<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 3, 1998
REGISTRATION NO. 333-38651
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
BNC MORTGAGE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------
DELAWARE 6162 33-0661303
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. IDENTIFICATION NUMBER)
JURISDICTION OF CLASSIFICATION CODE NUMBER)
INCORPORATION
OR ORGANIZATION)
1063 MCGAW AVENUE
IRVINE, CALIFORNIA 92614
(714) 260-6000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
EVAN R. BUCKLEY
CHIEF EXECUTIVE OFFICER
BNC MORTGAGE, INC.
1063 MCGAW AVENUE
IRVINE, CALIFORNIA 92614
(714) 260-6000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
THOMAS J. POLETTI, ESQ. ROBERT E. DEAN, ESQ.
KATHERINE J. BLAIR, ESQ. GIBSON, DUNN & CRUTCHER LLP
DARREN O. BIGBY, ESQ. 4 PARK PLAZA
FRESHMAN, MARANTZ, ORLANSKI, COOPER & IRVINE, CALIFORNIA 92614
KLEIN TELEPHONE (714) 451-3948
9100 WILSHIRE BOULEVARD, 8TH FLOOR EAST FACSIMILE (714) 451-4220
BEVERLY HILLS, CALIFORNIA 90212
TELEPHONE (310) 273-1870
FACSIMILE (310) 274-8357
</TABLE>
--------------
Approximate Date of Commencement of Proposed Sale to the Public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration 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, please 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. [_]
--------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value.......... 3,649,175(1) $12.00 $43,790,100 $12,918
- ------------------------------------------------------------------------------------------------------------------------------------
Representatives' Warrants to Purchase
Common Stock(3)....................... 317,319 $0.01 $3,173 --
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Underlying
Representatives' Warrants(4).......... 317,319 $13.20 $4,188,611 $1,236
- ------------------------------------------------------------------------------------------------------------------------------------
Total................................ $14,154(5)
====================================================================================================================================
</TABLE>
(1) Includes 475,979 shares which the Underwriters have the option to purchase
to cover over allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act of 1933.
(3) To be sold to the representatives of the Underwriters.
(4) Issuable upon exercise of Warrants to be sold to the representatives of
the Underwriters.
(5) $17,013 previously paid in connection with original filing on October 24,
1997.
--------------
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 THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 3, 1998
3,173,196 SHARES
BNC MORTGAGE, INC.
COMMON STOCK
[LOGO OF BNC
MORTGAGE, INC.] -----------
Of the 3,173,196 shares of common stock (the "Common Stock") offered hereby
(the "Offering"), 1,400,000 shares are being sold by BNC Mortgage, Inc., a
Delaware corporation (the "Company"), and 1,773,196 shares are being sold by
DLJ Mortgage Capital, Inc. ("DLJ" or the "Selling Stockholder"). The Company
will not receive any of the proceeds from the sale of shares of Common Stock by
the Selling Stockholder. After the Offering, the Selling Stockholder will own
no shares of the Company.
Prior to the Offering, there has been no public market for the Common Stock,
and there can be no assurance that any active trading market will develop. It
is currently anticipated that the initial public offering price will be between
$10.00 and $12.00 per share. See "Underwriting" for a discussion of factors to
be considered in determining the initial public offering price.
The Company has been approved, subject to official notice of issuance, for
quotation of the Common Stock on the Nasdaq National Market under the symbol
"BNCM."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 8 HEREOF FOR A DISCUSSION OF MATERIAL FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF SHARES OF COMMON STOCK.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS TO
TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDER(2)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share........................ $ $ $ $
- -----------------------------------------------------------------------------------------------
Total (3)........................ $ $ $ $
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) Does not include warrants to be issued to the representatives of the
underwriters (the "Representatives"), to purchase up to 317,319 shares of
Common Stock at an exercise price of $ per share, exercisable over a
period of four years, commencing one year from the date of this Prospectus
(the "Representatives' Warrants"). See "Underwriting" for information
relating to indemnification of the Underwriters, and other matters.
