to $7.8
million for the six months ended June 30, 1995. This increase was primarily
the result of the continued expansion and diversification of the Company's
operations. The following table details the major components of non-interest
expense for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Compensation and employee benefits........................ $ 4,157 $ 5,071
Amortization of mortgage servicing rights................. 613 1,184
Occupancy and equipment................................... 657 738
Professional fees......................................... 232 176
Data processing........................................... 246 273
Other..................................................... 1,854 2,083
-------- --------
Total................................................... $ 7,759 $ 9,525
======== ========
</TABLE>
Compensation and employee benefits generally represent the largest component
of non-interest expense for the Company. Compensation and employee benefits
increased $914,000, or 22.0%, to $5.1 million for the six months ended June
30, 1996, as compared to $4.2 million for the six months ended June 30, 1995.
The increase of $914,000 was a result of the Company's development and
expansion of existing and new business lines, which resulted in a significant
expansion in the Company's employee base. In June 1995, the Company started
the operations of USS and expanded its employee base at Matrix Financial to
handle the increase in wholesale loan originations; in January 1996, the
Company opened a branch of Matrix Bank in Sun City, Arizona; and in May 1996,
the Company acquired the operations of Sterling. All of the above expansion
activities required additional personnel, which was the primary contributor to
the increase in compensation and employee benefits (as compared to increases
in salary and benefit levels). The Company had a total of 206 full time
equivalent employees at June 30, 1996, as compared to 156 full time equivalent
employees at June 30, 1995. In addition, much of the compensation incurred in
connection with the Company's wholesale lending operations is based on
commission. A portion of the increase in compensation and employee benefits
during the six months ended June 30, 1996, therefore, was attributable to the
increased volume of wholesale loan originations.
Amortization of mortgage servicing rights fluctuates based on the size of
the Company's mortgage servicing portfolio, the size of the Company's
investment and the prepayment rates experienced with respect to the underlying
mortgage loan portfolio from year to year. Amortization of mortgage servicing
rights increased $571,000, or 93.1%, to $1.2 million for the six months ended
June 30, 1996, as compared to $613,000 for the six months ended June 30, 1995.
This increase was due to an increase in the average balance of the outstanding
servicing portfolio and was partially offset by the lower prepayments
experienced for the six months ended June 30, 1996 as compared to the six
months ended June 30, 1995.
Occupancy and equipment expenses increased $81,000, or 12.3%, to $738,000
for the six months ended June 30, 1996, as compared to $657,000 for the six
months ended June 30, 1995. The increase was the result of the opening of a
bank branch in Sun City, Arizona in January 1996, and the lease of office
space for the operations of USS and Sterling.
26
<PAGE>
The remaining non-interest expense, which includes professional fees, data
processing costs and other expenses, such as telephone, postage, advertising
and insurance, increased $200,000, or 8.6%, to $2.5 million for the six months
ended June 30, 1996 as compared to $2.3 million for the six months ended June
30, 1995. The increase was the result of the development and expansion of both
existing and new business lines by the Company.
PROVISIONS FOR INCOME TAXES. Provisions for income taxes decreased $130,000,
or 13.4%, to $840,000 for the six months ended June 30, 1996, as compared to
$970,000 for the six months ended June 30, 1995. The decrease was due to the
decrease in pre-tax income. The two periods had effective tax rates of 40% and
39%, respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND
1994
NET INCOME; RETURN ON AVERAGE EQUITY. Net income increased $915,000, or
34.6%, to $3.6 million for the year ended December 31, 1995, as compared to
$2.6 million for the year ended December 31, 1994. Return on average equity
decreased to 51.4% for the year ended December 31, 1995 as compared to 58.5%
for the year ended December 31, 1994. The decrease in return on average equity
was primarily due to the Company's policy of retaining all of its earnings,
which increased its equity base.
NET INTEREST INCOME. Net interest income before provision for loan losses
decreased $453,000, or 11.4%, to $3.5 million for the year ended December 31,
1995, as compared to $4.0 million for the year ended December 31, 1994. The
decrease for the year ended December 31, 1995 was attributable primarily to
the increase in the Company's cost of interest-bearing liabilities, which
increased to 7.14% for the year ended December 31, 1995, as compared to 5.16%
for the year ended December 31, 1994. The increase in the cost of interest-
bearing liabilities was primarily related to borrowings used to fund the
increase in the mortgage loan originations. The Company's mortgage loan
originations are funded through borrowings based on short-term interest rates.
The interest rate spread between short-term interest rates and long-term
interest rates generally was lower during the year ended December 31, 1995, as
compared to the year ended December 31, 1994. The decrease occurred primarily
because the cost of interest-bearing liabilities increased more rapidly than
the yield on interest-earning assets. The effect of smaller spreads between
long-term interest rates and short-term interest rates means generally that
the Company earns less net interest income on its wholesale mortgage loan
originations which, in turn, reduces its net interest margin (net interest
income before provision for loan losses divided by average interest-earning
assets). The Company's net interest margin decreased to 2.81% for the year
ended December 31, 1995 as compared to 4.63% for the year ended December 31,
1994. The effect of the lower interest rate margin was partially offset by an
increase in the Company's average interest-earning assets. The Company's
average interest-earning assets increased $39.8 million, or 46.3%, to $125.9
million for the year ended December 31, 1995, as compared to $86.1 million for
the year ended December 31, 1994. This increase was attributable primarily to
the increase in the size of the Company's loan portfolio held for sale. For a
tabular presentation of the changes in net interest income due to changes in
volume of interest-earning assets and changes in interest rates, see "--
Analysis of Changes in Net Interest Income Due to Changes in Interest Rates
and Volumes."
PROVISION FOR LOAN LOSSES. The provision for loan losses increased $185,000,
or 85.6%, to $401,000 for the year ended December 31, 1995, as compared to
$216,000 for the year ended December 31, 1994. This increase was attributable
primarily to the corresponding increase in the size of the Company's loan
portfolio. For a discussion of the Company's allowance for loan losses as it
relates to nonperforming assets, see "--Asset and Liability Management--
Nonperforming Assets."
LOAN ADMINISTRATION. Loan administration fees increased $823,000, or 11.9%,
to $7.7 million for the year ended December 31, 1995, as compared to $6.9
million for the year ended December 31, 1994. This increase was attributable
primarily to the increase in the average outstanding principal balance
underlying the Company's mortgage servicing rights portfolio for the year
ended December 31, 1995, as compared to the year ended December 31, 1994.
27
<PAGE>
BROKERAGE. Brokerage fees increased $770,000, or 19.2%, to $4.8 million for
the year ended December 31, 1995, as compared to $4.0 million for the year
ended December 31, 1994. The increase was primarily attributable to an
increase in the volume of residential mortgage servicing portfolios brokered
by United Financial. The balance of residential mortgage servicing portfolios
brokered by United Financial, in terms of aggregate unpaid principal balances
on the underlying loans, increased $3.7 billion, or 12.8%, to $32.6 billion
for the year ended December 31, 1995, as compared to $28.9 billion for the
year ended December 31, 1994.
GAIN ON SALE OF LOANS AND MORTGAGE-BACKED SECURITIES. Gain on sale of
mortgage loans and mortgage-backed securities increased by $1.7 million, or
105.8%, to $3.3 million for the year ended December 31, 1995, as compared to
$1.6 million for the year ended December 31, 1994. The increase was
attributable primarily to the type of loan portfolios that the Company was
able to purchase during 1995. The Company's strategy has been and will
continue to be to match its purchases and sales while managing its desired
growth. Therefore, the increase of $1.7 million in gain on loan sales was
attributable to the Company's loan purchases, which affect the mix and, to a
limited extent, the amount of the loan portfolios that the Company sold.
GAIN ON SALE OF MORTGAGE SERVICING RIGHTS. Gain on sale of mortgage
servicing rights increased $480,000, or 70.2%, to $1.2 million for the year
ended December 31, 1995, as compared to $684,000 for the year ended December
31, 1994. This increase resulted primarily from one particular sale of
mortgage servicing rights with aggregate unpaid principal balances of $16.2
million, resulting in a gain of $1.0 million. The servicing portfolio sold
consisted of loans with non-standard payment accrual methodologies, including
the Rule of 78s and daily simple interest accruals, and were secured by second
liens. The sale allowed the Company to deploy the cash generated to purchase
new servicing portfolios considered by the Company to be more conforming in
nature and, thereby, enhance the efficiencies of the Company's servicing
operations.
LOAN ORIGINATION. Loan origination income increased $775,000, or 59.9%, to
$2.1 million for the year ended December 31, 1995, as compared to $1.3 million
for the year ended December 31, 1994. The increase of $775,000 was primarily
the result of the increase in new loan origination volume experienced by
Matrix Financial during 1995. The new loan origination volume increased $205.8
million, or 112.4%, to $388.9 million for the year ended December 31, 1995, as
compared to $183.1 million for the year ended December 31, 1994.
NON-INTEREST EXPENSE. Non-interest expense increased $2.8 million, or 20.0%,
to $17.1 million for the year ended December 31, 1995, as compared to $14.3
million for the year ended December 31, 1994. This increase was primarily a
result of the continued expansion and diversification of the Company's
operations during 1995. The following table details the major components of
non-interest expense for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Compensation and employee benefits.......................... $ 7,719 $ 8,586
Amortization of mortgage servicing rights................... 1,185 1,817
Occupancy and equipment..................................... 1,067 1,124
Professional fees........................................... 485 660
Data processing............................................. 492 529
Other....................................................... 3,331 4,420
------- -------
Total..................................................... $14,279 $17,136
======= =======
</TABLE>
Compensation and employee benefits increased $867,000, or 11.2%, to $8.6
million for the year ended December 31, 1995, as compared to $7.7 million for
the year ended December 31, 1994. The majority of the increase was directly
related to the increase in the brokerage volume at United Financial and the
loan origination volume at Matrix Financial. The majority of employees engaged
in these activities are paid on a commission basis. The brokerage volume
increased $3.7 billion, or 12.8%, and the loan originations increased $205.8
million,
28
<PAGE>
or 112.4%, which resulted in an increase in compensation of approximately
$800,000. The remainder of the increase was the result of the Company's
development and expansion of both existing and new business lines during 1995,
which resulted in the expansion of the Company's employee base. The Company
had a total of 163 full time equivalent employees at December 31, 1995 as
compared to 153 full time equivalent at December 31, 1994.
Amortization of mortgage servicing rights increased $632,000, or 53.3%, to
$1.8 million for the year ended December 31, 1995, as compared to $1.2 million
for the year ended December 31, 1994. This increase was due to the growth in
the Company's average outstanding balance of servicing rights, but was
partially offset by the slower rate of prepayments experienced during the year
ended December 31, 1995, as compared to the year ended December 31, 1994.
The remaining non-interest expense, which includes occupancy and equipment
expenses, professional fees, data processing costs and other expenses, such as
telephone, postage, advertising and insurance, increased $1.3 million, or
25.3%, to $6.7 million for the year ended December 31, 1995 as compared to
$5.4 million for the year ended December 31, 1994. The increase was the result
of the development and expansion of both existing and new business lines.
PROVISIONS FOR INCOME TAXES. Provisions for income taxes increased $414,000,
or 22.4%, to $2.3 million for the year ended December 31, 1995, as compared to
$1.8 million for the year ended December 31, 1994. The increase was due to the
increase in pre-tax income. The two periods had comparable effective tax rates
of 39% and 41%, respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994 AND
1993
NET INCOME; RETURN ON AVERAGE EQUITY. Net income increased $940,000, or
55.1% to $2.6 million for the year ended December 31, 1994, as compared to
$1.7 million for the year ended December 31, 1993. Return on average equity
decreased to 58.5% for the year ended December 31, 1994, as compared to 88.4%
for the year ended December 31, 1993. Return on average equity decreased due
to the Company's policy of retaining all of its earnings, which increased its
equity base.
NET INTEREST INCOME. Net interest income before provision for loan losses
increased $3.1 million, or 322.6%, to $4.0 million for the year ended December
31, 1994, as compared to $944,000 for the year ended December 31, 1993. The
increase in the Company's net interest income was largely a result of the year
ended December 31, 1994, including a full 12 months of operating results for
Matrix Bank, as compared to the inclusion of only three months for the year
ended December 31, 1993. The Company's average interest-earning assets
increased $63.3 million, or 278.4%, to $86.1 million, as compared to $22.8
million for the year ended December 31, 1993. This increase was again
attributable primarily to the year ended December 31, 1994, including a full
12 months of operations for Matrix Bank. The Company's net interest margin
increased to 4.63% for the year ended December 31, 1994, as compared to 4.15%
for the year ended December 31, 1993. The increase resulted primarily from the
fact that the average balance of interest-earning assets increased greater
than the average balance of interest-bearing liabilities. The average balance
of interest-earning assets increased by $63.3 million, to $86.1 million for
the year ended December 31, 1994, from $22.8 million for the year ended
December 31, 1993, as compared to an increase in interest-bearing liabilities
of $35.7 million, to $58.6 million for the year ended December 31, 1994, as
compared to $22.9 million for the year ended December 31, 1993. The overall
increase in both the interest-earning assets and interest bearing liabilities
is the result of the year ended December 31, 1994 including a full 12 months
for Matrix Bank. The greater increase in the average balance of interest-
earning assets was a result of the effect of the noninterest bearing custodial
balances maintained at Matrix Bank. For a tabular presentation of the changes
in net interest income due to changes in volume of interest-earning assets and
changes in interest rates, see "--Analysis of Changes in Net Interest Income
Due to Changes in Interest Rates and Volumes."
PROVISION FOR LOAN LOSSES. The provision for loan losses increased $201,000
to $216,000 for the year ended December 31, 1994, as compared to $15,000 for
the year ended December 31, 1993. This increase was
29
<PAGE>
primarily attributable to the increase in the size of the Company's loan
portfolio for 1994, as compared to 1993. For a discussion of the Company's
allowance for loan losses as it relates to nonperforming assets, see "--Asset
and Liability Management--Nonperforming Assets."
LOAN ADMINISTRATION. Loan administration fees increased $499,000, or 7.8%,
to $6.9 million for the year ended December 31, 1994, as compared to $6.4
million for the year ended December 31, 1993. This increase was attributable
primarily to the increase in the average outstanding principal balances
underlying the Company's mortgage servicing rights portfolio for the year
ended December 31, 1994, as compared to the year ended December 31, 1993.
BROKERAGE. Brokerage fees increased $1.9 million, or 88.4%, to $4.0 million
for the year ended December 31, 1994, as compared to $2.1 million for the year
ended December 31, 1993. The increase was attributable primarily to an
increase in the volume of residential mortgage servicing portfolios brokered
by United Financial of $12.8 billion, or 79.5%, to $28.9 billion for the year
ended December 31, 1994, as compared to $16.1 billion for the year ended
December 31, 1993.
GAIN ON SALE OF LOANS. Gain on sale of mortgage loans decreased by $771,000,
or 32.7%, to $1.6 million for the year ended December 31, 1994, as compared to
$2.4 million for the year ended December 31, 1993. The decrease was
attributable primarily to the sale by the Company of fewer mortgage loans in
1994, as compared to 1993, consistent with the Company's objective of growing
the balance sheet of Matrix Bank through the acquisition of bulk loan
portfolios.
GAIN ON SALE OF MORTGAGE SERVICING RIGHTS. Gain on sale of mortgage
servicing rights increased $646,000 to $684,000 for the year ended December
31, 1994, as compared to $38,000 for the year ended December 31, 1993. This
increase resulted primarily from two sale transactions, aggregating $112.4
million in unpaid principal balances or underlying loans, consummated in the
year ended December 31, 1994, as compared to one insignificant transaction in
the year ended December 31, 1993.
LOAN ORIGINATION. Loan origination income increased $1.1 million, or 485.5%,
to $1.3 million for the year ended December 31, 1994, as compared to $221,000
for the year ended December 31, 1993. The increase of $1.1 million was
primarily attributable to the increase in new loan origination volume and
pricing. The new loan origination volume increased $56.9 million, or 45.1%, to
$183.1 million for the year ended December 31, 1994, as compared to $126.2 for
the year ended December 31, 1993, which included only six months of wholesale
loan originations because the Company commenced those operations in June 1993.
NON-INTEREST EXPENSE. Non-interest expense increased $3.8 million, or 36.5%,
to $14.3 million for the year ended December 31, 1994, as compared to $10.5
million for the year ended December 31, 1993. This increase was a result of
the expansion and diversification in the Company's operations and, more
specifically, the effect of the acquisition of Matrix Bank. The Company's
operations include a full 12 months of operating results for Matrix Bank for
the year ended December 31, 1994, as compared to only three months for the
year ended December 31, 1993. The following table details the major components
of non-interest expense for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1993 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Compensation and employee benefits.......................... $ 4,605 $ 7,719
Amortization of mortgage servicing rights................... 2,363 1,185
Occupancy and equipment..................................... 585 1,067
Professional fees........................................... 297 485
Data processing............................................. 408 492
Other....................................................... 2,206 3,331
------- -------
Total..................................................... $10,464 $14,279
======= =======
</TABLE>
30
<PAGE>
Compensation and employee benefits increased $3.1 million, or 67.6%, to $7.7
million for the year ended December 31, 1994, as compared to $4.6 million for
the year ended December 31, 1993. The increase of $3.1 million was a result
the growth that the Company experienced, primarily as a result of the
acquisition of Matrix Bank. The Company had a total of 153 full time
equivalent employees at December 31, 1994, as compared to 117 full time
equivalent employees at December 31, 1993.
Amortization of mortgage servicing rights decreased $1.2 million, or 49.9%,
to $1.2 million for the year ended December 31, 1994, as compared to $2.4
million for the year ended December 31, 1993. This decrease was primarily due
to a significant decrease in the rate of prepayments and was partially offset
by marginal growth in the Company's outstanding balance of servicing rights.
Occupancy and equipment expenses increased $482,000, or 82.4%, to $1.1
million for the year ended December 31, 1994, as compared to $585,000 for the
year ended December 31, 1993. The increase was primarily the result of the
growth that the Company experienced, including the addition of the facilities
and equipment utilized by Matrix Bank.
The remaining non-interest expense which includes professional fees, data
processing costs and other expenses, such as telephone, postage, advertising
and insurance, increased $1.4 million, or 48.0%, to $4.3 million for the year
ended December 31, 1994, as compared to $2.9 million for the year ended
December 31, 1993. The increase was a result of the development and expansion
of both existing and new business lines and the acquisition of Matrix Bank in
September 1993.
PROVISIONS FOR INCOME TAXES. Provisions for income taxes increased $1.4
million, or 356.9%, to $1.8 million for the year ended December 31, 1994, as
compared to $404,000 for the year ended December 31, 1993. The increase was
due to the increase in pre-tax income for 1994, as well as the fact that
United Financial and Matrix Financial had elected for the first six months of
1993 to be treated as subchapter "s" corporations with the prior shareholders
being responsible for the related tax liability. As part of the formation of
Matrix Capital, these corporations were converted to "c" corporations and were
taxed accordingly for the second half of 1993. The transition of United
Financial and Matrix Financial from subchapter "s" to subchapter "c"
corporations in June 1993 resulted in the Company having an effective tax rate
of 19% in 1993 as compared to 41% in 1994.
AVERAGE BALANCE SHEET
The following table sets forth for the periods and as of the dates indicated
information regarding the Company's average balances of assets and liabilities
as well as the dollar amounts of interest income from interest-earning assets
and interest expense on interest-bearing liabilities and the resultant yields
or costs. Average interest rate information for the six months ended June 30,
1995 and 1996 has been annualized. Ratio, yield and rate information are based
on average daily balances where available; otherwise, average monthly balances
have been used. Nonaccrual loans are included in the calculation of average
balances for loans for the periods indicated.
31
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1993 1994 1995
------------------------- ------------------------- --------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ------- ------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning
assets:
Loans receivable,
net of
discounts........ $18,608 $1,647 8.85% $79,393 $6,681 8.42% $121,206 $10,412 8.59%
Mortgage-backed
securities....... -- -- -- -- -- -- -- -- --
Interest-earning
deposits......... 3,991 100 2.51 5,974 299 5.01 3,381 232 6.86
FHLB stock....... 151 4 2.65 716 35 4.89 1,321 86 6.51
------- ------ ----- ------- ------ ------ -------- ------- ------
Total interest-
earning assets.. 22,750 1,751 7.70 86,083 7,015 8.15 125,908 10,730 8.52
Non-interest
earning assets:
Cash............. 844 1,618 2,046
Allowance for
loan losses...... (168) (690) (836)
Premises and
equipment........ 1,211 3,639 4,909
Other assets..... 9,653 7,624 17,611
------- ------- --------
Total
noninterest
earning assets.. 11,540 12,191 23,730
------- ------- --------
Total assets.... $34,290 $98,274 $149,638
======= ======= ========
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest-bearing
liabilities:
Passbook
accounts......... $ 908 17 1.87 $ 2,788 72 2.58 $ 2,394 85 3.55
Money market and
negotiable order
of withdrawal
("NOW") accounts. 3,713 72 1.94 9,481 271 2.86 8,320 292 3.51
Certificates of
deposit.......... 10,888 304 2.79 29,273 1,138 3.89 33,332 1,807 5.42
FHLB borrowings.. 271 9 3.32 3,071 213 6.94 17,662 1,113 6.30
Borrowed money... 7,090 405 5.71 14,008 1,332 9.51 39,021 3,897 9.98
------- ------ ----- ------- ------ ------ -------- ------- ------
Total interest-
bearing
liabilities..... 22,870 807 3.53 58,621 3,026 5.16 100,729 7,194 7.14
------- ------ ----- ------- ------ ------ -------- ------- ------
Noninterest
bearing
liabilities:
Demand deposits
(including
custodial escrow
balances)........ 5,186 30,559 35,794
Other
liabilities...... 4,305 4,570 6,184
------- ------- --------
Total noninterest
bearing
liabilities...... 9,491 35,129 41,978
Shareholders'
equity........... 1,929 4,524 6,931
------- ------- --------
Total
liabilities and
shareholders'
equity.......... $34,290 $98,274 $149,638
======= ======= ========
Net interest
income before
provision for
loan losses...... $ 944 $3,989 $ 3,536
====== ====== =======
Interest rate
spread........... 4.17% 2.99% 1.38%
===== ====== ======
Net interest
margin........... 4.15% 4.63% 2.81%
===== ====== ======
Ratio of average
interest-earning
assets to average
interest-
bearing liabilities.. 99.48% 146.85% 125.00%
===== ====== ======
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------------------
1995 1996
-------------------------- --------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning
assets:
Loans receivable,
net of
discounts........ $102,082 $4,092 8.02% $160,380 $7,713 9.62%
Mortgage-backed
securities....... -- -- -- 3,487 134 7.69
Interest-earning
deposits......... 2,986 115 7.70 4,612 112 4.86
FHLB stock....... 1,169 38 6.50 2,453 72 5.87
-------- ------ ------ -------- ------ ------
Total interest-
earning assets.. 106,237 4,245 7.99 170,932 8,031 9.40
Non-interest
earning assets:
Cash............. 2,025 2,346
Allowance for
loan losses...... (896) (978)
Premises and
equipment........ 4,670 6,277
Other assets..... 14,327 22,985
-------- --------
Total
noninterest
earning assets.. 20,126 30,630
-------- --------
Total assets.... $126,363 $201,562
======== ========
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest-bearing
liabilities:
Passbook
accounts......... $ 2,496 46 3.69 $ 2,415 40 3.31
Money market and
negotiable order
of withdrawal
("NOW") accounts. 7,928 128 3.23 11,929 233 3.91
Certificates of
deposit.......... 31,256 771 4.93 44,225 1,288 5.82
FHLB borrowings.. 15,458 494 6.39 34,416 976 5.67
Borrowed money... 23,221 1,144 9.85 64,359 2,862 8.89
-------- ------ ------ -------- ------ ------
Total interest-
bearing
liabilities..... 80,359 2,583 6.43 157,344 5,399 6.86
-------- ------ ------ -------- ------ ------
Noninterest
bearing
liabilities:
Demand deposits
(including
custodial escrow
balances)........ 33,779 28,518
Other
liabilities...... 6,144 5,856
-------- --------
Total noninterest
bearing
liabilities...... 39,923 34,374
Shareholders'
equity........... 6,081 9,844
-------- --------
Total
liabilities and
shareholders'
equity.......... $126,363 $201,562
======== ========
Net interest
income before
provision for
loan losses...... $1,662 $2,632
====== ======
Interest rate
spread........... 1.56% 2.54%
====== ======
Net interest
margin........... 3.13% 3.08%
====== ======
Ratio of average
interest-earning
assets to average
interest-
bearing liabilities.. 132.20% 108.64%
====== ======
</TABLE>
32
<PAGE>
ANALYSIS OF CHANGES IN NET INTEREST INCOME DUE TO CHANGES IN INTEREST RATES
AND VOLUMES
The following table presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the increase or
decrease related to changes in balances and changes in interest rates. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(i.e., changes in volume multiplied by old rate) and (ii) changes in rate
(i.e., changes in rate multiplied by old volume). For purposes of this table,
changes attributable to both rate and volume, which cannot be segregated, have
been allocated proportionately to the change due to volume and the change due
to rate.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
1994 VS 1993 1995 VS 1994 1995 VS 1996
---------------------- --------------------- ----------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN DUE TO CHANGE IN DUE TO CHANGE IN
---------------------- --------------------- ----------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ------- ------ ------ ----- ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net
of discounts.......... $5,380 $ (346) $5,034 $3,519 $ 212 $3,731 $2,337 $1,284 $3,621
Mortgage-backed securi-
ties.................. -- -- -- -- -- -- -- 134 134
Interest-earning depos-
its................... 50 149 199 (130) 63 (67) 63 (66) (3)
FHLB stock............. 15 16 31 30 21 51 42 (8) 34
------ ------- ------ ------ ----- ------ ------ ------ ------
Total interest-earning
assets................ 5,445 (181) 5,264 3,419 296 3,715 2,442 1,344 3,786
------ ------- ------ ------ ----- ------ ------ ------ ------
Interest-bearing liabil-
ities:
Passbook accounts...... 35 20 55 (10) 23 13 (1) (5) (6)
Money market and NOW
accounts.............. 112 87 199 (33) 54 21 65 40 105
Certificates of depos-
it.................... 513 321 834 158 512 670 320 197 517
FHLB advances.......... 93 111 204 1,012 (112) 900 606 (124) 482
Borrowed money......... 395 532 927 2,378 186 2,564 2,027 (309) 1,718
------ ------- ------ ------ ----- ------ ------ ------ ------
Total interest-bearing
liabilities........... 1,148 1,071 2,219 3,505 663 4,168 3,017 (201) 2,816
------ ------- ------ ------ ----- ------ ------ ------ ------
Change in net interest
income before provision
for loan losses........ $4,297 $(1,252) $3,045 $ (86) $(367) $ (453) $ (575) $1,545 $ 970
====== ======= ====== ====== ===== ====== ====== ====== ======
</TABLE>
ASSET AND LIABILITY MANAGEMENT
GENERAL. The Company's objective is to structure its operations to derive
the majority of its revenues and earnings from non-interest income. However, a
portion of the Company's revenues and net income are derived from net interest
income and, accordingly, the Company strives to manage its interest-earning
assets and interest-bearing liabilities to generate what management believes
to be an appropriate contribution from net interest income. Asset and
liability management seeks to control the variability of the Company's
performance due to changes in interest rates. The Company continually attempts
to achieve an appropriate relationship between rate sensitive assets and rate
sensitive liabilities. The Company has responded to interest rate volatility
by developing and implementing asset and liability management strategies
designed to increase its non-interest income and improve the match between
interest-earning assets and interest-bearing liabilities. These strategies
include:
. Utilizing mortgage servicing rights as a source of non-interest income
and as a countermeasure against the decline in the value of mortgage
loans during a rising interest rate environment. Increases in interest
rates tend to increase the value of mortgage servicing rights because of
the resulting decrease in prepayment rates on the underlying loans;
. Increasing the non-interest bearing custodial escrow balances related to
the Company's mortgage servicing rights;
. Increasing focus on lines of business that are less interest rate
sensitive, such as brokerage activities and real estate disposition;
. Maintaining a wholesale loan origination operation. Wholesale
originations provide a form of hedge against the balance of mortgage loan
servicing rights. In a decreasing interest rate environment, the value
33
<PAGE>
of the servicing portfolio tends to decrease due to increased prepayments
of the underlying loans. During this same period, however, the volume of
loan originations generally increases;
. Originating and purchasing adjustable rate mortgages and selling newly
originated fixed rate residential mortgages in the secondary market;
. Increasing emphasis on the origination of consumer loan products, which
tend to have higher interest rates with shorter loan maturities than
residential mortgage loans; and
. Increasing retail deposits, which are less susceptible to changes in
interest rates than other funding sources.
LENDING ACTIVITIES. A significant part of the Company's asset and liability
management is monitoring the composition of the Company's loan portfolio,
including the corresponding maturities. The table below sets forth the
composition of the Company's loan portfolio by loan type as of the dates
indicated. The amounts in the table below are shown net of discounts and other
deductions.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------
1993 1994 1995
--------------- --------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Residential................ $65,858 86.10% $80,010 89.56% $127,924 92.80%
Multi-family and commercial
real estate............... 7,813 10.21 7,518 8.41 7,544 5.47
Construction............... 125 0.16 106 0.12 78 0.06
Consumer................... 3,238 4.23 2,434 2.72 3,245 2.35
------- ------ ------- ------ -------- ------
Total loans.............. 77,034 100.70 90,068 100.81 138,791 100.68
Less allowance for loan
losses.................... 538 0.70 728 0.81 943 0.68
------- ------ ------- ------ -------- ------
Loans receivable, net...... $76,496 100.00% $89,340 100.00% $137,848 100.00%
======= ====== ======= ====== ======== ======
</TABLE>
The following table presents the aggregate maturities of loans in each major
category of the Company's loan portfolio as of December 31, 1995. Loans held
for sale are classified as maturing within one year due to the Company's
expectation of selling the loans within one year. Actual maturities may differ
from the contractual maturities shown below as a result of renewals and
prepayments or the timing of loan sales.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
---------------------------------------
LESS THAN ONE TO OVER FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
--------- ---------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Residential........................... $119,158 $1,591 $ 7,175 $127,924
Multi-family and commercial real
estate............................... 173 855 6,516 7,544
Construction.......................... 78 -- -- 78
Consumer.............................. 353 1,449 1,443 3,245
-------- ------ ------- --------
Total loans......................... $119,762 $3,895 $15,134 $138,791
======== ====== ======= ========
</TABLE>
34
<PAGE>
NONPERFORMING ASSETS. As part of asset and liability management, the Company
monitors nonperforming assets ("NPAs") on a monthly basis. NPAs consist
primarily of nonaccrual loans and foreclosed real estate. Loans are placed on
nonaccrual when full payment of principal or interest is in doubt, or when
they are past due 90 days as to either principal or interest. Foreclosed real
estate arises primarily through foreclosure on mortgage loans owned. The
following table sets forth the Company's NPAs as of the dates indicated:
<TABLE>
<CAPTION>
AS OF
-----------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1993 1994 1995 1996
------------ ------------ ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Nonaccrual mortgage loans..... $ 657 $3,275 $5,523 $3,958
Nonaccrual consumer loans..... 196 39 15 134
------ ------ ------ ------
Total nonperforming loans... 853 3,314 5,538 4,092
Foreclosed real estate........ 726 543 835 1,093
------ ------ ------ ------
Total nonperforming assets.. $1,579 $3,857 $6,373 $5,185
====== ====== ====== ======
Total nonperforming assets to
total assets................. 1.65% 3.44% 3.62% 2.54%
Total nonperforming loans to
total loans.................. 1.11% 3.68% 3.99% 2.93%
Ratio of allowance for loan
losses to total non-
performing loans............. 63.07% 21.97% 17.03% 25.86%
Interest income on non-
performing loans not included
in interest income........... $ 23 $ 140 $ 156 $ 39
</TABLE>
As of June 30, 1996, the Company had no accruing loans that were
contractually past due 90 days or more. The increase in nonaccrual loans
during 1994 and 1995 was primarily attributable to purchases by Matrix Bank of
bulk residential loan portfolios in those years. As part of its business
strategy, Matrix Bank purchases at a discount loans that have had
delinquencies in the past. Due to the past delinquency problems, there is
often an increase in delinquencies after the loans are purchased as a result
of the servicing being transferred to the Company. The Company's experience
has been that it generally takes 90 to 120 days after the servicing transfer
to see an improvement in the delinquency statistics. See "Business--Purchase
and Sale of Bulk Loan Portfolios."
The prior delinquency and anticipated future delinquencies are taken into
consideration in the pricing of the loans acquired. The Company generally
purchases such loans at significant discounts and, in some instances, receives
recourse or credit enhancement from the seller to further reduce the Company's
risk of loss associated with the loans' nonaccrual status. See "Business--
Purchase and Sale of Bulk Loan Portfolios." At June 30, 1996, $3.7 million, or
90.60%, of the nonaccrual loans were loans that were purchased in bulk loan
portfolios and remain classified as "held for sale." Total loans held for sale
at June 30, 1996, were $118.9 million, of which $3.7 million or 3.1% were
nonaccrual loans. However, against the $118.9 million of total loans held for
sale, the Company has $5.4 million of purchase discounts plus an additional
$1.8 of credit enhancements related to specific segments of the loan
portfolio.
The percentage of the allowance for loan losses to nonaccrual loans varies
widely due to the nature of the Company's portfolio of mortgage loans, which
are collateralized primarily by residential real estate. The Company analyzes
the collateral for each nonperforming mortgage loan to determine potential
loss exposure. In conjunction with other factors, this loss exposure
contributes to the overall assessment of the adequacy of the allowance for
loan losses. See "--Comparison of Results of Operations for the Six Months
Ended June 30, 1996 and 1995."
35
<PAGE>
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES. The following table sets forth
information regarding changes in the Company's allowance for loan losses for
the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period..................... $ -- $ 538 $ 728
Charge-offs:
Real estate-mortgage............................. 33 26 198
Real estate-construction......................... -- -- 35
Consumer......................................... -- -- 7
------- ------- --------
Total charge-offs.............................. 33 26 240
Recoveries:
Real estate-mortgage............................. -- -- 5
Consumer......................................... -- -- 49
------- ------- --------
Total recoveries............................... -- -- 54
------- ------- --------
Net charge-offs.................................... 33 26 186
Provision for loan losses charged to operations.... 15 216 401
Allowance for loan losses established in connection
with the acquisition of Matrix Bank............... 556 -- --
------- ------- --------
Balance at end of period........................... $ 538 $ 728 $ 943
======= ======= ========
Ratio of net charge-offs to average loans.......... .18% .03% .15%
======= ======= ========
Average loans outstanding during the period........ $18,608 $79,393 $121,206
======= ======= ========
</TABLE>
The allowance for loan losses is increased by the provision for loan losses
(which is charged to operations) for particular loans where management
considers ultimate collection to be questionable. The allowance for loan
losses is calculated, in part, based on historical loss experience. In
addition, management takes into consideration other factors such as certain
qualitative evaluations of individual classified assets, trends in the
portfolio, geographic and portfolio concentrations, new products or markets,
evaluations of the changes in the historical loss experience component, and
projections of this component into the current and future periods based on
current knowledge and conditions. Due to the nature of the Company's loan
portfolio, substantially all of the allowance for loan losses relates to
residential loans. The ratio of the allowance for loan losses to total loans
was .70%, .81%, .68% and .76% at December 31, 1993, 1994 and 1995 and at June
30, 1996, respectively. The allowance for loan losses is reduced by loans
charged off, net of recoveries.
RISK SENSITIVE ASSETS AND LIABILITIES. A traditional indicator of interest
rate risk is gap analysis. Gap analysis focuses on the difference (or gap)
between available repricing opportunities for assets and liabilities within
defined time periods. If the dollar amount of interest rate sensitive assets
is closely matched with the dollar amount of interest rate sensitive
liabilities in a given period, then the changes in interest income and
interest expense over this time frame should also be closely matched.
36
<PAGE>
The following table sets forth the estimated maturity or repricing, and the
resulting interest rate gap, of the Company's interest-earning assets and
interest-bearing liabilities as of December 31, 1995. The amounts in the table
are derived from internal data of the Company and could be significantly
affected by external factors such as changes in prepayment assumptions, early
withdrawals of deposits and competition. Loans held for sale are classified as
maturing within one year due to the Company's expectation of selling its loans
held for sale within one year.
<TABLE>
<CAPTION>
ESTIMATED MATURITY OR REPRICING
---------------------------------------------------------------
THREE MONTHS TO
LESS THAN THREE LESS THAN ONE TO FIVE OVER
MONTHS ONE YEAR YEARS FIVE YEARS TOTAL
--------------- --------------- ----------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Fixed-rate loans....... $ 599 $ 57,120 $ 2,514 $ 4,689 $64,922
Adjustable-rate loans.. 7,548 66,057 264 -- 73,869
Interest-earning
deposits.............. 5,586 -- -- -- 5,586
FHLB stock............. 1,954 -- -- -- 1,954
-------- -------- -------- ------- -------
Total interest-earning
assets............... 15,687 123,177 2,778 4,689 146,331
Interest-bearing
liabilities:
Passbook, NOW and money
market accounts....... 12,357 -- -- -- 12,357
Certificates of deposit
over $100,000......... 516 843 527 -- 1,886
Other certificates of
deposit............... 6,337 16,672 11,625 -- 34,634
FHLB borrowings........ 19,000 -- -- -- 19,000
Short term borrowings.. 47,416 188 -- -- 47,604
Other borrowings....... 358 2,167 11,636 3,328 17,489
-------- -------- -------- ------- -------
Total interest-bearing
liabilities.......... 85,984 19,870 23,788 3,328 132,970
-------- -------- -------- ------- -------
Interest rate gap....... $(70,297) $103,307 $(21,010) $ 1,361 $13,361
======== ======== ======== ======= =======
Cumulative interest rate
gap.................... $(70,297) $ 33,010 $ 12,000 $13,361
Gap/assets ratio........ (48.04)% 70.60% (14.36)% .93%
Cumulative gap/assets
ratio.................. (48.04)% 22.56% 8.20% 9.13%
</TABLE>
Gap analysis attempts to capture interest rate risk, which is attributable
to the mismatching of interest rate sensitive assets and liabilities. The
actual impact of interest rate movements on the Company's net interest income
may differ from that implied by any gap measurement, depending on the
direction and magnitude of the interest rate movements, the repricing
characteristics of various on and off-balance sheet instruments, as well as
competitive pressures. These factors are not fully reflected in the foregoing
gap analysis and, as a result, the gap report may not provide a complete
assessment of the Company's interest rate risk.
The generally positive cumulative gap value means that over the periods
indicated the assets of the Company will reprice slightly faster than the
Company's liabilities. This means generally that, in a rising interest rate
environment, net interest income can be expected to increase and that, in a
declining interest rate environment, net interest income can be expected to
decrease.
SHORT-TERM BORROWINGS. A primary function of asset and liability management
is to assure adequate liquidity. In addition to cash and cash equivalents, the
Company relies heavily on short-term borrowing capabilities for liquidity and
as funding vehicle. The primary sources for short-term borrowing are the FHLB
for Matrix Bank and unaffiliated financial institutions for Matrix Financial.
See "--Liquidity and Capital Resources."
37
<PAGE>
The following table sets forth a summary of the short-term borrowings of the
Company during 1993, 1994 and 1995 and as of the end of each such period:
<TABLE>
<CAPTION>
AMOUNT AVERAGE MAXIMUM WEIGHTED WEIGHTED
OUTSTANDING AMOUNT OUTSTANDING AVERAGE INTEREST AVERAGE INTEREST
AT OUTSTANDING AT ANY RATE DURING RATE AT
YEAR END DURING THE YEAR(1) MONTH END THE YEAR YEAR END
----------- ------------------ ----------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
At or for the year ended
December 31, 1993:
FHLB borrowings....... $ -- $ 271 $ -- 3.32% 3.43%
Revolving lines of
credit............... 122 249 300 8.84 7.00
Repurchase agree-
ments................ 6,488 2,341 9,367 8.03 5.83
At or for the year ended
December 31, 1994:
FHLB borrowings....... 14,600 3,071 15,000 6.94 6.50
Revolving lines of
credit............... 9,890 4,917 11,042 9.29 9.21
Repurchase agree-
ments................ 2,529 4,320 6,157 8.03 7.18
At or for the year ended
December 31, 1995:
FHLB borrowings....... 19,000 17,662 33,000 6.30 6.30
Revolving lines of
credit............... 46,833 22,842 46,833 7.57 7.30
Repurchase agree-
ments................ 570 4,559 14,129 8.97 8.70
</TABLE>
- --------
(1) Calculations are based on daily averages where available and monthly
averages otherwise.
PIPELINE MANAGEMENT. In the ordinary course of business, the Company makes
commitments to originate residential mortgage loans and holds originated loans
until delivery to an investor. Inherent in this business are risks associated
with changes in interest rates and the resulting change in the market value of
the pipeline loans. The Company mitigates this risk through the use of
mandatory and nonmandatory forward commitments to sell loans. As of December
31, 1995, the Company had $93.1 million in pipeline and funded loans offset
with mandatory forward commitments of $64.7 million and nonmandatory forward
commitments of $15.3 million. As of June 30, 1996, the Company had $95.4
million in pipeline and funded loans offset with mandatory forward commitments
of $69.7 million and nonmandatory forward commitments of $20.0 million. The
inherent value of the forward commitments is considered in the determination
of the lower of cost or market for such loans.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of the Company to generate funds to support asset
growth, satisfy disbursement needs, maintain reserve requirements and
otherwise operate on an ongoing basis. To date, the Company's principal source
of funding for its investing activities has been secured senior debt provided
by unaffiliated financial institutions and the issuance of the 13% Senior
Subordinated Notes in August 1995. As of June 30, 1996, Matrix Capital had
$6.7 million in indebtedness outstanding. The borrowed funds have been used
historically as capital injections to Matrix Bank and Matrix Financial, as
well as to acquire the office building in Phoenix where Matrix Financial
maintains its headquarters. See "Business--Properties."
The trend experienced over the reported periods of cash used by the
Company's operating activities results primarily from the growth that Matrix
Financial has experienced in its origination activities and the growth that
Matrix Bank has experienced in its whole loan purchasing activity. The growth
in the loan originations experienced by the Company has been due to a
conscious effort to increase loan originations and, to a lesser extent, market
conditions. The Company does not anticipate significant increases in loan
origination activities other than increases directly related to market
conditions. Nevertheless, the Company anticipates the trend of a net use of
cash from operations to continue for the foreseeable future. This anticipation
results from the expected growth at Matrix Bank, which management believes
will consist primarily of increased activity in the purchasing of loan
portfolios. The Company anticipates such growth will be funded through retail
deposits, custodial escrow deposits and FHLB borrowings.
38
<PAGE>
The Company's principal source of funding for its servicing acquisition
activities consist of line of credit facilities provided to Matrix Financial
by unaffiliated financial institutions. In prior years, including the year
ended December 31, 1995, Matrix Financial's principal source of funding for
servicing acquisition activities consisted of servicing acquisition lines, the
sale of mortgage servicing rights that were accounted for as financings and
capital contributions from the Company. As of June 30, 1996, Matrix
Financial's servicing acquisition facilities aggregated $11.0 million, of
which $327,000 was available to be utilized after deducting drawn amounts.
Borrowings under the servicing acquisition lines of credit are secured by
mortgage servicing rights owned by Matrix Financial, bear interest at the
federal funds rate plus a negotiated margin and are due at the earlier of the
maturity of the mortgage servicing rights or amortized over five to six years
from the date of borrowing. At June 30, 1996, $10.7 million was outstanding
under the servicing acquisition line and the interest rate on funds
outstanding under this facility at June 1996 was 8.8%.
The Company's principal source of funding for its loan origination business
consists of warehouse lines of credit and sale/repurchase facilities provided
to Matrix Financial by financial institutions and brokerage firms. As of June
30, 1996, Matrix Financial's warehouse lines of credit aggregated $70.0
million, of which $38.6 million was available to be utilized. Borrowings under
the warehouse lines of credit are secured by all of the mortgage loans funded
with warehouse loan proceeds and bear interest at the federal funds rate plus
a negotiated margin. At June 30, 1996, $30.5 million was outstanding under the
warehouse lines of credit at a weighted average interest rate of 6.6%. As of
June 30, 1996, Matrix Financial's sale/repurchase facilities aggregated $20.0
million, of which $19.4 million was available. Borrowings under the
sale/repurchase facilities are secured by all of the mortgage loans funded
with sale/repurchase facility proceeds and bear interest at either the prime
rate or the LIBOR rate plus a negotiated margin (depending on the facility).
At June 30, 1996, $610,000 was outstanding under the sale/repurchase
facilities and the average rate on funds outstanding under these facilities
for the month of June 1996 was 8.6%.
The Company's principal source of funding for the working capital needs of
Matrix Financial consists of working capital facilities provided to Matrix
Financial by unaffiliated financial institutions. As of June 30, 1996, Matrix
Financial's working capital facilities aggregated $2.5 million, of which $1.6
million was available. The amount of credit available for working capital
borrowings is a sublimit of the warehouse lines of credit, and therefore, any
amounts borrowed are netted against the amount of credit available from the
warehouse lines of credit. Borrowings under the working capital facilities are
secured by mortgage servicing rights, eligible servicing advance receivables
and eligible delinquent mortgage loans and bear interest at the federal funds
rate plus a negotiated margin. At June 30, 1996, $869,000 was outstanding
under the working capital facilities and the average interest rate on funds
outstanding under these facilities for the month of June 1996 was 7.9%.
On July 10, 1996, the Company renewed the Revolving Credit Facilities for
warehouse lending, servicing acquisitions and working capital. With this
renewal, the aggregate amount of warehouse lines of credit facilities totaled
$50.0 million, the aggregate amount of the servicing acquisition facility
totaled $13.5 million, and the aggregate amount of the working capital
facility totaled $2.5 million. The reduction in the aggregate amount of
warehouse lines of credit facilities from $70.0 million to $50.0 million was
initiated by the Company to reflect the recent reduction in the Company's
level of loan origination activity. The new credit facility agreements require
Matrix Financial to maintain (i) total shareholder's equity of at least $3.0
million plus 50% of capital contributed after January 1, 1996, (ii) adjusted
tangible net worth, as defined, of at least $9.0 million through January 31,
1997 and $10.0 million on January 31, 1997 and thereafter, (iii) a servicing
portfolio of at least $1.25 billion and (iv) a ratio of principal debt of
receivables borrowings and term line borrowings of no more than the lesser of
70% of the appraised value of the mortgage servicing portfolio or 1.25% of the
unpaid principal balance of the mortgage servicing portfolio.
In August 1995, the Company issued $2.9 million in aggregate principal
amount of 13% Senior Subordinated Notes. Interest on the 13% Senior
Subordinated Notes is payable semi-annually on January 15 and July 15, and the
13% Senior Subordinated Notes mature on July 15, 2002, with earlier mandatory
redemptions of $727,500, or 25% of the 13% Senior Subordinated Notes,
scheduled on July 15, 1999, 2000 and 2001,
39
<PAGE>
respectively. The Company is restricted from paying cash dividends under the
13% Senior Subordinated Notes. However, the Company may pay cash dividends in
an amount equal to 50% of the consolidated net income of the Company as long
as there has been no default under the terms of the 13% Senior Subordinated
Notes and as long as the dividend does not exceed 10% of the consolidated net
worth of the Company. The Company may redeem the 13% Senior Subordinated
Notes, in whole or in part, at any time on or after July 15, 1998 at a
redemption price equal to (i) 102% of par through July 14, 1999 and,
thereafter, at par, plus (ii) all accrued but unpaid interest. In addition,
the holders of the outstanding 13% Senior Subordinated Notes have certain
registration rights and rights of first refusal with respect to this offering.
See "Description of Capital Stock--Registration Rights; Rights of First
Refusal."
Matrix Bank's primary source of funds for use in lending, purchasing bulk
loan portfolios, investing and other general purposes are retail deposits,
custodial escrow balances, FHLB borrowings, sales of loan portfolios and
proceeds from principal and interest payments on loans. Contractual loan
payments and deposit inflows and outflows are a generally predictable source
of funds, while loan prepayments and loan sales are significantly influenced
by general market interest rates and economic conditions. Borrowings on a
short-term basis are used as a cash management vehicle to compensate for
seasonal or other reductions in normal sources of funds. Matrix Bank utilizes
advances from the FHLB as its primary source for borrowings. At June 30, 1996,
Matrix Bank had overnight borrowings from the FHLB of $36.4 million. The
custodial escrow balances held by Matrix Bank fluctuate based upon the mix and
size of the related servicing rights portfolios. For a tabular presentation of
the Company's short-term borrowings, see "--Asset and Liability Management--
Short-term Borrowings."
Matrix Bank offers a variety of deposit accounts having a range of interest
rates and terms. Matrix Bank's deposits principally consist of demand deposits
and certificates of deposit. The flow of deposits is influenced significantly
by general economic conditions, changes in prevailing interest rates and
competition. Matrix Bank's retail deposits are obtained primarily from areas
in which it is located and, therefore, its retail deposits are concentrated
primarily in Las Cruces and Sun City. Matrix Bank relies principally on
customer service, marketing programs and its relationships with customers to
attract and retain these deposits. Matrix Bank currently does not solicit or
accept brokered deposits. In pricing deposit rates, management considers
profitability, the matching of term lengths with assets, the attractiveness to
customers and rates offered by competitors. Matrix Bank intends to continue
its efforts to attract deposits as a primary source of funds to support its
lending and investing activities.
In January 1996, Matrix Bank opened a retail branch in Sun City, Arizona.
The Company has been successful in attracting deposits at the Sun City
location and this success has been the primary reason for the increased
deposit growth that the Company has experienced for the six months ended June
30, 1996. The following table sets forth the average balances for each major
category of Matrix Bank's deposit accounts and the weighted average interest
rates paid for interest-bearing deposits for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------- SIX MONTHS ENDED
1993 1994 1995 JUNE 30, 1996
---------------- ---------------- ---------------- ----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
------- -------- ------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook accounts....... $ 908 1.87% $ 2,788 2.58% $ 2,394 3.55% $ 2,415 3.31%
NOW accounts............ 675 1.48 2,131 1.69 2,460 2.11 2,777 2.20
Money market accounts... 3,038 2.04 7,350 3.20 5,860 4.10 9,152 4.41
Time deposits........... 10,888 2.79 29,273 3.89 33,332 5.42 44,225 5.82
------- ---- ------- ---- ------- ---- ------- ----
Total deposits........ $15,509 2.53% $41,542 3.57% $44,046 4.96% $58,569 5.33%
======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
40
<PAGE>
The following table sets forth the amount of Matrix Bank's certificates of
deposit that are greater than $100,000 by time remaining until maturity as of
June 30, 1996:
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-----------------------
WEIGHTED AVERAGE
AMOUNT RATE PAID
------ ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three months or less................................. $ 948 5.59%
Over three months through six months................. 335 4.86
Over six months through twelve months................ 1,917 5.95
Over twelve months................................... 545 6.34
------ ----
Total.............................................. $3,745 5.82%
====== ====
</TABLE>
The Company actively monitors Matrix Bank's compliance with regulatory
capital requirements. Historically Matrix Bank has increased it core capital
through the retention of a portion of its earnings. Matrix Bank's future
growth is expected to be achieved through deposit growth and borrowings from
the FHLB which is anticipated to require additional capital. The capital
requirements related to the anticipated growth are in part expected to be
fulfilled through use of the proceeds from the sale of Common Stock in this
offering. See "Regulation and Supervision--Matrix Bank's Capital Ratios."
Matrix Bank and Matrix Financial may, at times, be restricted from paying
dividends to Matrix Capital. See "Regulation and Supervision."
In June 1996, the Company purchased 154 acres of land for $1.3 million in
cash for the purpose of developing 750 residential and multi-family lots in
Ft. Lupton, Colorado. The purchase was completed with operating funds of the
Company and a loan from a third-party financial institution. As part of the
acquisition, the Company entered into a Residential Facilities Development
Agreement (the "Development Agreement") with the City of Ft. Lupton. The
Development Agreement is a residential and planned unit development agreement
providing for the orderly planning, engineering and development of a golf
course and surrounding residential community. The City of Ft. Lupton is
responsible for the development of the golf course and the Company is
responsible for the development of the surrounding residential lots.
The Development Agreement sets forth a mandatory obligation on the part of
the Company to pay the City of Ft. Lupton pledged enhancement assessments of
$600,000. These pledged enhancement assessments require the Company to pay the
city a $2,000 fee each time the Company sells a developed residential lot. The
Company is obligated to pay a minimum of $60,000 in assessment fees per year
beginning in the year 1998 through the year 2007. The Company also entered
into a development management agreement with a local developer to complete the
development of the land. The terms of the agreement specify that the Company
is to earn a preferred rate of return on its investment and, once the initial
amount of its investment has been returned, the remaining profits are split
equally. The development management agreement obligates the Company to provide
up to an additional $500,000 of funds for development. The Company has no
other financial obligations to the developer beyond the $500,000.
It is anticipated that the Company will obtain a loan from an unaffiliated
financial institution for a portion of the future development costs. The
Company expects development to begin during the third quarter of 1996.
INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and related data presented herein have
been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation. Unlike most industrial
companies, substantially all of the assets and liabilities of the Company are
monetary in nature. As a result, interest rates have a more significant impact
on the Company's
41
<PAGE>
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as prices
of goods and services. The Company discloses the estimated fair market value
of its financial instruments in accordance with Statement of Financial
Accounting Standards No. 107. See Note 14 to the Consolidated Financial
Statements included elsewhere herein.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets to be Disposed of. This statement, effective
for fiscal years beginning after December 15, 1995, requires a company to
assess impairment of "assets held or used" and "assets to be disposed of."
Whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable, the related undiscounted cash flows are
compared to the asset's book value. If the sum of the undiscounted cash flows
is less than the book value, a loss is recorded based upon the excess of the
book value over the fair value of the asset. Assets to be disposed of are
recorded at fair value less cost to sell and are not depreciated while held.
The adoption of this pronouncement in 1996 did not have a material effect on
the Company's consolidated financial statements.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, Stock-Based Compensation ("FAS 123"), which encourages the use of the
fair value method of accounting for all employee stock options. The fair value
method includes measuring the value of the stock option at grant date and
amortizing this value over the service period of the award. The "intrinsic
value method" as prescribed by Accounting Principles Bulletin ("APB") No. 25,
"Accounting for Stock issued to Employees" will also be allowed. This method
requires that compensation cost be measured as the excess of the quoted market
price of the stock, at the grant date or other measurement date, over the
amount an employee must pay to acquire the stock. FAS 123 is effective for
fiscal years beginning after December 15, 1995. The Company intends to apply
the recognition and measurement provisions of APB No. 25 to all employee stock
options and similar equity instruments awarded after December 31, 1995.
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities ("FAS 125"). This statement provides accounting
and reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities and is effective for the above that occur after
December 31, 1996. Transactions covered by FAS 125 include securitizations,
sales of partial interests in financial assets, repurchase agreements,
securities lending, pledges of collateral, loan syndications and
participations, sales of receivables with recourse, servicing of mortgages and
other loans, and in-substance defeasances. The statement uses a "financial
components" approach that focuses on control to determine the proper
accounting for financial asset transfers. Under that approach, after financial
assets are transferred, an entity would recognize on the balance sheet all
assets it controls and liabilities it has incurred. It would remove from the
balance sheet those assets it no longer controls and liabilities it has
satisfied. If the entity has surrendered control over the transferred assets,
the transaction would be considered a sale. Control is considered surrendered
only if the assets are isolated from the transferor; the transferee has the
right to pledge or exchange the assets or is a qualifying special-purpose
entity; and the transferor does not maintain effective control over the assets
through an agreement to repurchase or redeem them. If those conditions do not
exist, the transfer would be accounted for as a secured borrowing. The Company
has not yet determined the impact of FAS 125 on its consolidated financial
statements.
42
<PAGE>
BUSINESS
GENERAL
Matrix Capital Corporation is a specialized financial services company that,
through its Subsidiaries, focuses on mortgage merchant banking by purchasing
and selling residential mortgage loans and residential mortgage servicing
rights; offering brokerage, consulting and analytical services to other
financial services companies and financial institutions; servicing residential
mortgage portfolios for investors; originating residential mortgages; and
providing real estate management and disposition services. Based upon
management's experience within the industries in which the Company operates,
the Company believes that its structure of combining a mortgage banking firm,
a mortgage servicing brokerage and consulting firm, a federally chartered
banking institution and a real estate management and disposition firm is
unique to the financial services industry. This unique structure creates
revenue enhancing relationships among the Subsidiaries.
INDUSTRY OVERVIEW
According to Inside Mortgage Finance magazine, the total outstanding
principal amount of one-to-four family residential mortgage loans being
serviced in the United States as of March 31, 1996 was approximately $3.7
trillion, up from approximately $980 billion as of March 31, 1981, resulting
in a compound annual growth rate of approximately 9.2% over the last 15 years.
Mortgage loan servicing as of March 31, 1996 can be broken down into the
following types: GNMA, 12.9%; FHLMC, 15.2%; FNMA, 20.4%; private mortgage-
backed securities, 5.4%; and non-securitized loans, 46.2%.
The United States Department of Housing and Urban Development ("HUD")
reports that approximately $635.8 billion in aggregate principal amount of
one-to-four family residential mortgage loans was originated in the United
States in 1995. Of this amount 54.5% was originated by mortgage companies such
as Matrix Financial, 25.1% was originated by commercial banks, 18.9% was
originated by savings institutions such as Matrix Bank, 1.2% was originated by
state and federal government agencies and 0.1% was originated by insurance
companies. Less than $380 billion in aggregate principal amount of 1995
residential mortgage originations in the United States was originated by the
100 largest mortgage originators in that year. Industry analysts estimate that
nationwide residential mortgage loan production will be between $700 and $750
billion in 1996.