(2) Before deducting expenses estimated to be $850,000, of which $385,000 are
payable by the Company and $465,000 are payable by the Selling Stockholder.
(3) The Company has granted the Underwriters an option, exercisable from time
to time within 30 days from the date hereof, to purchase up to 475,979
additional shares of Common Stock at the Price to Public per share, less
the Underwriting Discount, solely for the purpose of covering over-
allotments, if any. If the Underwriters exercise such 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 Underwriters when, as and if
delivered to and accepted by them, subject to their right to withdraw, cancel
or reject orders in whole or in part and subject to certain other conditions.
It is expected that delivery of certificates representing the shares of Common
Stock will be made against payment on or about , 1998 at the office of
CIBC Oppenheimer Corp., CIBC Oppenheimer Tower, World Financial Center, New
York, New York 10281.
-----------
CIBC OPPENHEIMER PIPER JAFFRAY INC.
The date of this Prospectus is , 1998
<PAGE>
[ARTWORK MAP OF THE UNITED STATES, INDICATING, AS OF DECEMBER 31, 1997, (I)
STATES IN WHICH BNC LOANS ARE ORIGINATED: CALIFORNIA, ILLINOIS, FLORIDA, HAWAII,
- --------------------------------------------------------------------------------
UTAH, WISCONSIN, OREGON, MASSACHUSETTS, MARYLAND, COLORADO, INDIANA, OHIO,
- --------------------------------------------------------------------------------
WASHINGTON, IDAHO, MISSOURI, MICHIGAN, GEORGIA, SOUTH CAROLINA, RHODE ISLAND,
- --------------------------------------------------------------------------------
OKLAHOMA, TEXAS, NORTH CAROLINA, MINNESOTA, CONNECTICUT, NEW JERSEY, MONTANA,
- --------------------------------------------------------------------------------
WYOMING, NEVADA, ARIZONA, KANSAS, KENTUCKY, VIRGINIA, PENNSYLVANIA, NEW YORK AND
- --------------------------------------------------------------------------------
NEW HAMPSHIRE;
- -------------
(II) BNC ORIGINATION LOCATIONS WITH OFFICES: 34;
--
(III) BNC ORIGINATION LOCATIONS WITHOUT OFFICES: 12;
--
AND (IV) THE LOCATION OF THE COMPANY'S CORPORATE OFFICE IN IRVINE,
CALIFORNIA.]
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE SIX
YEAR ENDED JUNE MONTHS ENDED
30, DECEMBER 31,
----------------- -----------------
1996 1997 1996 1997
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage Loan Originations.................. $199,963 $532,621 $223,859 $354,572
Mortgage Loan Sales......................... $156,559 $519,909 $216,964 $333,045
States with Origination Locations........... 8 21 15 23
States in which Loans were Originated....... 21 33 27 36
Origination Locations with Offices.......... 18 30 24 34
Origination Locations without Offices....... 1 8 2 12
Account Executives.......................... 29 59 50 86
Approved Independent Brokers................ 620 1,830 1,271 2,541
</TABLE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE,
PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE
COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS, IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M
UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
<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, including the Notes thereto, appearing elsewhere in this
Prospectus. Except as otherwise specified, all information in this Prospectus
(i) assumes no exercise of the Underwriters' over-allotment option (see
"Underwriting"), (ii) regarding outstanding shares, excludes (A) shares of
Common Stock reserved for issuance under the Company's 1997 Stock Option,
Deferred Stock and Restricted Stock Plan (the "Stock Option Plan") and (B)
shares of Common Stock issuable upon exercise of the Representatives' Warrants
and (iii) gives effect to the reincorporation of the Company in Delaware, which
will be effected prior to the consummation of this Offering, whereby the
existing California corporation will be merged into a newly formed Delaware
corporation and pursuant to which each outstanding share of Class A and Class B
Common Stock of the existing California corporation will be exchanged for
4,123.71134 shares of $.001 par value Common Stock of the new Delaware
corporation. For a further description of the transactions referenced in
subparagraph (iii) above, see "Arrangements with DLJ and the Recapitalization."