BUSINESS STRATEGY
The Company's primary business strategy is to expand its core businesses,
while at the same time further capitalize on the revenue-enhancing
relationships created by the Company's unique corporate structure. The Company
also remains opportunistic and, accordingly, may in the future diversify its
business into areas where the Company perceives there to be opportunities
complementary in nature to the Company's existing businesses. To implement its
business strategy, the Company will focus on the following areas:
. SHARE KNOWLEDGE, INFORMATION AND BUSINESS OPPORTUNITIES AMONG THE
SUBSIDIARIES. The Company's corporate structure facilitates the sharing
of knowledge, information and business opportunities among the
Subsidiaries, which management believes gives the Company a competitive
advantage. The Company continually evaluates ways to better utilize
existing relationships developed by the Subsidiaries with their clients
and information and knowledge possessed by the Subsidiaries for the
potential benefit of the other Subsidiaries of the Company. For example,
the Company is currently investigating the possibility of using the
existing customer relationships from Matrix Financial's mortgage loan
servicing activities to market Matrix Bank's banking services, such as
credit card services, consumer loans and equity lines of credit. In
addition, the Company has begun, on a limited basis, to market warehouse
and sale/repurchase credit facilities to the smaller mortgage banking
companies who are clients of United Financial and who, due primarily to
their size, otherwise would not be able to obtain such facilities from
the larger financial institutions who traditionally provide such
facilities. For a discussion of various synergies among the Subsidiaries,
see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Relationships Among the Subsidiaries."
43
<PAGE>
. EXPAND THE COMPANY'S RESIDENTIAL MORTGAGE LOAN SERVICING PORTFOLIO. The
Company has devoted significant time and resources over the past several
years to building an infrastructure capable of efficiently servicing
substantially more residential mortgage loans than it does at present.
Given the existing base of servicing employees at Matrix Financial and
the size of the servicing platform in which the servicing operation is
maintained, the Company believes that it now has the capacity to more
than double the number of residential mortgage loans that it services.
Growth in the size of the servicing portfolio would likely reduce the
average cost of servicing a loan and allow the Company to grow Matrix
Bank since the non-interest bearing custodial escrow accounts held at
Matrix Bank would increase in proportion to the size of the Company's
residential mortgage loan servicing portfolio.
. DIVERSIFY REVENUE SOURCES THROUGH EXPANSION INTO COMPLEMENTARY BUSINESS
AREAS. The Company continually evaluates the development of new business
lines and potential acquisitions of financial services businesses that
management believes are complementary to the Company's existing
businesses. Such new business lines would allow the Company to leverage
its management expertise, customer relationships, existing capital and
corporate structure. As examples of this strategy, the Company formed USS
in June 1995, acquired the ongoing business of a Denver-based originator
of sub-prime automobile retail installment sales contracts in May 1996
and formed the B/C Lending Division of Matrix Financial in June 1996.
BROKERAGE AND CONSULTING SERVICES
GENERAL. United Financial provides brokerage, consulting and analytical
services to institutions in the mortgage banking industry, primarily relating
to the sale and management of servicing assets, corporate and servicing
portfolio valuation (including FAS 122 analysis and valuation) and, to a
lesser extent, mergers and acquisitions of mortgage banking entities. During
1995 and the first six months of 1996, United Financial brokered the sale of
103 and 48 mortgage loan servicing portfolios totaling $32.6 billion and $12.6
billion in outstanding mortgage loan principal balances, respectively.
BROKERAGE SERVICES. United Financial operates as a national, full-service
mortgage servicing broker. It is capable of analyzing, packaging, marketing
and closing servicing portfolio and selected corporate merger and acquisition
transactions. United Financial markets its services to all types and sizes of
market participants, thereby developing diverse relationships. United
Financial has provided brokerage services to each of the following clients
during the last 12 months:
Banc One Mortgage Corporation Knutson Mortgage
Chase Manhattan Mortgage Corporation LaSalle-Talman Home Mortgage
Comerica Mortgage Corporation Mellon Mortgage Corporation
Firstar Bank Principal Residential Mortgage, Inc.
The Huntington Mortgage Company Resource Bancshares Mortgage Group
The Company believes that the client relationships developed by United
Financial through its national network of contacts with commercial banks,
mortgage companies, savings associations and other institutional investors
represent a significant competitive advantage and form the basis for United
Financial's national market presence. These contacts also enable United
Financial to identify prospective clients for other Subsidiaries and make
referrals where appropriate.
The secondary market for purchasing and selling mortgage servicing rights
has become increasingly more active since its inception during the early
1980s. While servicing rights are the primary asset of most mortgage
companies, other institutions such as commercial banks and savings
associations also build portfolios of mortgage servicing rights, which can
serve as significant sources of non-interest income. Most institutions that
own mortgage servicing rights have found that careful management of these
assets is necessary due to their susceptibility to interest rate cycles,
changing prepayment patterns of mortgage loans and fluctuating earnings rates
achieved on custodial escrow balances. With the implementation of FAS 122,
which requires companies to
44
<PAGE>
capitalize originated mortgage servicing rights, management of mortgage
servicing assets has become even more critical. These managerial efforts,
combined with interest rate sensitivity of the assets and the growth
strategies of market participants, create constantly changing supply and
demand and, therefore, price levels in the secondary market for mortgage
servicing rights.
The sale and transfer of mortgage servicing rights occurs in a market that
is inefficient and often requires an intermediary to facilitate matching
buyers and sellers. Prices are unpublished and closely guarded by market
participants, unlike most other major financial secondary markets. This lack
of pricing information complicates an already difficult process of
differentiating between servicing product types, evaluating regional, economic
and socioeconomic trends and predicting the impact of interest rate movements.
Due to its significant contacts, United Financial has access to information on
the availability of mortgage servicing portfolios and helps bring together
interested buyers and sellers.
CONSULTING AND ANALYTIC SERVICES. The analytics group of United Financial
has developed expertise in helping companies implement and, on an ongoing
basis, track their FAS 122 valuations and analyses. Expansion into the FAS 122
valuations arena represented a logical progression for United Financial. In
connection with the consulting services performed by United Financial on pools
of mortgage servicing rights held for sale by United Financial's customers,
United Financial performed many of the same types of analyses required by FAS
122. Therefore, United Financial was able to enhance its existing valuation
models and create a software program that could be customized to fit its
customers' many different needs and unique situations in performing FAS 122
analyses. In addition, United Financial has the infrastructure and management
information system capabilities necessary to undertake the complex analyses
required by FAS 122. Many of the companies affected by the implementation of
FAS 122 have determined to outsource this function to a third party rather
than dedicate the resources necessary to develop systems for and perform their
own FAS 122 valuations. Management believes that providing these consulting
and analytic services enhances the Company's ability to attract and retain
client relationships. For a discussion of FAS 122 see "Regulation and
Supervision--Miscellaneous--FAS 122."
RESIDENTIAL LOAN SERVICING ACTIVITIES
RESIDENTIAL MORTGAGE LOAN SERVICING. Matrix Financial and Matrix Bank each
has its own mortgage servicing portfolio, but the Company conducts its
servicing activities exclusively through Matrix Financial. Matrix Bank's
mortgage servicing rights are subserviced under a contract with Matrix
Financial. At June 30, 1996, Matrix Financial serviced approximately $1.8
billion of mortgage loans, including $162.8 million for Matrix Bank and $439.5
million subserviced for non-affiliates of the Company. The balance of mortgage
servicing subserviced for non-affiliates at June 30, 1996 of $439.5 million is
significantly higher than is typical for the Company as a result of the sale
of mortgage servicing of $390.5 million, but for which physical transfer to
the purchaser is expected to occur in August and November 1996.
Servicing mortgage loans involves a contractual right to receive a fee for
processing and administering loan payments. This processing involves
collecting monthly mortgage payments on behalf of investors, reporting
information to those investors on a monthly basis and maintaining custodial
escrow accounts for the payment of principal and interest to investors and
property taxes and insurance premiums on behalf of borrowers. These payments
are held in custodial escrow accounts at Matrix Bank, where the money can be
invested by the Company in interest-earning assets at returns that
historically have been greater than could be realized by the Company using the
custodial escrow deposits as compensating balances to reduce the effective
borrowing cost on existing warehouse credit facilities. The Company believes
that this synergy gives the Company a competitive advantage in the industry.
As compensation for its mortgage servicing activities, the Company receives
servicing fees usually ranging from 0.25% to 0.75% per annum of the loan
balances serviced, plus any late charges collected from delinquent borrowers
and other fees incidental to the services provided. At June 30, 1996, the
Company's weighted average servicing fee was 0.44%. In the event of a default
by the borrower, the Company receives no servicing fees until the default is
cured.
45
<PAGE>
Servicing is provided on mortgage loans on a recourse or nonrecourse basis.
The Company's policy is to accept only a limited number of servicing assets on
a recourse basis. As of December 31, 1995 and June 30, 1996, on the basis of
outstanding principal balances only 0.7% and 1.0%, respectively, of the
mortgage servicing contracts owned by the Company involved recourse servicing.
To the extent that servicing is done on a recourse basis, the Company is
exposed to credit risk with respect to the underlying loan in the event of a
repurchase. Additionally, many of the nonrecourse mortgage servicing contracts
owned by the Company require the Company to advance all or part of the
scheduled payments to the owner of the mortgage loan in the event of a default
by the borrower. Many owners of mortgage loans also require the servicer to
advance insurance premiums and tax payments on schedule even though sufficient
escrow funds may not be available. The Company, therefore, must bear the
funding costs associated with making such advances. If the delinquent loan
does not become current, these advances are typically recovered at the time of
the foreclosure sale. Foreclosure expenses are generally not fully
reimbursable by FNMA, FHLMC or GNMA, for whom the Company provides significant
amounts of mortgage loan servicing.
Mortgage servicing rights represent a contract right to service and not a
beneficial ownership interest in underlying mortgage loans. Failure to service
the loans in accordance with contract requirements may lead to the termination
of the servicing rights and the loss of future servicing fees. To date, there
have been no terminations of mortgage servicing rights by any mortgage loan
owners because of the Company's failure to service the loans in accordance
with its contractual obligations.
In order to track information on its servicing portfolio, the Company
utilizes a data processing system provided by Alltel, one of the largest
mortgage banking service bureaus in the United States. Management believes
that this system gives the Company sufficient capacity to support anticipated
expansion of its residential mortgage loan servicing portfolio.
The following table sets forth certain information regarding the composition
of the Company's mortgage servicing portfolio (excluding loans subserviced for
others) as of the dates indicated:
<TABLE>
<CAPTION>
AS OF
-------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1993 1994 1995 1996
------------ ------------ ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FHA--insured/VA guaranteed
residential................ $ 299,354 $ 28,630 $ 37,135 $ 34,353
Conventional loans.......... 669,739 980,003 1,544,808 1,312,452
Other loans................. 38,193 33,152 14,442 15,639
---------- ---------- ---------- ----------
Total mortgage servicing
portfolio................ $1,007,286 $1,041,785 $1,596,385 $1,362,444
========== ========== ========== ==========
Fixed rate loans............ $ 747,985 $ 669,933 $1,073,803 $ 882,704
Adjustable rate loans....... 259,301 371,852 522,582 479,740
---------- ---------- ---------- ----------
Total mortgage servicing
portfolio................ $1,007,286 $1,041,785 $1,596,385 $1,362,444
========== ========== ========== ==========
</TABLE>
46
<PAGE>
The following table shows the delinquency statistics for the mortgage loans
serviced by the Company (excluding loans subserviced for others) compared with
national average delinquency rates as of the dates presented:
<TABLE>
<CAPTION>
AS OF
--------------------------------------------------------------
DECEMBER 31, 1993 DECEMBER 31, 1994
------------------------------ -------------------------------
NATIONAL NATIONAL
COMPANY AVERAGE(1) COMPANY AVERAGE(2))
------------------- ---------- ------------------- -----------
NUMBER PERCENTAGE PERCENTAGE NUMBER PERCENTAGE PERCENTAGEE
OF OF SERVICING OF OF OF SERVICING OF
LOANS PORTFOLIO(3) LOANS LOANS PORTFOLIO(3) LOANS
------ ------------ ---------- ------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent
for:
30-59 days...... 1,205 4.28% 2.72% 648 3.28% 2.76%
60-89 days...... 225 0.80 0.62 223 1.13 0.67
90 days and
over............ 126 0.45 0.75 287 1.46 0.74
----- ---- ---- ----- ---- ----
Total
delinquencies... 1,556 5.53% 4.09% 1,158 5.87% 4.17%
===== ==== ==== ===== ==== ====
Foreclosures.... 75 0.27% 0.31% 236 1.20% 0.33%
<CAPTION>
AS OF
-------------------------------------------------------------
DECEMBER 31, 1995 JUNE 30, 1996
------------------------------ ------------------------------
NATIONAL NATIONAL
COMPANY AVERAGE(2) COMPANY AVERAGE(2)
------------------- ---------- ------------------- ----------
NUMBER PERCENTAGE PERCENTAGE NUMBER PERCENTAGE PERCENTAGE
OF OF SERVICING OF OF OF SERVICING OF
LOANS PORTFOLIO(3) LOANS LOANS PORTFOLIO(3) LOANS
------ ------------ ---------- ------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent
for:
30-59 days...... 843 3.37% 3.07% 633 3.05% 3.05%
60-89 days...... 195 0.78 0.70 165 0.79 0.67
90 days and
over............ 166 0.67 0.71 133 0.64 0.63
----- ---- ---- --- ---- ----
Total
delinquencies... 1,204 4.82% 4.48% 931 4.48% 4.35%
===== ==== ==== === ==== ====
Foreclosures.... 277 1.11% 0.33% 256 1.23% 0.34%
</TABLE>
- ----
(1) Source: Mortgage Bankers Association, "Delinquency Rates of 1- to 4-Unit
Residential Mortgage Loans" (Seasonally Adjusted) (June 10, 1994 report).
(2) Source: Mortgage Bankers Association, "Delinquency Rates of 1- to 4-Unit
Residential Mortgage Loans" (Seasonally Adjusted) (September 5, 1996
report).
(3) Delinquencies and foreclosures generally exceed the national average due
to high rates of delinquencies and foreclosures on certain bulk loan and
bulk servicing portfolios acquired by the Company at a discount.
47
<PAGE>
During periods of declining interest rates, prepayments of mortgage loans
increase as homeowners seek to refinance at lower interest rates, resulting in
a decrease in the value of the servicing portfolio. Mortgage loans with higher
interest rates are more likely to result in prepayments. The following table
sets forth certain information regarding the number and aggregate principal
balance of the mortgage loans serviced by the Company, including both fixed
and adjustable rate loans (excluding loans subserviced for others), at various
mortgage interest rates:
<TABLE>
<CAPTION>
AS OF
--------------------------------------------------------------------------------------------
DECEMBER 31, 1993 DECEMBER 31, 1994 DECEMBER 31, 1995
------------------------------ ------------------------------ ------------------------------
PERCENTAGE PERCENTAGE PERCENTAGE
NUMBER AGGREGATE OF AGGREGATE NUMBER AGGREGATE OF AGGREGATE NUMBER AGGREGATE OF AGGREGATE
OF PRINCIPAL PRINCIPAL OF PRINCIPAL PRINCIPAL OF PRINCIPAL PRINCIPAL
RATE LOANS BALANCE BALANCE LOANS BALANCE BALANCE LOANS BALANCE BALANCE
---- ------ ---------- ------------ ------ ---------- ------------ ------ ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Less than
7.00%........... 2,972 $ 220,384 21.88% 2,113 $ 162,274 15.58% 2,781 $ 218,914 13.71%
7.00%-- 7.99%... 3,117 123,460 12.26 3,798 204,024 19.58 7,386 576,255 36.10
8.00%-- 8.99%... 5,874 168,935 16.77 4,894 261,630 25.11 7,160 442,634 27.73
9.00%-- 9.99%... 9,171 237,767 23.60 4,314 200,025 19.20 4,460 191,549 12.00
10.00%--10.99%... 2,424 121,595 12.07 2,179 142,504 13.68 2,005 125,544 7.86
11.00%--11.99%... 1,794 62,539 6.21 756 33,772 3.24 519 24,220 1.52
12.00% and over.. 2,783 72,606 7.21 1,667 37,556 3.61 647 17,269 1.08
------ ---------- ------ ------ ---------- ------ ------ ---------- ------
Total........... 28,135 $1,007,286 100.00% 19,721 $1,041,785 100.00% 24,958 $1,596,385 100.00%
====== ========== ====== ====== ========== ====== ====== ========== ======
<CAPTION>
AS OF
--------------------------------
JUNE 30, 1996
--------------------------------
PERCENTAGE
NUMBER AGGREGATE OF AGGREGATE
OF PRINCIPAL PRINCIPAL
RATE LOANS BALANCE BALANCE
---- -------- ---------- ------------
<S> <C> <C> <C>
Less than
7.00%........... 1,219 $ 93,545 6.87%
7.00%-- 7.99%... 6,654 539,302 39.58
8.00%-- 8.99%... 6,215 410,163 30.10
9.00%-- 9.99%... 3,809 165,629 12.16
10.00%--10.99%... 1,807 114,033 8.37
11.00%--11.99%... 472 22,170 1.63
12.00% and over.. 601 17,602 1.29
------ ---------- ------
Total........... 20,777 $1,362,444 100.00%
====== ========== ======
</TABLE>
<PAGE>
Loan administration fees decrease as the principal balance on the
outstanding loan decreases and as the remaining time to maturity of the loan
shortens. The following table sets forth certain information regarding the
remaining maturity of the mortgage loans serviced by the Company (excluding
loans subserviced for others) as of the dates shown:
<TABLE>
<CAPTION>
AS OF
--------------------------------------------------------------------------------
DECEMBER 31, 1993 DECEMBER 31, 1994
--------------------------------------- ----------------------------------------
PERCENTAGE PERCENTAGEE
NUMBER PERCENTAGE UNPAID UNPAID NUMBER PERCENTAGE UNPAID UNPAID
OF OF NUMBER PRINCIPAL PRINCIPAL OF OF NUMBER PRINCIPAL PRINCIPAL
MATURITY LOANS OF LOANS AMOUNT AMOUNT LOANS OF LOANS AMOUNT AMOUNT
-------- ------ ---------- ---------- ---------- ------ ---------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1-- 5 years.... 1,545 5.49% $ 32,459 3.22% 2,116 10.73% $ 43,818 4.21%
6--10 years.... 4,899 17.41 101,537 10.08 5,538 28.08 125,648 12.06
11--15 years.... 9,840 34.97 241,546 23.98 4,131 20.95 155,598 14.94
16--20 years.... 6,483 23.04 187,445 18.61 1,529 7.75 92,028 8.83
21--25 years.... 4,101 14.58 304,811 30.26 3,989 20.23 322,703 30.98
More than 25
years........... 1,267 4.51 139,488 13.85 2,418 12.26 301,990 28.98
------ ------ ---------- ------ ------ ------ ---------- ------
Total........... 28,135 100.00% $1,007,286 100.00% 19,721 100.00% $1,041,785 100.00%
====== ====== ========== ====== ====== ====== ========== ======
<CAPTION>
AS OF
-------------------------------------------------------------------------------
DECEMBER 31, 1995 JUNE 30, 1996
--------------------------------------- ---------------------------------------
PERCENTAGE PERCENTAGE
NUMBER PERCENTAGE UNPAID UNPAID NUMBER PERCENTAGE UNPAID UNPAID
OF OF NUMBER PRINCIPAL PRINCIPAL OF OF NUMBER PRINCIPAL PRINCIPAL
MATURITY LOANS OF LOANS AMOUNT AMOUNT LOANS OF LOANS AMOUNT AMOUNT
-------- ------ ---------- ---------- ---------- ------ ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1-- 5 years.... 3,077 12.33% $ 60,496 3.79% 2,187 10.53% $ 37,778 2.77%
6--10 years.... 4,898 19.62 118,928 7.45 4,197 20.20 93,477 6.86
11--15 years.... 5,263 21.09 302,332 18.94 3,770 18.14 205,690 15.10
16--20 years.... 2,608 10.45 168,166 10.53 2,209 10.63 142,408 10.45
21--25 years.... 4,880 19.55 472,613 29.61 4,729 22.76 443,544 32.56
More than 25
years........... 4,232 16.96 473,850 29.68 3,685 17.74 439,547 32.26
------ ------ ---------- ------ ------ ------ ---------- ------
Total........... 24,958 100.00% $1,596,385 100.00% 20,777 100.00% $1,362,444 100.00%
====== ====== ========== ====== ====== ====== ========== ======
</TABLE>
49
<PAGE>
The following table sets forth the geographic distribution of the mortgage
loans (including delinquencies) serviced by the Company (excluding loans
subserviced for others) by state:
<TABLE>
<CAPTION>
AS OF
-----------------------------------------------------------------------------------
DECEMBER 31, 1993 DECEMBER 31, 1994
---------------------------------------- ------------------------------------------
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
OF OF OF OF
NUMBER AGGREGATE AGGREGATE TOTAL NUMBER AGGREGATE AGGREGATE TOTAL
OF PRINCIPAL PRINCIPAL DELINQS. OF PRINCIPAL PRINCIPAL DELINQS.
STATE LOANS BALANCE BALANCE BY STATE(1) LOANS BALANCE BALANCE BY STATE(1)1)
----- ------ ---------- ---------- ----------- ------ ---------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CA(2)........... 2,194 $ 184,691 18.34% 7.07% 2,822 $ 343,135 32.94% 29.24%
NY.............. 1,177 44,455 4.41 4.83 943 36,831 3.54 7.49
AZ.............. 5,613 212,007 21.05 8.97 4,132 145,980 14.01 7.49
MD.............. -- -- -- -- 1,828 104,384 10.02 4.80
TX.............. 1,539 31,648 3.14 5.52 945 25,721 2.47 6.64
MA.............. -- -- -- -- 353 21,625 2.08 3.53
Other(3)........ 17,612 534,485 53.06 73.61 8,698 364,109 34.94 40.81
------ ---------- ------ ------ ------ ---------- ------ ------
Total........... 28,135 $1,007,286 100.00% 100.00% 19,721 $1,041,785 100.00% 100.00%
====== ========== ====== ====== ====== ========== ====== ======
<CAPTION>
AS OF
---------------------------------------------------------------------------------
DECEMBER 31, 1995 JUNE 30, 1996
---------------------------------------- ----------------------------------------
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
OF OF OF OF
NUMBER AGGREGATE AGGREGATE TOTAL NUMBER AGGREGATE AGGREGATE TOTAL
OF PRINCIPAL PRINCIPAL DELINQS. OF PRINCIPAL PRINCIPAL DELINQS.
STATE LOANS BALANCE BALANCE BY STATE(1) LOANS BALANCE BALANCE BY STATE(1)
----- ------ ---------- ---------- ----------- ------ ---------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CA(2)........... 4,948 $ 533,590 33.42% 39.04% 4,351 $ 452,151 33.19% 32.87%
NY.............. 532 32,620 2.04 3.49 1,571 178,263 13.08 8.49
AZ.............. 3,787 139,038 8.71 7.89 3,498 120,181 8.82 8.70
MD.............. 1,628 93,495 5.86 4.65 1,466 82,978 6.09 4.51
TX.............. 4,291 265,242 16.62 7.31 1,578 80,895 5.94 6.87
MA.............. 890 83,593 5.24 2.82 829 77,031 5.65 3.87
Other(3)........ 8,882 448,807 28.11 34.80 7,484 370,945 27.23 34.69
------ ---------- ------ ------ ------ ---------- ------ ------
Total........... 24,958 $1,596,385 100.00% 100.00% 20,777 $1,362,444 100.00% 100.00%
====== ========== ====== ====== ====== ========== ====== ======
</TABLE>
- ----
(1) In terms of number of loans outstanding.
(2) The concentration in California does not reflect a business strategy of
the Company but rather the pursuit of specific opportunities.
(3) No other state accounted for greater than 5.0%, based on aggregate
principal balances, of the Company's mortgage loan servicing portfolio as
of June 30, 1996.
50
<PAGE>
ACQUISITION OF SERVICING RIGHTS. The Company acquires substantially all of
its mortgage servicing rights in the secondary market. The secondary market
for purchasing and selling mortgage servicing rights is inefficient in several
respects, which include lack of a centralized exchange for conducting trading,
lack of definitive market prices, and lack of conformity in modeling
assumptions. The industry expertise of United Financial's and Matrix
Financial's employees provides the Company with the opportunity to capitalize
upon these inefficiencies when acquiring mortgage servicing rights. Prior to
completing any such acquisition, the Company analyzes a wide range of
characteristics with respect to each portfolio considered for purchase. This
analysis includes projecting revenues and expenses and reviewing geographic
distribution, interest rate distribution, loan-to-value ratios, outstanding
balances, delinquency history and other pertinent statistics. Due diligence is
performed either by Matrix Financial's employees or a designated independent
contractor on a representative sample of the mortgages involved. The purchase
price is based on the present value of the expected future cash flow,
calculated by using a discount rate and loan prepayment assumptions that
management considers to be appropriate to reflect the risk associated with the
investment.
SERVICING SALES. Generally, the Company holds to maturity its purchased
mortgage servicing portfolios; however, it sells substantially all of its
originated mortgage loan servicing rights. Such sales increase revenue, as
reflected in loan origination income, and generate cash at the time of sale,
but reduce future servicing fee income. Originated mortgage servicing rights
were sold on a bulk and flow basis on loans having an aggregate principal
amount of $89.0 million and $208.3 million during the year ended December 31,
1995 and the six months ended June 30, 1996, respectively. Periodically, the
Company may also sell purchased mortgage servicing rights to restructure its
portfolio or generate revenues. Purchased mortgage servicing rights were sold
on loans having an aggregate principal amount of $31.8 million and $390.5
million during the year ended December 31, 1995 and the six months ended June
30, 1996, for net gains of $1.2 million and $1.1 million, respectively.
The Company anticipates that it will continue to adhere to its policy of
selling substantially all of its originated mortgage servicing rights and the
Company also may sell, on occasion, purchased mortgage servicing rights.
Management intends to base decisions regarding future mortgage servicing sales
upon the Company's cash requirements, capital needs, earnings and the market
price for mortgage servicing rights. During the quarter in which a sale
occurs, reported income will tend to be greater than had no such sales
occurred during that quarter. Prices obtained for mortgage servicing rights
vary depending on servicing fee rates, anticipated prepayment rates, average
loan balances, remaining time to maturity, servicing costs, custodial escrow
balances, delinquency and foreclosure experience and purchasers' required
rates of return.
In the ordinary course of selling mortgage servicing rights, the Company, in
accordance with industry standards, makes certain representations and
warranties to purchasers of mortgage servicing rights. If a loan defaults when
there has been a breach of representations or warranties and the Company has
no third-party recourse, the Company may become liable for the unpaid
principal and interest on defaulted loans. In such a case, the Company may be
required to repurchase the mortgage loan and bear any subsequent loss on the
loan. In connection with any purchases by the Company of mortgage servicing
rights, the Company also is exposed to liability to the extent that an
originator or seller of the servicing rights is unable to honor its
representations and warranties. During 1995 and the first six months of 1996,
the Company recognized losses of $205,000 and $40,000, respectively, on loan
repurchases resulting from a particular servicing portfolio purchased by the
Company, and the Company has accrued a liability of $460,000 for additional
losses as of June 30, 1996. The Company believes that it has recourse against
the seller of this portfolio, but does not expect to realize any significant
recovery due to the current financial condition of the seller. The Company
anticipates selling this mortgage servicing portfolio and does not anticipate
any additional losses with respect to this or any other servicing portfolio
due to breaches of representations and warranties; however, there can be no
assurance that the Company will not experience such losses.
PURCHASE AND SALE OF BULK LOAN PORTFOLIOS
LOAN PURCHASES. In addition to its traditional mortgage loan origination and
servicing-related activities, the Company makes bulk purchases of mortgage
loans through Matrix Bank. The Company believes that its
51
<PAGE>
structure provides advantages over its competitors in the purchase of bulk
mortgage loan packages. United Financial, through its networking within the
mortgage banking industry, is able to refer to Matrix Bank mortgage banking
companies that are interested in selling mortgage loan portfolios. The direct
contacts reduce the number of portfolios that must be purchased through
competitive bid situations, thereby reducing the cost associated with bulk
mortgage loan portfolios.
Because the Company services mortgage loans for more than 200 private
investors, including banks, savings associations and insurance companies, it
is presented with opportunities to purchase the underlying mortgages. In many
cases, the mortgage loans increase in value solely due to the increased
liquidity provided by uniting ownership of the mortgage servicing rights with
the underlying mortgage loans. As servicer, Matrix Financial possesses
information about the quality and performance history related to each of these
loans, and, in many cases, the Company acts as custodian for the legal and
credit documents on the underlying loans. With such information available, the
Company is in a position to negotiate advantageous pricing on loans, which
provides the Company an opportunity to resell the mortgage loans at a higher
price (an "arbitrage" opportunity). Controlling ownership of the mortgage
servicing and the underlying mortgage loan provides the Company maximum
arbitrage opportunity in a sale. During the year ended December 31, 1995 and
the six months ended June 30, 1996, the Company made bulk purchases of
approximately $91.8 million and $65.3 million in mortgage loans, respectively.
TYPES OF LOANS PURCHASED. The Company reviews many loan portfolios for
prospective acquisition. The Company's primary focus is on acquiring seasoned
first lien priority loans secured primarily by one-to-four single family
residential properties valued at less than $250,000. The loans generally have
a minimum of three years of seasoning. The purchased loan portfolios typically
include both fixed and adjustable rate mortgage loans. Mortgage loan
portfolios are purchased from various sellers who, in some cases, have
originated the loans; but in most cases such sellers have acquired the loan
portfolios in bulk purchases.
There are several factors that the Company considers prior to the purchase.
These factors include the product type, the current loan balance, the current
interest rate environment, the seasoning of the mortgage loans, payment
histories, geographic location of the underlying collateral, price, the
current liquidity of the Company and the product mix in its existing mortgage
loan portfolio.
In many cases, the mortgage loan portfolios that the Company acquires are
purchased at a discount to par. Some of the loans in these portfolios are
considered performing loans that have had payment problems in the past or have
had document deficiencies. These types of portfolios afford the Company an
arbitrage opportunity if the purchase discount on such portfolios accurately
reflects the additional risks associated with purchasing these types of loans.
Loan document deficiencies are identified in the due diligence process and, to
the extent practical, are cured by the Company prior to reselling the loans.
The Company also analyzes the payment history on each mortgage loan portfolio.
Many prior problems may be a result of inefficient servicing or may be
attributable to several servicing transfers of the loans over a short period
of time. Because many considerations may impact pricing or yield, each loan
package evaluated is priced based on the specific underlying loan
characteristics.
DUE DILIGENCE. The Company performs comprehensive due diligence on each
mortgage loan portfolio that the Company desires to purchase on a bulk basis.
These procedures consist of analyzing a representative sample of the mortgage
loans in the portfolio and are typically performed by Company employees, but
occasionally are outsourced to third party contractors. The underwriter takes
into account many factors in analyzing the sample of mortgage loans in the
subject portfolio, including the general economic conditions in the geographic
area or areas in which the underlying residential properties are situated, the
loan-to-value ratios on the underlying loans, the payment histories of the
borrowers and other pertinent statistics. In addition, the underwriter
attempts to verify that each of the sample loans conforms to the standards for
loan documentation set by FNMA and FHLMC and, in cases where a significant
portion of the sample loans contain documentation that does not conform to
these standards, the Company assesses the additional risk involved in
purchasing such loans. Once the underwriting and due diligence process is
complete, the Company categorizes each loan pool into one of four
52
<PAGE>
categories, which helps the Company determine whether the mortgage loan
portfolio meets the Company's investment criteria and, if it does, the range
of pricing that the Company feels is appropriate for the portfolio of mortgage
loans in question.
LOAN SALES. Substantially all of the mortgage loans in the Company's loan
portfolio are classified as held for sale. The Company continually monitors
the secondary market for purchases and sales of mortgage loan portfolios and
typically undertakes a sale of a particular loan portfolio held by the Company
in an attempt to "match" an anticipated bulk purchase of a particular mortgage
loan portfolio or to generate current period earnings and cash flow. To the
extent that the Company is unsuccessful in matching its purchases and sales of
mortgage loans, the Company may have excess capital at Matrix Bank, resulting
in less than optimum leverage and capital ratios. During the year ended
December 31, 1995 and the six months ended June 30, 1996, the Company made
bulk sales of approximately $70.2 million and $44.2 million in loans, for
gains on sale of bulk mortgage loans of $3.3 million and $852,000,
respectively.
RESIDENTIAL MORTGAGE LOAN ORIGINATION
WHOLESALE ORIGINATIONS. The Company originates residential mortgage loans
primarily on a wholesale basis through Matrix Financial. For the year ended
December 31, 1995 and for the six months ended June 30, 1996, Matrix Financial
originated a total of $388.9 million and $373.0 million in wholesale
residential mortgage loans, respectively.
Matrix Financial's source of mortgage loan originations is its wholesale
division, which originates mortgage loans through approved independent
mortgage loan brokers that qualify to participate in Matrix Financial's
program through a formal application process that includes an analysis of the
broker's financial condition and sample loan files, as well as the broker's
reputation, general lending expertise and references. As of June 30, 1996,
Matrix Financial had approved relationships with approximately 500 mortgage
loan brokers. From Matrix Financial's offices in Atlanta, Denver and Phoenix,
the sales staff solicit mortgage loan brokers throughout the Southeastern
states, the Southwestern states and the Mountain states for loan packages that
meet Matrix Financial's criteria. Mortgage loans submitted by brokers are
funded after being underwritten by Matrix Financial.
Mortgage loan brokers act as intermediaries between borrowers and Matrix
Financial in arranging mortgage loans. Matrix Financial, as an approved FNMA,
FHLMC and GNMA seller/servicer, provides such brokers access to the secondary
market for the sale of mortgage loans that they otherwise cannot access
because they do not meet the applicable seller/servicer net worth
requirements. Matrix Financial attracts and maintains relationships with
mortgage loan brokers by offering a variety of services and products.
By concentrating on wholesale mortgage banking services through independent
mortgage loan brokers, Matrix Financial is able to originate mortgage loans in
a cost-effective manner. Historically, retail mortgage loan origination has
involved higher fixed overhead costs such as offices, furniture, computer
equipment and telephones, as well as additional personnel costs such as sales
representatives and loan processors. By limiting the number of offices and
personnel needed to generate business, Matrix Financial has transferred the
overhead burden of mortgage origination to the independent mortgage loan
brokers that originate the loans. As a result, Matrix Financial can match its
origination costs more directly to loan origination volume so that a
substantial portion of its costs are variable rather than fixed.
In June 1996, the Company implemented a program to supplement its product
offerings made through its wholesale loan origination networks by adding
products tailored to borrowers who are unable or unwilling to obtain mortgage
financing from conventional mortgage sources. The borrowers who need this type
of loan product often have impaired or unsubstantiated credit histories and/or
unverifiable income and require or seek a high degree of personalized services
and swift response to their loan applications. As a result, these borrowers
generally are not averse to paying higher interest rates that the Company will
charge for this loan product type as compared to the interest rates charged by
conventional lending sources. The Company has established
53
<PAGE>
classifications with respect to the credit profiles of these borrowers. The
classifications range from A-minus through D depending upon a number of
factors, including the borrower's credit history and employment status. This
new lending program will be managed as a separate division of Matrix
Financial, known as the B/C Lending Division. Matrix Financial has entered
into a strategic alliance with a marketing group to enroll new independent
mortgage loan brokers to deliver borrower applications to the B/C Lending
Division. In addition, the marketing group will work with Matrix Financial's
existing wholesale network operations in Atlanta, Denver and Phoenix to
solicit loan applications for the B/C Lending Division from its existing base
of independent mortgage loan brokers. To date, the operations of the B/C
Lending Division have not been material to those of the Company.
RETAIL ORIGINATIONS. On a limited basis, and primarily in order to serve the
communities in which it operates, Matrix Bank originates mortgage loans on a
retail basis through its branches in Las Cruces, New Mexico and Sun City,
Arizona. The retail loans originated by Matrix Bank consist of a broad range
of residential (both at fixed and at adjustable rates) and consumer loan
products and, on a more limited basis, commercial real estate loans.
QUALITY CONTROL. The Company has a loan quality control process designed to
ensure sound lending practices and compliance with FNMA, FHLMC and applicable
private investor guidelines. Prior to funding any wholesale or retail loan,
the Company performs a pre-funding quality control audit, which consists of
the verification of a borrower's credit and employment, utilizing a detailed
checklist. Subsequent to funding, the Company on a monthly basis selects 10%
of all closed loans for a detailed audit conducted by its own personnel or a
third-party service provider. The quality control process entails performing a
complete underwriting review, and independent reverification of all employment
information, tax returns, source of down payment funds, bank accounts and
credit. Furthermore, 10% of the audited loans are chosen for an independent
field review and standard factual credit report. All discovered deficiencies
in these audits are reported to senior management of the Company to determine
trends and additional training needs. All resolvable issues are addressed and
cured by the Company. Any loans that fail to meet applicable investment
criteria of an investor are reported to such investor, which could result in a
requirement by the investor for the Company to repurchase the loan. The
Company also performs a quality control audit on all early payment defaults,
first payment defaults and 60-day delinquent loans, with the findings reported
to the appropriate investor and/or senior management.
SALE OF LOAN ORIGINATIONS. The Company generally sells the loans that it
originates. In the future, however, Matrix Bank may elect to hold for
investment certain mortgage loans that it has originated. Under ongoing
programs established with FNMA and FHLMC, conforming conventional loans may be
sold on a cash basis or pooled by the Company and exchanged for securities
guaranteed by FNMA or FHLMC. These securities are then sold by Matrix
Financial and Matrix Bank to national or regional broker/dealers. Mortgage
loans sold to FNMA or FHLMC are sold on a nonrecourse basis so that
foreclosure losses are generally borne by FNMA or FHLMC and not by the
Company.
The Company also sells nonconforming mortgage loans on a nonrecourse basis
to other secondary market investors. These loans are typically first lien
mortgage loans that do not meet all of the agencies' underwriting guidelines,
and are originated instead for other institutional investors with which the
Company previously negotiated purchase commitments, and for which the Company
occasionally pays a fee. This practice would also apply to the sale of
residential mortgage loans originated through the Company's B/C Lending
Division.
The Company sells mortgage loans on a servicing-retained or servicing-
released basis. Certain purchasers of mortgage loans require that the loan be
sold to them servicing released. In all other cases the decision is left to
the Company. Generally, the Company sells conforming loans on a servicing-
retained basis and nonconforming loans on a servicing-released basis. See "--
Residential Loan Servicing Activities--Loan Servicing."
In connection with the Company's mortgage loan originations and sales, the
Company makes customary representations and warranties, similar in nature and
scope to those provided in connection with sales of mortgage servicing rights,
that to date have not resulted in any significant repurchases of loans by the
Company or any pending or threatened claims by the purchasers against the
Company.
54
<PAGE>
The sale of mortgage loans may generate a gain or loss for the Company.
Gains or losses result primarily from two factors. First, the Company may make
a loan to a borrower at a price that is higher or lower than it would receive
if it immediately sold the loan in the secondary market. These price
differences occur primarily as a result of competitive pricing conditions in
the primary loan origination market. Second, gains or losses may result from
the changes in interest rates that result in changes in the market value of
the mortgage loans from the time that the price commitment is given to the
borrower until the time that the mortgage loan is sold to the investor.
In order to hedge against the interest rate risk resulting from these timing
differences, the Company historically has committed to sell all closed
mortgage loans held for sale and a portion of its pipeline loans. On a daily
basis, the Company adjusts its net commitment position by either entering into
new commitments to sell or by buying back commitments to sell depending upon
its projection of the portion of the pipeline loans that it expects to close.
These projections are based on numerous factors, including changes in interest
rates and general economic trends. The accuracy of the underlying assumptions
bears directly upon the effectiveness of the Company's use of forward
commitments and subsequent profitability. At December 31, 1995, the Company
had approximately $93.1 million in pipeline and funded loans offset with
mandatory forward commitments of approximately $64.7 million and non-mandatory
forward commitments of approximately $15.3 million. At June 30, 1996, the
Company had approximately $95.4 million in pipeline and funded loans offset
with mandatory forward commitments of approximately $69.7 million and non-
mandatory forward commitments of approximately $20.0 million. The inherent
value of the forward commitments is considered in the determination of the
lower of cost or market in valuing the Company's pipeline and funded loans at
any given time. See "Risk Factors--Potential Adverse Impact of Fluctuating
Interest Rates--Pipeline Loans" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Comparison of Results of
Operations for the Six Months Ended June 30, 1996 and 1995--Loan Origination."
REAL ESTATE MANAGEMENT AND DISPOSITION SERVICES
USS, which began operations in June 1995, provides real estate management
and disposition services to customers across the United States. In addition to
the unaffiliated clients currently served by USS, Matrix Financial uses USS
exclusively in handling the disposition of its foreclosed real estate. Having
USS provide this service as opposed to Matrix Financial transforms the
disposition process into a revenue generator for the Company, since USS
typically collects a fee of 1% of the value of the foreclosed real estate from
the real estate broker involved in the sale transaction. USS is able to
provide this disposition service on an outsourced basis and at no additional
cost to the mortgage loan servicer, since USS collects its fee from the real
estate broker. USS is able to pass the cost of the disposition on to the real
estate broker because of the volume it generates. In addition, USS provides
limited collateral valuation opinions to clients such as FHLMC who are
interested in assessing the value of the underlying collateral on non-
performing mortgage loans, as well as to clients such as Matrix Bank and other
third-party mortgage loan originators and buyers interested in evaluating
potential bulk purchase of mortgage loans. To date, the operations of USS have
not been material to those of the Company.
SAVINGS BANK ACTIVITIES
With branches in Las Cruces, New Mexico and Sun City, Arizona, Matrix Bank
serves its local communities by providing a broad range of personal and
business depository services, offering residential and consumer loans and
providing, on a more limited basis, commercial real estate loans. For a
discussion of the depository services offered by Matrix Bank, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." For a discussion of the
historical loan portfolio of the Company, including that of Matrix Bank, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Asset and Liability Management--Lending Activities."
SUB-PRIME AUTOMOBILE LOANS
Sterling originates and sells sub-prime automobile retail installment sales
contracts on new and used automobiles. "Sub-prime" lending involves making
loans to borrowers with limited access to traditional sources
55
<PAGE>
of consumer credit. Sterling currently has relationships with more than 500
automobile dealerships located throughout the United States. Sterling
maintains a central processing center in Denver, which is responsible for
reviewing and approving credit applications submitted by dealers and other
originators directly via on-line connection with Sterling. Loans made by
Sterling average approximately $9,500 each, carry an interest rate generally
of between 18% and 26%, and are serviced by an unaffiliated third-party
servicer, who charges a fixed fee per month for servicing. Sterling sells
substantially all of its retail automobile installment sales contracts through
conduits in the secondary market within 30 to 60 days after their origination
or purchase. Because Sterling generally requires the first monthly installment
payment to be paid by the borrower at the closing of the loan, the credit risk
incurred by Sterling in connection with the origination, purchase and sale of
these loans is substantially reduced. To date, the operations of Sterling have
not been material to the business of the Company.
COMPETITION
The industries in which the Company competes are highly competitive. The
Company competes with other mortgage banking companies, servicing brokers,
commercial banks, savings associations, credit unions, other financial
institution and various other lenders. A number of these competitors have
substantially greater financial resources, greater operating efficiencies and
longer operating histories than the Company.
Competition in originating mortgage loans arises mainly from other mortgage
companies, savings associations and commercial banks. The distinction among
market participants is based primarily on price and, to a lesser extent, the
quality of customer service and name recognition. Aggressive pricing policies
of the Company's competitors, especially during a declining period of mortgage
loan originations, could in the future result in a decrease in the Company's
mortgage loan origination volume and/or a decrease in the profitability of the
Company's loan originations, thereby reducing the Company's revenues and net
income. Many of the nation's largest mortgage companies, savings associations
and commercial banks have a significant number of branch offices in areas in
which the Company operates. The Company competes for loans by offering
competitive interest rates and product types, and by seeking to provide a
higher level of personal service to mortgage brokers and borrowers than is
furnished by competitors. However, the Company does not have a significant
market share of the lending markets in which it conducts operations.
Management believes that Matrix Bank's most direct competition for deposits
comes from local financial institutions. The distinction among market
participants is based primarily on price and, to a lesser extent, the quality
of customer service and name recognition. Matrix Bank's cost of funds
fluctuates with general market interest rates. During certain interest rate
environments, additional significant competition for deposits may be expected
from corporate and governmental debt securities as well as money market mutual
funds. Matrix Bank competes for deposits by emphasizing quality of service,
extensive product lines and competitive pricing.
Competition in brokerage and consulting arises mainly from other mortgage
banking consulting firms and national and regional investment banking and
accounting firms. Management believes that the distinction among market
participants is based primarily on customer service. United Financial competes
for its brokerage and consulting activities by recruiting qualified and
experienced sales people, by developing innovative sales techniques, by
providing financing opportunities to its customers through its affiliation
with Matrix Bank and by seeking to provide a higher level of service than is
furnished by its competitors.
The Company competes for the acquisition of mortgage loan servicing rights
and bulk loan portfolios mainly with mortgage companies, savings associations,
commercial banks and other institutional investors. The Company believes that
it has competed successfully for the acquisition of mortgage loan servicing
rights and bulk loan portfolios by relying on the advantages provided by its
unique corporate structure and the secondary marketing expertise of the
employees in each Subsidiary.
The sub-prime consumer automobile finance market is highly fragmented.
Although the Company does not believe that it currently competes with
commercial banks, savings associations, credit unions and captive automobile
finance companies in the origination and resale of sub-prime automobile loans,
it does face
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competition from a number of companies providing, or capable of providing,
financing programs to individual purchasers that cannot qualify for
traditional financing. The Company also competes with numerous relatively
small, regional consumer finance companies. Many of these competitors or
potential competitors have pre-existing relationships with established dealer
networks. To the extent that any of such lenders significantly expand their
activities in the Company's market, the Company could be materially adversely
affected. The Company believes that it competes primarily on the basis of the
price paid for the loans and service to its participating dealers.
EMPLOYEES
At June 30, 1996, the Company had 206 employees. Management believes that
its relations with its employees are good. Neither Matrix Capital nor any of
the Subsidiaries is a party to any collective bargaining agreement.
PROPERTIES
The executive and administrative offices of Matrix Capital, United Financial
and USS are located at 1380 Lawrence Street, Suite 1410, Denver, Colorado
80204. The lease on these premises extends through January 1999 and the
current annual rent is approximately $110,000. The Company also owns a
building in Phoenix, which houses the bulk of Matrix Financial's operations.
This building was purchased by the Company in 1994 and is subject to third
party mortgage indebtedness. See Note 4 to the Consolidated Financial
Statements included elsewhere herein. The Company utilizes approximately
18,000 of the 30,000 square feet in this building, with the balance being
leased to an affiliated company at current market rates. See "Certain
Relationships and Related Transactions." The Company also leases two smaller
office facilities in Atlanta and Denver where Matrix Financial conducts its
wholesale loan origination activities. Sterling's operations are conducted in
an approximately 3,200 square foot leased facility in Denver.
Matrix Bank owns an approximately 30,000 square foot building in Las Cruces,
New Mexico. Of this 30,000 square feet, approximately 9,200 square feet serve
as the headquarters for Matrix Bank, with substantially all of the remaining
footage being rented to third-party tenants at market rates. Matrix Bank also
owns an approximately 3,000 square foot building in Sun City, Arizona, which
serves as Matrix Bank's branch there.
The Company believes that all of its present facilities are adequate for its
current needs and that additional space is available for future expansion upon
acceptable terms.
LEGAL PROCEEDINGS
Matrix Financial is a defendant in two lawsuits, Limper v. Matrix Financial
Services Corporation (Court of Common Pleas, Ottawa County, Ohio, January 29,
1996), and Mogavero v. Matrix Financial Services Corporation (United States
District Court for the District of Massachusetts, June 17, 1996), which
purport to cover a nationwide class of plaintiffs and involve similar facts
and legal claims. The plaintiffs have requested class action status for each
of these lawsuits. In both cases, the plaintiffs allege that Matrix Financial
breached the terms of plaintiffs' promissory notes and mortgages by imposing
certain fax and payoff statement fees at the time the plaintiffs prepaid their
loans. The plaintiffs claim that such fees constitute prepayment charges in
violation of the terms of the notes and demand restitution and attorneys'
fees. In addition, the plaintiffs in Mogavero seek treble damages for Matrix
Financial's alleged violation of 18 U.S.C. (S)1964.
Matrix Financial has filed an answer in Limper denying the plaintiffs'
claims but no answer has yet been filed in Mogavero. Matrix Financial believes
it has defenses to these lawsuits; however, no assurance can be given that an
adverse judgment will not be rendered or that such a judgment would not have a
material adverse effect on the Company's consolidated financial condition,
results of operations or cash flows. A joint settlement proposal has been
tendered by plaintiffs' counsel, whereby Matrix Financial would pay a
settlement payment of
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not more than $640,000, including attorneys' fees of the plaintiffs, payments
to the plaintiff class members and all administrative costs associated with
the settlement. Assuming the settlement occurs, and depending on the response
rate from the plaintiff class members, the ultimate total of payments made by
Matrix Financial could be significantly smaller. The terms of the settlement,
however, are being negotiated, and there can be no assurance that either
action will be settled on terms acceptable to the Company, or at all. If the
settlement negotiations proceed, the Company anticipates that it will
establish a reserve in the third quarter of 1996 to account for this
contingency.
The Company is involved from time to time in routine litigation incidental
to its business. However, other than described above, the Company believes
that it is not a party to any material pending litigation that, if decided
adversely to the Company, would have a significant adverse effect on the
Company's consolidated financial condition, results of operations or cash
flows.
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REGULATION AND SUPERVISION
Set forth below is a brief description of various laws and regulations
affecting the operations of the Company. The description of laws and
regulations contained herein does not purport to be complete and is qualified
in its entirety by reference to applicable laws and regulations.
MATRIX CAPITAL
Matrix Capital is a unitary thrift holding company within the meaning of the
Home Owners' Loan Act of 1933, as amended ("HOLA"). As such, Matrix Capital
has registered with the OTS and is subject to OTS regulation, examination,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over Matrix Capital and its non-savings institution subsidiaries.
Among other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to Matrix Bank. In
addition, Matrix Bank must notify the OTS at least 30 days before making any
distribution to Matrix Capital.
The HOLA prohibits a thrift holding company, directly or indirectly through
one or more subsidiaries, from (i) acquiring another savings institution or
holding company thereof, without prior written approval of the OTS, (ii)
acquiring or retaining, with certain exceptions, more than five percent of a
nonsubsidiary savings institution, a nonsubsidiary holding company, or a
nonsubsidiary company engaged in activities other than those permitted by the
HOLA, or (iii) acquiring or retaining control of a savings institution that is
not federally insured. In evaluating applications by holding companies to
acquire savings institutions, the OTS must consider the financial and
managerial resources and future prospects of the company and institution
involved, the effect of the acquisition on the risk to the insurance funds,
the convenience and needs of the community and competitive factors.
As a unitary thrift holding company, Matrix Capital generally is not
restricted under existing laws as to the types of business activities in which
it may engage, provided that Matrix Bank continues to be a "qualified thrift
lender" under HOLA ("QTL"). See "--Federal Savings Bank Operations--QTL Test"
for a discussion of the QTL requirements. Upon any nonsupervisory acquisition
by Matrix Capital of another savings association or savings bank that meets
the QTL test and is deemed to be a savings institution by OTS, Matrix Capital
would become a multiple thrift holding company (if the acquired institution is
held as a separate subsidiary) and would be subject to extensive limitations
on the types of business activities in which it could engage. HOLA limits the
activities of a multiple thrift holding company and its uninsured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act of 1956, as amended (the
"BHC Act"), subject to the prior approval of the OTS, and activities
authorized by OTS regulation.
Legislation has been proposed that would impose limits on the nonbanking
activities of companies that acquire savings associations. It is anticipated
that Matrix Capital's holding company status would be "grandfathered" under
such legislation, but there can be no assurance that Matrix Capital would be
so excepted from such limits. Furthermore, any available grandfathering might
not continue to be available to Matrix Capital as a result of a possible
merger of the federal regulatory agencies. Several proposals have been
introduced in Congress over a number of years with increasing frequency and
interest in such a merger. If the OTS and Office of the Comptroller of the
Currency were merged, as one proposal would require, the federal thrift
charter would actually be eliminated. If adopted, such a proposal would
require that Matrix Bank become a national bank and would subject it to
regulation as such. One effect of such a requirement would be that Matrix
Capital could not engage in activities not permitted for national banks. In
addition, the ability to branch interstate would become subject to the
restrictions of the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 ("Riegle Act"). Accordingly, any out-of-state branches of Matrix
Bank in existence upon the effectiveness of such a proposal that are not
permissible under the Riegle Act and, if not grandfathered, could be required
to be divested. There are also some benefits to such a charter conversion. For
example, Matrix Bank would not, under regulations currently applicable to
national banks, be subject to the QTL test described below.
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Federal law generally provides that no company may acquire control of a
federally-insured savings institution without obtaining the approval of the
OTS. Such acquisitions of control may be disapproved if it is determined,
among other things, that the acquisition would substantially lessen
competition or the financial and managerial resources and further prospects of
the acquiror and savings institution involved or that the acquisition would be
detrimental to the institution or present enhanced insurance risk to the SAIF
or BIF.
MORTGAGE BANKING OPERATIONS
The rules and regulations applicable to the Company's mortgage banking
operations establish underwriting guidelines that, among other things, include
anti-discrimination provisions, require provisions for inspections,
appraisals, and credit reports on prospective borrowers and fix maximum loan
amounts. Moreover, lenders, such as the Company, are required annually to
submit to the HUD, FNMA and FHLMC audited financial statements, and each
regulatory entity maintains its own financial guidelines for determining net
worth and eligibility requirements. The Company's affairs are also subject to
examination by HUD, FNMA and FHLMC at any time to assure compliance with the
applicable regulations, policies and procedures. Mortgage loan origination
activities are subject to, among others, the Equal Credit Opportunity Act,
Federal Truth-in-Lending Act and the Real Estate Settlement Procedures Act of
1974, as amended, and the regulations promulgated thereunder that prohibit
discrimination and require the disclosure of certain basic information to
mortgagors concerning credit terms and settlement costs.
Additionally, there are various state and local laws and regulations
affecting the Company's operations. The Company is licensed in those states in
which it does business requiring such a license where the failure to be
licensed would have a material adverse effect on the Company, its business or
assets. Conventional mortgage operations also may be subject to state usury
statutes.
FEDERAL SAVINGS BANK OPERATIONS
BUSINESS ACTIVITIES. The activities of savings associations are governed by
HOLA and, in certain respects, the Federal Deposit Insurance Act of 1933, as
amended ("FDI Act"). The HOLA and the FDI Act were amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, as amended
("FIRREA") and the Federal Deposit Insurance Corporation Act of 1991
("FDICIA"). FIRREA was enacted to resolve issues relating to problem
institutions, including thrifts, establish a new thrift insurance fund,
reorganize the regulatory structure applicable to savings associations and
impose bank-like standards on savings associations. FDICIA, among other
things, requires that federal banking regulators intervene promptly when a
depository institution experiences financial difficulties, mandates the
establishment of a risk-based deposit insurance assessment system and requires
imposition of numerous additional safety and soundness operational standards
and restrictions. Both FIRREA and FDICIA contain provisions affecting numerous
aspects of the operations and regulations of federally-insured savings
associations and empower the OTS and the FDIC, among other agencies, to
promulgate regulations implementing their provisions.
Provisions of the federal banking statutes, as amended by FIRREA and FDICIA,
among other provisions, (i) restrict the use of brokered deposits by troubled
savings associations that are not well capitalized, (ii) prohibit the
acquisition of any corporate debt security that is not rated in one of the
four highest rating categories, (iii) subject to OTS waiver, restrict the
aggregate amount of loans secured by non-residential real estate property to
400% of Tier I capital, (iv) permit savings and loan holding companies to
acquire up to 5% of the voting shares of non-subsidiary savings associations
or savings and loan holding companies without prior approval, (v) permit bank
holding companies to acquire healthy savings associations, (vi) require the
federal banking agencies to establish by regulation standards for extensions
of credit secured by real estate, and (vii) restrict transactions between a
savings association and its affiliates.
LOANS TO ONE BORROWER. Under the HOLA, savings associations are generally
subject to the national bank limits on loans to one borrower. Generally, a
savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of the institution's unimpaired
capital and surplus. An additional
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amount may be lent, equal to 10% of unimpaired capital and surplus, if such
loan is fully secured by readily marketable collateral, which is defined to
include certain securities and bullion, but generally does not include real
estate.
QTL TEST. The HOLA requires savings associations to meet a QTL test. Under
the QTL test, as modified by FDICIA, a savings association is required to
maintain at least 65% of its "portfolio assets" (total assets less (i)
specified liquid assets up to 20% of total assets, (ii) intangibles, including
goodwill and (iii) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed and related securities) on a
monthly basis in nine out of every 12 months.
A savings association that fails the QTL test for four or more months out of
the prior 12-month period must either convert to a bank charter or operate
under certain restrictions. If the savings association does not convert to a
bank charter, generally it will be prohibited from: (i) making any new
investment or engaging in any new activity not permissible for a national
bank; (ii) paying dividends not permissible under national bank statutes and
regulations; (iii) obtaining any new advances from any FHLB; and (iv)
establishing any new branch office in a location not permissible for a
national bank with its head office located in the association's home state.