Unless otherwise indicated, all references herein to the Company refer to BNC
Mortgage, Inc. and its subsidiaries. This Prospectus contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under
"Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
The Company is a specialty finance company that originates and sells, on a
whole loan basis for cash, non-conforming residential mortgage loans secured by
one-to-four family residences. Non-conforming loans are loans made to borrowers
who are unable or unwilling to obtain mortgage financing from conventional
mortgage sources, whether for reasons of credit impairment, income
qualification or credit history or a desire to receive funding on an expedited
basis. The Company's loans are made primarily to refinance existing mortgages,
consolidate other debt, finance home improvements, education and other similar
needs, and, to a lesser extent, to purchase single family residences. The
Company has two divisions: (i) a wholesale division which has relationships
with approximately 2,500 approved independent loan brokers and which
historically accounted for substantially all of the Company's total loan
originations and (ii) a retail division which is being developed to market
loans directly to homeowners.
Since it commenced operations in August 1995, the Company has experienced
significant growth in loan originations, with approximately $532.6 million of
originations in 33 states during the year ended June 30, 1997 compared to
$200.0 million in 21 states during its first full fiscal year ended June 30,
1996. Total originations were $354.6 million during the six months ended
December 31, 1997, as compared to $223.9 million during the six months ended
December 31, 1996, a 58% increase. This growth in originations resulted in an
increase in revenues to $20.0 million and $32.8 million for the six months
ended December 31, 1997 and the year ended June 30, 1997, respectively,
compared to $13.2 million and $8.2 million for the six months ended December
31, 1996 and the year ended June 30, 1996, respectively. In addition, as a
result, total expenses increased to $14.1 million and $20.3 million for the six
months ended December 31, 1997 and the year ended June 30, 1997, respectively,
compared to $8.3 million and $7.5 million for the six months ended December 31,
1996 and the year ended June 30, 1996, respectively. The Company's net income
rose to $7.5 million for the year ended June 30, 1997 as compared to $417,000
for the year ended June 30, 1996. Net income was $3.5 million for the six
months ended December 31, 1997 as compared to $3.0 million for the six months
ended December 31, 1996.
The Company currently sells substantially all of its mortgage loans through
whole loan sales resulting in cash gain on sale of mortgage loans. For the six
months ended December 31, 1997 and the years ended June 30, 1997 and 1996, the
Company had mortgage loan sales of $333.0 million, $519.9 million and
$156.6 million, respectively, with resulting cash gain on sale of mortgage
loans of $13.5 million, $21.9 million and $4.2 million, respectively.
3
<PAGE>
Substantially all loans originated by the Company are secured by a first
priority mortgage on the subject property. During the six months ended December
31, 1997, less than 0.2% of the principal balance of the loans originated were
secured by second priority mortgages; none of such loans were originated for
the years ended June 30, 1997 or 1996. The Company's core borrower base
consists of individuals who do not qualify for traditional "A" credit because
their credit history, income or other factors cause them not to conform to
standard agency lending criteria. During the six months ended December 31, 1997
and the year ended June 30, 1997, approximately 64.3% and 57.4% of the
principal balance of the loans originated by the Company, respectively, were to
borrowers with a Company risk classification of "A+" or "A-" while the
remainder were to borrowers with a Company risk classification of "B," "C+,"
"C" or "C-," respectively, representing approximately 35.7% and 42.6%,
respectively, of the total principal amount of loans originated by the Company.
Borrowers with a Company risk classification of "A+" or "A-" have a very good
credit history within the last 12 to 24 months with minor late payments allowed
on a limited basis. Borrowers with a "B" Company risk classification generally
have good credit within the last 12 months with some late payments. Borrowers
with a "C+" Company risk classification have some significant derogatory credit
in the past 12 months while those in the "C" category have frequent derogatory
consumer credit. Borrowers with a Company risk classification of "C-" have
numerous derogatory credit items up to and including a bankruptcy in the most
recent 12 month period. During each of the six months ended December 31, 1997
and the year ended June 30, 1997, approximately 3.9% of the principal balance
of the loans originated by the Company were to borrowers with a Company risk
classification of "C-." For a tabular presentation of the Company's loan
production by borrower risk classification, see "Business--Loan Production by
Borrower Risk Classification."
The Company believes that its primary strengths are (i) the experience of its
management, account executives and staff in the non-conforming lending
industry, which enhances the Company's ability to establish and maintain long-
term relationships with mortgage brokers, (ii) its service oriented sales
culture whereby the Company strives to respond quickly and efficiently to
customer needs and market demands, (iii) its operating philosophy to create
stable and deliberate loan origination growth by utilizing consistent and
prudent underwriting guidelines designed to produce mortgage products readily
saleable in the secondary market and (iv) its ability to manage and control
operating costs in order for it to remain a low cost originator. For a
description of the contractual nature of the Company's relationships with its
independent mortgage brokers, see "Business--Mortgage Loan Originations--
Wholesale Division."
The Company's growth and operating strategy is based on the following key
elements:
Whole Loan Sales for Cash. The Company sells substantially all of its
originated mortgage loans monthly for cash, historically at a premium over the
principal balance of the mortgage loans. Management believes that the cash
received in loan sales provides the Company greater flexibility and operating
leverage than a traditional portfolio lender, which holds the loans it
originates, by allowing the Company to generate income through interest on
loans held for sale and gain on loans sold. This strategy of frequent loan
sales has been an important factor in generating the Company's earnings,
creating cash flow to fund operations, decreasing the need for other forms of
financing and reducing the level of interest rate and default risk borne by the
Company.
Continuing Growth of Wholesale Production. The Company's growth strategy for
its Wholesale Division is greater penetration in existing markets and selective
geographic expansion. The Company intends to add additional sales personnel to
its existing origination locations in order to provide continued high levels of
service to brokers, to increase loan origination and further the basis for
repeat business, referral and other future lending opportunities. For each of
the six months ended December 31, 1997 and the year ended June 30, 1997, the
Company's loan originations primarily were in California, Illinois, Florida,
Hawaii, Utah, Wisconsin, Oregon, Massachusetts, Maryland, Colorado, Ohio and
Indiana. The Company anticipates that short-term geographic expansion will
focus on the development of lending operations in Texas, Pennsylvania, North
Carolina, Virginia and Tennessee. Thereafter, further expansion will be focused
on those geographic regions which management believes represent the most
attractive markets for the Company's products.
4
<PAGE>
Expertise on Product Offerings. The Company utilizes long-term relationships
with mortgage loan brokers to quickly and efficiently tailor existing products
or introduce new products to satisfy broker and consumer product needs.
Examples of recently introduced products include loans with higher loan-to-
value ratios for borrowers with good credit histories. Also, the Company
attempts to anticipate changing demands and formulate new products accordingly.
Securitization Flexibility. While a substantial majority of the Company's
mortgage loan originations will continue to be sold through whole loan sales in
cash transactions, the Company may in the future sell a portion of its loans
through securitizations. The ability to conduct securitizations may provide the
Company with the flexibility to take advantage of favorable pricing
differentials between the securitization and whole loan sale markets that may
exist from time to time.
The Company intends to utilize its primary strengths and its growth and
operating strategy to remain competitive in the non-conforming mortgage
industry. Increased competition in the non-conforming mortgage industry could
have the effect of (i) lowering gains that may be realized on loan sales, (ii)
reducing an individual company's volume of loan originations and sales,
(iii) increasing demand for experienced personnel increasing the likelihood
such personnel will be recruited by competitors and (iv) lowering the industry
standard for non-conforming underwriting guidelines as competitors attempt to
increase or maintain market share in the face of increased competition. In the
past, certain of these factors have caused the revenues and net income of many
participants in the non-conforming mortgage industry, including the Company, to
fluctuate from quarter to quarter.