Any bank chartered as a result of failure of the QTL test must pay exit and
entrance fees as a consequence of leaving the SAIF and entering the BIF as
further described below. In addition, beginning three years after the
association fails the QTL test, the association will be prohibited from
engaging in any activity or retaining any investment not permissible for a
national bank and will have to repay any outstanding advances from FHLB as
promptly as possible consistent with safety and soundness. One year from the
date the association fails the QTL test, any holding company that controls the
association must register as and be deemed to be a bank holding company,
subject to the restrictions and limitations of the BHC Act, and to the
regulations of the Board of Governors of the Federal Reserve System. As of
June 30, 1996, Matrix Bank maintained approximately 93% of its portfolio
assets in qualified thrift investments and, therefore, met the QTL test.
Consequently, Matrix Capital is able to retain its savings and loan holding
company status.
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations upon
all capital distributions by savings associations, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to
shareholders of another institution in a cash-out merger and other
distributions charged against capital. The rule establishes three tiers of
associations, which are based primarily on an institution's capital level. An
institution that has capital which is equal to or exceeds all fully phased-in
capital requirements before and after a proposed capital distribution ("Tier 1
Institution") and has not been advised by the OTS that it is in need of more
than normal supervision, could, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the
greater of: (i) 100% of its net income to date during the calendar year plus
the amount that would reduce by one-half its "surplus capital ratio" (the
excess capital over its fully phased-in capital requirements) at the beginning
of the calendar year or (ii) 75% of its net income for the previous four
quarters. Any additional capital distributions would require prior regulatory
approval. If Matrix Bank's capital falls below its fully-phased-in requirement
or the OTS notifies it that it is in need of more than normal supervision,
Matrix Bank's ability to make capital distributions could be restricted. In
addition, the OTS could prohibit a proposed capital distribution by any
institution, which would otherwise be permitted by the regulation, if the OTS
determines that such distribution would constitute an unsafe or unsound
practice. At June 30, 1996, Matrix Bank was a Tier 1 Institution.
LIQUIDITY. Matrix Bank must maintain an average daily balance of liquid
assets and short-term liquid assets equal to a monthly average of not less
than specified percentages of its net withdrawable deposit accounts plus
short-term borrowings. This liquidity requirement may be changed from time to
time by the OTS. Monetary penalties may be imposed for failure to meet these
liquidity requirements. Since its acquisition by Matrix Capital, Matrix Bank
has never failed to meet its liquidity requirements.
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ASSESSMENTS. Savings associations must pay assessments to the OTS to fund
the operations of the OTS. The general assessment, currently assessed on a
semi-annual basis, is computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the association's latest
quarterly thrift financial report. The assessments paid by Matrix Bank for the
years ended December 31, 1994 and 1995 and for the six months ended June 30,
1996 totaled $176,000, $155,000 and $86,000, respectively.
BRANCHING. In April 1992, the OTS amended its rule on branching by federally
chartered savings associations to permit nationwide branching to the extent
allowed by federal statute. This permits federal savings associations with
interstate networks to diversify their loan portfolios and lines of business.
The OTS authority preempts any state law purporting to regulate branching by
federal savings associations.
COMMUNITY REINVESTMENT. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help
meet the credit needs of its entire community, including low and moderate
income neighborhoods. The CRA does not establish specific lending requirements
or programs for financial associations nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community. The CRA requires the OTS, in
connection with its examination of a savings institution, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in evaluating certain applications by such
institution. The CRA also requires all associations to publicly disclose their
CRA rating. Matrix Bank received a CRA rating of "satisfactory" in its most
recent examination.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC. Matrix Bank is a member of
the SAIF, which is administered by the FDIC. Savings deposits are insured up
to $100,000 per insured member (as defined by law and regulation) by the FDIC.
Such insurance is backed by the full faith and credit of the United States. As
insurer, the FDIC imposes deposit insurance assessments and is authorized to
conduct examinations of and to require reporting by the FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging
in any activity the FDIC determines by regulation or order to pose a serious
risk to the FDIC. The FDIC also may initiate enforcement actions against
savings associations and may terminate the deposit insurance if it determines
that the institution has engaged or is engaging in unsafe or unsound
practices, or is in an unsafe or unsound condition.
FDICIA required the FDIC to implement a risk-based deposit insurance
assessment system. Pursuant to this requirement, the FDIC has adopted a risk-
based assessment system under which all SAIF insured depository associations
are placed into one of nine categories and assessed insurance assessments
based upon their level of capital and supervisory evaluation. Under this
system, associations classified as well capitalized and considered healthy pay
the lowest assessment while associations that are less than adequately
capitalized and considered of substantial supervisory concern pay the highest
assessment. In addition, under FDICIA, the FDIC may impose special assessments
on SAIF members to repay amounts borrowed from the United States Treasury or
for any other reason deemed necessary by the FDIC. The FDIC may increase
assessment rates, on a semiannual basis, if it determines that the reserve
ratio of the SAIF will be less than the designated reserve ratio of 1.25% of
SAIF insured deposits. In setting these increased assessments, the FDIC must
seek to restore the reserve ratio to that designated reserve level, or such
higher reserve ratio as established by the FDIC. Matrix Bank's current
assessment is 0.23% of deposits, which is the lowest rate.
By contrast, financial institutions that are members of the Bank Insurance
Fund ("BIF"), which has higher reserves, experienced lower deposit insurance
assessments. The disparity in deposit insurance assessments between SAIF and
BIF members was exacerbated by the statutory requirement that both the SAIF
and the BIF funds be recapitalized to a 1.25% reserved deposits ratio and that
a portion of most thrift's deposit insurance assessments be used to service
bonds issued by the Financial Corporation ("FICO"). BIF reached the required
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reserve ratio in 1995. As a result, financial institutions that have deposits
insured by the SAIF were subject to a potential competitive disadvantage as
compared to BIF members.
To address this rate disparity, on September 30, 1996, the President signed
legislation intended to enable SAIF to reach the designated reserve ratio. The
legislation provides for a one-time special assessment of .657% to be imposed
upon all SAIF deposits as of March 31, 1995. Based on the company's SAIF
deposits as of March 31, 1995, the cost of the one-time special assessment
will be approximately $450,000 (pre-tax). Such amount was accrued in the third
quarter of 1996 and must be paid in the fourth quarter of 1996.
The legislation also provides for BIF members to service a growing portion
of the FICO bond payments. Until January 1, 2000, annual assessments of .013%
of BIF deposits and .064% of SAIF deposits will service the annual payments
due on the FICO bonds. Subsequently, the legislation provides for a full pro
rata sharing of FICO bond payments by BIF and SAIF institutions. The
legislation would merge the SAIF and BIF as of January 1, 1999, but only if
the thrift charter has been eliminated.
The financing corporations created by FIRREA and the Competitive Equality
Banking Act of 1987 are also empowered to assess premiums on savings
associations to help fund the liquidation or sale of troubled associations.
Such premiums cannot, however, exceed the amount of SAIF assessments and are
paid in lieu thereof.
BROKERED DEPOSITS. Under the FDIC regulations governing brokered deposits,
well-capitalized associations are not subject to brokered deposit limitations,
while adequately capitalized associations are subject to certain brokered
deposit limitations and undercapitalized associations may not accept brokered
deposits. Matrix Bank is considered to be a well-capitalized association, but
does not currently accept, and in the foreseeable future does not expect to
accept, brokered deposits. See "--Capital Requirements."
FINANCIAL MANAGEMENT REQUIREMENTS. FDICIA also imposes new financial
reporting requirements on all depository associations with assets of more than
$500 million, their management and their independent auditors, and establishes
rules for the composition, duties and authority of such associations' audit
committees and boards of directors.
TRANSACTIONS WITH RELATED PARTIES. Matrix Bank's authority to engage in
transactions with related parties or affiliates or to make loans to certain
insiders is limited by the Federal Reserve Act of 1913, as amended. In
addition, savings associations may not lend to any affiliate that is engaged
in activities that are not permissible for bank holding companies under the
BHC Act. Further, no savings institution may purchase the securities of any
affiliate other than a subsidiary.
ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement
responsibility over savings associations such as Matrix Bank and has the
authority to bring enforcement action against all "institution-related
parties," including shareholders, attorneys, appraisers and accountants who
knowingly or recklessly participate in wrongful action which caused or is
likely to cause more than a minimal financial loss to, or a significant
adverse effect on an insured depository institution. Civil penalties cover a
wide range of violations and actions and range up to $25,000 per day unless a
finding of reckless disregard is made, in which case penalties may be as high
as $1 million per day. Criminal penalties for most financial institution
crimes include fines of up to $1 million and imprisonment for up to 30 years.
In addition, regulators have substantial discretion to impose enforcement
action on an institution that fails to comply with its regulatory
requirements, particularly with respect to the capital requirements. Possible
enforcement action ranges from the imposition of a capital plan and capital
directive to receivership, conservatorship or the termination of deposit
insurance. Under the FDI Act, the FDIC has the authority to recommend to the
Director of the OTS that enforcement action be taken with respect to a
particular savings institution. If action is not taken by the Director, the
FDIC has authority to take such action under certain circumstances. Matrix
Bank is not presently subject to any of the foregoing enforcement actions.
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STANDARDS FOR SAFETY AND SOUNDNESS. FDICIA requires each federal banking
agency to prescribe for all insured depository institutions and, to some
extent, their holding companies standards relating to internal controls,
information systems and audit systems, loan documentation, credit
underwriting, interest rate risk exposure, asset growth, and compensation,
fees and benefits and such other operational and managerial standards as the
agency deems appropriate. In addition, the federal banking regulatory agencies
are required to prescribe by regulation: (i) maximum classified assets to
capital ratios; (ii) minimum earnings sufficient to absorb losses without
impairing capital; (iii) to the extent feasible, a minimum ratio of market
value to book value for publicly traded shares of depository institutions or
the depository institution holding companies; (iv) standards for extensions of
credit secured by real estate or made for the purpose of financing the
construction of improvements on real estate; and (v) such other standards
relating to asset quality, earnings and valuation as the agency deems
appropriate. Finally, each federal banking agency is required to prescribe
standards for employment contracts and other compensation arrangements of
executive officers, employees, directors and principal shareholders of insured
depository associations that would prohibit compensation, benefits and
arrangements that are excessive or that could lead to a material financial
loss for the institution. If an insured depository institution or its holding
company fails to meet any of the standards described above, it must submit to
the appropriate federal banking agency a plan specifying the steps that will
be taken to cure the deficiency. If an institution fails to submit an
acceptable plan or fails to implement the plan, the appropriate federal
banking agency will require the institution or holding company to correct the
deficiency and, until corrected, may impose restrictions on the institution or
the holding company, including any of the restrictions applicable under the
prompt corrective action provisions of FDICIA. See "--Prompt Corrective
Action."
CAPITAL REQUIREMENTS. FDICIA added a provision establishing "capital
categories" in order to facilitate prompt corrective action by the federal
banking regulators. The purpose of this amendment is to impose more scrutiny
and restrictions on institutions, and to prohibit savings institutions from
making capital distributions or paying certain management fees if to do so
would leave the institution undercapitalized. FDICIA established five capital
categories for this purpose:
. An institution will be deemed to be well-capitalized if it (i) has a
total risk-based capital ratio of 10% or more, (ii) has a Tier 1 risk-
based capital ratio of 6% or more, and (iii) has a leverage ratio of 5%
or more.
. An institution will be deemed to be adequately capitalized if it (i) has
a total risk-based capital ratio of at least 8%, (ii) has a Tier 1 risk-
based capital ratio of at least 4%, and (iii) subject to certain
exceptions, has a leverage ratio of at least 4%.
. An institution will be deemed to be undercapitalized if it (i) has a
total risk-based capital ratio of less than 8%, (ii) has a Tier 1 risk-
based capital ratio that is less than 4%, or (iii) subject to certain
exceptions, has a leverage ratio of less than 4%.
. An institution will be deemed to be significantly undercapitalized if it
(i) has a total risk-based capital ratio of less than 6%, (ii) has a Tier
1 risk-based capital ratio of less than 3%, or (iii) has a leverage ratio
of less than 3%.
. An institution will be deemed to be critically undercapitalized if it has
a ratio of tangible equity to total assets of less than 2%.
The Congress of the United States adopted a bill that did not become law,
but which would require federal savings banks to convert to national banks. In
the event of such a conversion, subject to limited grandfathering, thrift
holding companies, such as Matrix Capital, would become regulated by the
Federal Reserve Board. The Federal Reserve Board requires bank holding
companies to maintain a leverage ratio of 5.0% with the aggregate amount of
purchased mortgage servicing rights not to exceed 50.0% of Tier I capital (the
numerator of the leverage ratio). Had Matrix Capital been subject to the
Federal Reserve Board's capital regulations, its consolidated leverage ratio
would have been approximately 2.7% at June 30, 1996 (assuming no other
adjustments). There is considerable uncertainty regarding whether such
legislation will be adopted.
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<PAGE>
PROMPT CORRECTIVE ACTION. FDICIA establishes a system of prompt corrective
action to resolve the problem of undercapitalized associations. Under that
system, the banking regulators must take certain supervisory actions against
undercapitalized associations, the severity of which depends upon the
institution's level of capitalization. Generally, subject to a narrow
exception, FDICIA requires the appropriate federal banking regulator to
appoint a receiver or conservator for an institution that is critically
undercapitalized. FDICIA authorizes the banking regulators to specify the
ratio of tangible capital to assets at which an institution becomes critically
undercapitalized and requires that ratio to be no less than 2% of assets.
A thrift institution may be reclassified to an even lower category than is
indicated by its current capital position if the OTS determines the
institution to be otherwise in an unsafe or unsound condition or to be engaged
in an unsafe or unsound practice. This could include a failure by the
institution to correct deficiencies following receipt of a less-than-
satisfactory rating on its most recent examination report. Among other things,
undercapitalized institutions are subject to growth limitations and are
required to submit capital restoration plans. If an institution fails to
submit an acceptable plan or fails in any material respect to implement an
approved plan, it is treated as significantly undercapitalized.
The OTS has adopted a rule that modifies the minimum core capital
requirement for some thrift institutions. The general minimum requirement of
Tier 1 capital at least equal to 3% of adjusted total assets is applicable
only to those institutions that receive a composite rating of one (the highest
rating) under the "MACRO" rating system for thrift institutions, and those
which are, in general, considered strong organizations having well-diversified
risks (including no undue interest rate risk exposure, excellent control
systems, good earnings, high asset quality and liquidity and well managed on-
and off-balance sheet assets). All other thrift institutions must maintain
core capital of 3% plus an additional 100 to 200 basis points as established
by the OTS on a case-by-case basis.
MATRIX BANK'S CAPITAL RATIOS. The following table indicates Matrix Bank's
regulatory capital ratios at December 31,1995 and June 30, 1996:
<TABLE>
<CAPTION>
AS OF
---------------------------------------
DECEMBER 31, 1995 JUNE 30, 1996
------------------- -------------------
CORE RISK-BASED CORE RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Shareholder's equity/GAAP capital..... $7,338 $7,338 $8,170 $8,170
Additional capital items:
Minority interest in subsidiary..... 202 202 -- --
General valuation allowances........ -- 781 -- 1,011
------ ------ ------ ------
Regulatory capital as reported to the
OTS.................................. 7,540 8,321 8,170 9,181
Minimum capital requirement as
reported to the OTS.................. 3,162 4,997 4,504 7,277
------ ------ ------ ------
Regulatory capital--excess............ $4,378 $3,324 $3,666 $1,904
====== ====== ====== ======
Capital ratios........................ 7.16% 13.32% 5.44% 10.09%
Well-capitalized requirement.......... 5.00% 10.00% 5.00% 10.00%
</TABLE>
FEDERAL HOME LOAN BANK SYSTEM. Matrix Bank is a member of the FHLB system,
which consists of 12 regional FHLBs. The FHLB provides a central credit
facility primarily for member associations and administers the home financing
credit function of savings associations. FHLB advances must be secured by
specified types of collateral and may only be obtained for the purpose of
providing funds for residential housing finance. The FHLB funds its operations
primarily from proceeds derived from the sale of consolidated obligations of
the FHLB system. Matrix Bank, as a member of the FHLB system, must acquire and
hold shares of capital stock in
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<PAGE>
FHLB in an amount at least equal to 1% of the aggregate principal amount of
its unpaid residential mortgage loans and similar obligations at the beginning
of each year, or 1/20 of its advances (borrowings) from the FHLB, whichever is
greater. Matrix Bank was in compliance with this requirement with an
investment in FHLB stock at June 30, 1996 of $2.7 million.
The FHLBs must provide funds to service the FICO bonds and contribute funds
for affordable housing programs. These requirements have affected adversely
the level of FHLB dividends paid and could continue to do so. Such
requirements could also result in the FHLBs' imposing a higher rate of
interest on advances to their members and could have an adverse effect on the
value of FHLB stock in the future, with a corresponding reduction in Matrix
Bank's capital. For the years ended December 31, 1994 and 1995, and for the
six months ended June 30, 1996, dividends from the FHLB to Matrix Bank
amounted to $35,000, $86,000 and $72,000, respectively. If dividends were
reduced, Matrix Bank's income would likely also be reduced.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board regulations require
savings associations to maintain non-interest earning reserves against their
transaction accounts (primarily regular checking and NOW accounts). Matrix
Bank is in compliance with these regulations. The balances maintained to meet
the reserve requirements imposed by the Federal Reserve Board may be used to
satisfy liquidity requirements imposed by the OTS. Because required reserves
must be maintained in the form of vault cash, a non-interest-bearing account
at a Federal Reserve Bank or a pass-through account as defined by the Federal
Reserve Board, the effect of this reserve requirement is to reduce Matrix
Bank's interest-earning assets. FHLB System members are also authorized to
borrow from the Federal Reserve "discount window," but Federal Reserve Board
regulations require associations to exhaust all FHLB sources before borrowing
from a Federal Reserve Bank.
MISCELLANEOUS
REGULATION OF SUB-PRIME AUTOMOBILE LENDING. The Company's sub-prime
automobile lending activities are subject to various federal and state laws
and regulations. Consumer lending laws generally require licensing of the
lender and purchasers of loans and adequate disclosure of loan terms and
impose limitations on the terms of consumer loans and on collection policies
and creditor remedies. Federal consumer credit statutes primarily require
disclosures of credit terms in consumer finance transactions. In general, the
Company's sub-prime automobile lending activities are conducted under licenses
issued by individual states and are also subject to the provisions of the
federal Consumer Credit Protection Act and its related regulations. Sterling
maintains an internal compliance staff to stay informed of changes in
applicable law.
Due to the consumer-oriented nature of the industry in which Sterling
operates and uncertainties with respect to the application of various laws and
regulations in certain circumstances, industry participants are named from
time to time as defendants in litigation involving alleged violations of
federal and state consumer lending or other similar laws and regulations. A
significant judgment against Sterling in connection with any litigation could
have a material adverse affect on the Company's financial condition and
results of operations. In addition, if it were determined that a material
number of loans purchased by Sterling involved violations of applicable
lending laws by the automobile dealers, the Company's financial condition and
results of operations could be materially adversely affected.
FAS 122. In May 1995, the Financial Accounting Standards Board issued FAS
122, which amended Statement of Financial Accounting Standards No. 65,
Accounting for Certain Mortgage Banking Activities ("FAS 65"). FAS 122
requires the recognition of originated mortgage servicing rights, as well as
purchased mortgage servicing rights, as assets by allocating total costs
incurred between the loan and the servicing rights based on their relative
fair values. Under FAS 65, the cost of originated mortgage servicing rights
was not recognized as an asset and was charged to earnings when the related
loan was sold. With respect to acquisition of mortgage servicing rights
through either the purchase or origination of mortgage loans, FAS 122 has a
different cost allocation methodology than SFAS No. 65. In contrast to a cost
allocation based on estimated fair market value as set forth in FAS 122, the
prior requirement was to allocate the costs incurred in excess of the market
value of the loans without the servicing rights to purchased mortgage
servicing rights. If it is not
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<PAGE>
practicable to estimate fair values of the mortgage servicing rights and the
mortgage loans (without the mortgage servicing rights), the entire cost of
purchasing or originating the loans should be allocated to the mortgage loans
and no cost should be allocated to the mortgage servicing rights. FAS 122 also
requires that all capitalized mortgage servicing rights be evaluated for
impairment based on the excess of the carrying amount of the mortgage
servicing rights over their value and it requires a holder of mortgage
servicing rights to stratify its mortgage servicing rights that are
capitalized after the adoption of FAS 122 based on one or more of the
predominant risk characteristics of the underlying loans. Impairment will be
recognized through a valuation allowance for each impaired stratum.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the current
directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL POSITIONS DIRECTOR'S TERM EXPIRES
---- --- ------------------- -----------------------
<S> <C> <C> <C>
Guy A. Gibson........... 32 Matrix Capital: President, Chief 1998
Executive Officer and Director
Matrix Financial: Chairman of the
Board and President
Richard V. Schmitz...... 33 Matrix Capital: Chairman of the Board 1999
United Financial: Chairman of the
Board and Chief Executive Officer
D. Mark Spencer......... 36 Matrix Capital: Vice Chairman of the 1999
Board
Matrix Bank: Chairman of the Board
Thomas M. Piercy........ 32 Matrix Capital: Director 1997
United Financial: President
David W. Kloos.......... 34 Matrix Capital: Senior Vice President, 1998
Chief Financial Officer and Director
Matrix Bank: Executive Vice President
and Chief Financial Officer
Gary Lenzo.............. 46 Matrix Bank: President and Chief --
Executive Officer
Thomas J. Osselaer...... 38 Matrix Financial: Executive Vice --
President, Chief Operating Officer
and Chief Financial Officer
James G. Panero......... 33 Matrix Capital: Senior Vice President, --
Secretary and General Counsel
Stephen Skiba........... 41 Matrix Capital: Director 1997
David A. Frank.......... 49 Matrix Capital: Director 1998
Peter G. Weinstock...... 35 Matrix Capital: Advisory Director --
</TABLE>
GUY A. GIBSON has served as the Chief Executive Officer and a director of
Matrix Capital since its formation in June 1993. Mr. Gibson has served as
Chairman of the Board of Matrix Financial since August 1990 and as its
President since August 1994. Mr. Gibson was one of the original founders of
Matrix Financial and acted as its Chief Executive Officer during 1990. Prior
to his tenure with the Company, Mr. Gibson held the position of Account
Executive with the investment banking firms of Paine Webber from 1987 to 1989
and Lincoln Financial Group, a Denver-based servicing brokerage firm, from
1989 to 1990.
RICHARD V. SCHMITZ has served as a director of Matrix Capital since its
formation in June 1993 and was elected Chairman of the Board of Matrix Capital
in February 1996. Mr. Schmitz was one of the original founders of United
Financial and has held the position of Chief Executive Officer of United
Financial since 1990.
D. MARK SPENCER served as Chairman of the Board of Matrix Capital from June
1993 until February 1996. Mr. Spencer has served as an executive officer of
the Company since June 1993. Mr. Spencer has served as Chairman of the Board
of Matrix Bank since October 1993, and has served as director of Matrix
Financial since August 1990. From 1985 through July 1990, Mr. Spencer served
as Vice President of Secondary Marketing for Austin Federal Savings and Loan,
an Austin, Texas savings and loan association.
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<PAGE>
THOMAS M. PIERCY served as Senior Vice President of United Financial from
October 1990 to June 1996, when he was elected President of United Financial.
Mr. Piercy has served as a director of Matrix Capital since June 1993. From
1986 to 1990, Mr. Piercy served as Managing Director of Lincoln Financial
Group.
DAVID W. KLOOS has served as a Vice President and Chief Financial Officer of
Matrix Capital since June 1993, and he has served as a director of Matrix
Capital also since June 1993. Mr. Kloos was appointed as Senior Vice President
of Matrix Capital in September 1996. Mr. Kloos has served as Executive Vice
President and Chief Financial Officer of Matrix Bank since October 1993. From
1989 through 1993, Mr. Kloos served as Senior Vice President and Chief
Financial Officer of Argo Federal Savings Bank, a Summit, Illinois federal
savings bank. From 1985 to 1989 Mr. Kloos, a certified public accountant, was
employed by the Chicago office of KPMG Peat Marwick LLP.
GARY LENZO has served as President and Chief Executive Officer and Director
of Matrix Bank since October 1993. From 1987 to 1992, Mr. Lenzo served as Vice
President of Austin Savings Association and Great Western Savings Bank, both
Austin, Texas based savings associations. From 1984 to 1986, Mr. Lenzo served
as Vice President of Unifirst American Mortgage Corporation, an Austin, Texas
mortgage company.
THOMAS J. OSSELAER has served as Executive Vice President and Chief
Financial Officer of Matrix Financial since July 1993, Chief Operating Officer
since August 1994, and was Vice President from March 1992 to July 1993. From
January 1990 to February 1992, Mr. Osselaer served as Treasurer and Finance
Division Manager for the receivership of MeraBank Federal Savings Bank, an RTC
controlled savings bank in Phoenix, Arizona. From 1985 to 1990, Mr. Osselaer
served as Vice President, Assistant Treasurer and Investment Manager for
MeraBank Federal Savings Bank.
JAMES G. PANERO has served as Senior Vice President, General Counsel and
Secretary of Matrix Capital since January 1996. From 1994 to 1995, Mr. Panero
served as Senior Counsel of Chemical Residential Mortgage Corporation of
Edison, New Jersey, the mortgage banking subsidiary of Chemical Bank. From
1992 to 1994, Mr. Panero served as Associate Counsel of Margaretten and Co.,
Inc., a publicly traded national mortgage banking company in Edison, New
Jersey, which was acquired by Chemical Bank in 1994. From 1988 to 1992, Mr.
Panero served as an associate with the law firm of Gurfein & Graubard in New
York City where he specialized in commercial and real estate litigation.
STEPHEN SKIBA, a director of Matrix Capital since March 1996, is Senior Vice
President and Senior Analyst, focusing on banks and thrifts, for the Chicago
Corporation, an investment banking firm in Chicago, Illinois. From November
1990 to June 1996, Mr. Skiba was Senior Vice President, Chief Financial
Officer and Treasurer of N.S. Bancorp, Inc. in Chicago, Illinois. Prior to
joining N.S. Bancorp, Inc., Mr. Skiba was an audit partner with the Chicago
office of KPMG Peat Marwick LLP, primarily responsible for financial
institutions and real estate audit engagements.
DAVID A. FRANK was elected director of Matrix Capital in September 1996. Mr.
Frank is President, Chief Executive Officer and founder of America's Mortgage
Source, a mortgage company based in Marlton, New Jersey that is primarily
involved in the origination of residential mortgage loans and which was formed
in 1995. From 1994 to 1995, Mr. Frank served as President and Chief Executive
Officer of Chemical Residential Mortgage Corporation in Edison, New Jersey,
and as a director of Chemical Bank, N.A. Chemical Residential Mortgage
Corporation is the primary mortgage banking operation of Chemical Banking
Corporation. Prior to joining Chemical Residential Mortgage Corporation, Mr.
Frank served from 1989 to 1994 as President and Chief Operating Officer of
Margaretten Financial Corporation, a publicly traded national mortgage banking
company based in Perth Amboy, New Jersey. From 1977 to 1989, Mr. Frank held
various positions with Primerica Corporation/American Can Company (now known
as Travelers, Inc.), where he was primarily involved in mergers, acquisitions,
capital market activities and in restructuring a manufacturing-based concern
into a diversified financial services company.
PETER G. WEINSTOCK has served as an advisory director to Matrix Capital
since September 1996. In his capacity as advisory director, Mr. Weinstock is
invited to attend meetings of the Board of Directors and to participate in its
discussions. However, Mr. Weinstock is not entitled to vote in matters
submitted for approval
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<PAGE>
and is not involved in the administration or management of the Company. Mr.
Weinstock is a member of the law firm of Jenkens & Gilchrist, a Professional
Corporation, where he has been employed for more than five years. Jenkens &
Gilchrist, a Professional Corporation, serves as outside general counsel to
the Company.
The Board of Directors of Matrix Capital is currently comprised of seven
directors. The Board of Directors is divided into three classes. Directors for
each class are elected at the annual meeting held in the year in which the
term for such class expires and serve thereafter for three years or until
their successors are elected and qualified. All advisory directors serve at
the pleasure of the Board of Directors. Subject to any applicable employment
agreement provisions, all officers are appointed by, and serve at the
discretion of, the Board of Directors of Matrix Capital or the Subsidiary or
Subsidiaries of their employ, as the case may be. There are no family
relationships between any directors or officers of Matrix Capital and/or any
of its Subsidiaries.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors currently has two standing committees: the
Compensation Committee and the Audit Committee. The Compensation Committee and
the Audit Committee are each comprised of Mr. Skiba and Mr. Frank. 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 Stock Option Plan and the Purchase Plan. See "--
Stock Option Plan" and "--Employee Stock Purchase Plan." The Audit Committee
is responsible for recommending independent auditors, reviewing the audit
plan, the adequacy of internal controls, the audit report and management
letter, and performing such other duties as the Board of Directors may from
time to time prescribe.
EMPLOYMENT AGREEMENTS
In January 1996, the Company entered into a five-year employment agreement
with Mr. Kloos. Under the terms of such agreement, Mr. Kloos is paid an annual
salary as agreed to by Mr. Kloos and Matrix Capital and, in addition, he is to
receive five annual installment payments of $25,000 each, with the first such
installment being payable on or before December 31, 1996. This employment
agreement is terminable without advance notice by the Company for good cause,
which is generally defined to include a breach by Mr. Kloos of the employment
agreement, a breach by Mr. Kloos of his fiduciary duties owed to the Company,
and fraud, embezzlement or theft from the Company by Mr. Kloos. In addition,
the employment agreement terminates upon the death or disability of Mr. Kloos
and Mr. Kloos may resign upon 30 days' notice to the Company.
The Company has also entered into an employment agreement with Mr. Lenzo.
Under the terms of such agreement, Mr. Lenzo is employed as the President and
Chief Executive Officer of Matrix Bank until January 1, 1999 at a base salary
of $100,000 per annum. In addition, Mr. Lenzo is eligible to participate in an
equitable manner in all discretionary bonuses authorized to be paid the
employees of Matrix Bank. The Company may, without notice, terminate this
employment agreement for just cause (which is generally defined to include
personal dishonesty, incompetence, willful misconduct or a breach of fiduciary
duty) and, in such case, the Company shall be obligated to pay Mr. Lenzo his
compensation accrued through the date of such termination. The Company may
also, upon 60-days' notice to Mr. Lenzo, terminate Mr. Lenzo's employment
agreement for any reason other than just cause and, in such a case, the
Company will be obligated to pay Mr. Lenzo his compensation through January 1,
1999. In addition, the Regional Director of the OTS may terminate Mr. Lenzo's
employment agreement in certain instances, including if the FDIC enters into
an agreement to provide assistance to Matrix Bank under its authority granted
by the FDI Act or if the Regional Director determines that Matrix Bank is in
an unsafe or unsound position. Mr. Lenzo is entitled to certain change in
control payments if, after a change in control of Matrix Bank or Matrix
Capital, Mr. Lenzo's employment is terminated prior to January 1, 1999. The
amount of such change in control payments, if required to be paid, would
generally be the balance of Mr. Lenzo's salary through January 1, 1999 plus an
additional amount that is equal to the amount of Mr. Lenzo's annual
compensation paid to Mr. Lenzo by Matrix Bank for the year prior to his
termination. The payments to Mr. Lenzo upon a change in control, however, may
not exceed 2.99 times Mr. Lenzo's "base amount" (as defined in Section
280G(b)(3) of the Code) without adverse tax consequences. These benefits are
estimated to have a value of $299,000 as of June 30, 1996.
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<PAGE>
COMPENSATION OF DIRECTORS
The Company pays each nonemployee director of Matrix Capital a $3,750
quarterly retainer and a fee of $1,000 ($250 if such director's attendance is
via teleconference) for each meeting of the Board of Directors of Matrix
Capital that he attends. The Company also reimburses each director for
ordinary and necessary travel expenses related to such director's attendance
at Board of Directors and committee meetings. Nonemployee directors are also
eligible for stock option grants under the 1996 Stock Option Plan. See "--
Stock Option Plan."
Each advisory director of the Company is paid a $2,500 quarterly retainer
and a fee of $1,000 ($250 if such advisory director's attendance is via
teleconference) for each meeting of the Board of Directors of Matrix Capital
that he attends. The Company also reimburses each advisory director for
ordinary and necessary travel expenses related to such advisory director's
attendance at Board of Directors meetings. Advisory directors are also
eligible for stock option grants under the 1996 Stock Option Plan. See "--
Stock Option Plan."
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<PAGE>
EXECUTIVE COMPENSATION
The Summary Compensation Table below provides certain summary information
concerning compensation paid or accrued during 1995 by the Company to or on
behalf of the Chief Executive Officer and the four other highest paid
executive officers of the Company whose salary and bonus for 1995 was in
excess of $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION (1)(2)
-------------------- ALL OTHER
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS COMPENSATION
---------------------------- ---- ------ --------- ------------
<S> <C> <C> <C> <C>
Guy A. Gibson
President, Chief Executive
Officer and Director of Matrix
Capital; President and Chairman
of the Board of Matrix
Financial....................... 1995 $ 250,000 $ 46,552 $ 8,300(3)(4)
Richard V. Schmitz
Chairman of the Board of Matrix
Capital; Chief Executive Officer
of United Financial............. 1995 250,000 100,000 8,300(3)(4)
D. Mark Spencer
Vice Chairman of the Board of
Matrix Capital.................. 1995 250,000 -- 8,300(3)(4)
Thomas M. Piercy
Director of Matrix Capital;
President of United Financial... 1995 271,372 -- 2,300(4)
David W. Kloos
Senior Vice President, Chief
Financial Officer and Director
of Matrix Capital; Executive
Vice President and Chief
Financial Officer of Matrix
Bank............................ 1995 100,000 20,000 109,300(3)(4)(5)
</TABLE>
- --------
(1) Annual compensation does not include the cost to the Company of benefits
certain executive officers receive in addition to salary and cash bonuses.
The aggregate amounts of such personal benefits, however, did not exceed
the lesser of either $50,000 or 10% of the total annual compensation of
such executive officer. Amounts listed in the salary column for each
executive officer include approximately $9,500 that such executive officer
contributed during 1995 to his account under the Company's 401(k) savings
plan.
(2) No options were granted during 1995 to any of the executive officers named
herein. See "--Stock Option Plan" for options granted during 1995 to
executive officers other than those named herein and for options granted
during 1996 to each of the executive officers of the Company.
(3) Of this amount, $6,000 represents directors fees paid by Matrix Bank for
such person's service on that entity's board of directors.
(4) Of this amount, $2,300 represents the Company's contribution to such
person's account maintained under the 401(k) savings plan. See "--401(k)
Savings Plan."
(5) Of this amount, $101,000 represents the estimated value of a stock bonus
of 138,438 shares awarded to Mr. Kloos on January 1, 1995 for services
rendered.
STOCK OPTION PLAN
In January 1995, the Board of Directors and shareholders adopted the
Company's 1995 Stock Option Plan, which was amended and restated as the 1996
Stock Option Plan by the Board of Directors and shareholders in September
1996. The purpose of the 1996 Stock Option Plan is to advance the interests of
the Company by providing additional incentives to attract and retain qualified
and competent employees and consultants of the Company and directors of the
Company and its subsidiaries, upon whose efforts and judgment the success of
the Company is largely dependent. As of the date hereof, substantially all of
the Company's full-time employees and all of the Company's directors and
advisory directors are eligible for grants of stock options ("Plan Options")
under the terms of the 1996 Stock Option Plan. Options to purchase an
aggregate of 79,500 shares of
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<PAGE>
Common Stock were granted to Mr. Osselaer on January 1, 1995 at an exercise
price of $5.13 per share. The aggregate value of Mr. Osselaer's options at
September 30, 1996 was $386,927 assuming a fair market value of the Common
Stock of $10.00 per share. In October 1996, but effective upon the effective
date of the offering, the Compensation Committee granted options to purchase
5,000 shares of Common Stock to each of Mr. Skiba and Mr. Frank as nonemployee
directors of the Company and options to purchase 5,000 shares of Common Stock
to Mr. Weinstock as advisory director. Fifty percent of these options will be
immediately exercisable upon consummation of this offering, with the remaining
50% becoming exercisable in October 1997. The exercise price per share for
Mr. Skiba's, Mr. Frank's and Mr. Weinstock's options is the Price to Public
set forth on the cover page of this Prospectus. In October 1996, but effective
upon the effective date of the offering, the Compensation Committee granted
options exercisable for approximately 114,600 shares of Common Stock,
including 35,000 shares to Mr. Kloos, 10,000 shares to Mr. Panero and 30,000
shares to Mr. Lenzo. The options granted to Messrs. Kloos, Panero and Lenzo
will become exercisable ratably over five years after their date of grant and
are exercisable at the Price to Public set forth on the cover page of this
Prospectus. The remainder of these 114,600 options were granted to various
non-executive employees of the Company, are also exercisable at the Price to
Public set forth on the cover page of this prospectus and become exercisable
incrementally over the next two to five years.
The 1996 Stock Option Plan authorizes the granting of incentive stock
options ("Incentive Options") and nonqualified stock options ("Nonqualified
Options") to purchase Common Stock to eligible persons. A total of 525,000
shares of Common Stock are authorized for sale upon exercise of Plan Options
granted under the 1996 Stock Option Plan. As of the date of this Prospectus,
options to purchase an aggregate of 209,100 shares have been granted. The 1996
Stock Option Plan is currently administered by the Compensation Committee. The
Compensation Committee consists of at least two members of the Board of
Directors, each of whom is an "outside director" within the meaning of the
Code and a "nonemployee director" within the meaning of Rule 16b-3 promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The 1996 Stock Option Plan provides for adjustments to the number of shares
and to the exercise price of outstanding options in the event of a declaration
of a stock dividend or any recapitalization resulting in a stock split-up,
combination or exchange of shares of Common Stock.
No Incentive Option may be granted with an exercise price per share less
than the fair market value of the Common Stock at the date of grant. The
Nonqualified Options may be granted with any exercise price determined by the
administrator of the 1996 Stock Option Plan. The exercise price of an Employee
Option may be paid in cash, by certified or cashier's check, by money order,
by personal check or by delivery of already owned shares of Common Stock
having a fair market value equal to the exercise price, or by delivery of a
combination of cash and already owned shares of Common Stock. However, if the
optionee acquired the stock to be surrendered directly or indirectly from the
Company, he must have owned the stock to be surrendered for at least six
months prior to tendering such stock for the exercise of a Plan Option.
An eligible employee may receive more than one Incentive Option, but the
maximum aggregate fair market value of the Common Stock (determined when the
Incentive Option is granted) with respect to which Incentive Options are first
exercisable by such employee in any calendar year cannot exceed $100,000. In
addition, no Incentive Option may be granted to an employee owning directly or
indirectly stock possessing more than 10% of the total combined voting power
of all classes of stock of the Company, unless the exercise price is set at
not less than 110% of the fair market value of the shares subject to such
Incentive Option on the date of grant and such Incentive Option expires not
later than five years from the date of grant. Awards of Nonqualified Options
are not subject to these special limitations.
No Incentive Option granted under the 1996 Stock Option Plan is assignable
or transferable, otherwise than by will or by laws of descent and
distribution. During the lifetime of an optionee, his Incentive Option is
exercisable only by him or his guardian or legal representative. Nonqualified
Options may be transferrable if provided for in the option agreement governing
the Nonqualified Option. The expiration date of a Plan Option is determined by
the administrator at the time of the grant, but in no event may a Plan Option
be exercisable after the expiration of 10 years from the date of grant of the
Plan Option.
The administrator of the 1996 Stock Option Plan may limit an optionee's
right to exercise all or any portion of a Plan Option until one or more dates
subsequent to the date of grant. The administrator also has the right,
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<PAGE>
exercisable in its sole discretion, to accelerate the date on which all or any
portion of a Plan Option may be exercised. The 1996 Stock Option Plan also
provides that 30 days prior to certain major corporate events such as, among
other things, certain changes in control, mergers or sales of substantially
all of the assets of the Company (a "Major Corporate Event"), each Plan Option
shall immediately become exercisable in full. In anticipation of a Major
Corporate Event, however, the administrator may, after notice to the optionee,
cancel the optionee's Employee Options on the consummation of the Major
Corporate Event. The optionee, in any event, will have the opportunity to
exercise his Plan Options in full prior to such Major Corporate Event.
If terminated for cause, all rights of an optionee under the 1996 Stock
Option Plan cease and the Plan Options granted to such optionee become null
and void for all purposes. The 1996 Stock Option Plan further provides that in
most instances a Plan Option must be exercised by the optionee within 30 days
after the termination of the consulting contract between such consultant and
the Company or termination of optionee's employment with the Company, as the
case may be (for any reason other than termination of cause, mental or
physical disability or death), if and to the extent such Plan Option was
exercisable on the date of such termination. If the optionee is not otherwise
employed by, or a consultant to, the Company, his Plan Option must be
exercised within 30 days of the date he ceases to be a director of the Company
or a subsidiary of the Company. Generally, if an optionee's employment or
consulting contract is terminated due to mental or physical disability, the
optionee will have the right to exercise the Plan Option (to the extent
otherwise exercisable on the date of termination) for a period of one year
from the date on which the optionee suffers the mental or physical disability.
If an optionee dies while actively employed by, or providing consulting
services under a consulting contract to, the company, the Plan Option may be
exercised (to the extent otherwise exercisable on the date of death) within
one year of the date of the optionee's death by the optionee's legal
representative or legatee.
The Company anticipates registering the shares issuable pursuant to the
exercise of Plan Options with the Commission in 1996.
Under current tax laws, the grant of a Plan Option will not be a taxable
event to the recipient optionee and the Company will not be entitled to a
deduction with respect to such grant. Upon the exercise of a Nonqualified
Option, an optionee will recognize ordinary income at the time of exercise
equal to the excess of the then fair market value of the shares of Common
Stock received over the exercise price. The taxable income recognized upon
exercise of a Nonqualified Option will be treated as compensation income
subject to withholding and the Company will be entitled to deduct as a
compensation expense an amount equal to the ordinary income an optionee
recognizes with respect to such exercise. When Common Stock received upon the
exercise of a Nonqualified Option subsequently is sold or exchanged in a
taxable transaction, the holder thereof generally will recognize capital gain
(or loss) equal to the difference between the total amount realized and the
fair market value of the Common Stock on the date of exercise; the character
of such gain or loss as long-term or short-term capital gain or loss will
depend upon the holding period of the shares following exercise.
The exercise of an Incentive Option will not be taxable to the optionee, and
the Company will not be entitled to any deduction with respect to such
exercise. However, to qualify for this favorable tax treatment of incentive
stock options under the Code, the optionee may not dispose of the shares of
Common Stock acquired upon the exercise of an Incentive Option until after the
later of two years following the date of grant or one year following the date
of exercise. The surrender of shares of Common Stock acquired upon the
exercise of an Incentive Option in payment of the exercise price of a Plan
Option within the required holding period for incentive stock options under
the Code will be a disqualifying disposition of the surrendered shares. Upon
any subsequent taxable disposition of shares of Common Stock received upon
exercise of a qualifying Incentive Option, the optionee generally will
recognize long-term or short-term capital gain (or loss) equal to the
difference between the total amount realized and the exercise price of the
Plan Option.
If a Plan Option that was intended to be an incentive stock option under the
Code does not qualify for favorable incentive stock option treatment under the
Code due to the failure to satisfy the holding period requirements, the
optionee may recognize ordinary income in the year of the disqualifying
disposition. Provided the amount realized in the disqualifying disposition
exceeds the exercise price, the ordinary income an optionee
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<PAGE>
shall recognize in the year of a disqualifying disposition shall be the lower
of (i) the excess of the amount realized over the exercise price or (ii)
excess of the fair market value of the Common Stock at the time of the
exercise over the exercise price. In addition, the optionee shall recognize
capital gain on the disqualifying disposition in the amount, if any, by which
the amount realized in the disqualifying disposition exceeds the fair market
value of the Common Stock at the time of the exercise. Such capital gain shall
be taxable as long-term or short-term capital gain, depending on the
optionee's holding period for such shares.
Notwithstanding the favorable tax treatment of Incentive Options for regular
tax purposes, as described above, for alternative minimum tax purposes, an
Incentive Option is generally treated in the same manner as a Nonqualified
Option. Accordingly, an optionee must generally include in alternative minimum
taxable income for the year in which an Incentive Option is exercised the
excess of the fair market value on the date of exercise of the shares of
Common Stock received over the exercise price. If, however, an optionee
disposes of shares of Common Stock acquired upon the exercise of an Incentive
Option in the same calendar year as the exercise, only an amount equal to the
optionee's ordinary income for regular tax purposes with respect to such
disqualifying disposition will be recognized for the optionee's calculation of
alternative minimum taxable income in such calendar year.
EMPLOYEE STOCK PURCHASE PLAN
In September 1996, the Board of Directors adopted the Matrix Capital
Corporation Employee Stock Purchase Plan (the "Purchase Plan") and reserved
shares of Common Stock for issuance thereunder. The shareholders of the
Company approved the Purchase Plan in September 1996. The purpose of the
Purchase Plan is to provide eligible employees of the Company and its
designated subsidiaries with an opportunity to purchase Common Stock ("ESPP
Shares") from the Company through payroll deductions. The Purchase Plan will
become effective upon consummation of the offering. The Purchase Plan is a
non-compensatory plan.
Offerings under the Purchase Plan generally have a duration ("Offering
Period") of 12 months and commence on January 1 of each year, but the Initial
Offering Period under the Purchase Plan will commence on the day of the
offering. On the first business day of an Offering Period (the "Enrollment
Date"), each eligible employee who chooses to participate ("Participant") is
granted the right to purchase ("Purchase Right") on the last business day of
such Offering Period ("Purchase Date") a number of whole ESPP Shares
determined by dividing the Participant's total annual payroll deductions
accumulated during such Offering Period by the Purchase Price described below.
However, the number of ESPP Shares subject to each Participant's Purchase
Right during such Offering Period shall in no event exceed the lesser of (i)
the maximum number of ESPP Shares which could be purchased with such
Participant's total payroll deductions for the Offering Period at a Purchase
Price equal to 85% of the fair market value of the ESPP Shares on the
Enrollment Date, (ii) the number of ESPP Shares determined by dividing $14,706
by the fair market value of the ESPP Shares on the Enrollment Date or (iii)
the maximum number of ESPP Shares that would cause the total owned by the
Participant to exceed the 5% ownership limits described below. Unless the
Participant's participation is discontinued, his or her Purchase Right will be
exercised automatically on the Purchase Date (i.e., the last business day of
the Offering Period) at the Purchase Price.
The total number of shares of Common Stock issuable under the Purchase Plan
is 125,000. No less than 15 days prior to each Offering Period, the
administrator of the Purchase Plan will determine the total number of ESPP
Shares that will be made available for purchase during such Offering Period
and will notify the eligible employees. With respect to ESPP Shares that are
made available for an Offering Period, but which are not purchased during such
Offering Period, the administrator may again make them available for purchase
with respect to any subsequent Offering period. In the event that on the
Purchase Date of reference the aggregate amount of payroll deductions during
the corresponding Offering Period exceed the aggregate Purchase Price of all
ESPP Shares available for purchase during such Offering Period, each Purchase
Right of a participant shall be reduced to that percentage of available ESPP
Shares as the accumulated payroll deduction in his or her account is of the
aggregate accumulated payroll deduction in the accounts of all Participants.
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<PAGE>
Any employee who is customarily employed for at least 20 hours per week and
more than five months per calendar year by the Company or its designated
subsidiaries, who is employed on the first day of the month preceding the
Enrollment Date of reference, and who continues to be employed on the
Enrollment Date, is eligible to participate in offerings under the Purchase
Plan during the Offering Period, which includes such Enrollment Date.
Employees become Participants by delivering to the Company an agreement
authorizing payroll deductions at any time during the 45 days immediately
preceding the Enrollment Date of reference. No employee is permitted to
purchase ESPP Shares under the Purchase Plan if such employee owns 5% or more
of the total combined voting power or value of all classes of shares of stock
of the Company, including as owned by such employee all ESPP Shares subject to
his Purchase Right, as adjusted, shares subject to any other options, or
shares whose ownership is attributable to the employee by reason of ownership
by certain members of his or her family. In addition, no Participant is
entitled to purchase during the Offering Period of reference more than the
maximum number of ESPP Shares subject to such Participant's Purchase Right
during such Offering Period.
The price at which ESPP Shares are sold under the Purchase Plan ("Purchase
Price") is 85% of the lower of the fair market value per Share of Common Stock
on the Enrollment Date (i.e., first business day of the Offering period) or
the Purchase Date (i.e., the last business day of the Offering Period). The
Purchase Price of the ESPP Shares is accumulated by payroll deductions made
during the Offering Period. The total payroll deductions of a Participant for
an Offering Period may not be greater than the lesser of $12,500, or 25% of
the Participant's annualized "considered pay" as determined at the beginning
of the Offering Period, nor may such payroll deductions be less than an
aggregate of $500. A Participant's "considered pay" is the administrator's
reasonable estimate of such Participant's basic rate of pay (i.e., exclusive
of bonuses and other special payments) during the Offering Period.
All payroll deductions of a Participant are credited to his or her account
under the Purchase Plan and are deposited with the general funds of the
Company. Such funds may be used for any corporate purpose. No charges for
administrative or other costs may be made by the Company against the accounts
of Participants. The Purchase Plan is administered by the Compensation
Committee of the Board of Directors.
A Participant may terminate his or her right to purchase ESPP Shares with
respect to a particular Offering Period by notifying the administrator at any
time prior to the last 15 days of the Offering period that the Participant is
withdrawing all, but not less than all, of the accumulated payroll deductions
credited to such Participant's account. The withdrawal of accumulated payroll
deductions automatically terminates the Participant's Purchase Right with
respect to that Offering Period. As soon as practicable after notice of such
withdrawal, the payroll deductions credited to a Participant's account will be
returned to the Participant without interest. A Participant's withdrawal with
respect to an Offering Period does not have any effect upon such Participant's
eligibility to participate in subsequent Offering Periods. Termination of a
Participant's employment for any reason, including retirement or death,
immediately terminates his or her participation in the Offering Period during
which such termination of employment occurs. In such event, the payroll
deductions credited to the Participant's account will be returned to the
Participant as soon as practicable, or in the case of death, to the person or
persons entitled thereto, in either case without interest.
In the event of changes in the Common Stock of the Company, however, due to
stock dividends or other changes in capitalization, or in the event of any
merger, sale or any other reorganization, appropriate adjustments will be made
by the Company to the ESPP Shares subject to purchase, to the price per share
and, where necessary, to the conditions relating to the exercise of the
Purchase Right, so that, to the extent reasonably possible, such events do not
adversely affect the rights of Participants. If, however, there is a proposed
dissolution or liquidation of the Company, the Offering Period during which
such event occurs will be deemed terminated upon the occurrence of such event.
The Purchase Plan will terminate automatically on December 31, 2005, and
prior to that date the Board of Directors of the Company generally may at any
time amend or terminate the Purchase Plan. The Company anticipates registering
the shares issuable under the Purchase Plan with the Commission in 1996.
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<PAGE>
401(K) SAVINGS PLAN
In February 1994, the Company established the Company's 401(k) savings plan,
which is intended to comply with Sections 401(a) and 401(k) of the Internal
Revenue Code of 1986, as amended, 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 Internal Revenue Code. All full
time employees of the Company that have completed at least six months of
service are eligible to participate in the plan. Participating employees will
be entitled to make pre-tax contributions to their accounts in amounts equal
to not less than 1% and not more than 15% of their compensation each year,
subject to certain maximum annual limits imposed by law (approximately $9,500
in 1996). The Company matches employee contributions in the amount of 25% of
their contributions. The Company also has the right to make certain additional
matching contributions. Matching contributions made by the Company vest in
participating employees over a six-year period based on years of service.
Distributions generally are payable in a lump-sum after retirement or death
and, in certain circumstances, upon termination of employment with the Company
for other reasons.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1995, the Company had no compensation committee or other committee of
the Board of Directors performing similar functions. Decisions concerning
executive compensation for 1995 were made by the Board of Directors of Matrix
Capital, including Messrs. Gibson, Schmitz, Spencer, Piercy and Kloos, all of
whom were and continue to be executive officers of the Company and
participated in deliberations of the Board of Directors regarding executive
officer compensation. The Board of Directors of the Company has established a
Compensation Committee to handle compensation issues for executive officers of
the Company in the future. 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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1995, the Company loaned Matrix Diversified, Inc.
("Diversified"), a company in which Messrs. Gibson, Schmitz, Piercy, Spencer,
Kloos and Osselaer, each of whom is an executive officer of the Company, and
Mr. Robert Fowles, an officer of United Financial, own all of the outstanding
capital stock, $750,000 in order to enable Diversified to purchase the assets
of an unaffiliated business. Such loan accrues interest at 13% per annum and
is secured by a secondary lien on the assets of Diversified. Principal and
interest on this loan is due and payable in one lump sum on October 1, 2000.
In addition, the Company leases approximately 7,400 square feet in its Phoenix
office building to a subsidiary of Diversified at a base rental of
approximately $8,500 per month. The lease expires in September 1997, but the
Company anticipates that it will be renewed for successive one-year terms.
On December 31, 1995, the Company renewed a loan originally made to Mr.
Spencer, Vice Chairman of the Board and a shareholder of the Company, in
December 1994 in the amount of approximately $80,000. The loan to Mr. Spencer
accrues interest at the prime rate, is unsecured, and the entire principal and
all accrued interest is due and payable in one lump sum on December 31, 1996.
The Company has the option of extending the maturity of such loan to Mr.
Spencer in annual increments, but does not presently anticipate doing so.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of the date hereof of: (i) each person known
by the Company to own beneficially five percent or more of the outstanding
Common Stock immediately prior to the offering; (ii) each of the Company's
directors and advisory directors; (iii) each of the executive officers named
in the Summary Compensation Table; and (iv) all directors, advisory directors
and executive officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING SHARES
NUMBER OF SHARES --------------------------------
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) PRIOR TO OFFERING AFTER OFFERING
- ------------------------ --------------------- ----------------- --------------
<S> <C> <C> <C>
Guy A. Gibson........... 1,280,858(2) 32.9% 22.7%
Richard V. Schmitz...... 1,280,858(3) 32.9 22.7
D. Mark Spencer......... 878,910(2)(3) 22.6 15.9
Thomas M. Piercy........ 234,375 6.0 4.2
David W. Kloos.......... 138,938 3.6 2.5
Stephen Skiba........... 2,500(4) * *
David A. Frank.......... 2,500(4) * *
Peter G. Weinstock...... 2,500(4) * *
All directors, advisory
directors and executive
officers as a group (11
persons)............... 3,900,939(5) 98.1 68.1
</TABLE>
- --------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission (the "Commission") and generally
includes voting or investment power with respect to securities. Except as
indicated in the footnotes to this table and subject to applicable
community property laws, the persons named in the table have sole voting
and investment power with respect to all shares of Common Stock
beneficially owned.
(2) On June 24, 1993, Mr. Gibson granted Mr. Spencer an option to purchase
133,983 of Mr. Gibson's shares of Common Stock at any time on or prior to
June 23, 1998, at an exercise price of $2.41 per share. The amount shown
in this table as beneficially owned by Mr. Spencer does not reflect these
133,983 shares of Common Stock.
(3) On June 24, 1993, Mr. Schmitz granted Mr. Spencer an option to purchase
133,983 of Mr. Schmitz's shares of Common Stock, at any time on or prior
to June 23, 1998, at an exercise price of $2.41 per share. The amount
shown in this table as beneficially owned by Mr. Spencer does not reflect
these 133,983 shares.
(4) Represents 2,500 shares issuable upon exercise of options that are
currently exercisable.
(5) Includes an aggregate of 87,000 shares issuable upon exercise of options
that are currently exercisable.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 5,000,000 shares of
preferred stock, par value $.0001 per share ("Preferred Stock"), and
50,000,000 shares of Common Stock, par value $0.0001 per share.
COMMON STOCK
As of June 30, 1996, there were 3,888,939 shares of Common Stock outstanding
which were held of record by six shareholders. Holders of Common Stock are
entitled to receive dividends when, as and if declared by the Board of
Directors from funds legally available therefor. See "Dividend Policy." Each
share of Common Stock entitles the holder thereof to one vote. Cumulative
voting for the election of directors is not permitted, which means that the
holders of the majority of shares voting for the election of directors can
elect all members of the Board of Directors. Except as otherwise required by
law, a majority vote is sufficient for any act of the shareholders. The
holders of Common Stock are entitled to receive the Company's assets remaining
after payment of liabilities proportionate to their pro rata ownership of the
outstanding shares of Common Stock. All shares of Common Stock now outstanding
are, and the shares of Common Stock to be outstanding upon the completion of
the offering will be, fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors is authorized, without further action of the
shareholders of the Company, to issue from time to time shares of Preferred
Stock in one or more series and with such relative rights, powers,
preferences, limitations as the Board of Directors may determine at the time
of issuance. Such shares may be convertible into Common Stock and may be
superior to the Common Stock in the payment of dividends, liquidation, voting
and other rights, preferences and privileges. The issuance of shares of
Preferred Stock could adversely affect the holders of Common Stock. By way of
example, the issuance of Preferred Stock could be used in certain
circumstances to render more difficult or discourage a merger, tender offer,
proxy contest or removal of incumbent management. Preferred Stock may be
issued with voting and conversion rights that could adversely affect the
voting power and other rights of the holders of Common Stock. Upon completion
of the offering, the Company will not have any shares of Preferred Stock
outstanding, and currently, the Company has no intention to issue shares of
Preferred Stock after the offering.