In connection with the capitalization of the Company in August 1995, DLJ
agreed to provide a $50.0 million warehouse line of credit and an outlet for
the Company's loan production. In exchange, DLJ received the exclusive right to
purchase all of the Company's loan production. In addition, DLJ purchased
shares of the Company's capital stock which represented approximately 44% of
the outstanding shares of Common Stock as of December 31, 1997 and which are
offered hereby. Upon completion of the Offering, the Company, with the
concurrence of DLJ, expects to expand the scope of the Company's financing and
loan sale activity beyond the exclusive arrangements with DLJ. DLJ has also
agreed to provide the Company with an increased $150.0 million financing
facility and, with regard to the purchase of loans from the Company by DLJ, DLJ
will receive no fees in connection with any such purchases for the first 12
months after the closing of the Offering and 12.5 basis points for the second
12 months after the closing. See "Business--Financing and Sale of Loans." For a
further description of the nature and parameters of the Company's existing and
anticipated future relationship with DLJ, see "Arrangements with DLJ and the
Recapitalization" and "Risk Factors--Discontinuance of Exclusive Arrangements
with DLJ Could Adversely Affect the Company's Operating Results."
The Company's predecessor was incorporated in California in May 1995. Prior
to the consummation of this Offering, the Company will reincorporate in
Delaware. The Company's administrative offices are located at 1063 McGaw
Avenue, Irvine, California, 92614, and its telephone number is (714) 260-6000.
5
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock Offered Hereby:
By the Company.................................... 1,400,000 shares
By the Selling Stockholder........................ 1,773,196 shares
Common Stock to be Outstanding After the Offering(1). 5,400,000 shares
Use of Proceeds...................................... The net proceeds
received by the Company
will be used to fund
future loan originations
and for general
corporate purposes.
Nasdaq National Market Symbol........................ "BNCM"
</TABLE>
- --------
(1) Excludes shares issuable pursuant to the Representatives' Warrants and
shares of Common Stock reserved for issuance pursuant to the Company's
Stock Option Plan. The Stock Option Plan authorizes the grant of options to
purchase, and awards of, 700,000 shares; of this amount, options to acquire
163,265 shares were granted prior to this Offering at a per share exercise
price of $6.10. Options to acquire an additional 325,000 shares are
expected to be granted to certain employees, officers and directors of the
Company on the effective date of the Offering at an exercise price equal to
the initial public offering price. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--General" and
"Management--Stock Options."
RISK FACTORS
See "Risk Factors" for a description of certain factors which should be
carefully considered before making an investment in the Company.
DIVIDEND POLICY
The Company intends to retain all of its future earnings to finance its
operations and does not anticipate paying cash dividends in the foreseeable
future. Any decision made by the Company's Board of Directors to declare
dividends in the future will depend upon the Company's future earnings, capital
requirements, financial condition and other factors deemed relevant by the
Company's Directors. See "Dividend Policy."
DILUTION
The assumed initial public offering price is substantially higher than the
book value per outstanding share of the Common Stock. Purchasers of the Common
Stock will experience immediate and substantial dilution of $6.39 per share
based upon an assumed initial public offering price of $11.00 per share. See
"Dilution."