UNDERWRITERS WARRANTS
The Company has agreed, upon the closing of the offering, to issue Piper
Jaffray Inc. and Keefe, Bruyette & Woods, Inc. warrants (the "Underwriters
Warrants") exercisable for a number of shares of Common Stock equal to (i) if
the Registration Statement to which this Prospectus is a part is declared
effective by the Commission on or prior to November 1, 1996, 5.0% of the
Common Stock sold in the offering, and (ii) if the Registration Statement to
which this Prospectus is a part is declared effective by the Commission after
November 1, 1996, but on or before January 31, 1997, 2.5% of the Common Stock
sold in the offering. If the Registration Statement of which this Prospectus
forms a part is not declared effective on or before January 31, 1997, the
Company will not be required to issue any Underwriters Warrants. If such
Underwriters Warrants are issued, they will be exercisable from time to time
during the four years after the one year anniversary of their date of grant,
and are not transferable during the first year after their grant. The exercise
price for the shares of Common Stock underlying such warrants will be 120% of
the initial public offering price set forth on the cover page of this
Prospectus. The shares of Common Stock underlying such warrants are entitled
to certain demand and incidental registration rights.
CERTAIN REGISTRATION RIGHTS; RIGHTS OF FIRST REFUSAL
If the Underwriters Warrants are issued, the Company will also grant Piper
Jaffray Inc. and Keefe, Bruyette & Woods, Inc. a right to demand that one
registration statement on Form S-3 relating to the shares of Common Stock
underlying the Underwriters Warrants be filed by the Company and declared
effective by the Commission and the right generally to "piggy-back" on any
registrations of Common Stock filed by the Company after
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<PAGE>
this offering. The demand registration rights are effective for the four-year
period, and the "piggy back" registration rights are effective for the six-
year period, each beginning one year after the effective date of the offering.
The Company is also obligated to register under the Securities Act the
approximately $2.9 million in aggregate principal amount outstanding of its
13% Senior Subordinated Notes on or before February 1, 1997. If such
registration is not effected on or prior to February 1, 1997, the interest
rate on such 13% Senior Subordinated Notes automatically increases to 14%. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The Company has granted the holders of its 13% Senior Subordinated Notes a
right of first refusal to purchase from the shares to be issued and sold in
this offering that number of shares of Common Stock equal in amount to
$727,500 divided by the Price to Public as set forth on the cover page of this
Prospectus. In that regard, the Company has committed to direct the necessary
shares of Common Stock to be issued and sold in the offering to the holders of
the 13% Senior Subordinated Notes who exercise their respective rights of
first refusal in accordance with the instruments governing such rights.
CERTAIN CHARTER AND BYLAWS PROVISIONS
Certain provisions in the Articles of Incorporation and the Bylaws could
have the effect of delaying, deferring or preventing changes in control of the
Company. Among other things, the Articles of Incorporation divide the members
of the Board of Directors into three different classes of directors who are
elected by holders of the Common Stock and who serve three-year staggered
terms, require advance notice of shareholder proposals and nominations of
directors and authorize the issuance of "blank check" preferred stock. The
first class of directors, which currently includes Messrs. Skiba and Piercy,
will be up for election at the 1997 annual meeting of shareholders; the second
class of directors, which currently includes Messrs. Gibson, Frank and Kloos,
will be up for election at the 1998 annual meeting of shareholders; and the
third class of directors, which currently includes Messrs. Schmitz and Spencer
will be up for election at the 1999 annual meeting of shareholders. See "Risk
Factors--Effect of Certain Charter and Bylaw Provisions" and "--Preferred
Stock."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Securities
Transfer & Trust, Inc.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have outstanding 5,638,939
shares of Common Stock (5,901,439 shares of Common Stock if the Underwriters'
over-allotment option is exercised in full). The 1,750,000 shares of Common
Stock to be sold in the offering, and any of the 262,500 shares that may be
sold upon exercise of the Underwriters' over-allotment option, will be freely
tradable by persons other than "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act, without restriction or
registration under the Securities Act. The remaining 3,888,939 shares (such
shares being referred to herein as the "Restricted Shares") will be held by
the Company's current shareholders. The Restricted Shares may not be sold
unless they are registered under the Securities Act or sold pursuant to an
applicable exemption from registration, including an exemption pursuant to
Rule 144 under the Securities Act.
As currently in effect, Rule 144 generally permits the public sale in
ordinary trading transactions of "restricted securities" and of securities
owned by "affiliates" beginning 90 days after the date of this Prospectus if
the other restrictions enumerated in Rule 144 are met. Restricted securities
are securities acquired directly or indirectly from an issuer or an affiliate
of the issuer in an action not involving a public offering. In general, under
Rule 144, if a period of at least two years has elapsed since the later of the
date the restricted securities were acquired from the Company or an affiliate,
as applicable, then the holder of such restricted securities (including an
affiliate) is entitled, subject to certain conditions, to sell within any
three-month period a number of shares
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<PAGE>
which does not exceed the greater of: (i) 1% of the Company's then outstanding
shares of Common Stock; or (ii) the share's average weekly trading volume
during the four calendar weeks preceding such sale. Sales under Rule 144 are
also subject to certain manner-of-sale provisions and requirements as to
notice and the availability of current public information about the Company.
Affiliates may sell shares not constituting restricted securities in
accordance with the foregoing limitations and requirements but without regard
to the two-year period. However, a person who is not and has not been an
affiliate of the Company at any time during the 90 days preceding the sale of
the shares, and who has beneficially owned restricted securities for at least
three years, is entitled to sell such shares under Rule 144 with regard to the
volume limitations, manner-of-sale provisions and notice and public
information requirements of Rule 144. A total of approximately 3,750,001 of
the Restricted Shares will become eligible for sale pursuant to Rule 144
beginning on the 90th day following the date of this Prospectus. In addition,
a total of approximately 138,938 of the Restricted Shares will become eligible
for sale pursuant to Rule 144 beginning on January 1, 1997. Notwithstanding,
the holders of all of such shares have agreed during the 180-day period
immediately following the date of this Prospectus not to sell or otherwise
dispose of any securities of the Company without the consent of Piper Jaffray
Inc., subject to specified exceptions.
The Company has reserved 525,000 shares of its Common Stock for issuance
under the 1996 Stock Option Plan and 125,000 for issuance under the Purchase
Plan. All of the shares of Common Stock issued as a result of any grants under
the foregoing plans will also be restricted securities unless the Company
files a registration statement under the Securities Act relating to the
issuance of the shares. The Company currently intends to register the shares
of Common Stock reserved under such employee benefit plans. Subject to
compliance with Rule 144 by affiliates of the Company, any shares issued upon
exercise of options granted under such employee benefit plans will become
freely tradable at the effective date of the registration statement for the
shares reserved under such plans.
Prior to the offering, there has been no public market for the Common Stock,
and no prediction can be made as to the effect, if any, that sales of shares
or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of
Common Stock in the public market could adversely affect prevailing market
prices.
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<PAGE>
UNDERWRITING
The Company has entered into a Purchase Agreement (the "Purchase Agreement")
with the underwriters listed in the table below (the "Underwriters"), for whom
Piper Jaffray Inc, Keefe, Bruyette & Woods, Inc. and Peacock, Hislop, Staley &
Given, Inc. are acting as representatives (the "Representatives"). Subject to
the terms and conditions of the Purchase Agreement, the Company has agreed to
sell to the Underwriters, and each of the Underwriters has severally agreed to
purchase, the number of shares of Common Stock set forth opposite each
Underwriters' name in the table below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Piper Jaffray Inc. .........................................
Keefe, Bruyette & Woods, Inc. ..............................
Peacock, Hislop, Staley & Given, Inc. ......................
---------
Total..................................................... 1,750,000
=========
</TABLE>
Subject to the terms and conditions of the Purchase Agreement, the
Underwriters have agreed to purchase all of the Common Stock being sold to the
public pursuant to the Purchase Agreement, if any is purchased (excluding
shares covered by the over-allotment option granted therein). In the event of
a default by any Underwriter, the Purchase Agreement provides that, in certain
circumstances, purchase commitments of the nondefaulting Underwriters may be
increased or decreased or the Purchase Agreement may be terminated.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock 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 of not more than $ per share.
Additionally, the Underwriters may allow, and such dealers may reallow, a
concession of not in excess of $ per share to certain other dealers. After
the offering, the initial public offering price and other selling terms may be
changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable by the
Representatives within 30 days after the date of the Purchase Agreement, to
purchase up to 262,500 shares of Common Stock at the same price per share to
be paid by the Underwriters for the other shares offered hereby. If the
Underwriters purchase any of such additional shares pursuant to this option,
each Underwriter will be committed to purchase such additional shares in
approximately the same proportion as set forth in the table above. The
Underwriters may exercise such option only for the purpose of covering over-
allotments, if any, made in connection with the distribution of the Common
Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the
right to reject an order for the purchase of shares in whole or in part.
The Representatives have advised the Company that the Underwriters will not
confirm sales of shares of Common Stock to accounts over which they exercise
discretionary authority.
82
<PAGE>
The Company and its executive officers and directors have agreed that,
without the prior written consent of Piper Jaffray Inc., they will not sell or
otherwise dispose of any shares of Common Stock for a period of 180 days after
the date of this Prospectus, other than as gifts to family members and
transfers to wholly owned affiliates, except that (i) the Company may issue
shares upon the exercise of options granted or which may be granted under the
1996 Stock Option Plan and the Purchase Plan, and (ii) Messrs. Gibson and
Schmitz may transfer shares to Mr. Spencer upon exercise of his option on a
portion of the shares beneficially owned by them. See "Principal
Shareholders."
In connection with the offering, the Company has agreed to issue the
Underwriters Warrants. See "Description of Capital Stock--Underwriters
Warrants."
Prior to the offering there has been no public market for the Common Stock.
The initial public offering price set forth on the cover page of this
Prospectus will be determined by negotiations between the Company and the
Representatives. Among the factors considered in determining the initial
public offering price were prevailing market and economic conditions,
estimates of the business potential and prospects of the Company, the present
state of the Company's business operations, an assessment of the Company's
management and the consideration of the above factors in relation to the
market valuation of companies in related businesses. See "Risk Factors--
Absence of Pubic Markets and Possible Volatility of Stock Price."
The Company has agreed to indemnify the Underwriters and their controlling
persons against certain liabilities, including liabilities under the
Securities Act, or to contribute to payment the Underwriters may be required
to make in respect thereof. The Company has been advised that, in the view of
the Commission, indemnification of the Underwriters and their controlling
persons under the Securities Act is against public policy and, therefore, is
unenforceable.
LEGAL MATTERS
The validity of the Common Stock to be offered hereby will be passed upon
for the Company by Jenkens & Gilchrist, a Professional Corporation, Dallas,
Texas. Mr. Weinstock, an advisory director of the Company, is a member of
Jenkens & Gilchrist, a Professional Corporation. Certain legal matters in
connection with the offering will be passed upon for the Underwriters by
Manatt, Phelps & Phillips, LLP, Los Angeles, California.
EXPERTS
The consolidated financial statements of the Company at December 31, 1994
and 1995 and for each of the three years in the period ended December 31,
1995, appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The consolidated statement of operations of Matrix Bank for the year ended
December 31, 1992, included in this Prospectus and elsewhere in the
Registration Statement, has been audited by Kriegel & Co., independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
is included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
83
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act, of which this Prospectus is a part, with respect
to the Common Stock offered hereby. This Prospectus omits certain information
contained in the Registration Statement, and reference is made to the
Registration Statement for further information with respect to the Company and
the Common Stock offered hereby. Statements contained herein concerning the
provisions of documents are necessarily summaries of such documents and when
any such document is an exhibit to the Registration Statement, each such
statement is qualified in its entirety by reference to the copy of such
document filed with the Commission. Copies of the Registration Statement,
including the exhibits and schedules thereto, may be acquired upon payment of
the prescribed fees or examined without charge at the public reference
facilities of the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and at the regional offices of the Securities and Exchange
Commission at 7 World Trade Center, New York, New York 10048, and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material
can also be obtained by mail at prescribed rates from the Public Reference
Section of the Securities and Exchange Commission at its principal office at
450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a web
site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission.
84
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Financial Statements of Matrix Capital Corporation
Report of Independent Auditors.......................................... F-2
Consolidated Balance Sheets--December 31, 1994 and 1995, and June 30,
1996 (unaudited)....................................................... F-3
Consolidated Statements of Income--for the years ended December 31,
1993, 1994 and 1995, and for the six months ended June 30, 1995 and
1996 (unaudited)....................................................... F-4
Consolidated Statements of Shareholders' Equity--for the years ended
December 31, 1993, 1994 and 1995, and for the six months ended June 30,
1996 (unaudited)....................................................... F-5
Consolidated Statements of Cash Flows--for the years ended December 31,
1993, 1994 and 1995, and for the six months ended June 30, 1995 and
1996 (unaudited)....................................................... F-6
Notes to Consolidated Financial Statements--December 31, 1995 and June
30, 1996 (unaudited)................................................... F-7
Consolidated Statement of Operations of Matrix Capital Bank (formerly
known as Dona Ana Savings and Loan Association, F.A.)
Report of Independent Auditors.......................................... F-31
Consolidated Statement of Operations--for the year ended December 31,
1992................................................................... F-32
Notes to Consolidated Statement of Operations--December 31, 1992........ F-33
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Matrix Capital Corporation
We have audited the accompanying consolidated balance sheets of Matrix
Capital Corporation (Company) as of December 31, 1994 and 1995, and the
related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1995. 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 audits 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
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated 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 consolidated financial position
of the Company at December 31, 1994 and 1995, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the consolidated financial statements, in 1995 the
Company changed its method of accounting for mortgage servicing rights as a
result of adopting Statement of Financial Accounting Standards No. 122,
Accounting for Mortgage Servicing Rights.
Ernst & Young LLP
Phoenix, Arizona
March 1, 1996, except for Note 17,
as to which the date is September 19, 1996
F-2
<PAGE>
MATRIX CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
----------------- JUNE 30
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash............................................ $ 2,076 $ 1,381 $ 2,522
Interest earning deposits....................... 2,626 5,586 5,915
Loans held for sale, net of discount of $2,404
in 1994, $5,816 in 1995 and $5,379 in 1996..... 69,110 118,989 118,931
Loans held for investment, net.................. 20,230 18,859 19,797
Mortgage servicing rights, net.................. 6,183 13,817 10,587
Due from broker................................. -- -- 21,153
Other receivables............................... 3,696 5,609 12,043
Federal Home Loan Bank of Dallas stock.......... 1,140 1,954 2,657
Premises and equipment, net..................... 4,458 5,904 6,454
Deferred income tax benefit..................... 212 -- 195
Other assets.................................... 2,320 3,816 3,990
-------- -------- --------
Total assets.................................... $112,051 $175,915 $204,244
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits...................................... $ 41,910 $ 48,877 $ 73,509
Custodial escrow balances..................... 24,687 27,011 26,689
Payable for purchase of mortgage servicing
rights....................................... 1,763 1,312 297
Federal Home Loan Bank of Dallas borrowings... 14,600 19,000 36,400
Borrowed money................................ 18,438 65,093 52,089
Other liabilities............................. 4,692 4,409 3,425
Income taxes payable.......................... 285 875 1,258
-------- -------- --------
Total liabilities........................... 106,375 166,577 193,667
Commitments and contingencies
Shareholders' equity:
Preferred stock, par value $.0001; authorized
5,000,000 shares; no shares outstanding
Common stock, par value $.0001; authorized
50,000,000 shares; issued and outstanding
3,750,001, 3,888,939 and 3,888,939 shares at
December 31, 1994 and 1995 and
June 30, 1996, respectively.................. -- -- --
Additional paid in capital.................... 2,525 2,626 2,626
Retained earnings............................. 3,151 6,712 7,951
-------- -------- --------
Total shareholders' equity.................. 5,676 9,338 10,577
-------- -------- --------
Total liabilities and shareholders' equity.. $112,051 $175,915 $204,244
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
MATRIX CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
----------------------------- -------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans and mortgage backed
securities................. $ 1,647 $ 6,681 $ 10,412 $ 4,092 $ 7,847
Interest earning deposits... 104 334 318 153 184
--------- --------- --------- --------- ---------
Total interest income....... 1,751 7,015 10,730 4,245 8,031
INTEREST EXPENSE
Savings and time deposits... 321 1,210 1,892 817 1,328
Demand and money market
deposits................... 72 271 292 128 233
FHLB borrowings............. 9 213 1,113 494 976
Borrowed money.............. 405 1,332 3,897 1,144 2,862
--------- --------- --------- --------- ---------
Total interest expense...... 807 3,026 7,194 2,583 5,399
--------- --------- --------- --------- ---------
Net interest income before
provision for loan losses.. 944 3,989 3,536 1,662 2,632
Provision for loan losses... 15 216 401 85 152
--------- --------- --------- --------- ---------
Net interest income......... 929 3,773 3,135 1,577 2,480
NONINTEREST INCOME
Loan administration......... 6,427 6,926 7,749 3,508 4,632
Brokerage................... 2,132 4,017 4,787 2,958 1,947
Gain on sale of loans and
mortgage backed
securities................. 2,361 1,590 3,272 1,320 852
Gain on sale of mortgage
servicing rights........... 38 684 1,164 190 1,091
Loan origination............ 221 1,294 2,069 440 194
Other....................... 466 487 781 290 408
--------- --------- --------- --------- ---------
Total noninterest income.... 11,645 14,998 19,822 8,706 9,124
NONINTEREST EXPENSES
Compensation and employee
benefits................... 4,605 7,719 8,586 4,157 5,071
Amortization of mortgage
servicing rights........... 2,363 1,185 1,817 613 1,184
Occupancy and equipment..... 585 1,067 1,124 657 738
Professional fees........... 297 485 660 232 176
Data processing............. 408 492 529 246 273
Other general and
administrative............. 2,206 3,331 4,420 1,854 2,083
--------- --------- --------- --------- ---------
Total noninterest expense... 10,464 14,279 17,136 7,759 9,525
--------- --------- --------- --------- ---------
Income before income taxes.. 2,110 4,492 5,821 2,524 2,079
Provision for income taxes.. 404 1,846 2,260 970 840
--------- --------- --------- --------- ---------
Net income.................. $ 1,706 $ 2,646 $ 3,561 $ 1,554 $ 1,239
========= ========= ========= ========= =========
Net income per common and
common equivalent share.... $ .71 $ .91 $ .40 $ .32
========= ========= ========= =========
Weighted average common and
common equivalent shares... 3,596,251 3,750,001 3,927,629 3,927,629 3,927,629
========= ========= ========= ========= =========
PRO FORMA (UNAUDITED)
Historical income before
income taxes............... $ 2,110
Pro forma income tax
provision.................. 844
---------
Pro forma net income........ $ 1,266
=========
Pro forma net income per
common and common
equivalent share........... $ .35
=========
</TABLE>
See accompanying notes.
F-4
<PAGE>
MATRIX CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993....... -- $ -- $ -- $ -- $ --
Pooling of interests with Matrix
Financial Services Corporation
and United Financial, Inc....... 3,442,501 -- 558 811 1,369
Issuance of stock for services... 307,500 -- 43 -- 43
Cash dividends ($.02 per share).. -- -- -- (88) (88)
Net income....................... -- -- -- 1,706 1,706
Reclassification of retained
earnings at date of termination
of Subchapter S election........ -- -- 1,924 (1,924) --
--------- ----- ------ ------ -------
Balance at December 31, 1993..... 3,750,001 -- 2,525 505 3,030
Net income....................... -- -- -- 2,646 2,646
--------- ----- ------ ------ -------
Balance at December 31, 1994..... 3,750,001 -- 2,525 3,151 5,676
Issuance of stock for services... 138,938 -- 101 -- 101
Net income....................... -- -- -- 3,561 3,561
--------- ----- ------ ------ -------
Balance at December 31, 1995..... 3,888,939 -- 2,626 6,712 9,338
Net income (unaudited)........... -- -- -- 1,239 1,239
--------- ----- ------ ------ -------
Balance at June 30, 1996
(unaudited)..................... 3,888,939 $ -- $2,626 $7,951 $10,577
========= ===== ====== ====== =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
MATRIX CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
---------------------------- ------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income................... $ 1,706 $ 2,646 $ 3,561 $ 1,554 $ 1,239
Adjustments to reconcile net
income to net cash used by
operating activities:
Depreciation and
amortization............... 184 414 743 206 294
Provision for loan losses... 15 216 401 85 152
Amortization of mortgage
servicing rights........... 2,363 1,185 1,817 613 1,184
Noncash compensation
expense.................... 43 -- 101 101 --
Accretion of premium on
deposits................... (28) (68) (28) (23) (7)
Deferred income taxes....... (400) 286 212 (91) (195)
Gain on sale of loans and
mortgage backed
securities................. (2,361) (1,590) (3,272) (1,320) (852)
Gain on sale of mortgage
servicing rights........... (38) (684) (1,164) (190) (1,091)
Loans originated for sale,
net of loans sold.......... (4,206) (4,681) (38,591) (25,813) 11,732
Loans purchased for sale.... (32,231) (80,048) (91,774) (32,367) (65,262)
Proceeds from sale of loans
purchased for sale......... 23,456 62,727 70,159 26,032 44,169
Originated mortgage
servicing rights........... -- -- (885) (138) (462)
Increase in due from
broker..................... -- -- -- -- (21,153)
Decrease (increase) in other
receivables and other
assets..................... (304) (2,116) (3,685) 985 (5,316)
Increase (decrease) in other
liabilities and income
taxes payable.............. 1,275 684 307 (1,521) (601)
-------- -------- -------- -------- --------
Net cash used by operating
activities.................. (10,526) (21,029) (62,098) (31,887) (36,169)
INVESTING ACTIVITIES
Loans originated and
purchased for portfolio..... (20,659) (423) (2,919) (1,031) (2,608)
Principal repayments on
loans....................... 1,378 10,962 17,517 4,329 11,789
Purchase of Federal Home Loan
Bank of Dallas stock........ (202) (536) (814) (3) (703)
Purchases of premises and
equipment................... (235) (1,804) (1,910) (509) (844)
Purchase of land under
development................. -- -- -- -- (1,292)
Acquisition of mortgage
servicing rights............ 625 (3,920) (9,654) (3,812) (2,487)
Proceeds from sale of
mortgage servicing rights... 1,503 677 1,769 198 5,071
Increase in cash from
purchase of Matrix Bank, net
of $2,343 paid.............. 6,361 -- -- -- --
-------- -------- -------- -------- --------
Net cash provided (used) by
investing activities........ (11,229) 4,956 3,989 (828) 8,926
FINANCING ACTIVITIES
Net increase (decrease) in
deposits.................... (3,949) (3,539) 6,995 2,965 24,639
Net increase (decrease) in
custodial escrow balances... 31,221 (7,107) 2,324 10,588 (322)
Increase in revolving lines
and repurchase agreements,
net......................... -- 20,409 39,384 14,851 1,991
Repayments of notes payable.. (1,705) (605) (3,865) (364) (927)
Proceeds from notes payable.. 8,360 2,893 12,933 4,337 3,494
Proceeds from senior
subordinated notes.......... -- -- 2,910 -- --
Repayment of financing
arrangements................ (2,671) (639) (307) (168) (162)
Dividends paid on common
stock....................... (88) -- -- -- --
Repayment of note payable to
officer..................... (175) -- -- -- --
-------- -------- -------- -------- --------
Net cash provided by
financing activities........ 30,993 11,412 60,374 32,209 28,713
-------- -------- -------- -------- --------
Increase (decrease) in cash
and cash equivalents........ 9,238 (4,661) 2,265 (506) 1,470
Cash and cash equivalents at
beginning of period......... 125 9,363 4,702 4,702 6,967
-------- -------- -------- -------- --------
Cash and cash equivalents at
end of period............... $ 9,363 $ 4,702 $ 6,967 $ 4,196 $ 8,437
======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF
NONCASH ACTIVITY
Payable for purchase of
mortgage servicing rights... $ 133 $ 1,763 $ 1,312 $ 2,836 $ 297
======== ======== ======== ======== ========
Transfer of mortgage
servicing rights holdback
against mortgage servicing
rights balance.............. $ 1,526 $ -- $ -- $ -- $ --
======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid for interest
expense..................... $ 802 $ 2,949 $ 6,489 $ 2,463 $ 5,392
======== ======== ======== ======== ========
Cash paid for income taxes... $ 323 $ 1,702 $ 1,530 $ 726 $ 656
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
MATRIX CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND JUNE 30, 1996
(THE INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX MONTHS ENDED JUNE 30, 1995
AND 1996 IS UNAUDITED)
1. ORGANIZATION
On June 30, 1993, the Company was formed and exchanged 1,000,000 shares of
its common stock for 100 percent of the common stock of United Financial, Inc.
(United Financial), Matrix Financial Services Corporation (Matrix Financial)
and another company with minimal assets or operations. The merger was
accounted for as a pooling of interests and, accordingly, the 1993
consolidated financial statements were restated to include the accounts and
operations of the companies prior to the merger.
On September 23, 1993 the Company acquired Dona Ana Savings Bank, FSB
(changed its name to Matrix Capital Bank, FSB, herein referred to as Matrix
Bank), a federally chartered savings and loan association (see Note 15). Upon
the acquisition of Matrix Bank, the Company became a unitary savings and loan
holding company which, through its subsidiaries, is engaged in a single
industry segment, the financial services industries.
The Company's mortgage banking business is conducted through Matrix
Financial, and was established with the primary objective of acquiring,
originating and servicing residential mortgage loan servicing rights.
Servicing mortgage loans involves the contractual right to receive a fee for
processing and administering mortgage loan payments. The Company acquires
servicing rights in the secondary market as well as through Matrix Financial's
wholesale loan origination offices in the Atlanta, Denver, and Phoenix
metropolitan areas, and through Matrix Bank with offices in Las Cruces, New
Mexico and Sun City, Arizona.
Matrix Bank serves its local community by providing a full range of personal
and business depository services, offering residential and consumer loans, and
providing, on a limited basis, commercial real estate loans. Matrix Bank's
participation in the mortgage banking business includes the purchase of bulk
residential loan portfolios, with the intent of reselling the loans, and
extends to acquisitions of servicing portfolios, which are in turn subserviced
by Matrix Financial.
In May 1996, Matrix Bank formed an operating subsidiary, Sterling Finance
Co., Inc. (Sterling), which acquired substantially all the assets of an
originator and seller of subprime automobile retail installment sales
contracts for approximately $47,000 in cash. The assets acquired (fixed assets
and prepaid expenses) were purchased at their estimated fair value and no
goodwill was recorded. The operations for the sub-prime originator for the six
months ended June 30, 1996 were immaterial to the Company's consolidated
financial statements.
United Financial provides brokerage and consulting services to financial
institutions and financial services companies in the mortgage banking
industry, primarily related to the brokerage and analysis of residential
mortgage loan servicing rights, corporate and mortgage loan servicing
portfolio valuations, and, to a lesser extent, consultation and brokerage
services in connection with mergers and acquisitions of mortgage banking
entities.
United Special Services, Inc. (USS), a wholly owned subsidiary of the
Company formed in June 1995, provides real estate management and disposition
services to financial services companies and financial institutions, including
Matrix Financial and Matrix Bank.
2. SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company and its subsidiaries
conform to generally accepted accounting principles and with the general
practices within the financial services industry.
F-7
<PAGE>
MATRIX CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACCOUNTING POLICIES--(CONTINUED)
The following is a description of the more significant policies which the
Company follows in preparing and presenting its consolidated financial
statements.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and the accompanying notes. Actual results could differ from these
estimates.
Loans Held for Sale
Loans originated or purchased with the intent for sale in the secondary
market are carried at the lower of cost, net of discounts or premiums, or
estimated market value in the aggregate. Market value is determined using
forward sales commitments to permanent investors or current market rates for
loans of similar quality and type. Net unrealized losses, if any, would be
recognized in a valuation allowance by charges to income. Discounts or
premiums on loans held for sale are not accreted or amortized into income on
an interest method, however discounts and premiums related to payments of loan
principal are recorded in interest income. The loans are primarily secured by
one to four family residential real estate located throughout the United
States.
Gains and losses on loan sales are recognized at the time of sale. Gains and
losses are calculated based upon the total consideration received, after
provisions to cover estimated future servicing costs.
Loans Held for Investment
Loans held for investment are stated at unpaid principal balances (since it
is the Company's intention to hold the loans until maturity), less unearned
discounts and premiums, deferred loan fees, loans in process, and allowance
for loan losses. Premiums, discounts and net origination fees on loans are
amortized to interest income over the contractual life of the related loans
using the interest method.
Allowance for Loan Losses
In January 1995, the Company adopted Statement of Financial Accounting
Standards Statement No. 114, Accounting by Creditors for Impairment of a Loan,
amended in October 1994 by Statement No. 118, Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosures, hereinafter
collectively referred to as Statement No. 114. Under Statement No. 114, a loan
is considered impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan. Statement No. 114 applies to all loans
except large groups of smaller-balance homogeneous loans, which are
collectively evaluated, loans measured at fair value or at the lower of cost
or fair value, leases and debt securities. The statement does not address the
overall adequacy of the allowance for loan losses.
Potential impaired loans of the Company, as defined by Statement No. 114,
include only commercial, real estate construction and commercial real estate
mortgage loans classified as nonperforming loans. Impairment allowances are
considered by the Company in determining the overall adequacy of the allowance
for loan losses. The adoption of Statement No. 114 resulted in no material
change in the allowance for loan losses. When a loan is identified as
"impaired," accrual of interest ceases. The Company had no impaired loans, as
defined by Statement No. 114, as of or for the year ended December 31, 1995.
The Company evaluates its mortgage loans collectively due to their
homogeneous nature. The allowance for loan losses is calculated, in part,
based on historical loss experience. In addition, management takes into
F-8
<PAGE>
MATRIX CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACCOUNTING POLICIES--(CONTINUED)
consideration other factors such as certain qualitative evaluations of
individual classified assets, trends in the portfolio, geographic and
portfolio concentrations, new products or markets, evaluations of the changes
in the historical loss experience component, and projections of this component
into the current and future periods based on current knowledge and conditions.
Due to the nature of the Company's loan portfolio, substantially all of the
allowance for loan losses relates to residential loans. Loan losses are
charged against the allowance when the probability of collection is considered
remote. In the opinion of management, the allowance, when taken as a whole, is
adequate to absorb reasonably foreseeable losses in the current loan
portfolio.
Loans are placed on nonaccrual status when full payment of principal or
interest is in doubt, or when they are past due ninety days as to either
principal or interest. Interest payments received on nonaccrual loans are
recorded as interest income unless there is doubt as to the collectibility of
the recorded investment. In those cases, cash received is recorded as a
reduction in principal.
Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is computed using the straight line method over the estimated
lives of the assets, which range from three to seven years for office
furniture and equipment and 30 years for buildings.
Mortgage Servicing Rights (MSR)
On January 1, 1995, the Company adopted Statement No. 122, Accounting for
Mortgage Servicing Rights. Since Statement No. 122 prohibits retroactive
application, the historical accounting results for 1993 and 1994 have not been
restated, and accordingly, the accounting results for 1995 are not directly
comparable to the results for prior periods.
With the adoption of this statement, the Company recognizes originated
mortgage servicing rights (OMSRs) as an asset separate from the underlying
originated mortgage loan by allocating the total cost of originating a
mortgage loan between the loan and the servicing right based on their
respective fair values. Mortgage servicing rights are carried at the lower of
cost (allocated cost for OMSRs), less accumulated amortization, or fair value.
Mortgage servicing rights are amortized in proportion to and over the period
of the estimated future servicing income.
The fair value of mortgage servicing rights is determined based on the
discounted future servicing income stratified based on one or more predominant
risk characteristics of the underlying loans. The Company stratifies its
mortgage servicing rights by product type and investor to reflect the
predominant risk characteristics. To determine the fair value of mortgage
servicing rights, the Company uses a valuation model that calculates the
present value of future cash flows to determine the fair value of the mortgage
servicing rights. In using this valuation method, the Company incorporates
assumptions that market participants would use in estimating future net
servicing income which includes estimates of the cost of servicing per loan,
the discount rate, float value, an inflation rate, ancillary income per loan,
prepayment speeds and default rates. As of December 31, 1995, no valuation
allowance was required and the fair value of the aggregate mortgage servicing
rights was approximately $20,500,000.
Gain on Sale of Servicing Rights
The Company complies with EITF Issue No. 95-5, Determination of What
Constitutes a Sale of Mortgage Loan Servicing Rights, such that the gain on
sale of servicing rights is recognized when substantially all the risks
and rewards inherent in owning the mortgage servicing rights have been
transferred to the buyer, and any protection provisions retained by the
Company are minor and can be reasonably estimated.
F-9
<PAGE>
MATRIX CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACCOUNTING POLICIES--(CONTINUED)
Loan Administration Income
Loan administration income represents service fees and other income earned
from servicing loans for various investors. Loan administration income
includes service fees that are based on a contractual percentage of the
outstanding principal balance plus late fees and other ancillary charges.
Income is recognized when the related payments are received.
Brokerage Income
Brokerage income represents fees earned related to brokerage and consulting
services. Brokerage income is recognized when earned.
Loan Origination Income
Loan origination income for loans originated for sale, which includes all
mortgage origination fees, secondary marketing activity and servicing-released
premiums on mortgage loans sold, net of outside origination costs, is
recognized as income at the time the loan is sold.
Loan origination income for loans originated for investment, which includes
mortgage origination fees and certain direct costs associated with loan
originations, is deferred and amortized as a yield adjustment over the
contractual life of the related loan using the interest method, adjusted for
estimated prepayments.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25 and, accordingly, recognizes no compensation expense for the
stock option grants.
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, which provides an alternative to APB Opinion No. 25,
Accounting for Stock Issued to Employees, in accounting for stock-based
compensation issued to employees. Statement No. 123 allows for a fair value
based method of accounting for employee stock options and similar equity
instruments awarded after December 31, 1995. The Company intends to apply the
recognition and measurement provisions of APB Opinion No. 25 to all employee
stock options and similar equity instruments awarded after December 31, 1995.
Foreclosed Real Estate
Real estate acquired through foreclosure, deed in lieu of foreclosure or in
judgment is carried at the lower of fair value, minus estimated costs to sell,
or the related loan balance at the date of foreclosure. Valuations are
periodically performed by management and an allowance for loss is established
by a charge to operations if the carrying value of a property exceeds its fair
value, minus estimated costs to sell. The net carrying value of foreclosed
real estate was $543,000, $835,000 and $1,093,000 at December 31, 1994 and
1995 and June 30, 1996, respectively.
Income Taxes
Prior to the merger, Matrix Financial and United Financial were taxed under
the provisions of subchapter "S" of the Internal Revenue Code. Under these
provisions, these companies did not pay federal corporate income taxes on
their income. Instead, the shareholders were liable for individual federal
income taxes on the respective company's taxable income.
On June 30, 1993, Matrix Financial and United Financial terminated their
subchapter "S" elections as a result of becoming subsidiaries of the Company.
Deferred income taxes were established at that time for temporary differences
between the financial reporting basis and the tax basis of assets and
liabilities.
F-10
<PAGE>
MATRIX CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACCOUNTING POLICIES--(CONTINUED)
Since the merger, the Company and its subsidiaries file consolidated federal
and state income tax returns. The subsidiaries are charged for the taxes
applicable to their profits calculated on the basis of filing separate income
tax returns. Matrix Bank qualifies as a savings and loan association for
income tax purposes.
The Company follows Statement No. 109, Accounting for Income Taxes, which
uses the liability method in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences
between financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Fair Value of Financial Instruments
In 1995, the Company adopted Statement No. 107, Disclosures about Fair Value
of Financial Instruments, which requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet,
where it is practicable to estimate their value. In cases where quoted market
prices are not available, fair values are based on estimates using present
value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the instruments. Statement No. 107
excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company. For additional
information refer to Note 14--Financial Instruments.
Cash and Cash Equivalents
Cash equivalents, for purposes of the statements of cash flows, consist of
cash and interest earning deposits with banks with original maturities when
purchased of three months or less.
Net Income and Pro Forma Net Income Per Share
Net income per common and common equivalent share is computed based on the
weighted average number of common shares outstanding during each period and
the dilutive effect, if any, of stock options outstanding.
Pro forma net income per common and common equivalent share (unaudited) is
presented for 1993 since the Company's predecessors were not taxable entities
as a result of their subchapter "S" elections and is computed by applying a
pro forma tax provision of 40 percent to income before income taxes and using
the weighted average number of shares of common stock and common stock
equivalents outstanding during the year.
Interim Financial Statements
The accompanying consolidated balance sheet at June 30, 1996 and the
consolidated statements of income, shareholders' equity and cash flows for the
six month periods ended June 30, 1995 and 1996 are unaudited and have been
prepared on the same basis as the audited consolidated financial statements
included herein. In the opinion of management, such unaudited consolidated
financial statements include all adjustments (all of which are of a normal
recurring nature) necessary to present fairly the consolidated financial
position and the results of operations for the periods presented. The results
of operations for such interim periods are not necessarily indicative of
results for the full year.
Impact of Recently Issued Accounting Standards
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets to be Disposed Of. This statement, effective
for fiscal years beginning after December 15, 1995, requires a company to
assess impairment of "assets held or used" and "assets to be disposed of."
Whenever events or
F-11
<PAGE>
MATRIX CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACCOUNTING POLICIES--(CONTINUED)
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable, the related undiscounted cash flows are compared to the
asset's book value. If the sum of the undiscounted cash flows is less than the
book value, a loss is recorded based upon the excess of the book value over
the fair value of the asset. Assets to be disposed of are recorded at fair
value less cost to sell and are not depreciated while held. The adoption of
this pronouncement by the Company in 1996 did not have a material effect on
the Company's consolidated financial statements.
In June 1996, the FASB issued Statement No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities and is
effective for periods beginning after December 31, 1996. Transactions covered
by Statement No. 125 include securitizations, sales of partial interests in
financial assets, repurchase agreements, securities lending, pledges of
collateral, loan syndications and participations, sales of receivables with
recourse, servicing of mortgages and other loans, and in-substance
defeasances. The statement uses a "financial components" approach that focuses
on control to determine the proper accounting for financial asset transfers.
Under that approach, after financial assets are transferred, an entity would
recognize on the balance sheet all assets it controls and liabilities it has
incurred. It would remove from the balance sheet those assets it no longer
controls and liabilities it has satisfied.
If the entity has surrendered control over the transferred assets, the
transaction would be considered a sale. Control is considered surrendered only
if the assets are isolated from the transferor; the transferee has the right
to pledge or exchange the assets or is a qualifying special-purpose entity;
and the transferor does not maintain effective control over the assets through
an agreement to repurchase or redeem them. If those conditions do not exist,
the transfer would be accounted for as a secured borrowing.
The Company has not yet determined the impact of Statement No. 125 on its
consolidated financial statements.
3. LOANS RECEIVABLE
Loans held for investment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------- JUNE 30
1994 1995 1996
------- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Residential loans.............................. $11,105 $ 9,349 $ 8,630
Multi-family and commercial real estate........ 7,518 7,544 7,758
Construction loans............................. 397 577 1,569
Consumer loans and other....................... 2,623 3,381 3,878
------- ------- -------
21,643 20,851 21,835
Less:
Loans in process............................. 291 499 480
Purchase discounts, net...................... 205 414 376
Unearned discounts on consumer loans......... 40 14 16
Allowance for loan losses.................... 728 943 1,058
Specific valuation allowance on purchased
loans....................................... 149 122 108
------- ------- -------
1,413 1,992 2,038
------- ------- -------
$20,230 $18,859 $19,797
======= ======= =======
</TABLE>
F-12
<PAGE>
MATRIX CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. LOANS RECEIVABLE--(CONTINUED)
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 JUNE 30
-------------------------- ------------
1993 1994 1995 1995 1996
------- ------- -------- ---- ------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period... $ -- $ 538 $ 728 $728 $ 943
Allowance for loan losses
established in connection with
the acquisition of Matrix Bank.. 556 -- -- -- --
Provision for loan losses........ 15 216 401 85 152
Charge-offs...................... (33) (26) (240) (40) (37)
Recoveries....................... -- -- 54 -- --
------- ------- -------- ---- ------
Balance at end of period......... $ 538 $ 728 $ 943 $773 $1,058
======= ======= ======== ==== ======
</TABLE>
Loans are placed on nonaccrual when full payment of principal or interest is
in doubt, or when they are past due ninety days as to either principal or
interest.
Nonaccrual loans in the loans held for investment portfolio totaled
approximately $326,000, $440,000 and $384,000 or 1.5 percent, 2.1 percent and
1.8 percent of the total loans held for investment portfolio at December 31,
1994 and 1995 and June 30, 1996, respectively.
Nonaccrual loans related to the loans held for sale portfolio aggregated
approximately $2,988,000, $5,098,000 and $3,708,000 at December 31, 1994 and
1995 and June 30, 1996, respectively. Approximately $1,500,000, $1,123,000 and
$834,000 at December 31, 1994 and 1995 and June 30, 1996, respectively, of the
nonaccrual loans relate to a 90 percent senior participation interest acquired
by the Company in a $22,000,000 passthrough certificate, with an outstanding
balance of $5,591,000 at June 30, 1996, secured by single family residential
real estate mortgages which are classified as loans held for sale. Losses
incurred related to loans underlying the passthrough certificate are first
charged to the subordinate participation interest, which was approximately
$1.8 million at June 30, 1996.
Interest income that would have been recorded for such nonaccrual loans was
approximately $23,000, $140,000, and $156,000, during the years ended December
31, 1993, 1994, and 1995, respectively, and $84,000 and $39,000 during the six
months ended June 30, 1995 and 1996, respectively.
For the six months ended June 30, 1996, the Company recognized a gross gain
on the sale of mortgage backed securities of approximately $171,000 and the
taxes related to this sale were approximately $68,000.
F-13
<PAGE>
MATRIX CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------- JUNE 30
1994 1995 1996
------ ------ -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Land.............................................. $ 417 $ 532 $ 694
Buildings......................................... 3,068 3,761 4,021
Leasehold improvements............................ 118 127 144
Office furniture and equipment.................... 1,407 1,721 2,111
Other equipment................................... 186 960 975
------ ------ ------
5,196 7,101 7,945
Less: accumulated depreciation and amortization... 738 1,197 1,491
------ ------ ------
$4,458 $5,904 $6,454
====== ====== ======
</TABLE>
Included in occupancy and equipment expense is depreciation and amortization
expense of premises and equipment of approximately $184,000, $414,000, and
$467,000, for the years ended December 31, 1993, 1994 and 1995, respectively,
and $197,000 and $294,000 during the six months ended June 30, 1995 and 1996,
respectively.
5. MORTGAGE SERVICING RIGHTS
The activity in the MSRs is summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31 ENDED
------------------------ JUNE 30
1993 1994 1995 1996
------- ------ ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period........ $ 6,200 $1,818 $ 6,183 $13,817
Purchases............................. 409 5,550 9,203 1,472
Acquisition of GNMA VA Vendee MSRs.... (902) -- -- --
Originated............................ -- -- 885 462
Amortization.......................... (2,363) (1,185) (1,817) (1,184)
Reclass of retainage against MSRs..... (1,526) -- -- --
Sales................................. -- -- (637) (3,980)
------- ------ ------- -------
Balance at end of period.............. $ 1,818 $6,183 $13,817 $10,587
======= ====== ======= =======
</TABLE>
The reclass of retainage against MSRs represents an adjustment to the
acquisition basis of MSRs resulting from the final settlement of the related
purchase price and retainage payable of MSRs purchased in prior years.
Accumulated amortization of mortgage servicing rights aggregated
approximately $7,773,000, $9,495,000 and $10,397,000 at December 31, 1994 and
1995 and June 30, 1996, respectively.
The Company's servicing activity is diversified throughout 48 states with
concentrations at June 30, 1996 in California, New York and Arizona of
approximately 33.2 percent, 13.1 percent and 8.8 percent, respectively, based
on aggregate outstanding principal balances of the mortgage loans serviced. As
of December 31, 1994 and 1995 and June 30, 1996, the Company subserviced loans
for others of approximately $89,000,000, $85,000,000
F-14
<PAGE>
MATRIX CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. MORTGAGE SERVICING RIGHTS--(CONTINUED)
and $439,525,000, respectively. The increase in the June 30, 1996 subserviced
loans is due to two sales of Company owned MSRs which occurred during the
second quarter of 1996 and the subservicing will terminate in August and
November 1996.
The Company's servicing portfolio (excluding subserviced loans) was
comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1994 1995 JUNE 30, 1996
-------------------- -------------------- --------------------
PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OUTSTANDING OF LOANS OUTSTANDING OF LOANS OUTSTANDING
-------- ----------- -------- ----------- -------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
FHLMC................... 6,043 $ 318,457 9,453 $ 671,966 8,178 $ 551,363
FNMA.................... 3,497 178,915 7,820 483,947 4,964 352,665
GNMA.................... 264 12,869 271 12,883 254 11,740
Other VA, FHA, and
conventional loans..... 9,917 531,544 7,414 427,589 7,381 446,676
------ ---------- ------ ---------- ------ ----------
19,721 $1,041,785 24,958 $1,596,385 20,777 $1,362,444
====== ========== ====== ========== ====== ==========
</TABLE>
The Company's custodial escrow balances shown in the accompanying
consolidated balance sheets pertain to escrowed payments of taxes and
insurance and the float on principal and interest payments on loans serviced
on behalf of others and owned by the Company, aggregating approximately
$17,564,000, $26,769,000, and $26,688,000 at December 31, 1994 and 1995, and
June 30, 1996, respectively. The Company also has custodial accounts on
deposit from other mortgage companies aggregating approximately $7,123,000,
$242,000 and $1,000 at December 31, 1994 and 1995, and June 30, 1996,
respectively. The custodial accounts are maintained at Matrix Bank in
noninterest bearing accounts. The balance of the custodial accounts fluctuate
from month to month based on the pass-through of the principal and interest
payments to the ultimate investors and the timing of the taxes and insurance
payments.
The mortgage servicing portfolio includes recourse servicing equal to
approximately 0.7 and 1.0 percent of the total owned at December 31, 1995 and
June 30, 1996, respectively. A reserve for losses is recorded, as appropriate,
for loans serviced for others, in which the investor has recourse to the
Company, which had a balance of approximately $52,000, $49,000 and $19,000 at
December 31, 1994 and 1995 and June 30, 1996, respectively. Additionally, in
certain circumstances the Company is required to make advances for escrow and
foreclosure costs for loans which it services. The Company experienced losses
for unrecoverable advances of approximately $69,000, $34,000 and $144,000 for
the years ended December 31, 1993, 1994 and 1995, respectively, and $5,000 and
$8,000 for the six months ended June 30, 1995 and 1996, respectively.
F-15
<PAGE>
MATRIX CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. DEPOSITS
Deposit account balances are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1994 1995 JUNE 30, 1996
------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT PERCENT RATE AMOUNT PERCENT RATE AMOUNT PERCENT RATE
------- ------- -------- ------- ------- -------- ------- ------- --------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook accounts....... $ 2,621 6.26% 2.65% $ 2,358 4.82% 3.40% $ 2,272 3.09% 3.31%
NOW accounts............ 3,744 8.94 2.00 3,832 7.84 1.49 4,032 5.49 2.20
Money market accounts... 5,755 13.74 2.70 6,167 12.62 4.38 8,331 11.33 4.41
------- ------ ---- ------- ------ ---- ------- ------ ----
12,120 28.94 2.46 12,357 25.28 3.18 14,635 19.91 3.63
Certificate accounts.... 29,755 71.06 4.71 36,513 74.72 5.97 58,874 80.09 5.82
------- ------ ---- ------- ------ ---- ------- ------ ----
41,875 100.00% 48,870 100.00% 73,509 100.00%
====== ====== ======
Purchase premium........ 35 7 --
------- ------- -------
$41,910 $48,877 $73,509
======= ======= =======
Weighted-average
interest rate.......... 4.04% 5.23% 5.33%
==== ==== ====
</TABLE>
Contractual maturities of certificate accounts as of December 31, 1995:
<TABLE>
<CAPTION>
UNDER 12 12 TO 36 36 TO 60
MONTHS MONTHS MONTHS
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
3.00-3.99%........................................ $ 345 $ -- $ --
4.00-4.99%........................................ 1,664 181 --
5.00-5.99%........................................ 13,450 907 27
6.00-6.99%........................................ 8,852 7,163 928
7.00-7.99%........................................ 35 2,479 427
8.00-10.50%....................................... 15 37 3
------- ------- ------
$24,361 $10,767 $1,385
======= ======= ======
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31 ENDED JUNE 30
------------------ -------------
1993 1994 1995 1995 1996
---- ------ ------ -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Passbook accounts.......................... $ 17 $ 72 $ 85 $ 46 $ 40
NOW accounts............................... 10 76 52 24 31
Money market............................... 62 195 240 104 202
Certificates of deposit.................... 304 1,138 1,807 771 1,288
---- ------ ------ ----- -------
$393 $1,481 $2,184 $ 945 $ 1,561
==== ====== ====== ===== =======
</TABLE>
The aggregate amount of deposit accounts with a balance greater than $100,000
was approximately $2,112,000, $2,066,000 and $3,745,000 at December 31, 1994
and 1995, and June 30, 1996 respectively.
F-16
<PAGE>
MATRIX CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. BORROWED MONEY
Borrowed money is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------- JUNE 30
1994 1995 1996
------ ------ -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Term Notes Payable
Note payable to a third-party financial institution
due in annual principal installments of $286,101,
plus interest, through 2003, collateralized by the
common stock of Matrix Bank; interest at prime plus
1.0 percent........................................ $2,575 $2,289 $2,289
Notes payable to a third-party financial institution
due in 28 consecutive quarterly installments,
secured by MSRs; interest ranging from prime plus
2.0 percent to fixed at 10 percent................. 740 631 576
Note payable to a bank, secured by a deed of trust
on real estate, unpaid principal balance plus
interest due June 1998; interest at prime plus
1.0 percent........................................ -- 921 962
$11,000,000 servicing acquisition loan agreement
with a bank, secured by MSRs, due at the earlier of
the maturity of the MSRs or amortized over five to
six years from the date of the borrowing through
October 2001; interest at federal funds rate plus
3.6 percent (8.8 percent at June 30, 1996);
$327,000 available at June 30, 1996................ -- 8,709 10,673
Senior subordinated notes, interest at 13 percent
payable semiannually, unsecured and maturing July
2002, with mandatory redemptions of $727,500 on
each of July 15, 1999, 2000 and 2001............... -- 2,910 2,910
Note payable to a third-party financial institution
due in monthly installments through 2000, secured
by equipment; interest at the one year treasury
rate plus 2.4 percent.............................. 164 786 759
Note payable to a bank secured by a deed of trust on
real estate, unpaid principal balance due July 21,
1998; interest at prime plus 1.0 percent........... -- -- 845
Other, interest at prime plus 2.0 percent........... 990 201 --
------ ------ ------
4,469 16,447 19,014
Revolving Lines
$70,000,000 revolving warehouse loan agreement (with
a $2,500,000 working capital sublimit) with banks,
secured by mortgage loans held for sale, mortgage
servicing rights, eligible servicing advance
receivables and eligible delinquent mortgage
receivables; interest at federal funds rate plus
1.1 to 2.6 percent (6.6 and 7.9 percent average
rate at June 30, 1996 for the warehouse loan and
working capital loan, respectively); matures in
July 1997; $38,616,000 available overall and
$1,631,000 available under the working capital
sublimit at June 30, 1996.......................... 46,833 31,384
$27,500,000 revolving warehouse lines of credit with
various banks. These lines were terminated
effective July 1995................................ 9,890 -- --
------ ------ ------
9,890 46,833 31,384
</TABLE>
F-17
<PAGE>
MATRIX CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. BORROWED MONEY--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
--------------- JUNE 30
1994 1995 1996
------- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Other
Agreements with a bank and an investment bank to
sell mortgage loans originated by the Company
under agreements to repurchase. The agreement can
be terminated upon 90 days written notice by
either party; interest at the higher of the prime
rate or note rate on the loans (average rate of
8.6 percent at June 30, 1996). Total commitment
amount of these agreements is $20,000,000, with
$19,390,000 available at June 30, 1996............ $ 2,403 $ 570 $ 610
MSR financing (see below).......................... 1,550 1,243 1,081
Other.............................................. 126 -- --
------- ------- -------
4,079 1,813 1,691
------- ------- -------
$18,438 $65,093 $52,089
======= ======= =======
</TABLE>
On July 10, 1996, Matrix Financial renewed its credit facilities for its
$70,000,000 revolving warehouse loan agreement and $11,000,000 servicing
acquisition loan agreement. With this renewal, the aggregate amount of the
revolving warehouse loan was reduced to $50,000,000, with a $2,500,000 working
capital sublimit, and the aggregate amount of the servicing acquisition loan
was increased to $13,500,000. The reduction in the revolving warehouse loan
commitment was initiated by Matrix Financial to reflect the recent reduction
in the level of loan origination activity. The new credit facility agreements
require Matrix Financial to maintain (i) total stockholder's equity of at
least $3,000,000 plus 50% of capital contributed after January 1, 1996, (ii)
adjusted tangible net worth, as defined, of at least $9,000,000 through
January 31, 1997 and $10,000,000 on January 31, 1997 and thereafter, (iii) a
servicing portfolio of at least $1,250,000,000 and (iv) a ratio of principal
debt of receivables borrowings and term line borrowings of no more than the
lesser of 70% of the appraised value of the mortgage servicing portfolio or
1.25% of the unpaid principal balance of the servicing portfolio.
The terms of the senior subordinated notes limit cash dividends to an amount
equal to 50 percent of consolidated net income as long as the dividend does
not exceed 10 percent of consolidated shareholders' equity. The Company may
redeem the senior subordinated notes, in whole or in part, at any time after
July 15, 1998 at a redemption price of 102 percent of par through July 14,
1999 and, thereafter, at par, plus accrued and unpaid interest.
The Company is obligated to register under the Securities Act of 1933 the
senior subordinated notes on or before February 1, 1997. If such registration
statement is not effected by February 1, 1997, the interest rate increases to
14 percent. The Company has granted the holders of the senior subordinated
notes a right of first refusal to purchase from the shares to be issued and
sold in the planned public offering that number of shares of common stock
equal in amount to $727,500 divided by the price to the public.
F-18
<PAGE>
MATRIX CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. BORROWED MONEY--(CONTINUED)
As of December 31, 1995 the maturities of term notes payable during the next
five years and thereafter are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1996.......................................................... $ 2,105
1997.......................................................... 2,280
1998.......................................................... 3,078
1999.......................................................... 2,977
2000.......................................................... 2,777
Thereafter.................................................... 3,230
-------
$16,447
=======
</TABLE>
The Company must comply with certain financial and other covenants related
to the foregoing debt agreements including the maintenance of specific ratios,
net worth and other amounts as defined in the credit agreements. At December
31, 1995, the Company was in compliance with these covenants.
MSR Financing
In 1992 and 1994 the Company entered into two unrelated transactions with
portions of its owned servicing portfolio which were accounted for as
financings due to various terms of the agreements regarding continuing
involvement. Amounts due to the other parties under the financings had
balances of approximately $1,550,000, $1,243,000 and $1,081,000 at December
31, 1994 and 1995, and June 30, 1996, respectively. The MSRs pledged as
collateral for the loans relate to mortgage loans with unpaid principal
balances of approximately $150,000,000, $125,000,000 and $116,000,000 at
December 31, 1994 and 1995 and June 30, 1996, respectively. In both financing
arrangements, the Company retains a portion of the servicing income associated
with the pledged or related MSRs, with the balance of the servicing income
paid to the other parties as a reduction of the debt and interest. The
implicit interest rate of the financings varies depending on the servicing
income derived from the MSRs.
A portion of the payment made under these arrangements is recorded as
interest expense on the level yield method. The amounts due the other parties
are payable solely from the servicing income derived from the MSRs, and there
is no implicit or explicit guarantee as to repayment. The total amounts paid
to the other parties aggregated approximately $875,000, $717,000 and $620,000
during the years ended December 31, 1993, 1994 and 1995, respectively, and
$326,000 and $265,000 during the six months ended June 30, 1995 and 1996,
respectively.
8. FEDERAL HOME LOAN BANK OF DALLAS BORROWINGS
Federal Home Loan Bank of Dallas borrowings aggregated $14,600,000,
$19,000,000 and $36,400,000 at December 31, 1994 and 1995 and June 30, 1996,
respectively. The advances bear interest at rates which adjust daily and are
based on the mortgage repo rate. All advances are secured by first mortgage
loans of Matrix Bank and all Federal Home Loan Bank of Dallas stock.
Matrix Bank has a commitment from the Federal Home Loan Bank of Dallas for
advances of approximately $49,000,000 at December 31, 1995. Matrix Bank
adopted a collateral pledge agreement whereby it has agreed to keep on hand,
at all times, first mortgages free of all other pledges, liens, and
encumbrances with unpaid principal balances aggregating no less than 170
percent of the outstanding secured advances from the Federal Home Loan Bank of
Dallas. All stock in the Federal Home Loan Bank of Dallas is pledged as
additional collateral for these advances.
F-19
<PAGE>
MATRIX CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES
The income tax provision consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current
Federal............................................ $ 703 $ 1,350 $ 1,630
State.............................................. 101 210 418
Deferred
Federal............................................ (346) 236 169
State.............................................. (54) 50 43
------ ------- -------
$ 404 $ 1,846 $ 2,260
====== ======= =======
</TABLE>
A reconciliation of the provision for income taxes with the expected income
taxes based on the statutory federal income tax rate follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Expected income tax provision..................... $ 717 $ 1,530 $ 1,979
State income taxes................................ 105 270 293
Other............................................. 6 46 (12)
Establishment of deferred tax assets at June 30,
1993............................................. (5) -- --
Subchapter S income taxed to shareholders......... (419) -- --
------ ------- -------
$ 404 $ 1,846 $ 2,260
====== ======= =======
</TABLE>
Deferred tax assets and liabilities result from the tax effects of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes
shown below.