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
(In thousands, except per share data and ratios)
The financial data set forth below should be read in conjunction with the
Consolidated Financial Statements of the Company and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
JUNE 30, DECEMBER 31,
-------------- --------------
1996 1997 1996 1997
STATEMENT OF OPERATIONS DATA: ------ ------- ------ -------
<S> <C> <C> <C> <C>
Revenues:
Gain on sale of mortgage loans................. $4,240 $21,855 $8,525 $13,543
Loan origination income........................ 1,978 5,473 2,383 2,767
Interest income................................ 1,960 5,182 2,215 3,447
Other income................................... 52 250 91 220
------ ------- ------ -------
Total revenues................................ 8,230 32,760 13,214 19,977
------ ------- ------ -------
Expenses:
Employees' salaries and commissions............ 3,624 11,052 4,396 8,326
General and administrative expenses............ 2,400 5,543 2,279 3,257
Interest expense............................... 1,452 3,693 1,595 2,471
------ ------- ------ -------
Total expenses................................ 7,476 20,288 8,270 14,054
------ ------- ------ -------
Income before income taxes....................... 754 12,472 4,944 5,923
Income tax expense............................... 337 4,930 1,954 2,392
------ ------- ------ -------
Net income..................................... $ 417 $ 7,542 $2,990 $ 3,531
====== ======= ====== =======
Pro forma net income per share................... $ 0.14 $ 1.80 $ 0.71 $ 0.86
====== ======= ====== =======
Shares used in computing pro forma net income per
share(1)........................................ 2,906 4,201 4,200 4,117
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31, 1997
--------------- ----------------------
1996 1997 ACTUAL AS ADJUSTED(2)
------- ------- ------- --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 2,452 $ 8,268 $ 7,142 $ 21,079(3)
Restricted cash......................... -- -- 614 614
Mortgage loans held for sale............ 42,723 55,145 76,196 76,196
Total assets............................ 46,352 65,713 87,339 101,276
Warehouse line of credit................ 42,723 54,625 74,369 74,369
Total liabilities....................... 44,506 56,509 76,387 76,387
Total stockholders' equity.............. 1,846 9,204 10,952 24,889
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
JUNE 30, DECEMBER 31,
------------------ ------------------
1996 1997 1996 1997
OPERATING STATISTICS: -------- -------- -------- --------
<S> <C> <C> <C> <C>
Loan originations:
Mortgage loan originations........... $199,963 $532,621 $223,859 $354,572
Average initial principal balance per
loan................................ $ 101 $ 98 $ 95 $ 96
Weighted average interest rate:
Fixed rate residential loans........ 10.7% 10.5% 10.8% 10.6%
Variable rate residential loans..... 9.2% 9.4% 9.4% 9.6%
Small commercial rate loans(4)...... -- 9.8% 9.2% --
Weighted average initial loan-to-
value ratio......................... 68.5% 69.3% 68.3% 72.9%
Whole loan sales....................... $156,559 $519,909 $216,964 $333,045
Gain on sale as a percentage of whole
loan sales............................ 2.7% 4.2% 3.9% 4.1%
Credit risk(5):
A+.................................. 9.7% 30.7% 22.8% 42.5%
A-.................................. 41.9% 26.7% 30.6% 21.8%
B................................... 26.0% 18.9% 21.0% 20.4%
C+.................................. 12.0% 10.7% 12.1% 8.0%
C................................... 7.7% 5.7% 6.9% 3.4%
C-.................................. 2.7% 3.9% 3.8% 3.9%
Small commercial(4)................. -- 3.4% 2.8% --
</TABLE>
- --------
(1) See Note 1 of Notes to Consolidated Financial Statements.
(2) As adjusted to reflect the sale of the shares of Common Stock by the
Company in this Offering at an assumed initial public offering price of
$11.00 per share and the application of the estimated net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
(3) The net proceeds of this Offering will be principally used to fund future
loan originations and for general corporate purposes. See "Use of
Proceeds."
(4) The Company discontinued the origination of small commercial loans in April
1997.
(5) Credit ratings are based on the Company's classification of loan products.
See "Business--Underwriting Guidelines."
7
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RISK FACTORS
Investment in the Common Stock offered hereby involves a high degree of
risk, including the risks described below. Prospective investors should
carefully consider the risk factors set forth below, as well as other
information included in this Prospectus, before making an investment decision
concerning the Common Stock.
This Prospectus contains certain "forward-looking statements" which
represent the Company's expectations or beliefs, including, but not limited
to, statements concerning industry performance and the Company's operations,
performance, financial condition, prospects, growth and strategies. For this
purpose, any statements contained in this Prospectus except for historical
information may be deemed to be forward-looking statements. Without limiting
the generality of the foregoing, words such as "may," "will," "expect,"
"believe," "anticipate," "intend," "could," "estimate," or "continue" or the
negative or other variations thereof or comparable terminology are intended to
identify forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, certain of which are beyond the Company's
control, and actual results may differ materially depending on a variety of
important factors, including those described below in this "Risk Factors"
section and elsewhere in this Prospectus.
LIMITED HISTORY OF OPERATIONS LIMITS PRIOR PERFORMANCE AS AN INDICATOR OF
FUTURE PERFORMANCE
The Company commenced operations in August 1995 and began originating loans
in October 1995. Although the Company has been profitable for each fiscal
period presented herein and has experienced substantial growth in mortgage
loan originations and total revenues, there can be no assurance that the
Company will be profitable in the future or that these rates of growth will be
sustainable or indicative of future results. Any decline in future
profitability or growth rates may adversely affect the market for the
Company's Common Stock which could result in volatility or a decline in its
market price.
Since it commenced operations in August 1995, the Company's growth in
originating loans has been significant. In light of this growth, the
historical financial performance of the Company may be of limited relevance in
predicting future performance. Since the Company historically has sold
substantially all loans originated on a whole loan basis, it has not tracked
the performance of its loans in the secondary market and thus is unable to
determine the history of loan losses associated with such loans. If a material
portion of such loans result in loan losses to the holders thereof, the market
for and pricing of the Company's loans could be adversely affected, which
could materially lower revenues for a subject reporting period.
NO ASSURANCE OF PLANNED GROWTH; INABILITY OF THE COMPANY TO GROW COULD
ADVERSELY AFFECT THE COMPANY'S OPERATING RESULTS
The Company's total revenues and net income have grown significantly since
inception, primarily due to increased mortgage loan origination and sales
activities. The Company intends to continue to pursue a growth strategy for
the foreseeable future. Since the Company expects recent higher levels of
mortgage broker compensation, which reduce the cash gain on sale of mortgage
loans, to continue for the three months ending March 31, 1998 and possibly
thereafter, the Company believes that its future operating results will depend
largely upon its ability to expand its mortgage origination and sales
activities, and, in particular, increased penetration in existing markets.
While the Company plans to continue its growth of loan originations through
the expansion of its Wholesale Division and Retail Division, these plans
require additional personnel and assets. To date, the Company has had a
relative lack of experience in retail originations, having only originated
$14.5 million through its Retail Division from the inception of the division
in March 1996 through December 31, 1997. There can be no assurance that the
Company will be able to successfully expand and operate such divisions and
programs profitably. It also is expected that such expansion plans will result
in a substantial increase in operating expenses in the short-run. Furthermore,
since management expects that there will be a time lag between the expenditure
of such monies and the receipt of any revenues from such expansion efforts,
the Company's results of operations may be adversely affected in the short-
run. There can be no assurance that the Company will anticipate and respond
effectively to all of the changing demands that its expanding operations will
have on the Company's management, information and operating systems, and the
failure to adapt its systems could have a material adverse effect on the
Company's results of operations and financial condition. There can be no
assurance that the Company will successfully achieve its planned expansion or,
if achieved, that the expansion will result in profitable operations.
8
<PAGE>
RISK OF VARIATIONS IN QUARTERLY OPERATING RESULTS
Several factors affecting the Company's business can cause significant
variations in its quarterly results of operations. In particular, variations
in the volume of the Company's loan originations, the differences between the
Company's costs of funds and the average interest rates of originated loans,
the inability of the Company to complete significant loan sales transactions
in a particular quarter, and problems generally affecting the mortgage loan
industry can result in significant increases or decreases in the Company's
revenues from quarter to quarter. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Quarterly Data." A delay in
closing a particular loan sale transaction during a particular quarter would
postpone recognition of cash gain on sale of loans. In addition, delays in
closing a particular loan sale transaction would also increase the Company's
exposure to interest rate fluctuations by lengthening the period during which
its variable rate borrowings under its warehouse facilities are outstanding.