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for losses..................................... $ 348 $ 190
Discounts and premiums................................... 65 177
Amortization of servicing rights......................... -- 160
Gain on sale of loans.................................... 22 --
Other.................................................... 71 51
------- -------
Total deferred tax assets.............................. 506 578
Deferred tax liabilities:
Gain on sale of loans.................................... -- (275)
Depreciation............................................. (203) (241)
Other.................................................... (91) (62)
------- -------
Total deferred tax liabilities......................... (294) (578)
------- -------
Net deferred tax asset..................................... $ 212 $ --
======= =======
</TABLE>
F-20
<PAGE>
MATRIX CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. REGULATORY
The Company is a unitary thrift holding company and, as such, is subject to
the regulation, examination and supervision of the Office of Thrift
Supervision (OTS).
Matrix Bank is also regulated by the OTS and is required to maintain minimum
levels of regulatory net worth. At December 31, 1995 and June 30, 1996, Matrix
Bank must maintain a core capital to assets ratio of 3.0 percent and a risk-
based capital ratio of 8.0 percent of risk-based assets. At December 31, 1995,
Matrix Bank's regulatory net worth as reported to the OTS was $7,540,000 and
$8,321,000 for each respective regulatory net worth requirement, which
exceeded such minimum requirement by $4,378,000 and $3,324,000, respectively.
At June 30, 1996, Matrix Bank's regulatory net worth as reported to the OTS
was $8,170,000 and $9,181,000 for each respective regulatory net worth
requirement, which exceeded such minimum requirements by $3,666,000 and
$1,904,000, respectively.
The OTS imposes limitations upon all capital distributions by savings
institutions, including cash dividends. An institution that is in excess of
capital requirements before and after a proposed capital distribution (Tier 1
Association) and has not been advised by the OTS that it is in need of more
than normal supervision, could, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year up to the higher of
(i) 100 percent of its net income to date during the calendar year plus the
amount that would reduce by one-half its "surplus capital ratio" (the excess
capital over its capital requirements) at the beginning of calendar year, or
(ii) 75 percent of its net income over the most recent four quarter period.
Any additional capital distributions would require prior regulatory approval.
As of June 30, 1996, Matrix Bank was a Tier 1 Association.
The various federal banking statutes to which Matrix Bank is subject also
include other limitations regarding the nature of the transactions in which it
can engage or assets it may hold or liabilities it may incur.
Deposits of Matrix Bank are insured by the Savings Association Insurance
Fund (SAIF). The U.S. Congress is currently considering a one-time special
assessment to recapitalize SAIF. It cannot be determined at this time whether
the U.S. Congress will enact such legislation or the amount of such
assessment. This assessment, if any, will be recorded upon enactment of the
legislation.
Matrix Financial is subject to examination by various regulatory agencies
involved in the mortgage banking industry. Each regulatory agency requires the
maintenance of a certain amount of net worth, the most restrictive of which
required $1,224,000 at December 31, 1995 and $1,310,000 at June 30, 1996.
11. SHAREHOLDERS' EQUITY
Common Stock
The authorized common stock of the Company consists of 50,000,000 shares
with a par value of $.0001 per share. There were 3,888,939 shares of common
stock outstanding at December 31, 1995 and June 30, 1996. Holders of common
stock are entitled to receive dividends when, and if, declared by the board of
directors. Each share of common stock entitles the holders thereof to one
vote, and cumulative voting is not permitted.
Preferred Stock
The authorized preferred stock of the Company consists of 5,000,000 shares
with a par value of $.0001 per share. The board of directors is authorized,
without further action of the shareholders of the Company, to issue from time
to time shares of preferred stock in one or more series and with such relative
rights, powers, preferences, and limitations as the board of directors may
determine at the time of issuance. Such shares may be convertible into common
stock and may be superior to the common stock in the payment of dividends,
liquidation, voting and other rights, preferences and privileges.
F-21
<PAGE>
MATRIX CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. SHAREHOLDERS' EQUITY--(CONTINUED)
Stock Option Plan
In 1995, the Company adopted a stock option plan (Plan), which provides for
options on up to 375,000 shares of the Company's common stock. These options
are available for grant under the Plan to the officers, directors and
employees of the Company or any of its affiliates. The Plan is administered by
a committee which is presently the board of directors of the Company. The
committee has the authority to determine the recipients of grants, the number
of shares subject to the grant, and the exercise price of each share subject
to the grant. The term of the options shall be ten years.
During 1995, the Company granted options to purchase 79,500 shares of common
stock at an exercise price of $5.13, which are exercisable upon vesting, which
is fifty percent at the date of grant and the balance in 1996.
At December 31, 1995, there were 295,500 shares reserved for future grants
under the Plan. For the six months ended June 30, 1996 there were no
additional grants under the Plan.
Restricted Net Assets
As a result of the regulatory requirements and debt covenants, substantially
all of the net assets of the Company are restricted at December 31, 1995 and
June 30, 1996.
12. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
Leases
The Company leases office space and certain equipment under noncancelable
operating leases. Annual amounts due under the office and equipment leases as
of December 31, 1995 are approximately as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1996.......................................................... $ 579
1997.......................................................... 266
1998.......................................................... 145
1999.......................................................... 13
2000.......................................................... --
------
$1,003
======
</TABLE>
Total rent expense aggregated approximately $383,000, $481,000, and
$437,000, for the years ended December 31, 1993, 1994 and 1995, respectively,
and $225,000 and $107,000 for the six months ended June 30, 1995 and 1996,
respectively.
Loan Commitments and Hedging
In the ordinary course of business, the Company makes commitments to
originate residential mortgage loans (Pipeline) and holds originated loans
until delivery to an investor. Inherent in this business is a risk associated
with changes in interest rates and the resulting change in the market value of
the Pipeline and funded loans. The Company mitigates this risk through the use
of mandatory and nonmandatory forward commitments to sell loans. At December
31, 1995, the Company had $93,133,000 in Pipeline and funded loans offset with
mandatory forward commitments of $64,743,000 and nonmandatory forward
commitments of $15,267,000. At June 30, 1996, the Company had $95,404,000 in
Pipeline and funded loans offset with mandatory forward commitments of
$69,652,000 and nonmandatory forward commitments of $19,987,000. The inherent
value of the forward commitments is considered in the determination of the
lower of cost or market for the Pipeline and funded loans. The Company does
not hold any other derivatives at December 31, 1995 or June 30, 1996.
F-22
<PAGE>
MATRIX CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS--(CONTINUED)
Land Development Commitment
In June 1996, the Company purchased 154 acres of land for $1.3 million in
cash for the purpose of developing residential and multi-family lots in Ft.
Lupton, Colorado. As part of the acquisition, the Company entered into a
Residential Facilities Development Agreement (Development Agreement) with the
City of Ft. Lupton. The Development Agreement is a residential and planned
unit development agreement providing for the orderly planning, engineering and
development of a golf course and surrounding residential community. The City
of Ft. Lupton is responsible for the development of the golf course and the
Company is responsible for the development of the surrounding residential
lots.
The Development Agreement sets forth a mandatory obligation on the part of
the Company to pay the City of Ft. Lupton pledged enhancement assessments of
$600,000. These pledged enhancement assessments require the Company to pay the
city a $2,000 fee each time the Company sells a developed residential lot. The
Company is obligated to pay a minimum of $60,000 in assessment fees per year
beginning in 1998 through 2007.
The Company also entered into a development management agreement with a
local developer to complete the development of the land. The terms of the
agreement specify that the Company is to earn a preferred rate of return on
its investment and, once the initial amount of its investment has been
returned, the remaining profits are split equally. The development management
agreement obligates the Company to provide up to an additional $500,000 of
funds for development. The Company has no other financial obligations to the
developer beyond the $500,000.
Contingencies
Matrix Bank has received demands from an investor for repurchase of loans
related to a servicing portfolio purchased by Matrix Bank from an unrelated
third-party mortgage banker (Seller). The repurchase demand is pursuant to a
claim of breach of covenants and warranties by the Seller related to
documentation deficiencies in connection with the origination and sale of the
loans. In January 1996, Matrix Bank commenced suit against the Seller to
recover, among other things, the purchase price paid for certain residential
mortgage loans. In connection with the lawsuit and the servicing portfolio at
issue, Matrix Bank has full representations and warranties from the Seller.
Since the representations and warranties have not been honored by the Seller,
Matrix Bank had included a cause of action in the lawsuit seeking to compel
the Seller to repurchase the portfolio. Matrix Bank had an accrued liability
of approximately $500,000 at December 31, 1995 and $460,000 at June 30, 1996
for the potential loss exposure related to the pending repurchase requests
which, in the opinion of management, is adequate for estimated future losses.
Matrix Financial is a defendant in two lawsuits filed in 1996 that seek
class action status, which allege that Matrix Financial breached the terms of
plaintiffs' promissory notes and mortgages by imposing certain charges at the
time the plaintiffs prepaid their mortgage loans. The plaintiffs seek
restitution for such charges and attorney fees, and one lawsuit seeks treble
damages. In September 1996, settlement proposals were tendered by the
plaintiffs' counsel in both cases, whereby Matrix Financial would pay a
settlement payment of not more than $640,000, including attorneys' fees of the
plaintiffs, payments to the plaintiff class members and all administrative
costs associated with the settlement. The terms of the settlement, however,
are being negotiated, and there can be no assurance that either action will be
settled on terms acceptable to the Company, or at all. If the negotiations
result in a settlement, the Company anticipates that it will establish a
reserve in the third quarter of 1996. If a settlement is not reached,
management believes that the Company has defenses to these lawsuits; however,
no assurance can be given that an adverse judgement will not be rendered or
that a judgement, if rendered against the Company, would not have a material
adverse affect on the Company's consolidated financial condition, results of
operations or cash flows.
F-23
<PAGE>
MATRIX CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS--(CONTINUED)
The Company and its subsidiaries are parties to various other litigation
matters, in most cases involving ordinary and routine claims incidental to the
business of the Company. The ultimate legal and financial liability of the
Company, if any, with respect to such other pending litigation cannot be
estimated with certainty, but the Company believes, based on its examination
of such matters, that such ultimate liability will not have a material adverse
effect on the consolidated financial position, results of operations or cash
flows of the Company.
Related Party Transactions
The Company has a note receivable from an affiliate of $750,000 at December
31, 1995 and June 30, 1996, which bears interest at 13 percent and is due
October 1, 2000. The note is secured by a secondary lien on the assets of the
affiliate. The Company leases office space to the affiliate for approximately
$8,500 per month. The lease expires in October 1996, but the Company
anticipates that it will be renewed for successive one-year terms.
At December 31, 1995 and June 30, 1996, the Company had an unsecured loan
receivable from a shareholder of approximately $80,000, which bears interest
at the prime rate and is due December 31, 1996.
13. DEFINED CONTRIBUTION PLAN
The Company has a 401(k) defined contribution plan (Plan) covering all
employees who have elected to participate in the Plan. Each participant may
make pretax contributions to the Plan up to 15 percent of such participant's
earnings with a maximum of $9,240 in 1995. The Company makes a matching
contribution of 25 percent of the participant's total contribution. Matching
contributions made by the Company vest in participating employees over a five-
year period after the date of the contribution. The cost of the plan
approximated $-0-, $46,000 and $61,000 during the years ended December 31,
1993, 1994 and 1995, respectively, and $28,000 and $41,000 for the six months
ended June 30, 1995 and 1996, respectively.
14. FINANCIAL INSTRUMENTS
Off-Balance Sheet Risk and Concentration of Commitments
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of its business. These instruments are commitments to
originate or purchase first mortgage loans and forward loan sale commitments
(see Note 12) and involve credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheet.
Commitments to originate or purchase mortgage loans amounted to
approximately $45,425,000 at December 31, 1995. Additionally, the Company has
a $400,000 commitment to lend funds on a secured basis. The Company plans to
fund the commitments in its normal commitment period. The Company evaluates
each customer's creditworthiness on a case-by-case basis.
The Company's credit risks are comprised of the outstanding loans held for
sale and loans held for investment as shown in the consolidated balance
sheets, and loans sold with recourse aggregating approximately $473,000 and
$354,000 at December 31, 1994 and 1995, respectively. The loans are located in
the state of New Mexico and throughout the United States and are
collateralized primarily by a first mortgage on the property.
F-24
<PAGE>
MATRIX CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. FINANCIAL INSTRUMENTS--(CONTINUED)
Fair Value of Financial Instruments
The carrying amounts and estimated fair value of financial instruments at
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Financial assets:
Cash.................................................... $ 1,381 $ 1,381
Interest earnings deposits.............................. 5,586 5,586
Loans held for sale, net................................ 118,989 122,537
Loans held for investment, net.......................... 18,859 19,113
Federal Home Loan Bank of Dallas stock.................. 1,954 1,954
Financial liabilities:
Deposits................................................ 48,877 49,283
Custodial escrow balances............................... 27,011 27,011
Payable for purchase of MSRs............................ 1,312 1,312
Federal Home Loan Bank of Dallas borrowings............. 19,000 19,000
Borrowed money.......................................... 65,093 65,093
</TABLE>
The following methods and assumptions were used by the Company in estimating
the fair value of the financial instruments:
The carrying amounts reported in the balance sheet for cash, interest
earnings deposits, Federal Home Loan Bank of Dallas stock, payable for
purchase of MSRs, Federal Home Loan Bank of Dallas borrowings, and borrowed
money approximate those assets' and liabilities' fair values.
The fair values of loans are based on quoted market prices where available
or outstanding commitments from investors. If quoted market prices are not
available, fair values are based on quoted market prices of similar loans sold
in securitization transactions, adjusted for differences in loan
characteristics. The fair value of forward sale commitments are included in
the determination of the fair value of loans held for sale.
The fair value disclosed for demand deposits (e.g., interest and noninterest
checking, savings, and money market accounts) are, by definition, equal to the
amount payable on demand at the reporting date (i.e., their carrying amounts).
Fair values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected periodic
maturities on time deposits. The component commonly referred to as deposit
base intangible, was not estimated at December 31, 1995 and is not considered
in the fair value amount. The fair value disclosed for custodial escrow
balances liabilities (noninterest checking) is, by definition, equal to the
amount payable on demand at the reporting date (i.e., their carrying amounts).
F-25
<PAGE>
MATRIX CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. ACQUISITION OF MATRIX BANK
The Company acquired all of the outstanding stock of Matrix Bank in
September 1993, for an aggregate purchase price of approximately $2,343,000.
The acquisition was accounted for as a purchase and, accordingly, the acquired
tangible and identifiable intangible assets and liabilities were recorded at
their estimated fair values at the date of acquisition. The operations of
Matrix Bank have been included in the consolidated operations of the Company
from the date of acquisition.
The following table sets forth the allocation of the purchase price to the
assets acquired and liabilities assumed:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Cash and cash equivalents............................. $ 8,704
Loans held for sale, net.............................. 29,544
Loans held for investment, net........................ 11,985
Investment in real estate............................. 2,486
Other assets.......................................... 1,836
Deposits.............................................. 49,495
Borrowed money........................................ 1,648
Other liabilities..................................... 1,069
The following table sets forth the unaudited pro forma results of operations
for 1993 as if the acquisition occurred at the beginning of 1993:
<CAPTION>
(IN THOUSANDS, EXCEPT
PER SHARE INFORMATION)
<S> <C>
Total interest income................................. $ 4,617
Net interest income................................... 2,123
Net income............................................ 1,673
Pro forma earnings per share.......................... 0.36
</TABLE>
F-26
<PAGE>
MATRIX CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Condensed financial information of Matrix Capital Corporation (Parent
Company) is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------- JUNE 30
1994 1995 1996
------- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
CONDENSED BALANCE SHEETS
Assets:
Cash...................... $ 180 $ 11 $ 654
Other receivables......... -- 804 829
Premises and equipment,
net...................... 1,154 1,371 1,408
Other assets.............. 303 515 466
Investment in and advances
to subsidiaries.......... 8,924 13,853 14,514
------- ------- -------
Total assets............ $10,561 $16,554 $17,871
======= ======= =======
Liabilities and
Shareholders' equity:
Borrowed money(a)......... $ 4,052 $ 6,751 $ 6,738
Other liabilities......... 833 465 556
------- ------- -------
Total liabilities....... 4,885 7,216 7,294
Shareholders' equity:
Common stock.............. -- -- --
Additional paid in
capital.................. 2,525 2,626 2,626
Retained earnings......... 3,151 6,712 7,951
------- ------- -------
Total shareholders'
equity................. 5,676 9,338 10,577
------- ------- -------
Total liabilities and
shareholders' equity... $10,561 $16,554 $17,871
======= ======= =======
</TABLE>
- --------
(a) The Parent's borrowed money consists of a note payable to a third-party
financial institution secured by common stock of Matrix Bank, note payable
to a bank secured by a deed of trust on real estate, senior subordinated
notes and a note payable to a third-party financial institution secured by
MSRs. The Parent also guarantees the revolving warehouse lines of credit.
See Note 7 for additional information regarding the borrowed money.
As of December 31, 1995, the maturities of the Parent's borrowed money
during the next five years and thereafter are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1996.......................................................... $ 438
1997.......................................................... 438
1998.......................................................... 1,232
1999.......................................................... 1,124
2000.......................................................... 1,123
Thereafter.................................................... 2,396
------
$6,751
======
</TABLE>
F-27
<PAGE>
MATRIX CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. PARENT COMPANY CONDENSED FINANCIAL INFORMATION--(CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30,
------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONDENSED STATEMENTS OF
INCOME
Income:
Interest income on loans.. $ -- $ -- $ 44 $ -- $ 94
Other..................... 121 472 374 -- (52)
------- ------- ------- -------- --------
Total income............ 121 472 418 -- 42
Expenses:
Interest on borrowed
money.................... 26 170 592 199 411
Compensation and employee
benefits................. 61 767 1,042 521 539
Occupancy and equipment... -- 18 92 28 125
Professional fees......... 51 82 112 33 46
Other general and
administrative........... 19 81 704 155 47
------- ------- ------- -------- --------
Total expenses.......... 157 1,118 2,542 936 1,168
------- ------- ------- -------- --------
Loss before income taxes and
equity in income of
subsidiaries............... (36) (646) (2,124) (936) (1,126)
Income taxes(b)............. -- -- -- -- --
------- ------- ------- -------- --------
Loss before equity in income
of subsidiaries............ (36) (646) (2,124) (936) (1,126)
Equity in income of
subsidiaries............... 1,742 3,292 5,685 2,490 2,365
------- ------- ------- -------- --------
Net income.................. $ 1,706 $ 2,646 $ 3,561 $ 1,554 $ 1,239
======= ======= ======= ======== ========
</TABLE>
- --------
(b) The Parent's tax sharing agreement with its subsidiaries provides that the
subsidiaries will pay the Parent an amount equal to its individual current
income tax provision calculated on the basis of the subsidiary filing a
separate return. In the event a subsidiary incurs a net operating loss in
future periods, the subsidiary will be paid an amount equal to the current
income tax refund the subsidiary would be due as a result of carryback of
such loss, calculated on the basis of the subsidiary filing a separate
return. Accordingly, the parent's condensed statements of income do not
include any income tax benefit for the current losses.
F-28
<PAGE>
MATRIX CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. PARENT COMPANY CONDENSED FINANCIAL INFORMATION--(CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30,
------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONDENSED STATEMENTS OF CASH
FLOWS
Operating activities:
Net income................. $ 1,706 $ 2,646 $ 3,561 $ 1,554 $ 1,239
Adjustments to reconcile
net income to net cash
provided (used) by
operating activities:
Equity in income of
subsidiaries............. (1,742) (3,292) (5,685) (2,490) (2,365)
Dividend from
subsidiaries............. 1,304 1,368 2,207 1,200 1,216
Depreciation and
amortization............. -- 5 34 4 23
Increase (decrease) in
other liabilities........ 423 410 (368) (432) 91
(Increase) decrease in
other receivables and
other assets............. (102) (202) (1,016) (93) 25
Noncash compensation
expense.................. 43 -- 101 101 --
------- ------- ------- -------- --------
Net cash provided (used)
by operating activities.... 1,632 935 (1,166) (156) 229
Investing activities:
Purchases of premises and
equipment................. -- (1,159) (251) (8) (60)
Investment in and advances
to subsidiaries........... (3,288) (1,904) (1,451) 47 488
------- ------- ------- -------- --------
Net cash provided (used) by
investing activities....... (3,288) (3,063) (1,702) 39 428
Financing activities:
Repayments of notes
payable................... -- (185) (1,133) (60) (14)
Proceeds from notes
payable................... 1,750 2,487 922 -- --
Proceeds from senior
subordinated notes........ -- -- 2,910 -- --
Dividends paid on common
stock..................... (88) -- -- -- --
------- ------- ------- -------- --------
Net cash provided (used) by
financing activities....... 1,662 2,302 2,699 (60) (14)
------- ------- ------- -------- --------
Increase (decrease) in cash
and cash equivalents....... 6 174 (169) (177) 643
Cash and cash equivalents at
beginning of period........ -- 6 180 180 11
------- ------- ------- -------- --------
Cash and cash equivalents at
end of period.............. $ 6 $ 180 $ 11 $ 3 $ 654
======= ======= ======= ======== ========
</TABLE>
F-29
<PAGE>
MATRIX CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. SUBSEQUENT EVENTS
Stock Split
On September 19, 1996, the Company's board of directors increased the
authorized number of shares of common stock, declared a 3.75-for-one stock
split of the common stock effected as a dividend that was declared and paid on
September 19, 1996, and made conforming adjustments on the terms of all
outstanding common stock equivalents. All shares and per share information in
the accompanying consolidated financial statements has been retroactively
adjusted to reflect these actions.
Stock Option Plan
In September 1996, the board of directors and shareholders adopted the 1996
Stock Option Plan, which amended and restated the Company's stock option plan
adopted in 1995. Substantially all of the Company's full-time employees and
directors are eligible for grants of stock options under the terms of the 1996
Stock Option Plan.
The 1996 Stock Option Plan authorizes the granting of incentive stock
options ("Incentive Options") and nonqualified stock options ("Nonqualified
Options") to purchase common stock to eligible persons. A total of 525,000
shares of common stock are authorized for sale upon exercise of options
granted under the 1996 Stock Option Plan. The 1996 Stock Option Plan is
currently administered by the compensation committee (administrator) of the
board of directors. The 1996 Stock Option Plan provides for adjustments to the
number of shares and to the exercise price of outstanding options in the event
of a declaration of stock dividend or any recapitalization resulting in a
stock split-up, combination or exchange of shares of common stock.
No Incentive Option may be granted with an exercise price per share less
than the fair market value of the common stock at the date of grant. The
Nonqualified Options may be granted with any exercise price determined by the
administrator of the 1996 Stock Option Plan. The expiration date of an option
is determined by the administrator at the time of the grant, but in no event
may an option be exercisable after the expiration of 10 years from the date of
grant of the option.
The 1996 Stock Option Plan further provides that in most instances an option
must be exercised by the optionee within 30 days after the termination of the
consulting contract between such consultant and the Company or termination of
optionee's employment with the Company, as the case may be, if and to the
extent such option was exercisable on the date of such termination.
Employee Stock Purchase Plan
In September 1996, the board of directors and shareholders adopted the
Matrix Capital Corporation Employee Stock Purchase Plan ("Purchase Plan") and
reserved 125,000 shares of common stock ("ESPP Shares") for issuance
thereunder. The Purchase Plan will become effective upon consummation of the
proposed public offering. The price at which ESPP Shares are sold under the
Purchase Plan is 85 percent of the lower of the fair market value per share of
common stock on the enrollment or the purchase date.
F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Dona Ana Savings and Loan Association, F.A.
Las Cruces, New Mexico
We have audited the accompanying consolidated statement of operations of
Dona Ana Savings and Loan Association, F.A. (the "Association") for the year
ended December 31, 1992. This statement of operations is the responsibility of
the Association's management. Our responsibility is to express an opinion on
this statement of operations based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of operations is free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement of
operations. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall statement of operation presentation. We believe that our audit
provides a reasonable basis for our opinion.
As discussed in Note 9 to the financial statement, there is a significant
risk that the December 31, 1992 Thrift Financial Report submitted to the
Office of Thrift Supervision has been misstated. Accordingly, there is
uncertainty as to whether, or not, the Association met the capital
requirements imposed by FIRREA at December 31, 1992.
In our opinion, the consolidated statement of operations referred to above
presents fairly, in all material respects, the results of operations of Dona
Ana Savings and Loan Association, F.A. for the year ended December 31, 1992,
in conformity with generally accepted accounting principles.
KRIEGEL & CO., LTD.
Las Cruces, New Mexico
March 18, 1993
F-31
<PAGE>
DONA ANA SAVINGS AND LOAN ASSOCIATION, F.A.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1992
<TABLE>
<S> <C>
INTEREST INCOME
First mortgage loans............................................... $ 3,979,078
Other loans........................................................ 746,402
Investments........................................................ 275,993
-----------
Total investment income.......................................... 5,001,473
-----------
COST OF MONEY
Interest on NOW accounts........................................... 383,170
Interest on savings deposits....................................... 94,434
Interest on time deposits.......................................... 2,384,134
Interest on borrowings............................................. 1,875
-----------
Total cost of money.............................................. 2,863,613
-----------
Net interest income.............................................. 2,137,860
Provision for losses............................................... (161,287)
Net interest income after provision for loan losses.............. 1,976,573
NON-INTEREST INCOME AND (EXPENSE)
Other income, net.................................................. 230,200
Loan fees and service charges...................................... 121,846
Plaza operating revenues........................................... 160,240
Plaza operating expenses........................................... (358,350)
-----------
Total other income (expense)..................................... 153,936
-----------
GENERAL AND ADMINISTRATIVE EXPENSES
Compensation and benefits.......................................... 665,137
Occupancy and equipment............................................ 424,557
FDIC insurance premium............................................. 131,159
Other.............................................................. 202,974
-----------
Total general and administrative expenses........................ 1,423,827
-----------
Net income before minority interest and income taxes............. 706,682
Minority interest in net loss of subsidiary........................ 20,418
-----------
Net income before income taxes................................... 727,100
PROVISION FOR INCOME TAXES
Current............................................................ 250,140
Deferred........................................................... --
-----------
NET INCOME......................................................... $ 476,960
===========
EARNINGS PER SHARE OF COMMON STOCK................................. $ 10.60
===========
</TABLE>
The Notes to Consolidated Financial Statement are an integral part of this
statement.
F-32
<PAGE>
DONA ANA SAVINGS AND LOAN ASSOCIATION, F.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1992
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principals of Consolidation
The accompanying consolidated financial statement include the accounts of
Dona Ana Savings and Loan Association, F.A. (the "Association"), its wholly
owned subsidiaries; DASALCO Corporation ("DASALCO"), and Dona Ana Savings
Office Plaza, Ltd., a partnership effectively controlled by the Association.
All significant intercompany balances and transactions between the Association
and its subsidiaries have been eliminated.
Investment Securities
Investment securities are carried at cost, adjusted for amortization of
premium and discounts that are recognized in interest income using the
interest method over the period to maturity.
Gains and losses on the sale of investment securities are determined using
the specific identification method.
Loans Receivable
Discounts on first mortgage loans are amortized to income using the interest
method over the remaining period to contractual maturity, adjusted for
anticipated prepayments. Discounts on consumer loans are recognized over the
lives of the loans using methods that approximate the interest method.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic evaluation
of the adequacy of the allowance is based on the Association's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, the estimated value of any
underlying collateral, and current economic conditions.
Uncollectible interest on loans that are contractually past due is charged
off, or an allowance is established based on management's periodic evaluation.
The allowance is established by a charge to interest income equal to all
interest previously accrued, and income is subsequently recognized only to the
extent that cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments is back to
normal, in which case the loan is returned to accrual status.
Loan-Origination Fees, Commitment Fees, and Related Costs
Loan fees received are accounted for in accordance with FASB Statement No.
91, Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases. Loan fees and certain
direct loan origination costs are deferred, and the net fee or cost is
recognized as an adjustment to interest income using the interest method over
the contractual life of the loans, on a loan-by-loan basis. Commitment fees
and costs relating to commitments, the likelihood of exercise of which is
remote, are recognized over the commitment period on a straight-line basis. If
the commitment is subsequently exercised during the commitment period, the
remaining unamortized commitment fee at the time of exercise is recognized
over the life of the loan as an adjustment of yield.
Real Estate Held for Investment and Foreclosed Real Estate
Real Estate properties acquired through, or in lieu of, loan foreclosure are
initially recorded at the lower of the cost basis established at the time of
foreclosure (defined as the lower of the fair value of the property or the
recorded investment in the loan at the date of foreclosure) or current fair
value, less selling costs. Real estate properties held for investment are
carried at the lower of cost, including cost of improvements and amenities
F-33
<PAGE>
DONA ANA SAVINGS AND LOAN ASSOCIATION, F.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
incurred subsequent to acquisition, or net realizable value. Costs relating to
development and improvement of property are capitalized, whereas costs
relating to the holding of property are expensed. The portion of interest
costs relating to the development of real estate is capitalized.
Valuations are periodically performed by management, and an allowance for
losses is established by a charge to operations if the carrying value of a
property exceeds its estimated net realizable value.
Premises and Equipment
Buildings, furniture, fixtures, and equipment are depreciated using the
straight-line method over the estimated useful lives of the assets. The useful
lives of depreciable assets are summarized as follows:
<TABLE>
<S> <C>
Buildings and improvements....................................... 10-40 years
Furniture and equipment.......................................... 3-10 years
</TABLE>
Income Taxes
The Company files consolidated income tax returns with its subsidiary,
DASALCO. Income tax expense (benefit) is allocated to each entity based on its
respective share of taxable income (loss).
Deferred income taxes are reported for timing differences between items of
income or expense reported in the financial statement and those reported for
income tax purposes. The differences relate principally to depreciation of
office buildings and equipment and provision for loan losses.
Regulatory authorities require stock savings and loan associations to
appropriate a portion of earnings to general reserves and to retain the
reserves as a protection for depositors. Provisions of the United States
Internal Revenue Code permit a savings and loan association to deduct an
annual addition to a reserve for bad debts in determining taxable income,
subject to certain limitations. This annual addition permitted by the Code
generally differs significantly from bad debt experience upon which
determination of pretax accounting income is based. Thus taxable income and
pretax accounting income of the Association will differ.
If certain conditions are met, savings and loan associations, in determining
taxable income, are allowed special bad debt deductions based on specific
experience formulas or on a percentage (8%) of taxable income before such
deductions. If the amounts that qualify as deductions for Federal income tax
purposes are later used for purposes other than bad debt losses including
distributions in liquidation, they will be subject to Federal income tax at
the then current rate.
Classification of Leases and Revenue Recognition
DASALCO's leases are classified as direct financing leases where there are
bargain purchase options, the collectability of the payments required from the
lessees are reasonably predictable, and no important uncertainties exist for
unreimbursable costs yet to be incurred by the lessor under the lease. The
lease terms range from one to five years.
The difference between the total amount to be received from the lease and
the cost of the property (including initial direct costs) is recorded as
unearned interest income which is amortized to income over the lease term
using the rate of interest implicit in the lease as the discount rate.
F-34
<PAGE>
DONA ANA SAVINGS AND LOAN ASSOCIATION, F.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Additionally, the unguaranteed residual values and investment tax credit are
recorded as unearned income and are amortized using the same method as for
unearned interest income.
For income tax purposes the leases are treated as operating leases whereby
the equipment leased is depreciated and the lease payments are treated as
rental income. The difference between the tax method and the financial
reporting method of accounting results in deferred taxes. DASALCO Corporation
filed a consolidated return with its parent corporation, Dona Ana Savings and
Loan Association, F.A. for the year ended 1992.
The Association is the general partner and a limited partner in Dona Ana
Savings Office Plaza Limited Partnership (the "Partnership"). The partnership
was formed for the purpose of constructing and leasing office space to the
Association and third parties. The Association owns 58.03 percent interest as
general partner and 19.13 percent as a limited partner at December 31, 1992.
Rental income is recognized by the Partnership as it is earned using the
accrual basis of accounting. Expenses are recognized when the liability is
actually incurred. Rental expense paid by the Association for office space, to
the Partnership, was $168,275 during 1992. These intercompany transactions
have been eliminated upon consolidation.
Earnings Per Share
Earnings per share have been computed on the basis of the weighted average
number of shares of common stock outstanding. The weighted average number of
shares outstanding was 45,000, in 1992.
NOTE 2. REAL ESTATE HELD FOR INVESTMENT
Depreciation expense on rental buildings was $9,166 for 1992.
NOTE 3. PREMISES AND EQUIPMENT
Depreciation expense on premises and equipment for 1992 was $120,072.
NOTE 4. INVESTMENT IN K-SCALE
K-Scale was organized on March 11, 1988. The Organization's investment in K-
Scale is recorded on the equity basis. DASALCO owns a 10% interest in K-Scale
voting stock. Additionally, DASALCO holds a note receivable from K-Scale in
the amount of $208,000 at December 31, 1992. Further, the Organization has
representation on the K-Scale Board of Directors. Consequently, DASALCO has
the ability to exercise significant influence over operating and financial
policies of K-Scale.
Condensed financial information, as of December 31, 1992, is summarized as
follows:
<TABLE>
<CAPTION>
EQUITY
COMMON IN INCOME
STOCK- (LOSSES) FOR INVESTMENT
K-SCALES' K-SCALES' HOLDERS YEAR ENDED IN K-SCALE
ASSETS LIABILITIES EQUITY 12/31 12/31
---------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
1992............. $1,244,427 $ 230,793 $ 1,013,634 $ 22,059 $ 101,363
========== ========= =========== ======== =========
</TABLE>
F-35
<PAGE>
DONA ANA SAVINGS AND LOAN ASSOCIATION, F.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT--(CONTINUED)
NOTE 5. DEPOSITS
Interest expense on deposits for the year ended December 31, 1992 is
summarized as follows:
<TABLE>
<S> <C>
Passbook Savings................................................ $ 94,434
NOW Accounts.................................................... 383,171
IRA Accounts.................................................... 178,914
Certificates of Deposit......................................... 1,427,521
Jumbo Certificates of Deposit................................... 788,956
-----------
2,872,996
Less penalties on early withdrawal.............................. (11,258)
-----------
$ 2,861,738
===========
</TABLE>
NOTE 6. BORROWED FUNDS
Pursuant to collateral agreements with the Federal Home Loan Bank (FHLB)
advances are secured by all stock in the FHLB and qualifying first mortgage
loans.
Interest expense on advances from the FHLB for the year ended December 31,
1992 is $ 1,875.
NOTE 7. INCOME TAXES
The Association and its wholly owned subsidiary file consolidated Federal
income tax returns on a calendar-year basis. If certain conditions are met in
determining taxable income, the Association is allowed a special bad-debt
deduction based on a percentage of taxable income (presently 8 percent) or on
specified experience formulas. The Association used the percentage-of-taxable-
income method in 1992.
The current and deferred components of income tax expense are summarized as
follows at December 31, 1992.
<TABLE>
<S> <C>
Current
Federal............................................................ $ 221,081
State.............................................................. 29,059
Deferred........................................................... --
---------
$ 250,140
=========
</TABLE>
Total income tax expense differed from the amounts computed by applying the
marginal United States Federal corporate income tax rate of 34% in 1992 to
income before income taxes as a result of the following:
<TABLE>
<S> <C>
Expected income tax expense at Federal tax rate................... $ 247,214
FHLB dividends.................................................... (8,364)
K-Scale net income................................................ (7,500)
State taxes....................................................... (9,880)
Other............................................................. (389)
---------
Total Federal income tax expense................................ $ 221,081
=========
</TABLE>
F-36
<PAGE>
DONA ANA SAVINGS AND LOAN ASSOCIATION, F.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT--(CONTINUED)
NOTE 7. INCOME TAXES--(CONTINUED)
For the year ended December 31, 1992 deferred tax expense (benefit) results
from timing differences in recognition of income and expense for tax and
financial reporting purposes. The sources and tax effects of these timing
differences are as follows:
<TABLE>
<S> <C>
Provisions for loan losses........................................ $(28,315)
Depreciation...................................................... 14,144
DASALCO--Capital vs. operating leases............................. (1,482)
Other............................................................. 16,210
</TABLE>
The current and deferred components of income tax expense are allocated as
follows:
<TABLE>
<CAPTION>
ASSOCIATION DASALCO CONSOLIDATED
----------- ------- ------------
<S> <C> <C> <C>
Current expense............................. $240,940 $9,200 $250,140
Deferred expense............................ -- -- --
-------- ------ --------
Provision................................... $240,940 $9,200 $250,140
======== ====== ========
</TABLE>
The Financial Accounting Standards Board (FASB) issued Statement No. 109
Accounting for Income Taxes issued in February 1992. Statement 109 supersedes
FASB Statement No. 96, Accounting for Income Taxes, issued in December 1987.
These statements change the method of computing deferred income taxes from a
deferred income to a liability approach. The Association has elected to defer
the implementation of Statement 109, which must be adopted no later than 1993.
The effect of the change on the Association's financial position and the
results of operations cannot presently be determined.
NOTE 8. FINANCIAL INSTITUTIONS REFORM, RECOVERY, AND ENFORCEMENT ACT (FIRREA)
OF 1989
FIRREA was signed into law on August 9, 1989; regulations for savings
institutions' minimum--capital requirements went into effect on December 7,
1989. In addition to the capital requirements, FIRREA includes provisions for
changes in the Federal regulatory structure for institutions, including a new
deposit insurance system, increased deposit insurance premiums, and restricted
investment activities with respect to non-investment-grade corporate debt and
certain other investments. FIRREA also increases the required ratio of
housing-related assets needed to qualify as a savings institution.
Certain features of the new capital regulations and their administration
have not been made final. However, the regulations require institutions to
have minimum regulatory tangible capital equal to 1.5 percent of total assets,
4 to 5 percent leverage capital ratio, and, for December 31, 1992, a 8.0
percent risk-based capital ratio. The ability to include qualifying
supervisory goodwill for purposes of the leverage-capital-ratio requirement
will be phased out by January 1, 1995. Additionally, the risk-based capital-
ratio requirement has been increased to 7.20 percent on December 31, 1990, and
to 8.0 percent on December 31, 1992.
The Institution, at December 31, 1992, meets the regulatory-tangible-
capital, the core-capital requirements, and the risk-based capital requirement
of 8.00 percent of total risk-adjusted assets, as defined by FIRREA. At
December 31, 1992, the institution's unaudited regulatory tangible capital was
$2,807,000, or 4.64 percent of total assets; core capital was $2,807,000, or
4.64 percent of total assets; and risk-based capital was $3,080,000, or 8.81
percent of total risk-adjusted assets, as defined by FIRREA.
F-37
<PAGE>
DONA ANA SAVINGS AND LOAN ASSOCIATION, F.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT--(CONTINUED)
NOTE 8. FINANCIAL INSTITUTIONS REFORM, RECOVERY, AND ENFORCEMENT ACT (FIRREA)
OF 1989--(CONTINUED)
The following is a reconciliation of GAAP capital to regulatory capital at
December 31, 1992:
<TABLE>
<CAPTION>
UNAUDITED--REGULATORY
-------------------------
(000'S)
GAAP TANGIBLE CORE TOTAL
CAPITAL CAPITAL CAPITAL CAPITAL
------- -------- ------- -------
<S> <C> <C> <C> <C>
GAAP capital, before adjustments........... $2,625
AUDIT ADJUSTMENTS:
Income tax expense......................... (21)
Other...................................... 22
------
GAAP capital, as adjusted.................. $2,626 $2,626 $2,626 $2,626
======
Nonallowable equity investments............ (61) (61) (61)
Minority interest in consolidated subsidi-
ary....................................... 242 242 242
ADDITIONAL CAPITAL ITEMS:
General valuation allowance--limited....... -- -- 441
Nonincludable assets....................... -- -- (168)
------ ------ ------
Regulatory capital--computed............... 2,807 2,807 3,080
Minimum capital--requirement............... 908 1,816 2,796
------ ------ ------
Regulatory capital--excess................. $2,807 $2,807 $3,080
====== ====== ======
</TABLE>
NOTE 9. UNCERTAINTIES
The Association has been unable to provide detailed trial balances which
support certain key figures on the December 31, 1992 quarterly Thrift
Financial Report (TFR), which has been submitted to the Office of Thrift
Supervision. At the date of this report, there is substantial uncertainty that
the TFR is correctly stated. Further, it is not determinable what action the
regulatory oversight agencies might take against the Association for such
reporting deficiencies. Finally, it is uncertain as to whether or not the
Association will meet its risk based capital requirement at December 31, 1992
if the fourth quarter TFR is restated.
NOTE 10. RELATED PARTY TRANSACTIONS
Sunbelt (predecessor of DASALCO and Amigo) and George Bowles invested in an
organization, Rand of Phoenix, now bankrupt under Chapter 11. Out of Rand of
Phoenix, DASALCO (Sunbelt) and George Bowles took assets to operate as K-
Scale. A priority dispute with the two investors went to trial March 20, 1989.
An agreed settlement was entered into and the trial was discontinued.
In an agreement dated March 31, 1989 between K-Scale as buyer and Bowles
Trust and DASALCO Corporation as sellers, Bowles and DASALCO agreed to trade
to K-Scale and K-Scale agreed to trade from Bowles and DASALCO certain assets
for a gross purchase valuation of $800,000 to be paid within five years. Mahon
(K-Scale manager and shareholder) has agreed to secure the obligation of K-
Scale by pledging 600,000 shares of K-Scale stock to a voting trust to be
voted by Bowles and DASALCO until payment has been made in full. In November
of 1991, K-Scale paid off the portion of the receivable due to Bowles. DASALCO
agreed to accept a promissory note, secured by the pledged stock and UCC-1
forms on all of the assets of K-Scale, as payment in full for their portion of
the receivable. At this time, the voting trust was dissolved.
The note balance is $208,000, as of December 31, 1992 with an interest rate
of prime plus 2% and required principal payments of at least $50,000 plus
interest annually. The note will mature in 1999.
F-38
<PAGE>
DONA ANA SAVINGS AND LOAN ASSOCIATION, F.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT--(CONTINUED)
NOTE 10. RELATED PARTY TRANSACTIONS--(CONTINUED)
Mortgage loans outstanding at December 31, 1992 to officers of the
Association were approximately $200,600.
Other loans outstanding to family members of the Chairman of the Board of
the Association were approximately $1,066,400 at December 31, 1992.
The Association leases its office facilities from Dona Ana Savings Office
Plaza, Ltd. (the "Plaza"), a limited partnership, which is substantially
controlled by the Association (see Note 1, Principals of Consolidation). The
operating lease agreement calls for monthly payments of approximately $14,000.
Annual rental expense paid by the Association to the Plaza was $168,275 for
1992.
Additionally, the Plaza pays land rent, management fees, and accounting fees
to the Association, summarized for 1992 as follows:
<TABLE>
<S> <C>
Land rent........................................................... $ 24,000
Management fees..................................................... 13,500
Accounting fees..................................................... 1,200
</TABLE>
At December 31, 1992, the Plaza owed the Association $13,215 for expenses
incurred by the Association on behalf of the Plaza.
All inter-company transactions have been properly eliminated at December 31,
1992.
NOTE 11. EVENT SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS' REPORT
(UNAUDITED)
Matrix Capital Corporation acquired Dona Ana Savings and Loan Association on
September 23, 1993. There was no action taken by the Office of Thrift
Supervision related to the uncertainty disclosed in Note 9 that affected the
acquisition of Dona Ana Savings and Loan Association. As part of the
acquisition, Matrix Capital Corporation injected sufficient capital for Dona
Ana Savings and Loan Association to meet all of its capital requirements.
F-39
<PAGE>
No dealer, salesperson or any other person has been authorized to give any in-
formation or to make any representation not made by this Prospectus and, if
given or made, such information or representation 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 any
of the securities offered hereby by anyone in any jurisdiction where such an
offer or solicitation is not authorized, or in which the person making such
offer of solicitation is not qualified to make such offer or solicitation.
Neither the delivery of this Prospectus nor any sale made hereunder shall, un-
der any circumstances, create an implication that there has been no change in
the affairs of the Company or that information contained herein is correct as
of any time subsequent to the date of this Prospectus.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Consolidated Financial and Operating Information................ 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 43
Regulation and Supervision............................................... 59
Management............................................................... 68
Certain Relationships and Related Transactions........................... 77
Principal Shareholders................................................... 78
Description of Capital Stock............................................. 79
Shares Eligible for Future Sale.......................................... 80
Underwriting............................................................. 82
Legal Matters............................................................ 83
Experts.................................................................. 83
Additional Information................................................... 84
Index to Financial Statements............................................ F-1
</TABLE>
----------------
Until , 1996 (25 days after the date of this Prospectus), all dealers ef-
fecting transactions in the securities offered hereby, whether or not partici-
pating in this distribution, may be required to deliver a Prospectus. This is
in addition to the obligations of dealers to deliver a Prospectus when acting
as Underwriters and with respect to their unsold allotments or subscriptions.
1,750,000 Shares
[LOGO APPEARS HERE]
Common Stock
----------------
PROSPECTUS
----------------
Piper Jaffray inc.
Keefe, Bruyette &
Woods, Inc.
Peacock, Hislop, Staley &
Given, Inc.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses and costs (other than
underwriting discounts and commissions) expected to be incurred in connection
with the issuance and distribution of the securities registered hereby:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............... $ 7,635
NASD filing fee................................................... 2,398
Nasdaq National Market listing fee................................ 31,597
Printing and engraving costs...................................... 125,000*
Legal fees and expenses........................................... 125,000*
Accounting fees and expenses...................................... 50,000*
Blue Sky fees and expenses........................................ 15,000*
Registrar and Transfer Agent's fees............................... 5,000*
Miscellaneous..................................................... 88,370*
--------
Total........................................................... $450,000*
========
</TABLE>
- --------
* Estimated
The Company will pay all of such expenses to be incurred in connection with
the issuance and distribution of the securities registered hereby.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS; LIMITATION OF LIABILITY
FOR MONETARY DAMAGES
(a) The Articles of Incorporation of the Registrant, together with its
Bylaws, provide that the Registrant shall indemnify officers and directors,
and may indemnify its other employees and agents, to the fullest extent
permitted by law. The laws of the State of Colorado permit, and in some cases
require, corporations to indemnify officers, directors, agents and employees
who are or have been a party to or are threatened to be made a party to
litigation against judgments, fines, settlements and reasonable expenses under
certain circumstances.
(b) The Registrant has also adopted provisions in its Articles of
Incorporation that limit the liability of its directors to the fullest extent
permitted by the laws of the State of Colorado. Under the Registrant's
Articles of Incorporation, and as permitted by the laws of the State of
Colorado, a director is not liable to the Registrant or its shareholders for
damages for breach of fiduciary duty. Such limitation of liability does not
affect liability for (i) breach of the director's duty of loyalty, (ii) acts
or omissions not in good faith or which involve intention misconduct or a
knowing violation of the law, (iii) any transaction from which the director
directly or indirectly derived an improper personal benefit, or (iv) the
payment of any unlawful distribution.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following sets forth information as of July 15, 1996 regarding all sales
of unregistered securities of the Registrant during the past three years. In
connection with each of these transactions, the shares were sold to a limited
number of persons, such persons were provided access to all relevant
information regarding the Registrant and/or represented to the Registrant that
they were "sophisticated" investors, and such persons represented to the
Registrant that the shares were purchased for investment purposes only and not
with a view toward distribution. Each such issuance was made in reliance on
Section 4(2) of the Securities Act of 1933, as amended.
On January 1, 1995, David W. Kloos was issued an aggregate of 138,938 shares
of Common Stock by the Company in consideration of past services rendered.
II-1
<PAGE>
On January 1, 1995, Thomas J. Osselaer was granted options by the Company to
purchase an aggregate of 79,500 shares of Common Stock at an exercise price of
$5.13 per share.
On August 1, 1995, the Registrant issued an aggregate of $2,910,000 in
principal amount of its 13% Senior Subordinated Notes to approximately 35
individuals, trusts, corporations and other business entities. Such notes were
issued for cash at face value.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1* Form of Underwriting Agreement
3.1+ Form of Amended and Restated Articles of Incorporation of the
Registrant
3.2+ Form of Bylaws, as amended, of the Registrant
4.1+ Specimen certificate for Common Stock of the Registrant
4.2+ Form of Amended and Restated 1996 Stock Option Plan
4.3+ Form of Employee Stock Purchase Plan
4.4* Form of Common Stock Purchase Warrant by and between the Registrant and
Piper Jaffray Inc.
4.5* Form of Common Stock Purchase Warrant by and between the Registrant and
Keefe, Bruyette & Woods, Inc.
5* Opinion of Jenkens & Gilchrist, a Professional Corporation, with
respect to the legality of the securities being registered
10.1+ Note and Agency Agreement, dated as of August 1, 1995, by and between
the Registrant and PHS Mortgage, Inc., as agent
10.2+ First Amendment to Note and Agency Agreement, dated as of August 2,
1995, by and between the Registrant and PHS Mortgage, Inc., as agent
10.3+ Form of 13% Senior Subordinated Note
10.4+ Executive Employment Agreement, dated as of January 1, 1996, by and
between the Registrant and David Kloos
10.5+ Employment Agreement, dated as of January 1, 1995, between Matrix
Capital Bank and Gary Lenzo and as amended January 1, 1996
10.6* Loan Agreement, dated as of October 2, 1995, by and between Matrix
Diversified, Inc. and the Registrant
10.7+ Revolving Subordinated Loan Agreement, dated as of January 2, 1996, by
and between Matrix Financial Services Corporation and the Registrant
10.8+ Multiple Advance Term Loan Agreement, dated as of June 27, 1994, by and
between Matrix Capital Corporation and CorTrust Bank
10.9+ Multiple Advance Fixed Rate Term Loan Promissory Note, dated as of June
30, 1994, from Matrix Capital Corporation, as maker, to CorTrust Bank,
as payee
10.10+ Multiple Advance Variable Rate Term Loan Promissory Note, dated as of
October 19, 1994, from Matrix Capital Corporation, as maker, to
CorTrust Bank, as payee
10.11+ Mortgage Loan Purchase and Servicing Agreement, dated as of August 1,
1993, by and between Argo Federal Savings Bank, FSB, and Matrix
Financial Services Corporation
10.12+ Loan Agreement, dated as of July 12, 1995, by and between Matrix
Financial Services Corporation, Bank One, Texas, N.A., as agent, and
certain lenders, as lenders
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.13+ First Amendment to Loan Agreement, dated as of August 30, 1995, by and
between Matrix Financial Services Corporation, Bank One, Texas, N.A.,
as agent, and certain lenders, as lenders
10.14+ Second Amendment to Loan Agreement, dated as of January 2, 1996, by and
between Matrix Financial Services Corporation, Bank One, Texas, N.A.,
as agent, and certain lenders, as lenders
10.15+ Third Amendment to Loan Agreement, dated as of March 13, 1996, by and
between Matrix Financial Services Corporation, Bank One, Texas, N.A.,
as agent, and certain lenders, as lenders
10.16+ Fourth Amendment to Loan Agreement, dated as of July 10, 1996, by and
between Matrix Financial Services corporation, Bank One, Texas, N.A.,
as agent, and certain lenders, as lenders
10.17+ Warehouse Note, dated as of July 10, 1996, from Matrix Financial
Services Corporation, as maker, to Bank One, Texas, N.A., as payee
10.18+ Warehouse Note, dated as of July 10, 1996, from Matrix Financial
Services Corporation, as maker, to Coastal Banc SSB, as payee
10.19+ Swing Note, dated as of July 10, 1996, from Matrix Financial Services
Corporation, as maker, to Bank One, Texas, N.A., as payee
10.20+ Receivables Note, dated as of July 10, 1996, from Matrix Financial
Services Corporation, as maker, to Coastal Banc SSB, as payee
10.21+ Participations Note, dated as of July 10, 1996, from Matrix Financial
Services Corporation, as maker, to Bank One, Texas, N.A., as payee
10.22+ Term-Line Note, dated as of July 10, 1996, from Matrix Financial
Services Corporation, as maker, to Bank One, Texas, N.A., as payee
10.23+ Term-Line Note, dated as of July 10, 1996, from Matrix Financial
Services Corporation, as maker, to Coastal Bank SSB, as payee
10.24+ Receivable Notes, dated as of July 10, 1996, from Matrix Financial
Services Corporation, as maker, to Bank One, Texas, N.A., as payee
10.25+ Participations Note, dated as of July 10, 1996, from Matrix Financial
Services Corporation, as Maker, to Coastal Bank SSB, as payee
10.26+ Guaranty, dated as of July 12, 1995, from the Registrant to Bank One,
Texas, N.A.
10.27+ Mortgage Loan Repurchase Agreement, dated as of March 30, 1995, by and
between PaineWebber Real Estate Securities, Inc. and Matrix Financial
Services Corporation
10.28+ Loan Servicing Rights Purchase and Sale Agreement, dated as of February
28, 1994, by and between Matrix Financial Services Corporation and
CorTrust Bank F.S.B.
10.29+ Multiple Advance Fixed Rate Term Loan Promissory Note, dated as of
October 19, 1994, from Matrix Capital Corporation, as maker, to
CorTrust, as payee
10.30+ Assignment and Assumption Agreement, dated as of June 28, 1996, by and
among Mariano C. DeCola, William M. Howdon, R. James Nicholson and
Matrix Funding Corp.
10.31+ Development Management Agreement, dated as of June 28, 1996, by and
among Matrix Funding Corp. and Nicholson Enterprises, Inc.
10.32+ Assignment and Assumption of PUD Agreement, dated as of June 28, 1996,
by and among Fort Lupton, L.L.C. and Matrix Funding Corp.
10.33+ Lease, dated as of October 1, 1995, by and between the Registrant and
Matrix Financial Services Corporation
10.34* Lease, dated as of October 1, 1995, by and between the Registrant and
Creative Networks, LLC
10.35+ Promissory Note, dated as of December 31, 1995, from D. Mark Spencer,
as maker, to the Registrant, as payee
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.36+ Fort Lupton Golf Course Residential and Planned Unit Development
Agreement, dated as of November 28, 1995
10.37+ Loan Agreement, dated as of December 10, 1994, by and between the
Registrant and Bankers' Bank of the West
10.38+ Continuing Guaranty of D. Mark Spencer, dated as of December 10, 1994
10.39+ Continuing Guaranty of Richard V. Schmitz, dated as of December 10,
1994
10.40+ Continuing Guaranty of Guy A. Gibson, dated as of December 10, 1994
10.41+ Loan Agreement, dated as of June 21, 1996, by and between Matrix
Funding Corporation and The First Security Bank
10.42+ Loan Agreement, dated as of June 29, 1995, by and between the
Registrant and Bank One, Arizona, N.A.
10.43+ Promissory Note, dated as of June 29, 1995, from the Registrant to Bank
One, Arizona, N.A.
10.44+ Deed of Trust, Assignment of Rents, Security Agreement and Fixture
Filing, dated as of June 29, 1995, from the Registrant to Arizona
Trust Deed Corporation, as trustee
10.45+ Loan Agreement, dated as of July 10, 1992, by and between American
Strategic Income Portfolio Inc. and Matrix Financial Services
Corporation
10.46+ Promissory Note, dated as of July 10, 1992, by Matrix Financial
Services Corporation, as maker, to American Strategic Income
Portfolio, Inc., as payee
11+ Statement regarding computation of per share earnings
21+ Subsidiaries of the Registrant
23.1* Consent of Ernst & Young LLP
23.2* Consent of Kriegel & Co., Ltd.
23.3* Consent of Jenkens & Gilchrist, a Professional Corporation (included in
Exhibit 5)
24+ Power of Attorney
27+ Financial Data Schedule
</TABLE>
(b) Financial Statement Schedules
Not applicable.
- --------
* Filed herewith.
+ Previously filed.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriter to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than payment by the Registrant
of expenses incurred or paid by a director, officer, or controlling person of
the Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being
II-4
<PAGE>
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the 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, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF DENVER, STATE OF COLORADO, ON THE 9TH DAY OF OCTOBER, 1996.
Matrix Capital Corporation
By: /s/ Guy A. Gibson
----------------------------------
GUY A. GIBSON, President
and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO THE HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Guy A. Gibson President, Chief October 9, 1996
- ------------------------------------- Executive Officer,
Guy A. Gibson and Director
(Principal
Executive Officer)
* Chairman of the October 9, 1996
- ------------------------------------- Board
Richard V. Schmitz
* Vice Chairman of the October 9, 1996
- ------------------------------------- Board
D. Mark Spencer
* Senior Vice October 9, 1996
- ------------------------------------- President, Chief
David W. Kloos Financial Officer,
and Director
(Principal
Financial and
Accounting Officer)
* Director October 9, 1996
- -------------------------------------
Thomas M. Piercy
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
* Director October 9, 1996
- -------------------------------------
Stephen Skiba
/s/ David A. Frank Director October 9, 1996
- -------------------------------------
David A. Frank
- --------
*By: /s/ Guy A. Gibson
- -------------------------------------
Guy A. Gibson, Attorney-in-Fact
</TABLE>
II-7
<PAGE>
EXHIBIT 1
1,750,000 SHARES/1/
MATRIX CAPITAL CORPORATION
Common Stock
PURCHASE AGREEMENT
------------------
____________, 1996
PIPER JAFFRAY INC.
KEEFE, BRUYETTE & WOODS, INC.
PEACOCK, HISLOP, STALEY & GIVEN, INC.
As Representatives of the several
Underwriters named in Schedule I hereto
c/o Piper Jaffray Inc.
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Gentlemen:
Matrix Capital Corporation, a Colorado corporation (the "Company"),
proposes to sell to the several Underwriters named in Schedule I hereto (the
"Underwriters") an aggregate of 1,750,000 shares (the "Firm Shares") of Common
Stock, $.0001 par value per share (the "Common Stock"), of the Company and to
sell to Piper Jaffray Inc. and Keefe, Bruyette & Woods, Inc., individually and
not in their capacity as Representatives, five year warrants (the "Warrants") to
purchase 75,000 shares of the Common Stock (the "Warrant Shares"), which sale
shall be consummated in accordance with the terms and conditions of the Warrant
Agreements as filed as exhibits to the registration statement described below.
The Company has also granted to the several Underwriters an option to purchase
up to 262,500 additional shares of Common Stock, on the terms and for the
purposes set forth in Section 3 hereof (the "Option Shares"). The Firm Shares
and any Option Shares purchased pursuant to this Purchase Agreement are herein
collectively called the "Securities."
The Company hereby confirms its agreement with respect to the sale of the
Securities to the several Underwriters, for whom you are acting as
Representatives (the "Representatives").
1. Registration Statement and Prospectus. A registration statement on
-------------------------------------
Form S-1 (File No. 333-10223) with respect to the Securities, including a
preliminary form of prospectus, has been
- --------------------
/1/Plus an option to purchase up to 262,500 additional shares to cover over-
allotments.
1
<PAGE>
prepared by the Company in conformity with the requirements of the Securities
Act of 1933, as amended (the "Act"), and the rules and regulations ("Rules and
Regulations") of the Securities and Exchange Commission (the "Commission")
thereunder and has been filed with the Commission; one or more amendments to
such registration statement have also been so prepared and have been, or will
be, so filed; and, if the Company has elected to rely upon Rule 462(b) of the
Rules and Regulations to increase the size of the offering registered under the
Act, the Company will prepare and file with the Commission a registration
statement with respect to such increase pursuant to Rule 462(b). Copies of such
registration statement(s) and amendments and each related preliminary prospectus
have been delivered to you.
If the Company has elected not to rely upon Rule 430A of the Rules and
Regulations, the Company has prepared and will promptly file an amendment to the
registration statement and an amended prospectus (including a term sheet meeting
the requirements of Rule 434 of the Rules and Regulations). If the Company has
elected to rely upon Rule 430A of the Rules and Regulations, it will prepare and
file a prospectus (or a term sheet meeting the requirements of Rule 434)
pursuant to Rule 424(b) that discloses the information previously omitted from
the prospectus in reliance upon Rule 430A. Such registration statement as
amended at the time it is or was declared effective by the Commission, and, in
the event of any amendment thereto after the effective date and prior to the
First Closing Date (as hereinafter defined), such registration statement as so
amended (but only from and after the effectiveness of such amendment), including
a registration statement (if any) filed pursuant to Rule 462(b) of the Rules and
Regulations increasing the size of the offering registered under the Act and
information (if any) deemed to be part of the registration statement at the time
of effectiveness pursuant to Rules 430A(b) and 434(d) of the Rules and
Regulations, is hereinafter called the "Registration Statement." The prospectus
included in the Registration Statement at the time it is or was declared
effective by the Commission is hereinafter called the "Prospectus," except that
if any prospectus (including any term sheet meeting the requirements of Rule 434
of the Rules and Regulations provided by the Company for use with a prospectus
subject to completion within the meaning of Rule 434 in order to meet the
requirements of Section 10(a) of tile Rules and Regulations) filed by the
Company with the Commission pursuant to Rule 424(b) (and Rule 434, if
applicable) of the Rules and Regulations or any other such prospectus provided
to the Underwriters by the Company for use in connection with the offering of
the Securities (whether or not required to be filed by the Company with the
Commission pursuant to Rule 424(b) of the Rules and Regulations) differs from
the prospectus on file at the time the Registration Statement is or was declared
effective by the Commission, the term "Prospectus" shall refer to such differing
prospectus (including any term sheet within the meaning of Rule 434 of the Rules
and Regulations) from and after the time such prospectus is filed with the
Commission or transmitted to the Commission for filing pursuant to such Rule
424(b) (and Rule 434, if applicable) or from and after the time it is first
provided to the Underwriters by the Company for such use. The term "Preliminary
Prospectus" as used herein means any preliminary prospectus included in the
Registration Statement prior to the time it becomes or became effective under
the Act and any prospectus subject to completion as described in Rule 430A or
434 of the Rules and Regulations.
2
<PAGE>
2. Representations and Warranties of the Company.
---------------------------------------------
(a) The Company represents and warrants to, and agrees with, the
several Underwriters as follows:
(i) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission and each Preliminary Prospectus, at
the time of filing thereof, did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading; except that the foregoing shall not apply to
statements in or omissions from any Preliminary Prospectus in reliance upon, and
in conformity with, written information furnished to the Company by you, or by
any Underwriter through you, specifically for use in the preparation thereof.
(ii) As of the time the Registration Statement (or any post-
effective amendment thereto, including a registration statement (if any) filed
pursuant to Rule 462(b) of the Rules and Regulations increasing the size of the
offering registered under the Act) is or was declared effective by the
Commission, upon the filing or first delivery to the Underwriters of the
Prospectus (or any supplement to the Prospectus (including any term sheet
meeting the requirements of Rule 434 of the Rules and Regulations)) and at the
First Closing Date and Second Closing Date (as hereinafter defined), (A) the
Registration Statement and Prospectus (in each case, as so amended and/or
supplemented) conformed or will conform in all material respects to the
requirements of the Act and the Rules and Regulations, (B) the Registration
Statement (as so amended) did not or will not include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (C) the Prospectus
(as so supplemented) did not or will not include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they are or were made, not misleading; except that the foregoing shall not
apply to statements in or omissions from any such document in reliance upon, and
in conformity with, written information furnished to the Company by you, or by
any Underwriter through you, specifically for use in the preparation thereof. If
the Registration Statement has been declared effective by the Commission, no
stop order suspending the effectiveness of the Registration Statement has been
issued, and no proceeding for that purpose has been initiated or, to the
Company's knowledge, threatened by the Commission.
(iii) The financial statements of the Company, together with the
notes thereto, set forth in the Registration Statement and Prospectus comply in
all material respects with the requirements of the Act and fairly present in all
material respects the financial condition of the Company as of the dates
indicated and the results of operations and changes in cash flows for the
periods therein specified in conformity with generally accepted accounting
principles consistently applied throughout the periods involved (except as
otherwise stated therein); and the supporting schedules included in the
Registration Statement present fairly the information required to be stated
therein. No other financial statements or schedules are required to be included
in the Registration Statement or Prospectus. Ernst & Young LLP, which has
expressed its opinion with respect to the financial statements and schedules
filed as a part of the Registration Statement and included in the
3
<PAGE>
Registration Statement and Prospectus, are independent public accountants as
required by the Act and the Rules and Regulations.
(iv) Each of the Company and its subsidiaries has been duly
organized and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation. Each of the Company and its
subsidiaries has full corporate power and authority to own its properties and
conduct its business as currently being carried on and as described in the
Registration Statement and Prospectus, and is duly qualified to do business as a
foreign corporation in good standing in each jurisdiction in which it owns or
leases real property or in which the conduct of its business makes such
qualification necessary and in which the failure to so qualify would have a
material adverse effect upon its business, condition (financial or otherwise) or
properties, taken as a whole ("Material Adverse Effect"). Matrix Capital Bank,
FSB (the "Bank") is a member in good standing with the Federal Home Loan Bank of
Dallas and the Bank's deposit accounts are insured up to applicable limits by
the Federal Deposit Insurance Corporation ("FDIC").
(v) Except as contemplated in the Prospectus, subsequent to the
respective dates as of which information is given in the Registration Statement
and the Prospectus, neither the Company nor any of its subsidiaries has incurred
any material liabilities or obligations, direct or contingent, or entered into
any material transactions, or declared or paid any dividends or made any
distribution of any kind with respect to its capital stock, other than in the
ordinary course of business; and there has not been any change in the capital
stock (other than a change in the number of outstanding shares of Common Stock
due to the issuance of shares upon the exercise of outstanding options or
warrants), or any material change in the short-term or long-term debt, or any
issuance of options, warrants, convertible securities or other rights to
purchase the capital stock, of the Company or any of its subsidiaries, or any
material adverse change, or any development involving a prospective material
adverse change, in the general affairs, condition (financial or otherwise),
business, key personnel, property, net worth or results of operations of the
Company and its subsidiaries, taken as a whole.
(vi) Except as set forth in the Prospectus, there is not pending
or, to the knowledge of the Company, threatened or contemplated, any action,
suit or proceeding to which the Company or any of its subsidiaries is a party
before or by any court or governmental agency, authority or body, or any
arbitrator, which might result in any material adverse change in the condition
(financial or otherwise), business, properties, net worth or results of
operations of the Company and its subsidiaries, taken as a whole.
(vii) There are no contracts or documents of the Company or any of
its subsidiaries that are required to be filed as exhibits to the Registration
Statement by the Act or by the Rules and Regulations that have not been so
filed.
(viii) This Agreement has been duly authorized, executed and
delivered by the Company, and constitutes a valid, legal and binding obligation
of the Company, enforceable in accordance with its terms, except as rights to
indemnity hereunder may be limited by federal or state securities laws and
except as such enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting the rights of creditors generally and
subject to general
4
<PAGE>
principles of equity. The execution, delivery and performance of this Agreement
and the consummation of the transactions herein contemplated will not result in
a breach or violation of any of the terms and provisions of, or constitute a
default under, any statute, any agreement or instrument to which the Company is
a party or by which it is bound or to which any of its property is subject, the
Company's charter or by-laws, or any order, rule, regulation or decree of any
court or governmental agency or body having jurisdiction over the Company or any
of its properties; no consent, approval, authorization or order of, or filing
with, any court or governmental agency or body is required for the execution,
delivery and performance of this Agreement or for the consummation of the
transactions contemplated hereby, including the issuance or sale of the
Securities by the Company, except such as may be required under the Act or state
securities or blue sky laws; and the Company has full power and authority to
enter into this Agreement and to authorize, issue and sell the Securities as
contemplated by this Agreement.
(ix) All of the issued and outstanding shares of capital stock of
the Company, including the outstanding shares of Common Stock, are duly
authorized and validly issued, fully paid and nonassessable, have been issued in
compliance with all federal and state securities laws, were not issued in
violation of or subject to any preemptive rights or other rights to subscribe
for or purchase securities, and the holders thereof are not subject to personal
liability by reason of being such holders; the Securities which may be sold
hereunder by the Company have been duly authorized and, when issued, delivered
and paid for in accordance with the terms hereof, will have been validly issued
and will be fully paid and nonassessable, and the holders thereof will not be
subject to personal liability by reason of being such holders; and the capital
stock of the Company, including the Common Stock, conforms to the description
thereof in the Registration Statement and Prospectus. Except as otherwise stated
in the Registration Statement and Prospectus, there are no preemptive rights or
other rights to subscribe for or to purchase, or any restriction upon the voting
or transfer of, any shares of Common Stock pursuant to the Company's charter,
by-laws or any agreement or other instrument to which the Company is a party or
by which the Company is bound. Neither the filing of the Registration Statement
nor the offering or sale of the Securities as contemplated by this Agreement
gives rise to any rights for or relating to the registration of any shares of
Common Stock or other securities of the Company. All of the issued and
outstanding shares of capital stock of each of the Company's subsidiaries have
been duly and validly authorized and issued and are fully paid and
nonassessable, and, except as otherwise described in the Registration Statement
and Prospectus and except for any directors' qualifying shares, the Company owns
of record and beneficially, free and clear of any security interests, claims,
liens, proxies, equities or other encumbrances, all of the issued and
outstanding shares of such stock. Except as described in the Registration
Statement and the Prospectus, there are no options, warrants, agreements,
contracts or other rights in existence to purchase or acquire from the Company
or any subsidiary of the Company any shares of the capital stock of the Company
or any subsidiary of the Company.
(x) The Company and each of its subsidiaries holds, and is
operating in compliance with, all franchises, grants, authorizations, licenses,
permits, easements, consents, certificates and orders of any governmental or
self-regulatory body required for the conduct of its business, except for any
non-compliance that would not have a Material Adverse Effect, and all such
franchises, grants, authorizations, licenses, permits, easements, consents,
certifications and orders are valid and in full force and effect; and the
Company and each of its subsidiaries is in compliance in all
5
<PAGE>
material respects with all applicable federal, state, local and foreign laws,
regulations, orders and decrees.
(xi) The Company and its subsidiaries have good and indefeasible
title to all property described in the Registration Statement and Prospectus as
being owned by them, in each case free and clear of all liens, claims, security
interests or other encumbrances, except such as are described in the
Registration Statement and the Prospectus; the property held under lease by the
Company and its subsidiaries is held by them under valid, subsisting and
enforceable leases with only such exceptions with respect to any particular
lease as do not interfere in any material respect with the conduct of the
business of the Company or its subsidiaries; the Company and each of its
subsidiaries owns or possesses all patents, patent applications, trademarks,
service marks, tradenames, trademark registrations, service mark registrations,
copyrights, licenses, inventions, trade secrets and rights necessary for the
conduct of the business of the Company and its subsidiaries as currently carried
on and as described in the Registration Statement and Prospectus; except as
stated in the Registration Statement and Prospectus, no name which the Company
or any of its subsidiaries uses and no other aspect of the business of the
Company or any of its subsidiaries will involve or give rise to any infringement
of, or license or similar fees for, any patents, patent applications,
trademarks, service marks, tradenames, trademark registrations, service mark
registrations, copyrights, licenses, inventions, trade secrets or other similar
rights of others material to the business of the Company and neither the Company
nor any of its subsidiaries has received any notice alleging any such
infringement or fee.
(xii) Neither the Company nor any of its subsidiaries is in
violation of its respective charter or by-laws or in breach of or otherwise in
default in the performance of any obligation, agreement or condition contained
in any bond, debenture, note, indenture, loan agreement or any other material
contract, lease or other instrument to which it is subject or by which any of
them may be bound, or to which any of the material property or assets of the
Company or any of its subsidiaries is subject, except for such violations or
defaults in performance that would not have a Material Adverse Effect.
(xiii) The Company and its subsidiaries have filed all federal,
state, local and foreign income and franchise tax returns required to be filed,
or have obtained extensions therefor, and are not in default in the payment of
any taxes which were payable pursuant to said returns or any assessments with
respect thereto, other than any which the Company or any of its subsidiaries is
contesting in good faith.
(xiv) The Company has not distributed and will not distribute any
prospectus or other offering material in connection with the offering and sale
of the Securities other than any Preliminary Prospectus or the Prospectus or
other materials permitted by the Act to be distributed by the Company.
(xv) The Securities have been approved for quotation on the Nasdaq
National Market and, on the date the Registration Statement became or becomes
effective, the Company's Registration Statement on Form 8-A or other applicable
form under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
became or will become effective.
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(xvi) Other than the subsidiaries of the Company listed in Exhibit
21 to the Registration Statement, the Company owns no capital stock or other
equity or ownership or proprietary interest in any corporation, partnership,
association, trust or other entity.
(xvii) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (A) transactions are
executed in accordance with management's general or specific authorization; (B)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (C) access to assets is permitted only in
accordance with management's general or specific authorization; and (D) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(xviii) Other than as contemplated by this Agreement, the Company
has not incurred any liability for any finder's or broker's fee or agent's
commission in connection with the execution and delivery of this Agreement or
the consummation of the transactions contemplated hereby.
(xix) Neither the Company nor any of its affiliates is presently
doing business with the government of Cuba or with any person or affiliate
located in Cuba.
(xx) The Company and its subsidiaries are in compliance with all
laws, rules and regulations relating to environmental protection, and neither
the Company nor any of its subsidiaries has any reason to believe that the
Company or any of its subsidiaries is subject to liability under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, or any similar law, except for violations which, if asserted, would not
have a material adverse effect on the Company and its subsidiaries, taken as a
whole. There are no actions, suits, regulatory investigations or other
proceedings, pending or, to the knowledge of the Company, threatened against the
Company or any of its subsidiaries relating to environmental protection. No
disposal, release or discharge of hazardous or toxic substances, pollutants or
contaminants, including petroleum and gas products, as any of such terms may be
defined under federal, state or local law, has been caused by the Company or its
subsidiaries or, to the knowledge of the Company, has occurred on, in, at or
about any of the facilities or properties of the Company or its subsidiaries,
except such disposal, release or discharge which, if discovered, would not have
a material adverse effect on the Company and its subsidiaries, taken as a whole.
(xxi) The Company has an outstanding capitalization as set forth
under "Capitalization" in the Prospectus as of the date indicated therein and
there has been no material change therein except as disclosed in or contemplated
by the Prospectus. The financial and numerical information and data in the
Prospectus under "Prospectus Summary," "Use of Proceeds," "Dilution," "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business," "Management," "Certain
Relationships and Related Transactions," "Principal Stockholders," "Shares
Available for Future Sale," "Regulation and Supervision" and "Description of
Capital Stock" are fairly presented in all material respects and
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prepared on a basis consistent in all material respects with the audited
financial statements of the Company.
(xxii) The minutes books of the Company and its subsidiaries are
current and contain a correct and complete record in all material respects of
all corporate action taken by the Board of Directors and the stockholders of the
Company and its subsidiaries, and all signatures contained therein are true
signatures of the persons whose signatures they purport to be.
(xxiii) The provisions of any qualified retirement plans sponsored
by the Company or its subsidiaries are in compliance with the Employee
Retirement Income Security Act of 1974 ("ERISA"), and the Company and its
subsidiaries are in material compliance with ERISA, including, without
limitation, ERISA's fiduciary and prohibited transaction rules, or the funding
requirements with respect to any such plan, except for any noncompliance that
would not have a Material Adverse Effect. The Company or its subsidiaries has
timely filed the reports required to be filed by ERISA in connection with the
maintenance of plans sponsored by the Company or its subsidiaries, and no fact,
including, without limitation, any "reportable event" as defined by ERISA and
the regulations thereunder, exists in connection with any plan sponsored by the
Company or its subsidiaries which would constitute grounds for the termination
of such plan by the Pension Benefit Guaranty Corporation or for the appointment
by the appropriate United States District Court of a trustee to administer any
such plan. With respect to multiemployer plans in which the Company or its
subsidiaries participates on behalf of its employees who are members of
collective bargaining units, neither the Company nor its subsidiaries has any
withdrawal liability. The provisions of any employee benefit welfare plan, as
defined in ERISA's Section 3(1), sponsored by the Company or its subsidiaries,
is in material compliance with ERISA's fiduciary and prohibited transaction
rules and reporting and disclosure requirements with respect to any such plan.
(xxiv) Neither the Company nor any of its subsidiaries is subject
to any directive or order (including any memorandum of understanding) specific
to the Company or any of its subsidiaries from the Office of Thrift Supervision
("OTS") or any governmental or quasi-governmental agency to make any material
change in the method of conducting its business as described in the Prospectus
or as otherwise presently contemplated; there are no directives or orders
specific to the Company or any of its subsidiaries from the OTS or any other
regulatory agency; and each of the Company and its subsidiaries is conducting
its business so as to comply in all material respects with all applicable
statutes and regulations.
(xxv) The Company and its subsidiaries are in compliance in all
material respects with the applicable financial recordkeeping and reporting
requirements of the Currency and Foreign Transaction Reporting Act of 1970, as
amended, and the rules and regulations thereunder, and the lending practices of
the Company and its subsidiaries are and have been, in all material respects, in
conformity with the Real Estate Settlement Procedures Act, as amended, and the
rules and regulations thereunder.
(xxvi) All of the loans represented as assets on the most recent
financial statements or selected financial information of the Company and its
subsidiaries included in the Prospectus meet or are exempt from all requirements
of federal, state or local law pertaining to
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lending, including without limitation, truth in lending (including the
requirements of Regulation Z and 12 C.F.R. Part 226), consumer credit
protection, equal credit opportunity and all disclosure laws applicable to such
loans, except for violations which, if asserted, would not have a material
adverse effect on the Company and its subsidiaries.
(xxvii) To the knowledge of the Company, none of the Company or
its subsidiaries has made any payment of funds of the Company as a loan for the
purchase of the Common Stock or made any other payment of funds prohibited by
law, and no funds have been set aside to be used for any payment prohibited by
law.
(xxviii) The Warrants and Warrant Agreements have been duly and
validly authorized by the Company and upon delivery to you in accordance
herewith will be duly issued and legal, valid and binding obligations of the
Company.
(xxix) The Warrant Shares have been duly authorized and reserved
for issuance upon the exercise of the Warrants and when issued upon payment of
the exercise price therefor will be validly issued, fully paid and nonassessable
shares of the Common Stock.
(b) Any certificate signed by any officer of the Company and delivered
to you or to counsel for the Underwriters shall be deemed a representation and
warranty by the Company to each Underwriter as to the matters covered thereby.
3. Purchase, Sale and Delivery of Securities.
-----------------------------------------
(a) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company agrees to issue and sell 1,750,000 Firm Shares to the several
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule I hereto. The purchase price for each Firm Share
shall be $___ per share. The obligation of each Underwriter to the Company shall
be to purchase from the Company that number of Firm Shares (to be adjusted by
the Representatives to avoid fractional shares) which represents the same
proportion of the number of Firm Shares to be sold by the Company pursuant to
this Agreement as the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I hereto represents to the total number of Firm Shares
to be purchased by all Underwriters pursuant to this Agreement. In making this
Agreement, each Underwriter is contracting severally and not jointly; except as
provided in paragraph (c) of this Section 3 and in Section 6 hereof, the
agreement of each Underwriter is to purchase only the respective number of Firm
Shares specified in Schedule I.
The Firm Shares will be delivered by the Company to you for the
accounts of the several Underwriters against payment of the purchase price
therefor by certified or official bank check or other next day funds payable to
the order of the Company, at the offices of Piper Jaffray Inc., Piper Jaffray
Tower, 222 South Ninth Street, Minneapolis, Minnesota, or such other location as
may be mutually acceptable, at 9:00 a.m. Central time on the third (or if the
Securities are priced, as contemplated by Rule 15c6-I(c) under the Exchange Act,
after 4:30 p.m. Eastern time, the fourth)
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full business day following the date hereof, or at such other time and date as
you and the Company determine pursuant to Rule 15c6- I(a) under the Exchange
Act, such time and date of delivery being herein referred to as the "First
Closing Date." If the Representatives so elect, delivery of the Firm Shares may
be made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives. Certificates representing the
Firm Shares, in definitive form and in such denominations and registered in such
names as you may request upon at least two business days' prior notice to the
Company, will be made available for checking and packaging not later than 10:30
a.m., Central time, on the business day next preceding the First Closing Date at
the offices of Piper Jaffray Inc., Piper Jaffray Tower, 222 South Ninth Street,
Minneapolis, Minnesota, or such other location as may be mutually acceptable.
(b) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company, with respect to the 262,500 Option Shares, hereby grants to the several
Underwriters an option to purchase all or any portion of the Option Shares at
the same purchase price as the Firm Shares, for use solely in covering any over-
allotments made by the Underwriters in the sale and distribution of the Firm
Shares. The option granted hereunder may be exercised at any time (but not more
than once) within 30 days after the effective date of this Agreement upon notice
(confirmed in writing) by the Representatives to the Company setting forth the
aggregate number of Option Shares as to which the several Underwriters are
exercising the option, the names and denominations in which the certificates for
the Option Shares are to be registered and the date and time, as determined by
you, when the Option Shares are to be delivered, such time and date being herein
referred to as the "Second Closing" and "Second Closing Date", respectively;
provided, however, that the Second Closing Date shall not be earlier than the
First Closing Date nor earlier than the second business day after the date on
which the option shall have been exercised. The number of Option Shares to be
purchased by each Underwriter shall be the same percentage of the total number
of Option Shares to be purchased by the several Underwriters as the number of
Firm Shares to be purchased by such Underwriter is of the total number of Firm
Shares to be purchased by the several Underwriters, as adjusted by the
Representatives in such manner as the Representatives deem advisable to avoid
fractional shares. No Option Shares shall be sold and delivered unless the Firm
Shares previously have been, or simultaneously are, sold and delivered.
The Option Shares will be delivered by the Company to you for the
accounts of the several Underwriters against payment of the purchase price
therefor by certified or official bank check or other next day funds payable to
the order of the Company, at the offices of Piper Jaffray Inc., Piper Jaffray
Tower, 222 South Ninth Street, Minneapolis, Minnesota, or such other location as
may be mutually acceptable at 9:00 a.m., Central time, on the Second Closing
Date. If the Representatives so elect, delivery of the Option Shares may be made
by credit through full fast transfer to the accounts at The Depository Trust
Company designated by the Representatives. Certificates representing the Option
Shares in definitive form and in such denominations and registered in such names
as you have set forth in your notice of option exercise, will be made available
for checking and packaging not later than 10:30 a.m., Central time, on the
business day next preceding the Second Closing Date at the office of Piper
Jaffray Inc., Piper Jaffray Tower, 222 South Ninth Street, Minneapolis,
Minnesota, or such other location as may be mutually acceptable.
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(c) It is understood that you, individually and not as Representatives
of the several Underwriters, may (but shall not be obligated to) make payment to
the Company on behalf of any Underwriter for the Securities to be purchased by
such Underwriter. Any such payment by you shall not relieve any such Underwriter
of any of its obligations hereunder. Nothing herein contained shall constitute
any of the Underwriters an unincorporated association or partner with the
Company.
4. Covenants. The Company covenants and agrees with the several
---------
Underwriters as follows:
(a) If the Registration Statement has not already been declared
effective by the Commission, the Company will use its best efforts to cause the
Registration Statement and any post-effective amendments thereto to become
effective as promptly as possible; the Company will notify you promptly of the
time when the Registration Statement or any post-effective amendment to the
Registration Statement has become effective or any supplement to the Prospectus
(including any term sheet within the meaning of Rule 434 of the Rules and
Regulations) has been filed and of any request by the Commission for any
amendment or supplement to the Registration Statement or Prospectus or
additional information; if the Company has elected to rely on Rule 430A of the
Rules and Regulations, the Company will prepare and file a Prospectus (or term
sheet within the meaning of Rule 434 of the Rules and Regulations) containing
the information omitted therefrom pursuant to Rule 430A of the Rules and
Regulations with the Commission within the time period required by, and
otherwise in accordance with the provisions of, Rules 424(b), 430A and 434, if
applicable, of the Rules and Regulations; if the Company has elected to rely
upon Rule 462(b) of the Rules and Regulations to increase the size of the
offering registered under the Act, the Company will prepare and file a
registration statement with respect to such increase with the Commission within
the time period required by, and otherwise in accordance with the provisions of,
Rule 462(b); the Company will prepare and file with the Commission, promptly
upon your request, any amendments or supplements to the Registration Statement
or Prospectus (including any term sheet within the meaning of Rule 434 of the
Rules and Regulations) that, in your opinion, may be necessary or advisable in
connection with the distribution of the Securities by the Underwriters; and the
Company will not file any amendment or supplement to the Registration Statement
or Prospectus (including any term sheet within the meaning of Rule 434 of the
Rules and Regulations) to which you shall reasonably object by notice to the
Company after having been furnished a copy a reasonable time prior to the
filing.
(b) The Company will advise you, promptly after it shall receive notice
or obtain knowledge thereof, of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement, of the suspension of
the qualification of the Securities for offering or sale in any jurisdiction, or
of the initiation or threatening of any proceeding for any such purpose; and the
Company will promptly use its best efforts to prevent the issuance of any stop
order or to obtain its withdrawal if such a stop order should be issued.
(c) Within the time during which a prospectus (including any term sheet
within the meaning of Rule 434 of the Rules and Regulations) relating to the
Securities is required to be delivered under the Act, the Company will comply as
far as it is able with all requirements imposed upon it by the Act, as now and
hereafter amended, and by the Rules and Regulations, as from time
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to time in force, so far as necessary to permit the continuance of sales of or
dealings in the Securities as contemplated by the provisions hereof and the
Prospectus. If during such period any event occurs as a result of which the
Prospectus would include an untrue statement of a material fact or omit to state
a material fact necessary to make the statements therein, in the light of the
circumstances then existing, not misleading, or if during such period it is
necessary to amend the Registration Statement or supplement the Prospectus to
comply with the Act, the Company will promptly notify you and will amend the
Registration Statement or supplement the Prospectus (at the expense of the
Company) so as to correct such statement or omission or effect such compliance.
(d) The Company will use its best efforts to qualify the Securities for
sale under the securities laws of such jurisdictions as you reasonably designate
and to continue such qualifications in effect so long as required for the
distribution of the Securities, except that the Company shall not be required in
connection therewith to qualify as a foreign corporation or to execute a general
consent to service of process in any state.
(e) The Company will furnish to the Underwriters copies of the
Registration Statement (one of which will be signed and will include all
exhibits), each Preliminary Prospectus, the Prospectus, and all amendments and
supplements (including any term sheet within the meaning of Rule 434 of the
Rules and Regulations) to such documents, in each case as soon as available and
in such quantities as you may from time to time reasonably request.
(f) During a period of five years commencing with the date hereof, the
Company will furnish to the Representatives, and to each Underwriter who may so
request in writing, copies of all periodic and special reports furnished to the
stockholders of the Company and all information, documents and reports filed
with the Commission, the National Association of Securities Dealers, Inc., the
Nasdaq National Market or any securities exchange.
(g) The Company will make generally available to its security holders
as soon as practicable, but in any event not later than 15 months after the end
of the Company's current fiscal quarter, an earnings statement (which need not
be audited) covering a 12-month period beginning after the effective date of the
Registration Statement that shall satisfy the provisions of Section 11(a) of the
Act and Rule 158 of the Rules and Regulations.
(h) The Company, whether or not the transactions contemplated hereunder
are consummated or this Agreement is prevented from becoming effective under the
provisions of Section 9(a) hereof or is terminated, will pay or cause to be paid
(A) all expenses (including transfer taxes allocated to the respective
transferees) incurred in connection with the delivery to the Underwriters of the
Securities, (B) all expenses and fees (including, without limitation, fees and
expenses of the Company's accountants and counsel but, except as otherwise
provided below, not including fees of the Underwriters' counsel) in connection
with the preparation, printing, filing, delivery, and shipping of the
Registration Statement (including the financial statements therein and all
amendments, schedules, and exhibits thereto), the Securities, each Preliminary
Prospectus, the Prospectus, and any amendment thereof or supplement thereto, and
the printing, delivery, and shipping of this Agreement and other underwriting
documents, including Blue Sky Memoranda, (C) all filing fees and fees and
disbursements of the Underwriters' counsel incurred in connection with the
qualification of the
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Securities for offering and sale by the Underwriters or by dealers under the
securities or blue sky laws of the states and other jurisdictions which you
shall designate in accordance with Section 4(d) hereof, (D) the fees and
expenses of any transfer agent or registrar, (E) the filing fees incident to any
required review by the National Association of Securities Dealers, Inc. of the
terms of the sale of the Securities, (F) listing fees, if any, and (G) all other
costs and expenses incident to the performance of its obligations hereunder that
are not otherwise specifically provided for herein. If the sale of the
Securities provided for herein is not consummated by reason of action by the
Company pursuant to Section 9(a) hereof which prevents this Agreement from
becoming effective, or by reason of any failure, refusal or inability on the
part of the Company to perform any agreement on its part to be performed, or
because any other condition of the Underwriters' obligations hereunder required
to be fulfilled by the Company is not fulfilled, the Company will reimburse the
several Underwriters for all out-of-pocket disbursements (including fees and
disbursements of counsel) incurred by the Underwriters in connection with their
investigation, preparing to market and marketing the Securities or in
contemplation of performing their obligations hereunder. The Company shall not
in any event be liable to any of the Underwriters for loss of anticipated
profits from the transactions covered by this Agreement.
(i) The Company will apply the net proceeds from the sale of the
Securities to be sold by it hereunder for the purposes set forth in the
Prospectus and will file such reports with the Commission with respect to the
sale of the Securities and the application of the proceeds therefrom as may be
required in accordance with Rule 463 of the Rules and Regulations.
(j) For a period of 180 days after the commencement of the public
offering of the Securities by the Underwriters, the Company will not, without
your prior written consent, offer for sale, sell, contract to sell, grant any
option for the sale of or otherwise issue or dispose of any Common Stock or any
securities convertible into or exchangeable for, or any options or rights to
purchase or acquire, Common Stock, except to the Underwriters pursuant to this
Agreement, to Piper Jaffray Inc. and Keefe, Bruyette & Woods, Inc., pursuant to
the Warrants or pursuant to the Company's stock option and stock purchase plans
as described in the Registration Statement.
(k) The Company either has caused to be delivered to you or will cause
to be delivered to you prior to the effective date of the Registration Statement
a letter from each of the Company's directors and officers stating that such
person agrees that he or she will not, without your prior written consent, offer
for sale, sell, contract to sell or otherwise dispose of any shares of Common
Stock or rights to purchase Common Stock, except to the Underwriters pursuant to
this Agreement, for a period of 180 days after commencement of the public
offering of the Securities by the Underwriters.
(l) The Company has not taken and will not take, directly or
indirectly, any action designed to or which might reasonably be expected to
cause or result in, or which has constituted, the stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
the Securities, and has not effected any sales of Common Stock which are
required to be disclosed in response to Item 701 of Regulation S-K under the Act
which have not been so disclosed in the Registration Statement.
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(m) The Company will inform the Florida Department of Banking and
Finance at any time prior to the consummation of the distribution of the
Securities by the Underwriters if it commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba. Such
information will be provided within 90 days after the commencement thereof or
after a change occurs with respect to previously reported information.
5. Conditions of Underwriters' Obligations. The obligations of the
---------------------------------------
several Underwriters hereunder are subject to the material accuracy, as of the
date hereof and at each of the First Closing Date and the Second Closing Date
(as if made at such Closing Date), of and material compliance with all
representations, warranties and agreements of the Company contained herein, to
the performance by the Company of its obligations hereunder and to the following
additional conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 p.m., Central time, on the date of this Agreement, or such later time
and date as you, as Representatives of the several Underwriters, shall approve
and all filings required by Rules 424, 430A and 434 of the Rules and Regulations
shall have been timely made; no stop order suspending the effectiveness of the
Registration Statement or any amendment thereof shall have been issued; no
proceedings for the issuance of such an order shall have been initiated or
threatened; and any request of the Commission for additional information (to be
included in the Registration Statement or the Prospectus or otherwise) shall
have been complied with.
(b) No Underwriter shall have advised the Company that the Registration
Statement or the Prospectus, or any amendment thereof or supplement thereto
(including any term sheet within the meaning of Rule 434 of the Rules and
Regulations), contains an untrue statement of fact which is material, or omits
to state a fact which is material and is required to be stated therein or
necessary to make the statements therein not misleading.
(c) Except as contemplated in the Prospectus, subsequent to the
respective dates as of which information is given in the Registration Statement
and the Prospectus, neither the Company nor any of its subsidiaries shall have
incurred any material liabilities or obligations, direct or contingent, or
entered into any material transactions, or declared or paid any dividends or
made any distribution of any kind with respect to its capital stock; and there
shall not have been any change in the capital stock (other than a change in the
number of outstanding shares of Common Stock due to the issuance of shares upon
the exercise of outstanding options or warrants), or any material change in the
short-term or long-term debt of the Company, or any issuance of options,
warrants, convertible securities or other rights to purchase the capital stock
of the Company or any of its subsidiaries, or any material adverse change or any
development involving a prospective material adverse change (whether or not
arising in the ordinary course of business), in the general affairs, condition
(financial or otherwise), business, key personnel, property, net worth or
results of operations of the Company and its subsidiaries, taken as a whole,
that, in your judgment, makes it impractical or inadvisable to offer or deliver
the Securities on the terms and in the manner contemplated in the Prospectus.
(d) On each Closing Date, there shall have been furnished to you, as
Representatives of the several Underwriters, the opinion of Jenkens & Gilchrist,
a Professional
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Corporation, counsel for the Company, dated such Closing Date and addressed to
you, to the effect that:
(i) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation. Each of the
Company and its subsidiaries has the requisite corporate power and
authority to own its properties and conduct its business as currently
being carried on and as described in the Registration Statement and
Prospectus, and is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction in which it
owns or leases real property or in which the conduct of its business
makes such qualification necessary and in which the failure to so
qualify would have a material adverse effect upon the business,
condition (financial or otherwise) or properties of the Company and its
subsidiaries, taken as a whole.
(ii) The capital stock of the Company conforms as to legal matters
in all material respects to the description thereof contained in the
Prospectus under the caption "Description of Capital Stock." All of the
issued and outstanding shares of the capital stock of the Company have
been duly authorized and validly issued and are fully paid and
nonassessable, and the holders thereof are not subject to personal
liability by reason of being such holders. The Securities to be issued
and sold by the Company hereunder and pursuant to the Warrants have
been duly authorized and, when issued, delivered and paid for in
accordance with the terms of this Agreement or the Warrant Agreements,
as the case may be, will have been validly issued and will be fully
paid and nonassessable, and the holders thereof will not be subject to
personal liability by reason of being such holders. Except as otherwise
stated in the Registration Statement and Prospectus, there are no
preemptive rights or other rights to subscribe for or to purchase, or
any restriction upon the voting or transfer of, any shares of Common
Stock pursuant to the Company's charter, by-laws or any agreement or
other instrument certified by the Company to such counsel to which the
Company is a party or by which the Company is bound. To such counsel's
knowledge, neither the filing of the Registration Statement nor the
offering or sale of the Securities as contemplated by this Agreement
gives rise to any rights for or relating to the registration of any
shares of Common Stock or other securities of the Company. The Company
has reserved a sufficient number of shares of Common Stock for issuance
upon exercise of the Warrants.
(iii) All of the issued and outstanding shares of capital stock of
each of the Company's subsidiaries have been duly and validly
authorized and issued and are fully paid and nonassessable, and, to
such counsel's knowledge, except as otherwise described in the
Registration Statement and Prospectus and except for directors'
qualifying shares, the Company owns of record and beneficially, free
and clear of any security interests, claims, liens, proxies, equities
or other encumbrances, all of the issued and outstanding shares of such
stock. To such counsel's knowledge, except as described in the
Registration Statement and Prospectus, there are no options,
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warrants, agreements, contracts or other rights in existence to
purchase or acquire from the Company or any subsidiary any shares of
the capital stock of the Company or any subsidiary of the Company.
(iv) The Registration Statement has become effective under the Act
and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceeding for that purpose has been instituted or, to the knowledge of
such counsel, threatened by the Commission.
(v) The descriptions in the Registration Statement and Prospectus
of statutes, legal and governmental proceedings, contracts and other
documents are accurate summaries and fairly present in all material
respects the information required to be shown; and such counsel does
not know of any statutes or legal or governmental proceedings required
to be described in the Prospectus that are not described as required,
or of any contracts or documents of a character required to be
described in the Registration Statement or Prospectus or included as
exhibits to the Registration Statement that are not described or
included as required.
(vi) The Company has the requisite corporate power and authority
to enter into this Agreement and the Warrant Agreements, and this
Agreement and the Warrant Agreements have been duly authorized,
executed and delivered by the Company and constitute valid, legal and
binding obligations of the Company enforceable against the Company in
accordance with their terms (except as rights to indemnity hereunder
may be limited by federal or state securities laws and except as such
enforceability may be limited by bankruptcy, insolvency, reorganization
or similar laws affecting the rights of creditors generally and subject
to general principles of equity); the execution, delivery and
performance of this Agreement and the Warrant Agreements and the
consummation of the transactions herein and therein contemplated will
not result in a breach or violation of any of the terms and provisions
of, or constitute a default under, any statute, rule or regulation, or
any agreement or instrument certified by the Company to such counsel to
which the Company is a party or by which it is bound or to which any of
its property is subject, or the Company's charter or by-laws, or any
order or decree certified by the Company to such counsel of any court
or governmental agency or body having jurisdiction over the Company or
any of its properties; and no consent, approval, authorization or order
of, or filing with, any court or governmental agency or body is
required for the execution, delivery and performance of this Agreement
and the Warrant Agreements or for the consummation of the transactions
contemplated hereby and thereby, including the issuance or sale of the
Securities by the Company, except such as may be required under the Act
or state securities laws.
(vii) The Registration Statement and the Prospectus, and any
amendment thereof or supplement thereto (including any term sheet
within the meaning of Rule 434 of the Rules and Regulations), comply as
to form in all material respects with the requirements of the Act and
the Rules and Regulations.
16
<PAGE>
(viii) The certificates for the Securities to be delivered
hereunder are in due and proper form and, when duly countersigned by
the Company's transfer agent and delivered to you or upon your order
against payment of the agreed consideration therefor in accordance with
the provisions of this Agreement, the Securities represented thereby
will be duly authorized and validly issued, fully paid and
nonassessable and, upon consummation of the purchase by the
Underwriters, and assuming they have no knowledge of any liens, claims
or marketable title thereto, free and clear of any claim, security
interest, community property right, or other encumbrance or restriction
on transfer (except for restrictions under the Act and under the blue
sky laws of various jurisdictions).
(ix) The information in the Prospectus under "Dividend Policy,"
"Regulation and Supervision" and "Description of Capital Stock," to the
extent that it constitutes matters of law, summaries of legal matters,
documents or proceedings, or legal conclusions, has been reviewed by
such counsel and are correct summaries in all material respects.
In rendering such opinion such counsel may rely (i) as to matters of law
other than Texas and federal law, upon the opinion or opinions of local counsel
provided that the extent of such reliance is specified in such opinion and that
such counsel shall state that such opinion or opinions of local counsel are
satisfactory to them and that they believe they and you are justified in relying
thereon and (ii) as to matters of fact, to the extent such counsel deems
reasonable upon certificates of officers of the Company and its subsidiaries
provided that the extent of such reliance is specified in such opinion. With
respect to the opinion set forth in subparagraph (vi) above as to
enforceability, such counsel may assume that the laws of the State of Minnesota
are identical to the laws of the State of Texas. In addition, such counsel shall
state that such counsel has participated in conferences with officers and
representatives of the Company, representatives of the independent public
accountants for the Company and the Underwriters at which the contents of the
Registration Statement and the Prospectus and related matters were discussed,
and, although such counsel is not passing upon and does not assume any
responsibility for and has not verified the accuracy, completeness or fairness
of the statements contained in the Registration Statement and the Prospectus,
and has not made any independent check or verification thereof, on the basis of
the foregoing (relying as to materiality to a large extent upon facts provided
by officers and other representatives of the Company), no facts have come to the
attention of such counsel that lead such counsel to believe that either the
Registration Statement at the time it became effective (including the
information deemed to be part of the Registration Statement at the time of
effectivess pursuant to Rule 430A(b), if applicable, and including any
Registration Statement filed pursuant to Rule 462(b)), or any amendment thereof
made prior to the Closing Date as of the date of such amendment, contained an
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading or that the Prospectus as of its date (or any amendment thereof or
supplement thereto made prior to the Closing Date as of the date of such
amendment or supplement) and as of the Closing Date contained or contains an
untrue statement of a material fact or omitted or omits to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading (it
being
17
<PAGE>
understood that such counsel need express no belief or opinion with respect to
the exhibits and the financial statements and other financial and statistical
data included therein).
(e) On each Closing Date, there shall have been furnished to you, as
Representatives of the several Underwriters, such opinion or opinions from
Manatt, Phelps & Phillips, LLP, counsel for the several Underwriters, dated such
Closing Date and addressed to you, with respect to the formation of the Company,
the validity of the Securities, the Registration Statement, the Prospectus and
other related matters as you reasonably may request, and such counsel shall have
received such papers and information as they request to enable them to pass upon
such matters.
(f) On each Closing Date you, as Representatives of the several
Underwriters, shall have received a letter of Ernst & Young LLP dated such
Closing Date and addressed to you, confirming that they are independent public
accountants within the meaning of the Act and are in compliance with the
applicable requirements relating to the qualifications of accountants under Rule
2-01 of Regulation S-X of the Commission, and stating, as of the date of such
letter (or, with respect to matters involving changes or developments since the
respective dates as of which specified financial information is given in the
Prospectus, as of a date not more than five days prior to the date of such
letter), the conclusions and findings of said firm with respect to the financial
information and other matters covered by its letter delivered to you
concurrently with the execution of this Agreement, and the effect of the letter
so to be delivered on such Closing Date shall be to confirm the conclusions and
findings set forth in such prior letter. Such letter shall be to the effect set
forth in Schedule II to this Agreement and shall contain such additional
information as shall be requested by the Representatives as of a date within
five days of such letter.
(g) On each Closing Date, there shall have been furnished to you, as
Representatives of the several Underwriters, a certificate, dated such Closing
Date and addressed to you, signed by the chief executive officer and by the
chief financial officer of the Company, to the effect that:
(i) The representations and warranties of the Company in this
Agreement are true and correct in all material respects as if made at
and as of such Closing Date, and the Company has complied in all
material respects with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or prior to such
Closing Date;
(ii) No stop order or other order suspending the effectiveness of
the Registration Statement or any amendment thereof or the
qualification of the Securities for offering or sale has been issued,
and no proceeding for that purpose has been instituted or, to their
knowledge, is threatened by the Commission or any state or regulatory
body; and
(iii) The signers of said certificate have carefully examined the
Registration Statement and the Prospectus, and any amendments thereof
or supplements thereto (including any term sheet within the meaning of
Rule 434 of the Rules and Regulations), and (A) such documents contain
all statements and information required
18
<PAGE>
to be included therein, the Registration Statement, or any amendment
thereof, does not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and the
Prospectus, as amended or supplemented, does not include any untrue
statement of material fact or omit to state a material fact necessary
to make the statements therein, in light of the circumstances under
which they were made, not misleading, (B) since the effective date of
the Registration Statement, there has occurred no event required to be
set forth in an amended or supplemented prospectus which has not been
so set forth, (C) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
neither the Company nor any of its subsidiaries has incurred any
material liabilities or obligations, direct or contingent, or entered
into any material transactions, not in the ordinary course of business,
or declared or paid any dividends or made any distribution of any kind
with respect to its capital stock, and except as disclosed in the
Prospectus, there has not been any change in the capital stock (other
than a change in the number of outstanding shares of Common Stock due
to the issuance of shares upon the exercise of outstanding options or
warrants), or any material change in the short-term or long-term debt,
or any issuance of options, warrants, convertible securities or other
rights to purchase the capital stock, of the Company, or any of its
subsidiaries, or any material adverse change or any development
involving a prospective material adverse change (whether or not arising
in the ordinary course of business), in the general affairs, condition
(financial or otherwise), business, key personnel, property, prospects,
net worth or results of operations of the Company and its subsidiaries,
taken as a whole, and (D) except as stated in the Registration
Statement and the Prospectus, there is not pending, or, to the
knowledge of the Company, threatened, any action, suit or proceeding to
which the Company or any of its subsidiaries is a party before or by
any court or governmental agency, authority or body, or any arbitrator,
which would result in any material adverse change in the condition
(financial or otherwise), business or results of operations of the
Company and its subsidiaries, taken as a whole.
(h) At or prior to the First Closing Date, the Warrant Agreements shall
have been entered into by the Company, Piper Jaffray Inc. and Keefe, Bruyette &
Woods, Inc., and the Warrants shall have been issued and sold to Piper Jaffray
Inc. and Keefe, Bruyette & Woods, Inc., pursuant thereto. The Company shall
have furnished to you and counsel for the Underwriters such additional
documents, certificates and evidence as you or they may have reasonably
requested.
(i) The Securities shall have been approved for quotation on the Nasdaq
National Market.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are satisfactory in form and
substance to you and counsel for the Underwriters. The Company will furnish you
with such conformed copies of such opinions, certificates, letters and other
documents as you shall reasonably request.
19
<PAGE>
6. Indemnification and Contribution.
--------------------------------
(a) The Company and each of its subsidiaries, jointly and severally,
agree to indemnify and hold harmless each Underwriter against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter may
become subject, under the Act or otherwise (including in settlement of any
litigation if such settlement is effected with the written consent of the
Company), insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement,
including the information deemed to be a part of the Registration Statement at
the time of effectiveness pursuant to Rules 430A and 434(d) of the Rules and
Regulations, if applicable, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto (including any term sheet within the meaning of
Rule 434 of the Rules and Regulations), or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
will reimburse each Underwriter for any legal or other expenses reasonably
incurred by it in connection with defending against such loss, claim, damage,
liability or action; provided, however, that neither the Company nor any of its
subsidiaries shall be liable in any such case to the extent that any such loss,
claim, damage, liability or action (i) arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
the Registration Statement, any Preliminary Prospectus, the Prospectus, or any
such amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by you, or by any Underwriter through you,
specifically for use in the preparation thereof; or (ii) results from the fact
that such Underwriter failed to send or give a copy of the Prospectus (as
amended or supplemented) to such person at or prior to the confirmation of the
sale of such Shares to such person in any case where such delivery is required
by the Act, and arises out of or is based upon an untrue statement or omission
of a material fact contained in such Preliminary Prospectus that was corrected
in the Prospectus (or any amendment or supplement thereto).
In addition to their other obligations under this Section 6(a), the
Company and each subsidiary, jointly and severally, agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in this Section 6(a), they will
reimburse each Underwriter on a monthly basis for all reasonable legal fees or
other reasonable expenses incurred in connection with defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of the
Company's and/or any subsidiary's obligation to reimburse the Underwriters for
such expenses and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Underwriter
that received such payment shall promptly return it to the party or parties that
made such payment, together with interest, compounded daily, determined on the
basis of the prime rate (or other commercial lending rate for borrowers of the
highest credit standing) announced from time to time by Norwest Bank Minnesota,
National Association (the "Prime Rate"). Any such interim reimbursement payments
which are not made to an Underwriter within 30 days of a request for
reimbursement shall bear interest at the Prime Rate from the date of
20
<PAGE>
such request. This indemnity agreement shall be in addition to any liabilities
which the Company may otherwise have.
(b) Each Underwriter will indemnify and hold harmless the Company
against any losses, claims, damages or liabilities to which the Company may
become subject, under the Act or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of such
Underwriter), insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon an untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto (including any term sheet within the meaning of Rule 434 of
the Rules and Regulations), or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any such amendment or
supplement, in reliance upon and in conformity with written information
furnished to the Company by you, or by such Underwriter through you,
specifically for use in the preparation thereof, and will reimburse the Company
for any legal or other expenses reasonably incurred by the Company in connection
with investigating or defending against any such loss, claim, damage, liability
or action.
(c) Promptly after receipt by an indemnified party under subsection (a)
or (b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof, but the omission so to notify the indemnifying party shall
not relieve the indemnifying party from any liability that it may have to any
indemnified party. In case any such action shall be brought against any
indemnified party, and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
in, and, to the extent that it shall wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with counsel
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of the indemnifying party's election so to
assume the defense thereof, the indemnifying party shall not be liable to such
indemnified party under such subsection for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that
if, in the sole judgment of the Representatives, it is advisable for the
Underwriters to be represented as a group by separate counsel, the
Representatives shall have the right to employ a single counsel to represent the
Representatives and all Underwriters who may be subject to liability arising
from any claim in respect of which indemnity may be sought by the Underwriters
under subsection (a) of this Section 6, in which event the reasonable fees and
expenses of such separate counsel shall be borne by the indemnifying party or
parties and reimbursed to the Underwriters as incurred (in accordance with the
provisions of the second paragraph in subsection (a) above). An indemnifying
party shall not be obligated under any settlement agreement relating to any
action under this Section 6 to which it has not agreed in writing.
(d) If the indemnification provided for in this Section 6 is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above, then each
21
<PAGE>
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of the losses, claims, damages or liabilities
referred to in subsection (a) or (b) above, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the Underwriters on the other from the offering of the Securities or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company on the one hand and the Underwriters on the other in connection with
the statements or omissions that resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Underwriters
on the other shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the Company
bear to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Underwriters and the parties' relevant intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The Company and the Underwriters agree that it
would not be just and equitable if contributions pursuant to this subsection (d)
were to be determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to in the
first sentence of this subsection (d). The amount paid by an indemnified party
as a result of the losses, claims, damages or liabilities referred to in the
first sentence of this subsection (d) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending against any action or claim which is the subject of
this subsection (d). Notwithstanding the provisions of this subsection (d), no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages that such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) The obligations of the Company under this Section 6 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 6 shall be in addition to any liability that the
respective Underwriters may otherwise have and shall extend, upon the same terms
and conditions, to each director of the Company (including any person who, with
his or her consent, is named in the Registration Statement as about to become a
director of the Company), to each officer of the Company who has signed the
Registration Statement and to each person, if any, who controls the Company
within the meaning of the Act.
7. Representations and Agreements to Survive Delivery. All
--------------------------------------------------
representations, warranties, and agreements of the Company herein or in
certificates delivered pursuant hereto, and the
22
<PAGE>
agreements of the several Underwriters, the Company and its subsidiaries
contained in Section 6 hereof, shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any Underwriter
or any controlling person thereof, or the Company or any of its officers,
directors, or controlling persons and shall survive delivery of, and payment
for, the Securities to and by the Underwriters hereunder.
8. Substitution of Underwriters.
----------------------------
(a) If any Underwriter or Underwriters shall fail to take up and pay
for the amount of Firm Shares agreed by such Underwriter or Underwriters to be
purchased hereunder, upon tender of such Firm Shares in accordance with the
terms hereof, and the amount of Firm Shares not purchased does not aggregate
more than 10% of the total amount of Firm Shares set forth in Schedule I hereto,
the remaining Underwriters shall be obligated to take up and pay for (in
proportion to their respective underwriting obligations hereunder as set forth
in Schedule I hereto except as may otherwise be determined by you) the Firm
Shares that the withdrawing or defaulting Underwriters agreed but failed to
purchase.
(b) If any Underwriter or Underwriters shall fail to take up and pay
for the amount of Firm Shares agreed by such Underwriter or Underwriters to be
purchased hereunder, upon tender of such Firm Shares in accordance with the
terms hereof, and the amount of Firm Shares not purchased aggregates more than
10% of the total amount of Firm Shares set forth in Schedule I hereto, and
arrangements satisfactory to you for the purchase of such Firm Shares by other
persons are not made within 36 hours thereafter, this Agreement shall terminate.
In the event of any such termination, the Company shall not be under any
liability to any Underwriter (except to the extent provided in Section 4(h) and
Section 6 hereof) nor shall any Underwriter (other than an Underwriter who shall
have failed, otherwise than for some reason permitted under this Agreement, to
purchase the amount of Firm Shares agreed by such Underwriter to be purchased
hereunder) be under any liability to the Company (except to the extent provided
in Section 6 hereof).
If Firm Shares to which a default relates are to be purchased by
the non-defaulting Underwriters or by any other party or parties, the
Representatives or the Company shall have the right to postpone the First
Closing Date for not more than seven business days in order that the necessary
changes in the Registration Statement, Prospectus and any other documents, as
well as any other arrangements, may be effected. As used herein, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 8.
9. Effective Date of this Agreement and Termination.
------------------------------------------------
(a) This Agreement shall become effective at 10:00 a.m., Central time,
on the first full business day following the effective date of the Registration
Statement, or at such earlier time after the effective time of the Registration
Statement as you in your discretion shall first release the Securities for sale
to the public; provided, that if the Registration Statement is effective at the
time this Agreement is executed, this Agreement shall become effective at such
time as you in your discretion shall first release the Securities for sale to
the public. For the purpose of this Section, the Securities shall be deemed to
have been released for sale to the public upon release by you of the
23
<PAGE>
publication of a newspaper advertisement relating thereto or upon release by you
of telexes offering the Securities for sale to securities dealers, whichever
shall first occur. By giving notice as hereinafter specified before the time
this Agreement becomes effective, you, as Representatives of the several
Underwriters, or the Company may prevent this Agreement from becoming effective
without liability of any party to any other party, except that the provisions of
Section 4(h) and Section 6 hereof shall at all times be effective.
(b) You, as Representatives of the several Underwriters, shall have the
right to terminate this Agreement by giving notice as hereinafter specified at
any time at or prior to the First Closing Date, and the option referred to in
Section 3(b), if exercised, may be canceled at any time prior to the Second
Closing Date, if (i) the Company shall have failed, refused or been unable, at
or prior to such Closing Date, to perform any agreement on its part to be
performed hereunder, (ii) any other condition of the Underwriters' obligations
hereunder is not fulfilled, (iii) trading on the New York Stock Exchange or the
American Stock Exchange shall have been wholly suspended, (iv) minimum or
maximum prices for trading shall have been fixed, or maximum ranges for prices
for securities shall have been required, on the New York Stock Exchange or the
American Stock Exchange, by such Exchange or by order of the Commission or any
other governmental authority having jurisdiction, (v) a banking moratorium shall
have been declared by Federal, New York, Arizona, Colorado or New Mexico
authorities, or (vi) there has occurred any material adverse change in the
financial markets in the United States or an outbreak of major hostilities (or
an escalation thereof) in which the United States is involved, a declaration of
war by Congress, any other substantial national or international calamity or any
other event or occurrence of a similar character shall have occurred since the
execution of this Agreement that, in your judgment, makes it impractical or
inadvisable to proceed with the completion of the sale of and payment for the
Securities. Any such termination shall be without liability of any party to any
other party except that the provisions of Section 4(h) and Section 6 hereof
shall at all times be effective.
(c) If you elect to prevent this Agreement from becoming effective or
to terminate this Agreement as provided in this Section, the Company shall be
notified promptly by you by telephone or telegram, confirmed by letter. If the
Company elects to prevent this Agreement from becoming effective, you shall be
notified by the Company by telephone or telegram, confirmed by letter.
10. Default by the Company. If the Company shall fail at the First
----------------------
Closing Date to sell and deliver the number of Securities which it is obligated
to sell hereunder, then this Agreement shall terminate without any liability on
the part of any non-defaulting party. No action taken pursuant to this Section
shall relieve the Company from liability, if any, in respect of such default.
11. Information Furnished by Underwriters. The statements set forth in
-------------------------------------
the last paragraph of the cover page and under the caption "Underwriting" in any
Preliminary Prospectus and in the Prospectus constitute the written information
furnished by or on behalf of the Underwriters referred to in Section 2 and
Section 6 hereof.
12. Notices. Except as otherwise provided herein, all communications
-------
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to the
24
<PAGE>
Representatives c/o Piper Jaffray Inc., Piper Jaffray Tower, 222 South Ninth
Street, Minneapolis, Minnesota 55402, except that notices given to an
Underwriter pursuant to Section 6 hereof shall be sent to such Underwriter at
the address stated in the Underwriters' Questionnaire furnished by such
Underwriter in connection with this offering; if to the Company, shall be
mailed, telegraphed or delivered to it at 1380 Lawrence Street, Denver, Colorado
8204, Attention: Guy A. Gibson, President. All notices given by telegram shall
be promptly confirmed by letter. Any party to this Agreement may change such
address for notices by sending to the parties to this Agreement written notice
of a new address for such purpose.
13. Persons Entitled to Benefit of Agreement. This Agreement shall inure
----------------------------------------
to the benefit of and be binding upon the parties hereto and their respective
successors and assigns and the controlling persons, officers and directors
referred to in Section 6. Nothing in this Agreement is intended or shall be
construed to give to any other person, firm or corporation any legal or
equitable remedy or claim under or in respect of this Agreement or any provision
herein contained. The term "successors and assigns" as herein used shall not
include any purchaser, as such purchaser, of any of the Securities from any of
the several Underwriters.
14. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Minnesota.
[Signature Page Follows]
25
<PAGE>
Please sign and return to the Company the enclosed duplicates of this
letter whereupon this letter will become a binding agreement between the Company
and the several Underwriters in accordance with its terms.
Very truly yours,
MATRIX CAPITAL CORPORATION
By
------------------------------------------
Name:
Title:
Confirmed as of the date first above
mentioned, on behalf of themselves
and the other several Underwriters
named in Schedule I hereto.
PIPER JAFFRAY INC.
By
-----------------------------------
Name:
Title:
KEEFE, BRUYETTE & WOODS, INC.
By
-----------------------------------
Name:
Title:
PEACOCK, HISLOP, STALEY & GIVEN, INC.
By:
----------------------------------
Name:
Title:
26
<PAGE>
Acknowledged and agreed as
to Section 6 hereof by the following:
MATRIX CAPITAL BANK, FSB
By
-----------------------------------
Name:
Title:
MATRIX FINANCIAL SERVICES CORPORATION
By
-----------------------------------
Name:
Title:
UNITED FINANCIAL, INC.
By
-----------------------------------
Name:
Title:
UNITED SPECIAL SERVICES, INC.
By
-----------------------------------
Name:
Title:
27
<PAGE>
SCHEDULE I
Underwriter Number of Firm Shares (1)
- ----------- -------------------------
Piper Jaffray Inc.
Keefe, Bruyette & Woods, Inc.
Peacock, Hislop, Staley & Given, Inc.
Total. . . . . . . . . . . . . . . . . . . . 1,750,000
=========
- ---------------------
(1) The Underwriters may purchase up to an additional 262,500 Option Shares, to
the extent the option described in Section 3(b) of the Agreement is
exercised, in the proportions and in the manner described in the Agreement.
28
<PAGE>
SCHEDULE II
COMFORT LETTER OF ERNST & YOUNG LLP
-----------------------------------
(1) They are independent public accountants with respect to the Company
within the meaning of the Act and the applicable rules and regulations
thereunder, and the answer to Item 10 of the Registration Statement on Form S-1,
insofar as it relates to them, is correct.
(2) In their opinion, the financial statements of the Company included in
the Registration Statement comply as to form in all material respects with the
applicable accounting requirements of the Act and the rules and regulations
thereunder.
(3) They have not audited any financial statements of the Company as of any
date or for any period subsequent to December 31, 1995; although they have
conducted an audit for the year ended December 31, 1995, the purpose (and
therefore the scope) of the audit was to enable them to express their opinion on
the financial statements as of December 31, 1995, and for the year then ended,
but not on the financial statements for any interim period within that period.
Therefore, they are unable to and do not express any opinion on the unaudited
balance sheet as of June 30, 1996 or the unaudited statements of operations,
changes in stockholders' equity and cash flows for the six months ended June
30, 1996 and June 30, 1995 included in the Registration Statement.
(4) For purposes of their letter, they have read the minutes of meetings of
the stockholders and Board of Directors as set forth in the Company's minute
books as of __________, 1996, officials of the Company having advised them that
the minutes of all such meetings through that date were set forth therein, and
have carried out other procedures to _____________, 1996, as follows:
(a) With respect to the six-month periods ended June 30, 1996 and June
30, 1995, they have:
(i) Read the unaudited balance sheet of the Company as of June 30,
1996 and the unaudited statements of operations, changes in
stockholders' equity and cash flows for the six-month periods ended
June 30, 1996 and June 30, 1995 included in the Registration Statement;
and
(ii) Made inquiries of certain officials of the Company who have
responsibility for financial and accounting matters regarding (1)
whether the unaudited financial statements referred to under (4)(a)(i)
comply in form in all material respects with the applicable accounting
requirements of the Act and the rules and regulations thereunder and
(2) whether those financial statements are stated on a basis
substantially consistent with that of the audited financial statements
included in the Registration Statement.
(b) With respect to the period from July 1, 1996 to ________, 1996,
they have:
<PAGE>
(i) Read the unaudited financial statements of the Company and
subsidiaries for _________, __________ and ___________ of both 1995 and
1996 furnished to them by the Company, officials of the Company having
advised them that no financial statements as of any date or for any
period subsequent to __________, 1996, were available; and
(ii) Made inquiries of certain officials of the Company who have
responsibility for financial and accounting matters as to whether the
unaudited financial statements referred to in (4)(b)(i) are stated on a
basis substantially consistent with that of the audited financial
statements included in the Registration Statement.
(5) Nothing came to their attention as a result of the foregoing
procedures, however, that caused them to believe that:
(a) The financial statements described in (4)(a)(i), included in the
Registration Statement, do not comply as to form in all material respects
with the applicable accounting requirements of the Act and the rules and
regulations thereunder or are not in conformity with generally accepted
accounting principles applied on a basis substantially consistent with that
of the audited financial statements; or
(b) At _________, 1996 there was any change in the capital stock or
increase in long-term debt of the Company as compared with amounts shown in
the June 30, 1996 unaudited balance sheet included in the Registration
Statement.
(6) Company officials have advised them that no statements as of any date
or for any period subsequent to __________, 1996 are available; accordingly, the
procedures carried out by them after ________, 1996 have, of necessity, been
even more limited than those with respect to the periods referred to in 4 above.
They have made inquiries of certain Company officials who have responsibility
for financial and accounting matters regarding whether (a) there was any change
at __________, 1996 in the capital stock or long-term debt of the Company or any
decreases in consolidated total assets or stockholders' equity as compared with
amounts shown on the June 30, 1996 unaudited balance sheet included in the
Registration Statement or (b) for the period from July 1, 1996 to _________,
1996 there were any decreases, as compared with the corresponding period in the
preceding year, in the total or per share amounts of net earnings. On the basis
of these inquiries and their reading of the minutes as described in 4 above,
nothing came to their attention that caused them to believe that there was any
such change or decrease except in all instances for changes or decreases that
the Registration Statement discloses have occurred or may occur.
(7) In addition to the procedures referred to in 4, 5 and 6 above, they
have carried out certain specified procedures, not constituting an audit, with
respect to certain amounts, percentages, numerical data and financial
information appearing in the Registration Statement, which have previously been
specified by the Representatives and which are specified in their letter, and
have compared certain of such items with, and have found such amounts,
percentages, numerical data and financial information to be in agreement with,
the accounting, financial and other records of the Company.
<PAGE>
EXHIBIT 4.4
WARRANT
TO SUBSCRIBE FOR AND PURCHASE COMMON STOCK OF
MATRIX CAPITAL CORPORATION
THIS CERTIFIES THAT, for value received, Piper Jaffray Inc. (herein called
"Purchaser") or its registered assigns is entitled to subscribe for and purchase
from Matrix Capital Corporation (herein called the "Company"), a corporation
organized and existing under the laws of the State of Colorado, at the price
specified below (subject to adjustment as noted below) at any time from and
after the first anniversary of this Warrant (the "Effective Date") to and
including the fourth anniversary date of the Effective Date, fifty thousand
(50,000) fully paid and nonassessable shares of the Company's Common Stock, par
value $.0001 per share (subject to adjustment as noted below).
The warrant purchase price (subject to adjustment as noted below) shall be
$_____ per share.
This Warrant is subject to the following provisions, terms and conditions:
1. Exercise. The rights represented by this Warrant may be exercised by
--------
the holder hereof, in whole or in part, by written notice of exercise delivered
to the Company prior to the intended date of exercise and by the surrender of
this Warrant (properly endorsed if required) at the principal office of the
Company and upon payment to it by check of the purchase price for such shares.
The Company agrees that the shares so purchased shall be and are deemed to be
issued to the holder hereof as the record owner of such shares as of the close
of business on the date on which this Warrant shall have been surrendered and
payment made for such shares as aforesaid. Subject to the provisions of the
next succeeding paragraph, certificates for the shares of stock so purchased
shall be delivered to the holder hereof within a reasonable time, not exceeding
7 days, after the rights represented by this Warrant shall have been so
exercised, and, unless this Warrant has expired, a new Warrant representing the
number of shares, if any, with respect to which this Warrant shall not then have
been exercised shall also be delivered to the holder hereof within such time.
2. Restriction on Transferability. Notwithstanding the foregoing,
------------------------------
however, the Company shall not be required to deliver any certificate for shares
of stock upon exercise of this Warrant except in accordance with the provisions,
and subject to the limitations, of Section 7 hereof. This Warrant shall not be
sold, transferred, assigned or hypothecated for a period of one year from
__________, 1996 except to persons who are officers of the Purchaser, to a
partnership comprised of such persons and the Purchaser, or by operation of law.
3. Covenants of the Company. The Company covenants and agrees that all
------------------------
shares which may be issued upon the exercise of the rights represented by this
Warrant will, upon issuance, be duly authorized and issued, fully paid and
nonassessable. The Company further covenants and agrees that during the period
within which the rights represented by this Warrant may be exercised, the
Company will at all times have authorized, and reserved for the purpose of issue
or transfer upon exercise of the subscription rights evidenced by this Warrant,
a sufficient number of shares of its Common Stock to provide for the exercise of
the rights represented by this Warrant.
<PAGE>
4. Anti-Dilution Adjustments. The above provisions, however, are subject
-------------------------
to the following:
(a) The warrant purchase price from and after the date of issuance of
this Warrant shall be subject to adjustment from time to time as hereinafter
provided. Upon each adjustment of the warrant purchase price, the holder of this
Warrant shall thereafter be entitled to purchase, at the warrant purchase price
resulting from such adjustment, the number of shares obtained by multiplying the
warrant purchase price in effect immediately prior to such adjustment by the
number of shares purchasable pursuant hereto immediately prior to such
adjustment and dividing the product thereof by the warrant purchase price
resulting from such adjustment.
(b) In case the Company shall (i) declare a dividend upon the Common
Stock payable in Common Stock or in any obligations or any securities of the
Company which are convertible into or exchangeable for Common Stock (any of such
obligations or securities being hereinafter called "Convertible Securities"), or
in any rights or options to purchase Common Stock or Convertible Securities, or
(ii) declare any other dividend or make any other distribution upon the Common
Stock other than out of earnings or earned surplus, then thereafter the holder
of this Warrant upon the exercise hereof will be entitled to receive the number
of shares of Common Stock to which such holder shall be entitled upon such
exercise, and, in addition and without further payment therefor, each dividend
described in clause (i) above and each dividend or distribution described in
clause (ii) above which such holder would have received by way of dividends or
distributions if continuously since such holder became the record holder of this
Warrant such holder (i) had been the record holder of the number of shares of
Common Stock then received, and (ii) had retained all dividends or distributions
in stock or securities (including Common Stock or Convertible Securities, or in
any rights or options to purchase any Common Stock or Convertible Securities)
payable in respect of such Common Stock or in respect of any stock or securities
paid as dividends or distributions and originating directly or indirectly from
such Common Stock.
(c) In case the Company shall at any time after the issuance of this
Warrant subdivide its outstanding shares of Common Stock into a greater number
of shares, the warrant purchase price in effect immediately prior to such
subdivision shall be proportionately reduced, and conversely, in case the
outstanding shares of Common Stock of the Company shall be combined into a
smaller number of shares, the warrant purchase price in effect immediately prior
to such combination shall be proportionately increased.
(d) If any capital reorganization or reclassification of the capital
stock of the Company, or consolidation or merger of the Company with another
corporation, or the sale of all or substantially of its assets to another
corporation shall be effected in such a way that holders of Common Stock shall
be entitled to receive stock, securities or assets with respect to or in
exchange for Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provision
shall be made whereby the holder hereof shall thereafter have the right to
purchase and receive, upon the basis and upon the terms and conditions specified
in this Warrant and in lieu of the shares of the Common Stock of the Company
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby, such shares of stock, securities or assets as may be
issued or payable with respect to or in exchange for a number
2
<PAGE>
of outstanding shares of such Common Stock equal to the number of shares of such
stock immediately theretofore purchasable and receivable upon the exercise of
the rights represented hereby had such reorganization, reclassification,
consolidation, merger or sale not taken place, and in any such case appropriate
provision shall be made with respect to the rights and interests of the holder
of this Warrant to the end that the provisions hereof (including without
limitation provisions for adjustments of the warrant purchase price and of the
number of shares purchasable upon the exercise of this Warrant) shall thereafter
be applicable, as nearly as may be, in relation to any shares of stock,
securities or assets thereafter deliverable upon the exercise hereof. The
Company shall not effect any such consolidation, merger or sale, unless prior to
the consummation thereof the successor corporation (if other than the Company)
resulting from such consolidation or merger or the corporation purchasing such
assets shall assume, by written instrument executed and mailed to the registered
holder hereof at the last address of such holder appearing on the books of the
Company, the obligation to deliver to such holder such shares of stock,
securities or assets as, in accordance with the foregoing provisions, such
holder may be entitled to purchase.
(e) Upon any adjustment of the warrant purchase price, then and in each
such case, the Company shall give written notice thereof, by first-class mail,
postage prepaid, addressed to the registered holder of this Warrant, at the
address of such holder as shown on the books of the Company, which notice shall
state the warrant purchase price resulting from such adjustment and the increase
or decrease, if any, in the number of shares purchasable at such price upon the
exercise of this Warrant, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
(f) In case at any time prior to the expiration or exercise of this
Warrant:
(i) the Company shall declare any cash dividend on its Common Stock
or any cash dividends at a rate in excess of the rate of the last cash
dividend theretofore paid;
(ii) the Company shall pay any dividend payable in stock upon its
Common Stock or make any distribution (other than regular cash
dividends) to the holders of its Common Stock;
(iii) the Company shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class
or other rights;
(iv) there shall be any capital reorganization, or reclassification
of the capital stock of the Company, or consolidation or merger of the
Company with, or sale of all or substantially all of its assets to,
another corporation; or
(v) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of said cases, the Company shall give written notice,
by first-class mail, postage prepaid, addressed to the registered holder of this
Warrant at the address of such holder as
3
<PAGE>
shown on the books of the Company, of the date on which (A) the books of the
Company shall close or a record shall be taken for such dividend, distribution
or subscription rights, or (B) such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up shall take
place, as the case may be. Such notice shall also specify the date as of which
the holders of Common Stock of record shall participate in such dividend,
distribution or subscription rights, or shall be entitled to exchange their
Common Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, as the case may be. Such written notice shall be
given at least 30 days prior to the action in question and not less than 30 days
prior to the record date or the date on which the Company's transfer books are
closed in respect thereto.
(g) If any event occurs as to which the other provisions of this
Section 4 are not strictly applicable or if strictly applicable would not fairly
protect the purchase rights of the holder of this Warrant or of Common Stock in
accordance with the essential intent and principles of such provisions, then
this Warrant shall be adjusted in the application of such provisions, in
accordance with such essential intent and principles, so as to protect such
purchase rights as aforesaid.
(h) No fractional shares of Common Stock shall be issued upon the
exercise of this Warrant, but, instead of any fraction of a share which would
otherwise be issuable, the Company shall pay a cash adjustment (which may be
effected as a reduction of the amount to be paid by the holder hereof upon such
exercise) in respect of such fraction in an amount equal to the same fraction of
the market price per share of Common Stock as of the close of business on the
date of the notice required by Section 1 above. "Market price" for purposes of
this Section 4(h) shall mean, if the Common Stock is traded on a securities
exchange or on the Nasdaq National Market, the closing price of the Common Stock
on such exchange or the Nasdaq National Market, or, if the Common Stock is
otherwise traded in the over-the-counter market, the closing bid price, in each
case averaged over a period of 5 consecutive business days prior to the date as
of which "market price" is being determined. If at any time the Common Stock is
not traded on an exchange or the Nasdaq National Market, or otherwise traded in
the over-the-counter market, the "market price" shall be deemed to be the higher
of (i) the book value thereof as determined by any firm of independent public
accountants of recognized standing selected by the Board of Directors of the
Company as of the last day of any month ending within 60 days preceding the date
as of which the determination is to be made, or (ii) the fair value thereof
determined in good faith by the Board of Directors of the Company as of a date
which is within 15 days of the date as of which the determination is to be made.
5. Common Stock. As used herein, the term "Common Stock" shall mean and
------------
include the Company's presently authorized Common Stock and shall also include
any capital stock of any class of the Company hereafter authorized which shall
not be limited to a fixed sum or percentage in respect of the rights of the
holders thereof to participate in dividends or in the distribution of assets
upon the voluntary or involuntary liquidation, dissolution or winding up of the
Company; provided that the shares purchasable pursuant to this Warrant shall
include shares designated as Common Stock of the Company on the date of original
issue of this Warrant or, in the case of any reclassification of the outstanding
shares thereof, the stock, securities or assets provided for in Section 4(d)
above.
4
<PAGE>
6. No Voting Rights. This Warrant shall not entitle the holder hereof to
----------------
any voting rights or other rights as a stockholder of the Company.
7. Notice of Transfer of Warrant or Resale of Shares. Subject to the
-------------------------------------------------
terms of Section 2 hereof, the holder of this Warrant, by acceptance hereof,
agrees to give written notice to the Company before transferring this Warrant,
in whole or in part, or transferring any Common Stock issuable or issued upon
the exercise hereof of such holder's intention to do so, describing briefly the
manner of any proposed transfer of this Warrant or such holder's intention as to
the disposition to be made of shares of Common Stock issuable or issued upon the
exercise hereof. Such holder shall also provide the Company with an opinion of
counsel satisfactory to the Company to the effect that the proposed transfer of
this Warrant or disposition of shares may be effected without registration or
qualification (under any federal or state law) of this Warrant or the shares of
Common Stock issuable upon the exercise hereof. Upon receipt of such written
notice and opinion by the Company, such holder shall be entitled to transfer
this Warrant, or to exercise this Warrant in accordance with its terms and
dispose of the shares received upon such exercise or to dispose of shares of
Common Stock received upon the previous exercise of this Warrant, all in
accordance with the terms of the notice delivered by such holder to the Company,
provided that an appropriate legend, if any, respecting the aforesaid
restrictions on transfer and disposition may be endorsed on this Warrant or the
certificates for such shares.
8. Transferability. Subject to the provisions of Section 2 and Section 7
---------------
hereof, this Warrant and all rights hereunder are transferable, in whole or in
part, at the principal office of the Company by the holder hereof in person or
by duly authorized attorney, upon surrender of this Warrant properly endorsed.
Each taker and holder of this Warrant, by taking or holding the same, consents
and agrees that the bearer of this Warrant, when endorsed, may be treated by the
Company and all other persons dealing with this Warrant as the absolute owner
hereof for any purpose and as the person entitled to exercise the rights
represented by this Warrant, or to the transfer hereof on the books of the
Company, any notice to the contrary notwithstanding; but until such transfer on
such books, the Company may treat the registered holder hereof as the owner for
all purposes.
This Warrant is exchangeable, upon the surrender hereof by the holder
hereof at the principal office of the Company, for new Warrants of like tenor
representing in the aggregate the right to subscribe for and purchase the number
of shares which may be subscribed for and purchased hereunder, each of such new
Warrants to represent the right to subscribe for and purchase such number of
shares as shall be designated by said holder hereof at the time of such
surrender.
9. Registration Rights.
-------------------
9.1 Required Registration. During the four year period beginning on
---------------------
__________, 1997, if Form S-3 or any successor form ("Form S-3") promulgated by
the Securities and Exchange Commission (the "Commission") is available for use
by the Company and any record holder or holders of Purchased Stock (as defined
in Section 9.6) and the Company shall receive a written request therefor from
any such record holder or holders of an aggregate of at least a majority of the
shares of Purchased Stock not theretofore registered under the Securities Act of
1933, as amended (the "Securities Act"), and sold, the Company shall prepare and
file a registration statement on
5
<PAGE>
Form S-3 under the Securities Act covering the shares of Purchased Stock which
are the subject of such request and shall use its best efforts to cause such
registration statement to become effective. In addition, upon the receipt of
such request, the Company shall promptly give written notice to all other record
holders of shares of Purchased Stock not theretofore registered under the
Securities Act and sold that such registration is to be effected. The Company
shall include in such registration statement such shares of Purchased Stock for
which it has received written requests and for which Form S-3 is available to
register by such other record holders within 30 days after the delivery of the
Company's written notice to such other record holders. The Company shall be
obligated to prepare, file and cause to become effective only one such
registration statement pursuant to this Section 9.1, and to pay the expenses
associated with such registration statement. In the event that the holders of a
majority of the Purchased Stock for which registration has been requested
pursuant to this Section 9.1 determine for any reason not to proceed with a
registration at any time before a registration statement has been declared
effective by the Commission, and such registration statement, if theretofore
filed with the Commission, is withdrawn with respect to the Purchased Stock
covered thereby, and the holders of such Purchased Stock agree to bear their own
expenses incurred in connection therewith and to reimburse the Company for the
expenses incurred by it attributable to the registration of such Purchased
Stock, then the holders of such Purchased Stock shall not be deemed to have
exercised their right to require the Company to register Purchased Stock
pursuant to this Section 9.1.
If, at the time any written request for registration is received by the
Company pursuant to this Section 9.1, the Company has determined to proceed with
the actual preparation and filing of a registration statement under the
Securities Act in connection with the proposed offer and sale for cash of any of
its securities by it or any of its security holders, such written request shall
be deemed to have been given pursuant to Section 9.2 hereof rather than this
Section 9.1, and the rights of the holders of Purchased Stock covered by such
written request shall be governed by Section 9.2 hereof.
Without the written consent of the holders of a majority of the
Purchased Stock for which registration has been requested pursuant to this
Section 9.1, neither the Company nor any other holder of securities of the
Company may include securities in such registration if in the good faith
judgment of the managing underwriter of such public offering the inclusion of
such securities would interfere with the successful marketing of the Purchased
Stock or require the exclusion of any portion of the Purchased Stock to be
registered.
The rights granted by this Section 9.1 may be transferred to and are
exercisable by subsequent transferees of any shares of Purchased Stock, except
with respect to shares of Purchased Stock that have been registered under the
Securities Act and sold.
9.2 Incidental Registration. During the six year period beginning on
-----------------------
____________, 1997, each time the Company shall determine to proceed with the
actual preparation and filing of a registration statement under the Securities
Act in connection with the proposed offer and sale for cash of any of its
securities by it or any of its security holders (other than a registration
statement on a form that does not permit the inclusion of shares by its security
holders), the Company will give written notice of its determination to all
record holders of Purchased Stock not theretofore registered under the
Securities Act and sold no later than 30 days prior to the filing of a
registration
6
<PAGE>
statement with the Commission, and upon the written request of a record holder
of any shares of Purchased Stock given within 30 days after receipt of any such
notice from the Company, the Company will, except as herein provided, cause all
such shares of Purchased Stock, the record holders of which have so requested
registration thereof, to be included in such registration statement, all to the
extent requisite to permit the sale or other disposition by the prospective
seller or sellers of the Purchased Stock to be so registered; provided, however,
that nothing herein shall prevent the Company from, at any time, abandoning or
delaying any registration. If any registration pursuant to this Section 9.2
shall be underwritten in whole or in part, the Company may require that the
Purchased Stock requested for inclusion pursuant to this Section 9.2 be included
in the underwriting on the same terms and conditions as the securities otherwise
being sold through the underwriters. If in the reasonable judgment of the
managing underwriter of such public offering the inclusion of all of the
Purchased Stock originally covered by a request for registration would reduce
the number of shares to be offered by the Company or interfere with the
successful marketing of the shares of stock offered by the Company, the number
of shares of Purchased Stock otherwise to be included in the underwritten public
offering may be reduced pro rata (by number of shares) among the holders thereof
requesting such registration; provided, however, that after any such required
reduction, the Purchased Stock to be included in such offering shall constitute
at least 25% of the total number of shares to be included in such offering.
The rights granted by this Section 9.2 may be transferred to and are
exercisable by subsequent transferees of any shares of Purchased Stock, except
with respect to shares of Purchased Stock that have been registered under the
Securities Act and sold.
9.3 Registration Procedures. If and whenever the Company is required
-----------------------
by the provisions of Sections 9.1 or 9.2 hereof to effect the registration of
shares of Purchased Stock under the Securities Act, the Company will:
(a) prepare and file with the Commission a registration statement
with respect to such securities, and use its best efforts to cause such
registration statement to become and remain effective for such period as may be
reasonably necessary to effect the sale of such securities, not to exceed nine
months;
(b) prepare and file with the Commission such amendments to such
registration statement and supplements to the prospectus contained therein as
may be necessary to keep such registration statement effective for such period
as may be reasonably necessary to effect the sale of such securities, not to
exceed nine months;
(c) furnish to the security holders participating in such
registration and to the underwriters of the securities being registered such
number of copies of the registration statement, preliminary prospectus, final
prospectus and such other documents as such underwriters may reasonably request
in order to facilitate the public offering of such securities;
(d) use its best efforts to register or qualify the securities
covered by such registration statement under such state securities or blue sky
laws of such jurisdictions as such participating holders may reasonably request
in writing within 20 days following the original filing
7
<PAGE>
of such registration statement, except that the Company shall not for any
purpose be required to execute a general consent to service of process or to
qualify to do business as a foreign corporation in any jurisdiction wherein it
is not so qualified;
(e) notify the security holders participating in such
registration, promptly after it shall receive notice thereof, of the time when
such registration statement has become effective or a supplement to any
prospectus forming a part of such registration statement has been filed;
(f) notify such holders promptly of any request by the Commission
for the amending or supplementing of such registration statement or prospectus
or for additional information;
(g) prepare and file with the Commission, promptly upon the
request of any such holders, any amendments or supplements to such registration
statement or prospectus which, in the opinion of counsel for such holders (and
concurred in by counsel for the Company), is required under the Securities Act
or the rules and regulations thereunder in connection with the distribution of
the Purchased Stock by such holder;
(h) prepare and promptly file with the Commission and promptly
notify such holders of the filing of such amendment or supplement to such
registration statement or prospectus as may be necessary to correct any
statements or omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Securities Act, any event shall
have occurred as the result of which any such prospectus or any other prospectus
as then in effect would include an untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein, in the
light of the circumstances in which they were made, not misleading;
(i) advise such holders, promptly after it shall receive notice or
obtain knowledge thereof, of the issuance of any stop order by the Commission
suspending the effectiveness of such registration statement or the initiation or
threatening of any proceeding for that purpose and promptly use its best efforts
to prevent the issuance of any stop order or to obtain its withdrawal if such
stop order should be issued;
(j) not file any amendment or supplement to such registration
statement or prospectus to which a majority in interest of such holders shall
have reasonably objected on the grounds that such amendment or supplement does
not comply in all material respects with the requirements of the Securities Act
or the rules and regulations thereunder, after having been furnished with a copy
thereof at least two business days prior to the filing thereof, unless in the
opinion of counsel for the Company the filing of such amendment or supplement is
reasonably necessary to protect the Company from any liabilities under any
applicable federal or state law and such filing will not violate applicable law;
and
(k) at the request of any such holder, furnish (i) an opinion,
dated as of the closing date, of the counsel representing the Company for the
purposes of such registration, addressed to the underwriters, if any, and to the
holder or holders making such request, covering such matters as such
underwriters and holder or holders may reasonably request; and (ii) letters
dated as
8
<PAGE>
of the effective date of the registration statement and as of the closing date,
from the independent certified public accountants of the Company, addressed to
the underwriters, if any, and to the holder or holders making such request,
covering such matters as such underwriters and holder or holders may reasonably
request.
9.4 Expenses. With respect to Sections 9.1 and 9.2 hereof (except as
--------
otherwise provided in Sections 9.1 and 9.2), the Company shall bear the
following fees, costs and expenses: all registration, filing and NASD fees,
printing expenses, fees and disbursements of counsel and accountants for the
Company, fees and disbursements of counsel for the underwriter or underwriters
of such securities (if the Company and/or selling security holders are required
to bear such fees and disbursements), all internal Company expenses, all legal
fees and disbursements and other expenses of complying with state securities or
blue sky laws of any jurisdictions in which the securities to be offered are to
be registered or qualified, and the premiums and other costs of policies of
insurance against liability (if any) arising out of such public offering. Fees
and disbursements of counsel and accountants for the selling security holders,
underwriting discounts and commissions and transfer taxes relating to the shares
included in the offering by the selling security holders, and any other expenses
incurred by the selling security holders not expressly included above, shall be
borne pro rata by the selling security holders.
9.5 Indemnification.
---------------
(a) The Company will indemnify and hold harmless each holder of
shares of Purchased Stock which are included in a registration statement
pursuant to the provisions hereof, its directors and officers, and any
underwriter (as defined in the Securities Act) for such holder and each person,
if any, who controls such holder or such underwriter within the meaning of the
Securities Act, from and against, and will reimburse such holder and each such
underwriter and controlling person with respect to, any and all loss, claim,
damage, liability, cost and expense to which such holder or any such underwriter
or controlling person may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages, liabilities, costs or expenses arise
out of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in such registration statement, any prospectus contained
therein or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading
in light of the circumstances in which they were made; provided, however, that
the Company will not be liable in any such case to the extent that any such
loss, damage, liability, cost or expense arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission so
made in conformity with information furnished by such holder, such underwriter
or such controlling person in writing specifically for use in the preparation
thereof.
(b) Each holder of shares of Purchased Stock which are included in
a registration statement pursuant to the provisions hereof will indemnify and
hold harmless the Company, its directors and officers, any controlling person
and any underwriter from and against, and will reimburse the Company, its
directors and officers, any controlling person and any underwriter with respect
to, any and all loss, claim, damage, liability, cost or expense to which the
Company or any controlling person and/or any underwriter may become subject
under the Securities Act or
9
<PAGE>
otherwise, insofar as such losses, claims, damages, liabilities, costs or
expenses arise out of or are based upon any untrue or alleged untrue statement
of any material fact contained in such registration statement, any prospectus
contained therein or any amendment or supplement thereto, or arise out of or are
based upon the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances in which they were made, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was so made in reliance upon
and in strict conformity with written information furnished by such holder
specifically for use in the preparation thereof; provided, however that in no
event shall any holder of shares of Purchased Stock be liable under any such
indemnity for any amount in excess of the aggregate amount of proceeds such
holder received from the sale of shares of Purchased Stock pursuant to such
registration statement.
(c) Promptly after receipt by an indemnified party pursuant to the
provisions of paragraph (a) or (b) of this Section 9.5 of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provisions such indemnified party will, if a claim thereof is to be
made against the indemnifying party pursuant to the provisions of said paragraph
(a) or (b), promptly notify the indemnifying party of the commencement thereof;
but the omission to so notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than
hereunder. In case such action is brought against any indemnified party and it
notifies the indemnifying part of the commencement thereof, the indemnifying
party shall have the right to participate in, and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party,
provided, however, if the defendants in any action include both the indemnified
party and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party or if there is a conflict of interest which would prevent
counsel for the indemnifying party from also representing the indemnified party,
the indemnified party or parties shall have the right to select separate counsel
to participate in the defense of such action on behalf of such indemnified party
or parties. After notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party will
not be liable to such indemnified party pursuant to the provisions of said
paragraph (a) or (b) for any legal or other expense subsequently incurred by
such indemnified party in connection with the defense thereof other than
reasonable costs of investigation, unless (i) the indemnified party shall have
employed counsel in accordance with the proviso of the preceding sentence, (ii)
the indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after the notice of the commencement of the action, or (iii) the indemnifying
party has authorized the employment of counsel for the indemnified party at the
expense of the indemnifying party. Notwithstanding the foregoing, nothing in
this Section 9.5 will obligate any indemnifying party, with respect to any
proceeding or related proceedings in the same jurisdiction to be liable for the
fees and expenses of more than one separate law firm at any one time for all
such indemnified parties.
9.6 Purchased Stock Definition. "Purchased Stock" shall mean this
----------------------------
Warrant, and the shares of Common Stock of the Company issuable upon exercise of
this Warrant and all shares
10
<PAGE>
of such Common Stock issued in exchange or substitution therefor, whether or not
such securities (other than this Warrant) have in fact been issued, and the
stock or other securities of the Company issued in a stock split or
reclassification of, or a stock dividend or other distribution on or in
substitution or exchange for, or otherwise in connection with, any of the
foregoing securities, or in a merger or consolidation involving the Company or a
sale of all or substantially all of the Company's assets. For purposes hereof,
the record holder of this Warrant shall be treated as the record holder of the
related Common Stock then issuable upon the exercise thereof. Nothing in this
Section 9.6 shall, however, be deemed to require the Company to register this
Warrant, it being understood that the registration rights granted hereby relate
only to shares of Common Stock of the Company and securities issued in
substitution or exchange therefor.
10. Optional Conversion.
-------------------
(a) In addition to and without limiting the rights of the holder
of this Warrant under the terms of this Warrant, the holder of this Warrant
shall have the right (the "Conversion Right") to convert this Warrant or any
portion thereof into shares of Common Stock as provided in this Section 10 at
any time or from time to time after the first anniversary of the date hereof and
prior to its expiration, subject to the restrictions set forth in paragraph (c)
below. Upon exercise of the Conversion Right with respect to a particular number
of shares subject to this Warrant (the "Converted Warrant Shares"), the Company
shall deliver to the holder of this Warrant, without payment by the holder of
any exercise price or any cash or other consideration, that number of shares of
Common Stock equal to the quotient obtained by dividing the Net Value (as
hereinafter defined) of the Converted Warrant Shares by the fair market value
(as defined in paragraph (d) below) of a single share of Common Stock,
determined in each case as of the close of business on the Conversion Date (as
hereinafter defined). The "Net Value" of the Converted Warrant shares shall be
determined by subtracting the aggregate warrant purchase price of the Converted
Warrant Shares from the aggregate fair market value of the Converted Warrant
Shares. Notwithstanding anything in this Section 10 to the contrary, the
Conversion Right cannot be exercised with respect to a number of Converted
Warrant Shares having a Net Value below $100. No fractional shares shall be
issuable upon exercise of the Conversion Right, and if the number of shares to
be issued in accordance with the foregoing formula is other than a whole number,
the Company shall pay to the holder of this Warrant an amount in cash equal to
the fair market value of the resulting fractional share.
(b) The Conversion Right may be exercised by the holder of this
Warrant by the surrender of this Warrant at the principal office of the Company
together with a written statement specifying that the holder thereby intends to
exercise the Conversion Right and indicating the number of shares subject to
this Warrant which are being surrendered (referred to in paragraph (a) above as
the Converted Warrant Shares) in exercise of the Conversion Right. Such
conversion shall be effective upon receipt by the Company of this Warrant
together with the aforesaid written statement, or on such later date as is
specified therein (the "Conversion Date"), but not later than the expiration
date of this Warrant. Certificates for the shares of Common Stock issuable upon
exercise of the Conversion Right, together with a check in payment of any
fractional share and, in the case of a partial exercise, a new warrant
evidencing the shares remaining subject to this Warrant, shall be issued as of
the Conversion Date and shall be delivered to the holder of this Warrant within
15 days following the Conversion Date.
11
<PAGE>
(c) In the event the Conversion Right would, at any time this
Warrant remains outstanding, be deemed by the Company's independent certified
public accountants to give rise to a material charge to the Company's earnings
for financial reporting purposes, then the Conversion Right shall automatically
terminate upon the Company's written notice to the holder of this Warrant of
such adverse accounting treatment.
(d) For purposes of this paragraph 10, the "fair market value" of
a share of Common Stock as of a particular date shall be its "market price",
calculated as described in Section 4(h) hereof.
11. Governing Law. All questions concerning this Warrant will be
-------------
governed and interpreted and enforced in accordance with the internal law of the
State of Minnesota without regard to the principles of conflicts of law thereof.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer and this Warrant to be dated as of _________, 1996.
MATRIX CAPITAL CORPORATION
By:__________________________________
Name:
Title:
RESTRICTION ON TRANSFER
The securities evidenced hereby may not be transferred without
compliance with the provisions of Section 7 hereof or registration under the
Securities Act of 1933, as amended.
12
<PAGE>
FORM OF ASSIGNMENT
(To Be Signed Only Upon Assignment)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto ______________________________ this Warrant, and appoints
________________________ to
transfer this Warrant on the books of the Company with the full power of
substitution in the premises.
Dated:
In the presence of:
_______________________________________________
(Signature must conform in all respects to the
name of the holder as specified on the face of
this Warrant without alteration, enlargement or
any change whatsoever, and the signature must
be guaranteed in the usual manner)
13
<PAGE>
SUBSCRIPTION FORM
To be Executed by the Holder of this Warrant if such Holder
Desires to Exercise this Warrant in Whole or in Part:
TO: Matrix Capital Corporation (the "Company")
The undersigned _____________________________________
Please insert Social Security or other identifying number of Subscriber:
_____________________________
hereby irrevocably elects to exercise the right of purchase represented by this
Warrant for, and to purchase thereunder, _______ shares of the Common Stock
provided for therein and tenders payment herewith to the order of the Company in
the amount of $__________, such payment being made as provided on the face of
this Warrant.
The undersigned requests that certificates for such shares of Common Stock be
issued as follows:
Name:______________________________________
Address:___________________________________
Deliver to:________________________________
Address:___________________________________
and, if such number of shares of Common Stock shall not be all the shares of
Common Stock purchasable hereunder, that a new Warrant for the balance remaining
of the shares of Common Stock purchasable under this Warrant be registered in
the name of, and delivered to, the undersigned at the address stated above.
Dated:
Signature:_______________________________________
Note: The signature on this
Subscription Form must correspond
with the name as written upon the
face of this Warrant in every
particular, without alteration or
enlargement or any change whatever.
14
<PAGE>
EXHIBIT 4.5
WARRANT
TO SUBSCRIBE FOR AND PURCHASE COMMON STOCK OF
MATRIX CAPITAL CORPORATION
THIS CERTIFIES THAT, for value received, Keefe, Bruyette & Woods, Inc.
(herein called "Purchaser") or its registered assigns is entitled to subscribe
for and purchase from Matrix Capital Corporation (herein called the "Company"),
a corporation organized and existing under the laws of the State of Colorado, at
the price specified below (subject to adjustment as noted below) at any time
from and after the first anniversary of this Warrant (the "Effective Date") to
and including the fourth anniversary date of the Effective Date, twenty-five
thousand (25,000) fully paid and nonassessable shares of the Company's Common
Stock, par value $.0001 per share (subject to adjustment as noted below).
The warrant purchase price (subject to adjustment as noted below) shall be
$_____ per share.
This Warrant is subject to the following provisions, terms and
conditions:
1. Exercise. The rights represented by this Warrant may be exercised by
--------
the holder hereof, in whole or in part, by written notice of exercise delivered
to the Company prior to the intended date of exercise and by the surrender of
this Warrant (properly endorsed if required) at the principal office of the
Company and upon payment to it by check of the purchase price for such shares.
The Company agrees that the shares so purchased shall be and are deemed to be
issued to the holder hereof as the record owner of such shares as of the close
of business on the date on which this Warrant shall have been surrendered and
payment made for such shares as aforesaid. Subject to the provisions of the
next succeeding paragraph, certificates for the shares of stock so purchased
shall be delivered to the holder hereof within a reasonable time, not exceeding
7 days, after the rights represented by this Warrant shall have been so
exercised, and, unless this Warrant has expired, a new Warrant representing the
number of shares, if any, with respect to which this Warrant shall not then have
been exercised shall also be delivered to the holder hereof within such time.
2. Restriction on Transferability. Notwithstanding the foregoing,
------------------------------
however, the Company shall not be required to deliver any certificate for shares
of stock upon exercise of this Warrant except in accordance with the provisions,
and subject to the limitations, of Section 7 hereof. This Warrant shall not be
sold, transferred, assigned or hypothecated for a period of one year from
___________, 1996 except to persons who are officers of the Purchaser, to a
partnership comprised of such persons and the Purchaser, or by operation of law.
3. Covenants of the Company. The Company covenants and agrees that all
------------------------
shares which may be issued upon the exercise of the rights represented by this
Warrant will, upon issuance, be duly authorized and issued, fully paid and
nonassessable. The Company further covenants and agrees that during the period
within which the rights represented by this Warrant may be exercised, the
Company will at all times have authorized, and reserved for the purpose of issue
or transfer upon exercise of the subscription rights evidenced by this Warrant,
a sufficient number of shares of its Common Stock to provide for the exercise of
the rights represented by this Warrant.
<PAGE>
PAGE>
4. Anti-Dilution Adjustments. The above provisions, however, are subject
-------------------------
to the following:
(a) The warrant purchase price from and after the date of issuance of
this Warrant shall be subject to adjustment from time to time as hereinafter
provided. Upon each adjustment of the warrant purchase price, the holder of this
Warrant shall thereafter be entitled to purchase, at the warrant purchase price
resulting from such adjustment, the number of shares obtained by multiplying the
warrant purchase price in effect immediately prior to such adjustment by the
number of shares purchasable pursuant hereto immediately prior to such
adjustment and dividing the product thereof by the warrant purchase price
resulting from such adjustment.
(b) In case the Company shall (i) declare a dividend upon the Common
Stock payable in Common Stock or in any obligations or any securities of the
Company which are convertible into or exchangeable for Common Stock (any of such
obligations or securities being hereinafter called "Convertible Securities"), or
in any rights or options to purchase Common Stock or Convertible Securities, or
(ii) declare any other dividend or make any other distribution upon the Common
Stock other than out of earnings or earned surplus, then thereafter the holder
of this Warrant upon the exercise hereof will be entitled to receive the number
of shares of Common Stock to which such holder shall be entitled upon such
exercise, and, in addition and without further payment therefor, each dividend
described in clause (i) above and each dividend or distribution described in
clause (ii) above which such holder would have received by way of dividends or
distributions if continuously since such holder became the record holder of this
Warrant such holder (i) had been the record holder of the number of shares of
Common Stock then received, and (ii) had retained all dividends or distributions
in stock or securities (including Common Stock or Convertible Securities, or in
any rights or options to purchase any Common Stock or Convertible Securities)
payable in respect of such Common Stock or in respect of any stock or securities
paid as dividends or distributions and originating directly or indirectly from
such Common Stock.
(c) In case the Company shall at any time after the issuance of this
Warrant subdivide its outstanding shares of Common Stock into a greater number
of shares, the warrant purchase price in effect immediately prior to such
subdivision shall be proportionately reduced, and conversely, in case the
outstanding shares of Common Stock of the Company shall be combined into a
smaller number of shares, the warrant purchase price in effect immediately prior
to such combination shall be proportionately increased.
(d) If any capital reorganization or reclassification of the capital
stock of the Company, or consolidation or merger of the Company with another
corporation, or the sale of all or substantially of its assets to another
corporation shall be effected in such a way that holders of Common Stock shall
be entitled to receive stock, securities or assets with respect to or in
exchange for Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provision
shall be made whereby the holder hereof shall thereafter have the right to
purchase and receive, upon the basis and upon the terms and conditions specified
in this Warrant and in lieu of the shares of the Common Stock of the Company
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby, such shares of stock, securities or assets as may be
issued or payable with respect to or in exchange for a number
2
<PAGE>
of outstanding shares of such Common Stock equal to the number of shares of such
stock immediately theretofore purchasable and receivable upon the exercise of
the rights represented hereby had such reorganization, reclassification,
consolidation, merger or sale not taken place, and in any such case appropriate
provision shall be made with respect to the rights and interests of the holder
of this Warrant to the end that the provisions hereof (including without
limitation provisions for adjustments of the warrant purchase price and of the
number of shares purchasable upon the exercise of this Warrant) shall thereafter
be applicable, as nearly as may be, in relation to any shares of stock,
securities or assets thereafter deliverable upon the exercise hereof. The
Company shall not effect any such consolidation, merger or sale, unless prior to
the consummation thereof the successor corporation (if other than the Company)
resulting from such consolidation or merger or the corporation purchasing such
assets shall assume, by written instrument executed and mailed to the registered
holder hereof at the last address of such holder appearing on the books of the
Company, the obligation to deliver to such holder such shares of stock,
securities or assets as, in accordance with the foregoing provisions, such
holder may be entitled to purchase.
(e) Upon any adjustment of the warrant purchase price, then and in each
such case, the Company shall give written notice thereof, by first-class mail,
postage prepaid, addressed to the registered holder of this Warrant, at the
address of such holder as shown on the books of the Company, which notice shall
state the warrant purchase price resulting from such adjustment and the increase
or decrease, if any, in the number of shares purchasable at such price upon the
exercise of this Warrant, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
(f) In case at any time prior to the expiration or exercise of this
Warrant:
(i) the Company shall declare any cash dividend on its Common
Stock or any cash dividends at a rate in excess of the rate of the last
cash dividend theretofore paid;
(ii) the Company shall pay any dividend payable in stock upon its
Common Stock or make any distribution (other than regular cash
dividends) to the holders of its Common Stock;
(iii) the Company shall offer for subscription pro rata to the
holders of its Common Stock any additional shares of stock of any class
or other rights;
(iv) there shall be any capital reorganization, or
reclassification of the capital stock of the Company, or consolidation
or merger of the Company with, or sale of all or substantially all of
its assets to, another corporation; or
(v) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of said cases, the Company shall give written notice,
by first-class mail, postage prepaid, addressed to the registered holder of this
Warrant at the address of such holder as
3
<PAGE>
shown on the books of the Company, of the date on which (A) the books of the
Company shall close or a record shall be taken for such dividend, distribution
or subscription rights, or (B) such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up shall take
place, as the case may be. Such notice shall also specify the date as of which
the holders of Common Stock of record shall participate in such dividend,
distribution or subscription rights, or shall be entitled to exchange their
Common Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, as the case may be. Such written notice shall be
given at least 30 days prior to the action in question and not less than 30 days
prior to the record date or the date on which the Company's transfer books are
closed in respect thereto.
(g) If any event occurs as to which the other provisions of this
Section 4 are not strictly applicable or if strictly applicable would not fairly
protect the purchase rights of the holder of this Warrant or of Common Stock in
accordance with the essential intent and principles of such provisions, then
this Warrant shall be adjusted in the application of such provisions, in
accordance with such essential intent and principles, so as to protect such
purchase rights as aforesaid.
(h) No fractional shares of Common Stock shall be issued upon the
exercise of this Warrant, but, instead of any fraction of a share which would
otherwise be issuable, the Company shall pay a cash adjustment (which may be
effected as a reduction of the amount to be paid by the holder hereof upon such
exercise) in respect of such fraction in an amount equal to the same fraction of
the market price per share of Common Stock as of the close of business on the
date of the notice required by Section 1 above. "Market price" for purposes of
this Section 4(h) shall mean, if the Common Stock is traded on a securities
exchange or on the Nasdaq National Market, the closing price of the Common Stock
on such exchange or the Nasdaq National Market, or, if the Common Stock is
otherwise traded in the over-the-counter market, the closing bid price, in each
case averaged over a period of 5 consecutive business days prior to the date as
of which "market price" is being determined. If at any time the Common Stock is
not traded on an exchange or the Nasdaq National Market, or otherwise traded in
the over-the-counter market, the "market price" shall be deemed to be the higher
of (i) the book value thereof as determined by any firm of independent public
accountants of recognized standing selected by the Board of Directors of the
Company as of the last day of any month ending within 60 days preceding the date
as of which the determination is to be made, or (ii) the fair value thereof
determined in good faith by the Board of Directors of the Company as of a date
which is within 15 days of the date as of which the determination is to be made.
5. Common Stock. As used herein, the term "Common Stock" shall mean and
------------
include the Company's presently authorized Common Stock and shall also include
any capital stock of any class of the Company hereafter authorized which shall
not be limited to a fixed sum or percentage in respect of the rights of the
holders thereof to participate in dividends or in the distribution of assets
upon the voluntary or involuntary liquidation, dissolution or winding up of the
Company; provided that the shares purchasable pursuant to this Warrant shall
include shares designated as Common Stock of the Company on the date of original
issue of this Warrant or, in the case of any reclassification of the outstanding
shares thereof, the stock, securities or assets provided for in Section 4(d)
above.
4
<PAGE>
6. No Voting Rights. This Warrant shall not entitle the holder hereof to
----------------
any voting rights or other rights as a stockholder of the Company.
7. Notice of Transfer of Warrant or Resale of Shares. Subject to the
-------------------------------------------------
terms of Section 2 hereof, the holder of this Warrant, by acceptance hereof,
agrees to give written notice to the Company before transferring this Warrant,
in whole or in part, or transferring any Common Stock issuable or issued upon
the exercise hereof of such holder's intention to do so, describing briefly the
manner of any proposed transfer of this Warrant or such holder's intention as to
the disposition to be made of shares of Common Stock issuable or issued upon the
exercise hereof. Such holder shall also provide the Company with an opinion of
counsel satisfactory to the Company to the effect that the proposed transfer of
this Warrant or disposition of shares may be effected without registration or
qualification (under any federal or state law) of this Warrant or the shares of
Common Stock issuable upon the exercise hereof. Upon receipt of such written
notice and opinion by the Company, such holder shall be entitled to transfer
this Warrant, or to exercise this Warrant in accordance with its terms and
dispose of the shares received upon such exercise or to dispose of shares of
Common Stock received upon the previous exercise of this Warrant, all in
accordance with the terms of the notice delivered by such holder to the Company,
provided that an appropriate legend, if any, respecting the aforesaid
restrictions on transfer and disposition may be endorsed on this Warrant or the
certificates for such shares.
8. Transferability. Subject to the provisions of Section 2 and Section 7
---------------
hereof, this Warrant and all rights hereunder are transferable, in whole or in
part, at the principal office of the Company by the holder hereof in person or
by duly authorized attorney, upon surrender of this Warrant properly endorsed.
Each taker and holder of this Warrant, by taking or holding the same, consents
and agrees that the bearer of this Warrant, when endorsed, may be treated by the
Company and all other persons dealing with this Warrant as the absolute owner
hereof for any purpose and as the person entitled to exercise the rights
represented by this Warrant, or to the transfer hereof on the books of the
Company, any notice to the contrary notwithstanding; but until such transfer on
such books, the Company may treat the registered holder hereof as the owner for
all purposes.
This Warrant is exchangeable, upon the surrender hereof by the holder
hereof at the principal office of the Company, for new Warrants of like tenor
representing in the aggregate the right to subscribe for and purchase the number
of shares which may be subscribed for and purchased hereunder, each of such new
Warrants to represent the right to subscribe for and purchase such number of
shares as shall be designated by said holder hereof at the time of such
surrender.
9. Registration Rights.
-------------------
9.1 Required Registration. During the four year period beginning on
---------------------
__________, 1997, if Form S-3 or any successor form ("Form S-3") promulgated by
the Securities and Exchange Commission (the "Commission") is available for use
by the Company and any record holder or holders of Purchased Stock (as defined
in Section 9.6) and the Company shall receive a written request therefor from
any such record holder or holders of an aggregate of at least a majority of the
shares of Purchased Stock not theretofore registered under the Securities Act of
1933, as amended (the "Securities Act"), and sold, the Company shall prepare and
file a registration statement on Form
5
<PAGE>
S-3 under the Securities Act covering the shares of Purchased Stock which are
the subject of such request and shall use its best efforts to cause such
registration statement to become effective. In addition, upon the receipt of
such request, the Company shall promptly give written notice to all other record
holders of shares of Purchased Stock not theretofore registered under the
Securities Act and sold that such registration is to be effected. The Company
shall include in such registration statement such shares of Purchased Stock for
which it has received written requests and for which Form S-3 is available to
register by such other record holders within 30 days after the delivery of the
Company's written notice to such other record holders. The Company shall be
obligated to prepare, file and cause to become effective only one such
registration statement pursuant to this Section 9.1, and to pay the expenses
associated with such registration statement. In the event that the holders of a
majority of the Purchased Stock for which registration has been requested
pursuant to this Section 9.1 determine for any reason not to proceed with a
registration at any time before a registration statement has been declared
effective by the Commission, and such registration statement, if theretofore
filed with the Commission, is withdrawn with respect to the Purchased Stock
covered thereby, and the holders of such Purchased Stock agree to bear their own
expenses incurred in connection therewith and to reimburse the Company for the
expenses incurred by it attributable to the registration of such Purchased
Stock, then the holders of such Purchased Stock shall not be deemed to have
exercised their right to require the Company to register Purchased Stock
pursuant to this Section 9.1.
If, at the time any written request for registration is received by the
Company pursuant to this Section 9.1, the Company has determined to proceed with
the actual preparation and filing of a registration statement under the
Securities Act in connection with the proposed offer and sale for cash of any of
its securities by it or any of its security holders, such written request shall
be deemed to have been given pursuant to Section 9.2 hereof rather than this
Section 9.1, and the rights of the holders of Purchased Stock covered by such
written request shall be governed by Section 9.2 hereof.
Without the written consent of the holders of a majority of the
Purchased Stock for which registration has been requested pursuant to this
Section 9.1, neither the Company nor any other holder of securities of the
Company may include securities in such registration if in the good faith
judgment of the managing underwriter of such public offering the inclusion of
such securities would interfere with the successful marketing of the Purchased
Stock or require the exclusion of any portion of the Purchased Stock to be
registered.
The rights granted by this Section 9.1 may be transferred to and are
exercisable by subsequent transferees of any shares of Purchased Stock, except
with respect to shares of Purchased Stock that have been registered under the
Securities Act and sold.
9.2 Incidental Registration. During the six year period beginning on
-----------------------
________________, 1997, each time the Company shall determine to proceed with
the actual preparation and filing of a registration statement under the
Securities Act in connection with the proposed offer and sale for cash of any of
its securities by it or any of its security holders (other than a registration
statement on a form that does not permit the inclusion of shares by its security
holders), the Company will give written notice of its determination to all
record holders of Purchased Stock not theretofore registered under the
Securities Act and sold no later than 30 days prior to the filing
6
<PAGE>
of a registration statement with the Commission, and upon the written request of
a record holder of any shares of Purchased Stock given within 30 days after
receipt of any such notice from the Company, the Company will, except as herein
provided, cause all such shares of Purchased Stock, the record holders of which
have so requested registration thereof, to be included in such registration
statement, all to the extent requisite to permit the sale or other disposition
by the prospective seller or sellers of the Purchased Stock to be so registered;
provided, however, that nothing herein shall prevent the Company from, at any
time, abandoning or delaying any registration. If any registration pursuant to
this Section 9.2 shall be underwritten in whole or in part, the Company may
require that the Purchased Stock requested for inclusion pursuant to this
Section 9.2 be included in the underwriting on the same terms and conditions as
the securities otherwise being sold through the underwriters. If in the
reasonable judgment of the managing underwriter of such public offering the
inclusion of all of the Purchased Stock originally covered by a request for
registration would reduce the number of shares to be offered by the Company or
interfere with the successful marketing of the shares of stock offered by the
Company, the number of shares of Purchased Stock otherwise to be included in the
underwritten public offering may be reduced pro rata (by number of shares) among
the holders thereof requesting such registration; provided, however, that after
any such required reduction, the Purchased Stock to be included in such offering
shall constitute at least 25% of the total number of shares to be included in
such offering.
The rights granted by this Section 9.2 may be transferred to and are
exercisable by subsequent transferees of any shares of Purchased Stock, except
with respect to shares of Purchased Stock that have been registered under the
Securities Act and sold.
9.3 Registration Procedures. If and whenever the Company is required
-----------------------
by the provisions of Sections 9.1 or 9.2 hereof to effect the registration of
shares of Purchased Stock under the Securities Act, the Company will:
(a) prepare and file with the Commission a registration statement
with respect to such securities, and use its best efforts to cause such
registration statement to become and remain effective for such period as may be
reasonably necessary to effect the sale of such securities, not to exceed nine
months;
(b) prepare and file with the Commission such amendments to such
registration statement and supplements to the prospectus contained therein as
may be necessary to keep such registration statement effective for such period
as may be reasonably necessary to effect the sale of such securities, not to
exceed nine months;
(c) furnish to the security holders participating in such
registration and to the underwriters of the securities being registered such
number of copies of the registration statement, preliminary prospectus, final
prospectus and such other documents as such underwriters may reasonably request
in order to facilitate the public offering of such securities;
(d) use its best efforts to register or qualify the securities
covered by such registration statement under such state securities or blue sky
laws of such jurisdictions as such participating holders may reasonably request
in writing within 20 days following the original filing
7
<PAGE>
of such registration statement, except that the Company shall not for any
purpose be required to execute a general consent to service of process or to
qualify to do business as a foreign corporation in any jurisdiction wherein it
is not so qualified;
(e) notify the security holders participating in such
registration, promptly after it shall receive notice thereof, of the time when
such registration statement has become effective or a supplement to any
prospectus forming a part of such registration statement has been filed;
(f) notify such holders promptly of any request by the Commission
for the amending or supplementing of such registration statement or prospectus
or for additional information;
(g) prepare and file with the Commission, promptly upon the
request of any such holders, any amendments or supplements to such registration
statement or prospectus which, in the opinion of counsel for such holders (and
concurred in by counsel for the Company), is required under the Securities Act
or the rules and regulations thereunder in connection with the distribution of
the Purchased Stock by such holder;
(h) prepare and promptly file with the Commission and promptly
notify such holders of the filing of such amendment or supplement to such
registration statement or prospectus as may be necessary to correct any
statements or omissions if, at the time when a prospectus relating to such
securities is required to be delivered under the Securities Act, any event shall
have occurred as the result of which any such prospectus or any other prospectus
as then in effect would include an untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein, in the
light of the circumstances in which they were made, not misleading;
(i) advise such holders, promptly after it shall receive notice or
obtain knowledge thereof, of the issuance of any stop order by the Commission
suspending the effectiveness of such registration statement or the initiation or
threatening of any proceeding for that purpose and promptly use its best efforts
to prevent the issuance of any stop order or to obtain its withdrawal if such
stop order should be issued;
(j) not file any amendment or supplement to such registration
statement or prospectus to which a majority in interest of such holders shall
have reasonably objected on the grounds that such amendment or supplement does
not comply in all material respects with the requirements of the Securities Act
or the rules and regulations thereunder, after having been furnished with a copy
thereof at least two business days prior to the filing thereof, unless in the
opinion of counsel for the Company the filing of such amendment or supplement is
reasonably necessary to protect the Company from any liabilities under any
applicable federal or state law and such filing will not violate applicable law;
and
(k) at the request of any such holder, furnish (i) an opinion,
dated as of the closing date, of the counsel representing the Company for the
purposes of such registration, addressed to the underwriters, if any, and to the
holder or holders making such request, covering such matters as such
underwriters and holder or holders may reasonably request; and (ii) letters
dated as
8
<PAGE>
of the effective date of the registration statement and as of the closing date,
from the independent certified public accountants of the Company, addressed to
the underwriters, if any, and to the holder or holders making such request,
covering such matters as such underwriters and holder or holders may reasonably
request.
9.4 Expenses. With respect to Sections 9.1 and 9.2 hereof (except as
--------
otherwise provided in Sections 9.1 and 9.2), the Company shall bear the
following fees, costs and expenses: all registration, filing and NASD fees,
printing expenses, fees and disbursements of counsel and accountants for the
Company, fees and disbursements of counsel for the underwriter or underwriters
of such securities (if the Company and/or selling security holders are required
to bear such fees and disbursements), all internal Company expenses, all legal
fees and disbursements and other expenses of complying with state securities or
blue sky laws of any jurisdictions in which the securities to be offered are to
be registered or qualified, and the premiums and other costs of policies of
insurance against liability (if any) arising out of such public offering. Fees
and disbursements of counsel and accountants for the selling security holders,
underwriting discounts and commissions and transfer taxes relating to the shares
included in the offering by the selling security holders, and any other expenses
incurred by the selling security holders not expressly included above, shall be
borne pro rata by the selling security holders.
9.5 Indemnification.
---------------
(a) The Company will indemnify and hold harmless each holder of
shares of Purchased Stock which are included in a registration statement
pursuant to the provisions hereof, its directors and officers, and any
underwriter (as defined in the Securities Act) for such holder and each person,
if any, who controls such holder or such underwriter within the meaning of the
Securities Act, from and against, and will reimburse such holder and each such
underwriter and controlling person with respect to, any and all loss, claim,
damage, liability, cost and expense to which such holder or any such underwriter
or controlling person may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages, liabilities, costs or expenses arise
out of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in such registration statement, any prospectus contained
therein or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading
in light of the circumstances in which they were made; provided, however, that
the Company will not be liable in any such case to the extent that any such
loss, damage, liability, cost or expense arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission so
made in conformity with information furnished by such holder, such underwriter
or such controlling person in writing specifically for use in the preparation
thereof.
(b) Each holder of shares of Purchased Stock which are included in
a registration statement pursuant to the provisions hereof will indemnify and
hold harmless the Company, its directors and officers, any controlling person
and any underwriter from and against, and will reimburse the Company, its
directors and officers, any controlling person and any underwriter with respect
to, any and all loss, claim, damage, liability, cost or expense to which the
Company or any controlling person and/or any underwriter may become subject
under the Securities Act or
9
<PAGE>
otherwise, insofar as such losses, claims, damages, liabilities, costs or
expenses arise out of or are based upon any untrue or alleged untrue statement
of any material fact contained in such registration statement, any prospectus
contained therein or any amendment or supplement thereto, or arise out of or are
based upon the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances in which they were made, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was so made in reliance upon
and in strict conformity with written information furnished by such holder
specifically for use in the preparation thereof; provided, however that in no
event shall any holder of shares of Purchased Stock be liable under any such
indemnity for any amount in excess of the aggregate amount of proceeds such
holder received from the sale of shares of Purchased Stock pursuant to such
registration statement.
(c) Promptly after receipt by an indemnified party pursuant to the
provisions of paragraph (a) or (b) of this Section 9.5 of notice of the
commencement of any action involving the subject matter of the foregoing
indemnity provisions such indemnified party will, if a claim thereof is to be
made against the indemnifying party pursuant to the provisions of said paragraph
(a) or (b), promptly notify the indemnifying party of the commencement thereof;
but the omission to so notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than
hereunder. In case such action is brought against any indemnified party and it
notifies the indemnifying part of the commencement thereof, the indemnifying
party shall have the right to participate in, and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party,
provided, however, if the defendants in any action include both the indemnified
party and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party or if there is a conflict of interest which would prevent
counsel for the indemnifying party from also representing the indemnified party,
the indemnified party or parties shall have the right to select separate counsel
to participate in the defense of such action on behalf of such indemnified party
or parties. After notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party will
not be liable to such indemnified party pursuant to the provisions of said
paragraph (a) or (b) for any legal or other expense subsequently incurred by
such indemnified party in connection with the defense thereof other than
reasonable costs of investigation, unless (i) the indemnified party shall have
employed counsel in accordance with the proviso of the preceding sentence, (ii)
the indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after the notice of the commencement of the action, or (iii) the indemnifying
party has authorized the employment of counsel for the indemnified party at the
expense of the indemnifying party. Notwithstanding the foregoing, nothing in
this Section 9.5 will obligate any indemnifying party, with respect to any
proceeding or related proceedings in the same jurisdiction to be liable for the
fees and expenses of more than one separate law firm at any one time for all
such indemnified parties.
9.6 Purchased Stock Definition. "Purchased Stock" shall mean this
----------------------------
Warrant, and the shares of Common Stock of the Company issuable upon exercise of
this Warrant and all shares
10
<PAGE>
of such Common Stock issued in exchange or substitution therefor, whether or not
such securities (other than this Warrant) have in fact been issued, and the
stock or other securities of the Company issued in a stock split or
reclassification of, or a stock dividend or other distribution on or in
substitution or exchange for, or otherwise in connection with, any of the
foregoing securities, or in a merger or consolidation involving the Company or a
sale of all or substantially all of the Company's assets. For purposes hereof,
the record holder of this Warrant shall be treated as the record holder of the
related Common Stock then issuable upon the exercise thereof. Nothing in this
Section 9.6 shall, however, be deemed to require the Company to register this
Warrant, it being understood that the registration rights granted hereby relate
only to shares of Common Stock of the Company and securities issued in
substitution or exchange therefor.
10. Optional Conversion.
-------------------
(a) In addition to and without limiting the rights of the holder of
this Warrant under the terms of this Warrant, the holder of this Warrant shall
have the right (the "Conversion Right") to convert this Warrant or any portion
thereof into shares of Common Stock as provided in this Section 10 at any time
or from time to time after the first anniversary of the date hereof and prior to
its expiration, subject to the restrictions set forth in paragraph (c) below.
Upon exercise of the Conversion Right with respect to a particular number of
shares subject to this Warrant (the "Converted Warrant Shares"), the Company
shall deliver to the holder of this Warrant, without payment by the holder of
any exercise price or any cash or other consideration, that number of shares of
Common Stock equal to the quotient obtained by dividing the Net Value (as
hereinafter defined) of the Converted Warrant Shares by the fair market value
(as defined in paragraph (d) below) of a single share of Common Stock,
determined in each case as of the close of business on the Conversion Date (as
hereinafter defined). The "Net Value" of the Converted Warrant shares shall be
determined by subtracting the aggregate warrant purchase price of the Converted
Warrant Shares from the aggregate fair market value of the Converted Warrant
Shares. Notwithstanding anything in this Section 10 to the contrary, the
Conversion Right cannot be exercised with respect to a number of Converted
Warrant Shares having a Net Value below $100. No fractional shares shall be
issuable upon exercise of the Conversion Right, and if the number of shares to
be issued in accordance with the foregoing formula is other than a whole number,
the Company shall pay to the holder of this Warrant an amount in cash equal to
the fair market value of the resulting fractional share.
(b) The Conversion Right may be exercised by the holder of this Warrant
by the surrender of this Warrant at the principal office of the Company together
with a written statement specifying that the holder thereby intends to exercise
the Conversion Right and indicating the number of shares subject to this Warrant
which are being surrendered (referred to in paragraph (a) above as the Converted
Warrant Shares) in exercise of the Conversion Right. Such conversion shall be
effective upon receipt by the Company of this Warrant together with the
aforesaid written statement, or on such later date as is specified therein (the
"Conversion Date"), but not later than the expiration date of this Warrant.
Certificates for the shares of Common Stock issuable upon exercise of the
Conversion Right, together with a check in payment of any fractional share and,
in the case of a partial exercise, a new warrant evidencing the shares remaining
subject to this Warrant, shall be issued as of the Conversion Date and shall be
delivered to the holder of this Warrant within 15 days following the Conversion
Date.
11
<PAGE>
(c) In the event the Conversion Right would, at any time this Warrant
remains outstanding, be deemed by the Company's independent certified public
accountants to give rise to a material charge to the Company's earnings for
financial reporting purposes, then the Conversion Right shall automatically
terminate upon the Company's written notice to the holder of this Warrant of
such adverse accounting treatment.
(d) For purposes of this paragraph 10, the "fair market value" of a
share of Common Stock as of a particular date shall be its "market price",
calculated as described in Section 4(h) hereof.
11. Governing Law. All questions concerning this Warrant will be governed
-------------
and interpreted and enforced in accordance with the internal law of the State of
New York without regard to the principles of conflicts of law thereof.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer and this Warrant to be dated as of _________, 1996.
MATRIX CAPITAL CORPORATION
By: __________________________________
Name:
Title:
RESTRICTION ON TRANSFER
The securities evidenced hereby may not be transferred without
compliance with the provisions of Section 7 hereof or registration under the
Securities Act of 1933, as amended.
12
<PAGE>
FORM OF ASSIGNMENT
(To Be Signed Only Upon Assignment)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers unto ______________________________ this Warrant, and appoints
________________________ to
transfer this Warrant on the books of the Company with the full power of
substitution in the premises.
Dated:
In the presence of:
_______________________________________________
(Signature must conform in all respects to the
name of the holder as specified on the face of
this Warrant without alteration, enlargement or
any change whatsoever, and the signature must
be guaranteed in the usual manner)
13
<PAGE>
SUBSCRIPTION FORM
To be Executed by the Holder of this Warrant if such Holder
Desires to Exercise this Warrant in Whole or in Part:
TO: Matrix Capital Corporation (the "Company")
The undersigned _____________________________________
Please insert Social Security or other identifying number of Subscriber:
_____________________________
hereby irrevocably elects to exercise the right of purchase represented by this
Warrant for, and to purchase thereunder, _______ shares of the Common Stock
provided for therein and tenders payment herewith to the order of the Company in
the amount of $__________, such payment being made as provided on the face of
this Warrant.
The undersigned requests that certificates for such shares of Common Stock be
issued as follows:
Name:_____________________________________
Address:__________________________________
Deliver to:_______________________________
Address:__________________________________
and, if such number of shares of Common Stock shall not be all the shares of
Common Stock purchasable hereunder, that a new Warrant for the balance remaining
of the shares of Common Stock purchasable under this Warrant be registered in
the name of, and delivered to, the undersigned at the address stated above.
Dated:
Signature:___________________________________
Note: The signature on this
Subscription Form must correspond
with the name as written upon the
face of this Warrant in every
particular, without alteration or
enlargement or any change whatever.
14
<PAGE>
Exhibit 5
[JENKENS & GILCHRIST LETTERHEAD APPEARS HERE]
October 8, 1996
Matrix Capital Corporation
1380 Lawrence Street, Suite 1410
Denver, Colorado 80204
Re: Offering of Common Stock of Matrix Capital Corporation on Form S-1
Gentlemen:
On August 15, 1996, Matrix Capital Corporation, a Colorado corporation (the
"Company"), filed with the Securities and Exchange Commission a Registration
Statement on Form S-1 (the "Registration Statement") under the Securities Act of
1933, as amended (the "Act"). Such Registration Statement, as amended by
Amendment No. 1 thereto, relates to the sale by the Company of an aggregate of
1,750,000 shares of the Company's common stock, par value $.0001 per share (the
"Common Stock"), plus an additional 262,500 shares of Common Stock subject to
the exercise of an over-allotment option to be granted by the Company
(collectively, the "Shares"). We have acted as counsel to the Company in
connection with the preparation and filing of the Registration Statement, as
amended.
In connection therewith, we have examined and relied upon the original or
copies, certified to our satisfaction, of (i) the Amended and Restated Articles
of Incorporation and the bylaws of the Company, as amended, (ii) copies of
resolutions of the Board of Directors of the Company authorizing the offering of
the Shares, the preparation and filing of the Registration Statement and related
matters, (iii) the Registration Statement, and all amendments and exhibits
thereto, and (iv) such other documents and instruments as we have deemed
necessary for the expression of the opinions herein contained. In making the
foregoing examinations, we have assumed the genuineness of all signatures and
the authenticity of all documents submitted to us as originals, and the
conformity to original documents of all documents submitted to us as certified
or photostatic copies. As to various questions of fact material to this opinion,
we have relied, to the extent we deem reasonably appropriate, upon
representations or certificates of officers or directors of the Company and upon
documents, records and instruments furnished to us by the Company, without
independent check or verification of their accuracy.
Based upon the foregoing examination, we are of the opinion that the Shares
to be issued by the Company in the offering, as described in the Registration
Statement, as amended, have been duly and validly authorized for issuance and
the Shares, when issued and delivered by the Company in the manner and for the
consideration stated in the Prospectus constituting a part of
<PAGE>
Matrix Capital Corporation
October 8, 1996
Page 2
the Registration Statement, as amended, and in accordance with the Purchase
Agreement described in the Registration Statement, as amended, will be validly
issued, fully paid and nonassessable.
We advise you that we are licensed to practice law only in the State of
Texas, and we are not experts with respect to the laws of any other
jurisdictions other than the laws of the State of Texas and the federal laws of
the United States of America. In rendering the opinions herein relating to the
laws of the State of Colorado, we advise you that we have rendered such opinions
in reliance upon the legal opinion, dated October 8, 1996, given to this firm
and the Company by James G. Panero, the General Counsel of the Company.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Prospectus forming part of the Registration Statement. In giving
such consent, we do not admit that we come within the category of persons whose
consent is required by Section 7 of the Act or the rules and regulations of the
Commission thereunder.
Respectfully submitted,
JENKENS & GILCHRIST,
a Professional Corporation
By: /s/
-------------------------------------
Ronald J. Frappier
Authorized Signatory
<PAGE>
EXHIBIT 10.6
LOAN AGREEMENT
This Loan Agreement (the "Agreement") is entered into this 2 day of
October, 1995 by and between MATRIX DIVERSIFIED, INC., an Arizona corporation
having an address at 201 West Coolidge Street, Phoenix, Arizona, 85013, as
borrower ("Borrower") and MATRIX CAPITAL CORPORATION, a Colorado corporation
having an address at 1380 Lawrence Street, Suite 1410, Denver, Colorado 80222,
as lender (Lender).
RECITALS
WHEREAS, Borrower has acquired Creative Networks, LLC by operation of
the Asset Purchase Agreement, dated October 1, 1995;
WHEREAS, Borrower has secured financing from Matrix Capital
Corporation and other lenders for the purchase of Creative Networks, LLC;
WHEREAS, Lender desires to loan to Borrower, and Borrower desires to
borrow from Lender, the amount of $750,000.00 (the "Loan Amount"), for the
purpose of financing the purchase price for Creative Networks, LLC;
NOW, THEREFORE, in consideration of the mutual agreements hereinafter
set forth, and for other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, Borrower and Lender, intending to be
legally bound, agree as follows:
1. PROMISE TO PAY. Borrower promises to pay to the order of Lender
--------------
at the address set forth above the principal amount of the funds borrowed,
together with interest on the principal amount from time to time outstanding,
from and including the date of disbursement until, but not including the date of
payment, at a per annum rate as set forth in Section 2 below.
2. STATED INTEREST RATE. The principal balance outstanding hereunder
--------------------
shall bear interest at the Stated Interest Rate, calculated daily on the basis
of actual days elapsed over a 360-day year, applied to the principal balance of
the Loan Amount from time to time outstanding. The Stated Interest Rate shall
be a per annum rate equal to thirteen percent (13%).
3. PRINCIPAL BALANCE. The principal balance outstanding at any time
-----------------
shall be the total amount of the original Loan Amount less the total amount of
payments of principal applied against the Loan Amount, as reflected in the
records of Lender with respect to the indebtedness evidenced by this Agreement.
<PAGE>
4. PAYMENTS. Payments hereunder shall be made at the address for
--------
Lender first set forth above, or at such other address as Lender may specify to
Borrower in writing. Borrower agrees to make the following Payments:
(a) Interest Payments. Accrued and unpaid interest at the Stated
-----------------
Interest Rate shall be payable on the maturity date of this Agreement.
(b) Principal Payments. In addition to the Principal Reductions
------------------
provided in Section 5 below, the principal balance outstanding hereunder,
together with all accrued interest and other amounts payable hereunder, if not
sooner paid as provided in this Agreement, shall be due and payable on October
1, 2000. Principal Payments shall be payable by wire transfer.
5. PRINCIPAL REDUCTIONS. Borrower may make periodic payments of
--------------------
principal, without penalty, at its election. Such payments to Lender, are
hereinafter referred to as Principal Reductions.
6. COLLATERAL. In order to secure repayment of the indebtedness
----------
evidenced by this Agreement, Borrower will cause lien positions to be filed
against Matrix Diversified, Inc. The lien position evidenced by this Loan
Agreement shall rank pari passu with the lien positions of any other lender
providing funds for the acquisition of Creative Networks, LLC. Additionally,
the lien position of Lender shall rank senior to the lien position of all other
future lenders.
7. REPRESENTATIONS AND WARRANTIES
------------------------------
(a) Organization. Borrower is an Arizona corporation, duly
------------
organized, validly existing and in good standing under the laws of the State of
Arizona.
(b) Enforceability. Borrower has the power and authority to enter
--------------
into this Agreement and has taken all action necessary to authorize the
execution, delivery and performance of this Agreement. This Agreement is the
legal, valid and binding obligation of Borrower, enforceable in accordance with
its terms.
(c) No Violation. No provision or obligation of Borrower contained
------------
in this Agreement violates any applicable law, regulation or ordinance, or any
order or ruling of any court or governmental entity. No provision or obligation
of this Agreement conflicts with, or constitutes a breach or default under, any
agreement binding Borrower.
(d) Financial Information. All financial information that has
---------------------
been and will be delivered to Lender, including all information relating to the
financial condition of Borrower fairly and accurately represents the financial
condition being reported.
<PAGE>
(e) Taxes. Borrower has filed all required state, federal and
-----
local income tax returns and has paid all taxes that are due and payable.
Borrower knows of no basis for any additional assessment of taxes against
Borrower.
8. EVENTS OF DEFAULT; ACCELERATION. The occurrence of any one or
-------------------------------
more of the following events shall constitute an "Event of Default" hereunder,
and upon such Event of Default, the entire principal balance outstanding
hereunder, together with all accrued interest and other amounts payable
hereunder, at the election of Lender, shall become due and payable, upon notice
to Borrower:
(a) Nonpayment of principal, interest or other amounts when the
same shall become due and payable under this Agreement, which nonpayment
continues for a period of fifteen days after written notice from Lender to
Borrower;
(b) Failure of Borrower to comply with any other provision of this
Agreement, which failure continues for a period of thirty days after written
notice from Lender to Borrower;
(c) The dissolution or liquidation of Borrower;
(d) The calling of a meeting of the creditors of Borrower;
(e) The making by Borrower of an assignment for the benefit of
its creditors; or,
(f) The appointment of (or application for appointment of) a
receiver of Borrower or the involuntary filing against or voluntary filing by
Borrower of a petition or application for relief under federal bankruptcy law or
any similar state or federal law, or the issuance of any writ of garnishment,
execution or attachment for service with respect to Borrower or any property of
Borrower.
9. WAIVERS. Except as set forth in this Agreement, to the extent
-------
permitted by applicable law, Borrower waives demand, diligence, grace,
presentment for payment, protest, notice of nonpayment, nonperformance,
extension, dishonor, maturity, protest and default. Lender may extend the time
for payment of or renew this Agreement, release collateral as security for the
indebtedness evidenced hereby or release any party from liability hereunder, and
any such extension, renewal, release or other indulgence shall not alter or
diminish the liability of Borrower, except to the extent expressly set forth in
a writing evidencing or constituting such extension, renewal, release or other
indulgence and executed by Lender.
10. COSTS OF COLLECTION. Borrower agrees to pay costs of collection,
-------------------
including, without limitation, reasonable attorneys' fees and costs of suit, to
enforce payment of this
<PAGE>
Agreement. Attorneys' fees shall be set by the court and not by the jury and
shall be included in any judgment obtained by Lender.
11. NO WAIVER BY LENDER. No delay or failure of Lender in exercising
-------------------
any right hereunder shall affect such right, nor shall any single or partial
exercise of any right preclude further exercise thereof.
12. GOVERNING LAW. This Agreement shall be construed in accordance
-------------
with and governed by the laws of the State of Colorado.
13. TIME OF ESSENCE. Time is of the essence of this Agreement and
---------------
each and every provision hereof.
14. AMENDMENTS. No amendment, modification, change, waiver, release
----------
or discharge hereof and hereunder shall be effective unless evidenced by an
instrument in writing and signed by the party against whom enforcement is
sought.
15. SEVERABILITY. If any provision hereof is invalid or
------------
unenforceable, the other provisions hereof shall remain in full force and
effect.
16. BINDING NATURE. The provisions of this Agreement shall be
--------------
binding upon Borrower and its respective successors and assigns.
17. COUNTERPARTS. This Agreement may be executed in counterparts,
------------
and all counterparts shall constitute but one and the same document.
18. SECTION HEADINGS. The section headings set forth in this
----------------
Agreement are for convenience only, do not define or limit any terms or
provisions and shall not have substantive meaning hereunder or be deemed part of
this Agreement.
19. CONSTRUCTION. This Agreement shall be construed as a whole, in
------------
accordance with its fair meaning, and without regard to or taking into account
any presumption or other rule of law requiring construction against the party
preparing this Agreement.
IN WITNESS WHEREOF, this Loan Agreement has been executed as of the date first
set forth above.
"BORROWER"
MATRIX DIVERSIFIED, INC.
<PAGE>
By:__________________________________
Its:_________________________________
"LENDER"
MATRIX CAPITAL CORPORATION
By:__________________________________
Its:_________________________________
<PAGE>
EXHIBIT 10.34
LEASE
DATE: OCTOBER 1, 1996
LANDLORD: MATRIX CAPITAL CORPORATION
TENANT: CREATIVE NETWORKS, LLC
I. LEASED PREMISES
The leased premises (the "Leased Premises") are as shown on Exhibit "A"
attached hereto and are further defined as:
7360 Rentable Square Feet at 201 West Coolidge Street, Phoenix, Arizona
85013. The Rentable Square Feet includes a common area factor of 12% for
computation of the area of the Leased Premises
II. LEASE
The Landlord hereby leases to the Tenant, and the Tenant hereby leases from
the Landlord, the Leased Premises, upon the terms and conditions set forth in
this Lease (the "Lease").
III. TERM
The Lease is for a term of twelve (12) months commencing October 1, 1996,
(the "Commencement Date") and terminating September 30, 1997, (the "Termination
Date").
IV. SECURITY DEPOSIT
Tenant has paid Landlord at the execution hereof, the amount of zero
dollars ($0.00) as security for the performance by Tenant of the terms hereof,
which amount shall be returned to Tenant at the Termination Date if Tenant has
discharged its obligations to Landlord in full pursuant to this Lease and all
amendments thereto.
V. RENTAL, DEFINITIONS
Tenant agrees to pay as base rental one hundred eight thousand four hundred
thirty three and thirty three one hundredths dollars ($8,433.33) per month (the
"Base Rent") for each and every month of the Lease (plus any excise, privilege
or sales taxes levied on the rentals or the receipt thereof, except Landlord's
income tax), payable in advance, without offset or deduction, on the first day
of each month commencing with the Commencement Date of the Lease.
Each year of this Lease, Landlord may elect to require that the rental be
adjusted for that year on the basis of Landlord's incurred Operating Costs,
which adjusted rental Tenant agrees to pay in accordance with the statements
rendered. Operating Costs shall be assessed at Tenant's Proportionate Share of
the Building.
"Operating Costs" shall be determined on the basis for each year of this
Lease by taking into account, on a consistent basis, all costs of management,
maintenance, and operation of the Building, including but not limited to the
costs of Real and Personal Property taxes, cleaning, utilities, air conditioning
and heating, plumbing, elevator, insurance, ground rent, landscaping
<PAGE>
costs and the cost of improvements installed to reduce the above-listed
operating costs together with interest at the Prime Rate (as hereinafter
defined) on the unamortized portion of such cost, amortized over such reasonable
period as Landlord shall determine, and all other costs which can properly be
considered operating expenses incurred in the management, maintenance and
operation of the Building.
For the purposes of this Paragraph V. Rental, Definitions, the following
terms shall have the following meanings:
1. "Real and Personal Property taxes" shall mean and include a) all real
property taxes and personal property taxes, charges and general and special
assessments which are levied or assessed upon or with respect to the Building
and any improvements, fixtures, and equipment and all other personal property of
Landlord located on, in or about the Building and/or used in connection with the
operation thereof and b) all taxes which shall be levied or assessed in addition
to or in lieu of such real or personal property taxes, but shall not include any
net income, franchise, capital stock, estate or inheritance taxes.
2. Tenant's "Proportionate Share" shall mean the ratio, expressed as a
percentage, of the rentable area of the Leased Premises to the rentable area of
the Building, which the parties hereby stipulate to be twenty-five percent
(25%).
3. As used in this Lease, the term "Building" includes the building
and/or buildings and adjoining parking areas, if any, and the land and/or air
space which is the site and grounds for such buildings and parking areas,
regardless of the name under which such buildings may be known.
4. As used in this Lease, the term "Prime Rate" shall mean the sum of (a)
that rate of interest, charged by Bank One, Arizona, N.A. a national banking
association (or any successor to the business of such bank), and announced by
such bank, from time to time, as its "prime rate", and (b) two (2) percentage
points above the annual rate of interest specified in clause (a) immediately
hereinabove.
VI. INITIAL CONSTRUCTION
Construction, if any, to be completed by Landlord will be in accordance
with the plans, specifications and agreements approved by both parties, which
are attached hereto, as Exhibit "A" (the "Plans and Specifications") and made
part of this Lease. Landlord will not be obligated to construct or install any
improvements or facilities of any kind other than those called for on the Plans
and Specifications. Landlord agrees to commence and complete such Construction
with reasonable diligence. All such improvements are to be the property of
Landlord, and upon termination of this Lease, Tenant shall deliver the Leased
premises to Landlord in good condition and repair, broom clean, normal wear and
tear excepted.
VII. REPAIRS AND ALTERATIONS
Landlord agrees to make all necessary repairs to the exterior walls,
exterior doors, windows and corridors of the Building. Landlord agrees to keep
the Building in a clean, neat and attractive condition. Landlord agrees to keep
all building standard equipment such as elevators, plumbing, heating, air
conditioning and similar equipment in good repair, but Landlord shall not be
liable or responsible for breakdowns or temporary interruptions in service when
reasonable efforts are used to restore service.
Tenant agrees that it will pay for the cost of all repairs to the Leased
Premises not required above to be made by Landlord and be responsible for all
redecorating, remodeling, alteration and painting required by it during the term
of this Lease. Tenant shall pay for any repairs to the Leased Premises, or the
Building, made necessary by any negligence or carelessness
<PAGE>
of Tenant, its employees or invitees. Tenant agree to maintain the Leased
Premises in a clean, neat and sanitary condition.
Tenant may place partitions and fixtures and make improvements and other
alternations to the interior of the Leased Premises at Tenant's expense,
provided however, that prior to commencing any such work Tenant shall first
obtain the written consent of Landlord to the proposed work and Landlord shall
have right to review and approve all plans. Landlord may require that said work
be done by Landlord's own employees or under Landlord's direction but at the
expense of Tenant, and Landlord may, as a condition to consenting to such work,
require that Tenant give security that the Leased Premises will be completed
free and clear of liens and in a manner satisfactory to Landlord.
Notwithstanding the foregoing, any such improvements or alterations by Tenant
shall conform to and be in substantial accordance in quality and appearance with
the quality and appearance of the improvements in the remainder of the Building.
Any such improvements shall become the property of Landlord upon expiration of
this Lease. Tenant shall remove any movable furniture and equipment upon
termination of this Lease and shall deliver the Leased Premises to Landlord in
as good condition as received, broom clean, normal wear and tear excepted. In
the event Tenant receives consent of the Landlord and uses Tenant's own
contractor for any such improvements then Tenant must provide Landlord with
contractor's evidence of workmen's compensation and liability insurance in
amounts sufficient to Landlord and have acquired the necessary building permits
prior to commencing any such construction.
VII. FIRE OR CASUALTY INSURANCE
In the event that the Leased Premises are wholly or partially destroyed by
fire or other casualty covered by the usual form of fire and extended coverage
insurance rendering them untenantable, Landlord shall, to the extent of
insurance proceeds actually received by Landlord, rebuild, repair or restore the
Leased Premises to substantially the same condition as when the same were
furnished to Tenant and this Lease shall remain in effect during such period. In
the event of total destruction, rent shall abate during the period of
reconstruction, and in the event of partial destruction, rent shall abate
prorata during the period of reconstruction. In the event, however, that the
building containing the Leased Premises is damaged or destroyed to the extent of
more than one-third (1/3) of its replacement cost, Landlord may elect to
terminate this Lease.
Tenant shall be responsible for and shall provide Tenant's own insurance
coverage, and supply Landlord with evidence of such coverage with respect to any
furniture, fixtures, improvements, betterments, equipment and personal property
belonging to Tenant and placed by Tenant in or upon the Leased Premises. Tenant
agrees and warrants to Landlord that any fire insurance policy, extended
coverage policy, casualty and loss policy, or other policy or policies carried
by Tenant in connection with this Lease or the Leased Premises and/or insuring
Tenant's property or effects located in or upon the Leased Premises shall each
contain a provision whereby the insurance carrier waives any right of
subrogation against the Landlord.
Provided Landlord can obtain such waiver of subrogation rights with regard
to policies of fire or casualty insurance obtained by Landlord with regard to
the Building, Landlord hereby releases and waives any and all rights of
subrogation against Tenant which, in the absence of this release and waiver,
would arise in favor of any insurance company insuring Landlord against loss of
fire, extended coverage casualty and loss of any other type, resulting from
damage to or destruction of the building of which the Leased Premises form a
part or any portion thereof in damage to or destruction of the property of
Landlord in the Building. Landlord shall not be required to obtain such
insurance policies except through insurance companies satisfactory to the
Landlord and the holder of any mortgage covering the Leased Premises.
IX. USE OF LEASED PREMISES
The Leased Premises are leased to Tenant for the sole purpose of
professional administration and for no other purpose whatsoever. Tenant agrees
that it will use the Leased Premises in such manner as to not interfere with or
infringe upon the rights of other tenants in the Building. Tenants agrees to
comply with all applicable laws, ordinances and regulations in
<PAGE>
connection with its use of and/or transfer of any interest in the Leased
Premises and in performing all repairs, remodeling and alterations to the Leased
Premises, including all Environmental Laws and obtaining all necessary permits,
licenses or other authorizations required pursuant to such laws. Tenant shall
supply all documentation regarding compliance with the law, including written
documentation by the appropriate governmental authority that all such laws have
been complied with.
X. SIGNS
Landlord shall retain absolute control over the exterior appearance of the
Building and the exterior appearance of the Leased Premises as viewed from the
public halls. Tenant will not install, or permit to be installed, any drapes,
shutters, lettering, advertising or any items that will in any way alter the
exterior appearance of the Building or the exterior appearance of the Leased
Premises as viewed from the public halls or exterior.
XI. CONFIDENCE REPOSED IN TENANT AND TENANT'S REPRESENTATIONS AND WARRANTIES
It is agreed that one of the conditions moving Landlord to make this Lease
is the personal confidence reposed by it in Tenant, combined with the belief
that Tenant will be a tenant and occupant satisfactory to Landlord and the other
occupants of the Building. Should Tenant vacate or abandon the Leased Premises
during the term hereof, Landlord, at Landlord's discretion, shall have the right
to cancel this Lease without obligation to Tenant.
Tenant represents and warrants as follows:
A. Tenant has never been in violation of or investigated for violation of
any Environmental Laws.
B. Tenant will not engage in any activity involving Hazardous Substances
or which could cause an Environmental Condition on the Leased Premises or permit
any third party to do so, without Landlord's written consent.
C. Tenant will immediately notify Landlord of (i) any investigation,
proceeding, notice or claim regarding a violation of any Environmental Law
relating to the Leased Premises or other premises which Tenant occupies, an
Environmental Condition on the Leased Premises, or a Release of Hazardous
Substances on the Leased Premises, (ii) any submissions or notifications made
by Tenant to governmental authorities or others concerning Environmental
Conditions or Hazardous Substances on the Leased Premises, and (iii) the
existence of any Hazardous Substances or Environmental Conditions on or about
the Leased Premises or on property adjoining or in the vicinity of the Leased
Premises that may be in violation of an Environmental Law (regardless of whether
Tenant is responsible for its existence). Tenant will take all appropriate
response actions in the event of an occurrence of an Environmental Condition on
the Leased Premises and shall resolve all environmental problems to the
satisfaction of Landlord. In the event of any investigation, notice of
violation or other action taken by a governmental agency or private person
relating in any way to Tenant's operation on the Leased Premises. Tenant shall
be solely responsible for complying with all legal requirements, including
cleanup of the Leased Premises, and requirements imposed by the governmental
authority. Tenant shall not, however take any remedial action in response to
the presence of any Hazardous Substance or Environment Condition, nor enter into
any settlement agreement, consent decree or other compromise without first
notifying Landlord and affording Landlord ample opportunity to appear,
intervene, or otherwise appropriately assert and protect Landlord's interest.
As used in this Lease, the following terms shall have the meanings
specified below:
A. "Environmental Law(s) shall mean any federal, state or local law,
including statutes, ordinances, rules, common law and guidelines, now in effect
or hereinafter enacted,
<PAGE>
pertaining to health, industrial hygiene, or the environment, including without
limitation, the Comprehensive Environmental Response, Compensation and Liability
Act, the Resource Conservation and Recovery Act, the Toxic Substances Control
Act, the Superfund Amendments and Reauthorization Act, the Clean Air Act, the
Federal Water Pollution Control Act, the Safe Drinking Water Act, and the Solid
Waste Disposal Act.
B. "Hazardous Substances" shall mean any material or sublease which may
or could pose risk of injury or threat to health or the environment and any
substance that is or becomes regulated by any federal, state or local law.
C. "Environmental Condition" shall mean any condition with respect to
soil, air, surface or groundwater which could require remedial action and/or may
result in claims, demands, and/or liabilities by or to third parties, including
without limitation, governmental entities.
D. "Release" shall mean any releasing, spilling, leaking, pumping,
pouring, emitting, emptying, discharging, injecting, escaping, leaching,
disposing or dumping.
Tenant's failure to perform or observe any of the above representations and
warranties shall constitute a substantial breach of the Lease and shall entitle
Landlord to pursue any and all remedies allowed by law or at equity, including
without limitation cancelling and terminating the Lease and imposing a rent
surcharge.
XII. ASSIGNMENT AND SUBLETTING
(a) Tenant for itself, its heirs, distributees, successors and assigns,
expressly covenants that it shall not, by operation of law or otherwise, assign,
sublet, mortgage or encumber all or any part of this Lease or the Leased
Premises, including environment liens in favor of a governmental entity, or
permit the Leased Premises to be used by others without the prior written
consent of Landlord in each instance. Any attempt to do so by the Tenant shall
be void. The consent by Landlord to any assignment, sublet, mortgage or
encumbrance or use of all or any part of the Leased Premises by others, shall
not constitute a waiver of Landlord's right to withhold its consent to any other
assignment, sublet, mortgage, or encumbrance or use of all or any part of the
Leased Premises by others. Without the prior written consent of Landlord, this
Lease and the interest of Tenant therein or any assignee of Tenant therein,
shall not pass by operation of law, and shall not be subject to garnishment or
sale under execution in any lawsuit or proceeding which may be brought against
or by Tenant or any sublessee or assignee of Tenant.
(b) If Tenant requests Landlord's consent to an assignment of this Lease
or subletting of all or any part of the Leased Premises, Tenant shall submit to
Landlord: (1) the name of the proposed assignee or subtenant, (2) the terms of
the proposed assignment or subletting, (3) the nature of the proposed
subtenant's or assignee's business: and (4) such information as to such
subtenant's or assignee's financial responsibility and general reputation as
Landlord may require.
(c) Upon the receipt of the request pursuant to paragraph XII (b)
hereinabove and information from Tenant, Landlord shall have the option, at
Landlord's discretion, to be exercised in writing within thirty (30) days after
such receipt, to either (1) cancel and terminate the Lease, if the request is to
assign or sublet all of the Lease and/or the Leased Premises or, if the request
is to sublet or assign a portion of the Lease and/or the Leased Premises, to
cancel and terminate this Lease with respect to such portion, in each case as of
the date set forth in Landlord's notice of exercise of such option: (2) to grant
said request, or (3) deny said request if Landlord finds such subtenant or
assignee unacceptable.
(d) In the event Landlord shall cancel this Lease, Tenant shall surrender
possession of the Leased Premises, or the portion of the Leased Premises which
is the subject of the request, as the case may be, on the date set forth in such
notice in accordance with the provisions of this Lease relating to surrender of
the Leased Premises. If the lease shall be cancelled as to a portion of the
Leased Premises only, the rent and other charges payable by Tenant hereunder
shall be
<PAGE>
reduced proportionately according to the ratio that the number of square feet in
the portion of space surrendered bears to the square feet of space at the
initial Leased Premises.
(e) In the event that Landlord shall consent to a sublease or assignment
pursuant to the request from Tenant, Tenant shall cause to be executed by its
assignee or subtenant an agreement satisfactory to Landlord, whereby such
assignee or subtenant agrees to perform faithfully and to assume and be bound by
all of the terms, covenants, provisions and agreements of this Lease for the
period covered by the assignment or sublease and to the extent of the space
sublet or assigned. In addition, Tenant agrees that with regard to each such
sublease or assignment so consented to by Landlord, Tenant: (1) will not collect
more than one month's rent in advance, (2) will not terminate or cancel such
sublease or assignment without Landlord's prior written consent, (3) will be
responsible for all the acts and omissions of said sublessees or assignees, (4)
will only sublease at the rental which Tenant is then paying to Landlord, (5)
shall pay to Landlord promptly, following receipt of the amount of the value of
any consideration received by Tenant from any assignment of this lease, (6)
shall not assign or sublet the premises to another existing tenant in the
building housing the Leased Premises, and (7) an executed copy of each sublease
or assignment and assumption of performance by the sublessee or assignee, on
Landlord's standard form, shall be delivered to Landlord within five (5) days
prior to the commencement of occupancy set forth in such assignment of sublease.
No such assignment or sublease shall be binding on Landlord until Landlord shall
have actually received such copies as required herein.
(f) In no event shall any assignment or subletting to which Landlord may
consent, release or relieve Tenant from its obligations to fully perform all of
the terms, covenants and conditions of this Lease on its part to be performed.
(g) In the event this Lease is cancelled at Landlord's option as provided
hereinabove, neither of the parties shall have any further obligations
hereunder, except as may be expressly provided herein and except Tenant shall
pay all rents, charges and all other amounts due, as set out in the Lease, to
the date Tenant is notified of such cancellation.
XIII. EMINENT - DOMAIN
In the event any portion of the Leased Premises is taken from Tenant under
eminent domain proceedings, Tenant shall have no right, title or interest in any
award made for such taking.
XIV. WAIVER AND SEVERABILITY
The consent of the Landlord in any instance to any variation of the terms
of the Lease, or the receipt of rent with knowledge of any breach, shall not be
deemed to be a waiver as to any breach of any covenant or condition herein
contained, nor shall any waiver be claimed as to any provisions of this Lease
unless the same be in writing, signed by Landlord. This Lease and any written
amendment, exhibits or addenda hereto contain the entire agreement between the
parties. If any term or provision of this Lease or any application thereof
shall be invalid or unenforceable, then the remaining terms and provisions of
this Lease and any other application of such term or provision shall not be
affected thereby.
XV. USE OF COMMON FACILITIES
All elevators stairways, halls and areas for the common use of all tenants
at the Building shall be open to reasonable use by Tenant, its customers,
clients and employees. Tenant and its officers, agents and employees agree to
park their motor vehicles only in areas designated from time to time for that
purpose or otherwise as permitted in writing by Landlord.
<PAGE>
XVI. SERVICES
(a) Landlord agrees to provide air conditioning, heat, water and
electricity for lighting and normal office usage during the customary business
hours of the Building as established by Landlord, and to provide janitor
services of the type customarily furnished by comparable buildings, which shall
consist essentially of a nightly clean-up five (5) days per week, the cost of
which shall be included in Operating Costs hereunder.
(b) Tenant agrees to pay for all utilities and other services and expenses
used or incurred by Landlord on Tenant's behalf not specifically provided for
above.
XVII. ENTRY OF LANDLORD
Landlord reserves the right, without abatement of rent and other charges
due hereunder from Tenant to enter upon or have its agent enter the Leased
Premises at reasonable times for the inspection of the same, including
environmental assessments and audits, to make necessary repairs, including any
actions necessary to remediate, abate or cleanup any Hazardous Substances or
Environmental Conditions on the Leased Premises, the cost of which Tenant will
be responsible pursuant to paragraph XXV below, to post notices of non-
responsibility and Landlord reserves the right, during the last six (6) months
of the term of this Lease to show the Leased Premises, at reasonable times, to
prospective purchasers or tenants.
Tenant hereby waives any claim for damages for any injury or inconvenience
to or interference with Tenant's business, any loss of occupancy or quiet
enforcement of the Leased Premises, and any other loss occasioned by Landlord's
entry. Landlord shall at all times have and retain a key with which to unlock
all of the doors in, upon and about the Leased Premises, excluding Tenant's
vaults and safes (as the same are permitted by Landlord to be upon the Leased
Premises), and Landlord shall have the right to use any and all means which
Landlord may deem proper to open said doors in an emergency in order to obtain
entry to the Leased Premises and any entry into the Leased Premises obtained by
Landlord by any of said means, or otherwise, shall not under any circumstances
be construed or deemed to be a forcible or unlawful entry into, or a detainer
of, the Leased Premises or an eviction of Tenant from the Leased Premises or any
portion thereof.
XIII. SUBSTITUTED PREMISES
Landlord reserves the right upon thirty (30) days' written notice to Tenant
to substitute other premises within the Building for the Leased Premises for all
uses and purposes as though originally leased to Tenant pursuant to this Lease.
The substituted premises shall contain approximately the same number of square
feet as the Leased Premises without increase of Base Rent. Landlord shall pay
all reasonable moving expenses of Tenant incidental to such substitution of
premises.
XIX. SUBORDINATION AND ATTORNMENT
Landlord reserves the right to place liens and encumbrances on the Leased
Premises superior in lien and effect to this Lease. This Lease and any and all
renewals, modifications, replacements or extensions thereof, at the option of
the Landlord, shall be subject and subordinate to any liens and encumbrances now
or hereinafter imposed by Landlord upon the Leased Premises or the Building and
Tenant agrees to execute and deliver upon demand (and to cause all sublessees
and assignees under Tenant to execute and deliver upon demand) such instruments
subordinating this Lease (and all subleases and assignments pursuant to this
Lease) to any such lien or encumbrance as shall be required by Landlord.
In the event Landlord's interest in the Leased Premises is derived from a
lease from another party and said Lease should be terminated by the other party.
Tenant agrees to attorn (and to cause all sublessees and assignees under Tenant
to so attorn) to the other party, its successors and assigns as Landlord on this
Lease.
<PAGE>
In the event any proceedings are brought for the foreclosure of any
mortgage on the Leased Premises, Tenant will attorn (and Tenant will cause all
sublessees and assignees under Tenant to so attorn) to the purchaser at
foreclosure sale and recognize the purchaser as the Landlord under this Lease.
The purchaser by virtue of such foreclosure shall be deemed to have assumed, as
substitute Landlord, the terms and conditions of this Lease until the resale or
other disposition of its interest by such purchaser. Such assumption, however,
shall not be deemed of itself an acknowledgment by the purchaser of the validity
of any then existing claims of Tenant (or the claims of any sublessees or
assignees under Tenant) against the prior Landlord.
Tenant agrees to execute and deliver (and to cause all sublessees and
assignees under Tenant to execute and deliver) such further assurance and other
documents (including but not limited to a new lease upon the same terms and
conditions as this lease) confirming the foregoing as such purchaser may
reasonably request. Tenant on behalf of itself and on behalf of all sublessees
and assignees under Tenant waives any right of election to terminate this Lease
because of any such foreclosure proceedings. Tenant hereby irrevocably
constitutes and appoints Landlord as Tenant's attorney-in-fact to execute (and
to deliver to any third party) any documents hereinabove required to be executed
by Tenant, for and on behalf of Tenant, if Tenant shall have failed to do so
within ten (10) days after the request therefor by Landlord.
XX. NOTICES
Any notices or demands to be given hereunder shall be in writing and shall
be given to Landlord and to Landlord's managing agent with regard to the
Building, at their respective offices and to Tenant at the Leased Premises, or
at such other address as either party shall designate, and shall be by
registered or certified United States mail, postage prepaid or, at the election
of Landlord, hand delivered.
XXI. DEFAULT
In the event Tenant fails to pay any rental due hereunder or fails to keep
and perform any of the other terms or conditions hereof, time being of the
essence, then five (5) days after written notice of default from Landlord, the
Landlord may, if such default has not been corrected, resort to any and all
legal remedies or combination of remedies which Landlord may desire to assert
including but not limited to one or more of the following: (1) lock the doors
to the Leased Premises and exclude Tenant therefrom, (2) retain or take
possession of any property on the Leased Premises pursuant to Landlord's
statutory lien, (3) enter the Leased Premises and remove all persons and
property therefrom, (4) declare this Lease at an end and terminated, (5) sue for
the rent due and to become due under this Lease, and for any damages sustained
by Landlord, (6) collect, directly from any sublease or assignee under Tenant
all subrents and other charges payable by such sublessees or assignees, Tenant
hereby assigning to Landlord such subrents and other charges in the event of a
default by Tenant under this lease, and (7) continue this Lease in effect and
relet the Leased Premises on such terms and conditions as Landlord may deem
advisable with Tenant remaining liable for the monthly rent plus the reasonable
cost of obtaining possession of the Leased Premises and of any repairs and
alterations necessary to prepare the Leased Premises for reletting, less the
rentals received from such reletting, if any. No action of Landlord shall be
construed as an election to terminate this Lease unless written notice of such
intention be given to Tenant. Tenant agrees to pay as additional rental all
attorney's fees and other costs and expenses incurred by Landlord in enforcing
any of Tenant's obligations under this Lease. Any amount due from Tenant to
Landlord under this Lease which is not paid when due shall bear interest at the
"Prime Rate" that is in effect on the date such amount is due, accruing from
such date until paid. Furthermore, that rate of interest paid by Tenant on any
such amount shall be adjusted as the "Prime Rate" is adjusted.
<PAGE>
XXII. LATE PAYMENTS
Tenant hereby acknowledges that the late payment by Tenant to Landlord of
rent or any additional rent or other sums due hereunder will cause Landlord to
incur costs not contemplated in this Lease, the exact amount which will be
extremely difficult and impracticable to ascertain. Such costs include but are
not limited to processing, administrative and accounting costs.
Accordingly, if any installment of rent or any additional rent or any other
sum due from Tenant shall not be received by Landlord within five (5) days after
such amount shall be due, Tenant shall pay to Landlord a late charge equal to
five percent (5%) of such overdue amount. If any installment of rent or any
additional rent or any other sum due from Tenant shall not be received within
thirty (30) days after such amount shall be due, Landlord shall incur additional
processing, administrative and accounting costs. In order to compensate Landlord
therefor, Tenant shall pay to Landlord an additional late charge equal to five
percent (5%) of such overdue amount, including previous penalties. The parties
hereby agree that such late charges represent a fair and reasonable estimate of
the costs Landlord will incur by reason of late payment by Tenant. Neither
assessment nor acceptance of such late charge by Landlord shall constitute a
waiver of Tenant's default with respect to such overdue amount, nor prevent
Landlord from exercising any of the other rights and remedies granted under the
Lease. Nothing contained in this paragraph shall be deemed to condone,
authorize, sanction or grant to Tenant an option for the late payment of rent,
and Tenant shall be deemed in default in the payment of its rent should the same
not be paid by the date on which it is due.
XXIII. BUILDING RULES AND REGULATIONS
Tenant agrees to abide by all rules and regulations of the Building imposed
by Landlord. Such rules and regulations are imposed for the cleanliness, good
appearance, proper maintenance, good order and reasonable use of the Leased
Premises and the Building, and as may be necessary for the proper enjoyment of
the Building by all Tenants and their clients, customers and employees. The
rules and regulations may be changed from time to time upon ten (10) days notice
to Tenant. Breach of the rules and regulations of the Building shall not be
ground for termination of the Lease unless Tenant continues to breach the same
after ten (10) days written notice by Landlord. Landlord shall not be
responsible to Tenant for nonperformance by any tenant or occupant of the
Building of any rules or regulations.
XXIV. LIENS
Tenant shall keep the Landlord, Leased Premises and building harmless from
and against any liens or claims arising out of any work performed, materials
furnished or obligations incurred by Tenant, and shall indemnify and hold
Landlord harmless against the same, together with all costs of suit and
attorney's fees incurred by Landlord in connection therewith.
XXV. INDEMNIFICATION OF LANDLORD
Landlord shall not be liable to Tenant and Tenant hereby waives all claims
against Landlord for any injury (including death) or damage to any person or
property in or about the Leased Premises by or from any cause whatsoever and
Tenant shall indemnify and hold Landlord, its successors, officers and employees
harmless from any and all claims, costs, expenses or liability of any kind
(including without limitation a decrease in the value of the Leased Premises and
reasonable consultants' and attorneys' fees) arising directly or indirectly
from: (i) injury (including death) or damage to any person or property
whatsoever occurring on or about the Leased Premises, (ii) Hazardous Substances
or an Environmental Condition on or about the Leased Premises, or (iii)
violations or claims of violations by Tenant of an Environmental Law. This
indemnification obligation shall be in addition to any other obligations and
liabilities Tenant may have to Landlord at law or equity, and shall survive the
term of this Lease and shall not be subject to any other provisions of this
Lease that operate to limit Tenant's liability.
<PAGE>
Tenant shall obtain and keep in effect during the term of this Lease a
policy of comprehensive liability insurance, including public liability and
property damage, with a minimum combined single limit of liability of One
Million Dollars ($1,000,000.00). Said policy or policies shall name Landlord and
its agents as additional insureds and shall be issued by an insurance company,
licensed to do business in the State of Arizona, and acceptable to Landlord.
Said policy or policies shall additionally provide that the insurance shall not
be cancelled or modified unless thirty (30) days prior written notice has been
given to Landlord. Tenant shall supply Landlord with a certificate of the
insurance which it has obtained prior to its occupation of the Leased Premises.
Landlord shall have the right to request Tenant to provide additional or other
form of security satisfactory to Lender in the event that Tenant's activities on
the Leased Premises involve Hazardous Substances.
XXVI. TAXES
Tenant agrees to pay or cause to be paid, before delinquency, any and all
taxes levied or assessed and which become payable during the term hereof upon
all of Tenant's equipment, furniture, fixtures and other personal property
located in the Leased Premises.
XXVII. HOLDING OVER
Upon the expiration of this Lease, Tenant shall immediately surrender the
Leased Premises to Landlord, such Leased Premises to be broom clean, in good
condition and repair, ordinary wear and tear excepted. If the Tenant or any
sublessee or assignee under Tenant holds over the expiration or earlier
termination of this Lease without Landlord's express written consent, Tenant
shall be in default hereunder and in addition to all of the rights or remedies
available to Landlord, Tenant shall be obligated to pay to Landlord rent at a
rate established by Landlord with regard to the Leased Premises for the time
during which Tenant retains possession, which payment shall not constitute a
waiver of any of Landlord's other rights or remedies provided herein.
XXVIII. INSOLVENCY OR BANKRUPTCY
Either (a) the appointment of a receiver to take possession of all or
substantially all of the assets of Tenant; or (b) an assignment by Tenant for
the benefit of creditors; or (c) any action taken or suffered by Tenant under
any insolvency, bankruptcy or reorganization act, shall constitute a default and
breach of this Lease by Tenant. Upon the happening of any such event, Landlord
shall have all the rights herein provided in the event of any such default or
breach, including without limitation the right, at Landlord's option, to
terminate this Lease and enter the Leased Premises and remove all persons and
property therefrom. In no event shall this Lease be assigned or assignable by
operation of law or by voluntary or involuntary bankruptcy proceedings or
otherwise and in no event shall this Lease or any rights or privileges hereunder
be an asset of Tenant under any bankruptcy, insolvency or reorganization
proceedings.
XXIX. SALE BY LANDLORD
In the event of a sale or conveyance by Landlord of the Leased Premises,
the same shall operate to release Landlord from any further liability upon any
of the covenants or conditions, express or implied, herein contained in favor of
Tenant and in such event Tenant agrees to look solely to the responsibility of
the successor in interest of Landlord in and to this Lease. This Lease shall
not be affected by any such sale, and Tenant agrees to attorn to the purchaser
of assignee upon Landlord's request. Tenant shall deliver to such purchaser an
offset statement and an estoppel certificate in such form as Landlord may
request, and, in the event Tenant fails to deliver said statement and
certificate within ten (10) days after demand by Landlord, Tenant hereby
constitutes and appoints Landlord as Tenant's attorney-in-fact to execute said
statement and certificate.
<PAGE>
XXX. ATTORNEY'S FEES
In the event of any action or proceeding brought by either party against
the other under this Lease, the prevailing party shall be entitled to recover
its attorney's fees and costs in such action or proceeding. In the event
Landlord intervenes in or becomes a party or is made a party to any action or
proceeding arising in connection with this Lease in order to protect its rights,
then Tenant shall pay to Landlord the fees of Landlord's attorneys therein as
fixed by the court.
XXXI. SURRENDER OF PREMISES
The voluntary or other surrender of this Lease by Tenant, or a mutual
cancellation thereof, shall not work a merger, and shall, at the option of
Landlord, terminate all or any existing subleases or subtenancies, or may, at
the option of Landlord, operate as an assignment to Landlord of any or all such
subleases or subtenancies. Tenant agrees that there shall be no value to the
leasehold upon termination or cancellation of the Lease under its terms.
XXXII. LIMITATION OF LANDLORD'S LIABILITY
Tenant covenants and agrees that any claims that Tenant may have now or
hereafter against Landlord shall be asserted solely against and satisfied only
out of Landlord's right, title and interest in the Building and not from any
other thing or asset of Landlord.
XXXIII. TIME OF THE ESSENCE
Time is of the essence of this Lease and all of its provisions.
XXXIV. BINDING EFFECT
The covenants and conditions herein contained shall, subject to the
provisions restricting Tenant's assignment and subletting, apply to and bind the
heirs, executors, administrators, personal representatives, successors and
assigns of the parties hereto.
XXXV. RECORDATION
Tenant shall not record this Lease or any short form memorandum thereof,
without the prior written consent of Landlord.
XXXXVI. NAME OF BUILDING
Tenant shall not use the name of the Building for any purpose other than as
an address of the business to be conducted by Tenant in the Leased Premises.
XXXVII. GOVERNING LAW
This Lease and all the terms and conditions thereof shall be governed by the
laws of the State of Arizona.
<PAGE>
XXXVIII. DEFINED TERMS AN PARAGRAPH HEADINGS
The words "Landlord" and "Tenant" as used herein shall include the plural
as well as the singular. Words used in masculine gender include the feminine and
neuter. If there is more than one Tenant, the obligations hereunder imposed
upon Tenant shall be joint and several. The paragraph headings and titles to
the paragraphs of this Lease are not a part of this Lease and shall have no
effect upon the construction or interpretation of any party thereof.
CREATIVE NETWORKS, LLC MATRIX CAPITAL CORPORATION
- -------------------------------- ----------------------------------
Name of Tenant Name of Landlord
- -------------------------------- ----------------------------------
By By
- -------------------------------- ----------------------------------
(Authorized Signature)
Date
- -------------------------------- ----------------------------------
Date
- --------------------------------
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 1, 1996, except for Note 17 to the
consolidated financial statements, as to which the date is September 19, 1996,
with respect to the consolidated financial statements of Matrix Capital
Corporation as of December 31, 1994 and 1995 and for each of the three years
in the period ended December 31, 1995, in the Registration Statement (Form S-1
No. 333-10223) and related Prospectus of Matrix Capital Corporation for the
registration of 2,012,500 shares of its common stock.
/s/ Ernst & Young LLP
Phoenix, Arizona
October 8, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 18, 1993, with respect to the consolidated
statement of operations of Dona Ana Savings and Loan Association, F.A. included
in the Registration Statement and related Prospectus of Matrix Capital
Corporation for the registration of 2,012,500 shares of its common stock.
Kriegel & Co., Ltd.
Las Cruces, New Mexico
October 9, 1996