If the Company were unable to sell a sufficient number of its loans at a
premium in a particular reporting period, the Company's revenues for such
period would decline, resulting in lower net income and possibly a net loss
for such period, which could have a material adverse effect on the Company's
results of operations and financial condition. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
DISCONTINUANCE OF EXCLUSIVE ARRANGEMENTS WITH DLJ COULD ADVERSELY AFFECT THE
COMPANY'S OPERATING RESULTS
The Company commenced operations in August 1995 and prior to this Offering,
has benefitted from its relationship with DLJ, which owned approximately 44%
of the Company's outstanding Common Stock as of December 31, 1997. Since
commencement of operations, DLJ has provided the Company with a $50.0 million
warehouse line of credit to fund loan production (the "DLJ Facility"), which
has been the only financing facility the Company has used to date. The
interest rate under the DLJ Facility was equal to the federal funds rate plus
100 basis points, subject to increase based on the length of time loans are
held by the Company. The Company is substantially dependent upon its access to
warehouse lines of credit and other lending facilities in order to fund loan
originations.
In October 1997, the Company and DLJ agreed to amend the terms of the DLJ
Facility (the "Amended DLJ Facility") to increase the amount of the DLJ
Facility to $150.0 million and modified the term of the DLJ Facility to two
years after the closing of this Offering. The interest rate of the DLJ
Facility will remain effective until the closing of this Offering; thereafter,
borrowings under the Amended DLJ Facility during the first 12 months will bear
interest at the federal funds rate plus 50 basis points and thereafter the
rate will be the federal funds rate plus 100 basis points. See "Business--
Financing and Sale of Loans." It is expected that the Amended DLJ Facility
will not be extended beyond the modified term. The Company is seeking to
obtain additional and alternative sources of financing on favorable terms to
decrease its reliance on DLJ. While the Company is currently negotiating with
other lenders to obtain additional warehouse lines of credit, the Company
currently has no financing commitment for such lines of credit. Any failure by
DLJ to continue to provide financing under the Amended DLJ Facility or the
Company's failure to obtain adequate funding under any additional or
alternative facilities, on favorable terms or otherwise, could cause the
Company to curtail loan origination activities, which would result in a
decline in revenues, the effect of which could have a material adverse effect
on the Company's operations.
In addition, under the Company's master loan purchase agreement and
commitment letter thereto with DLJ (the "Master Loan Purchase Agreement"),
since the Company commenced business, DLJ has purchased substantially all of
the Company's loan production through whole loan sales. For a more detailed
discussion of the terms of the Master Loan Purchase Agreement, see
"Arrangements with DLJ and the Recapitalization." Gain on sales of loans
represents the primary source of the Company's revenues and net income. The
Company relies almost entirely on proceeds from loan sales to generate cash
for repayment of borrowings under the Company's warehouse facilities. There
can be no assurance that DLJ will continue to purchase loans originated by the
Company or will be willing to purchase such loans on terms under which it had
historically purchased the Company's loans. Following the completion of this
Offering, the Company intends to sell loan production to DLJ and other
institutional purchasers in the secondary market. While the Company has
historically assisted DLJ in identifying purchasers of those loans purchased
by DLJ
9
<PAGE>
under the Master Loan Purchase Agreement (see "Business--Financing and Sale of
Loans--Loan Sales"), there can be no assurance that the Company would be
successful in identifying other institutional purchasers or in negotiating
favorable terms for such loan sales. The failure by the Company to timely sell
its loans would expose the Company to interest rate fluctuations and greater
risks of borrower defaults and bankruptcies, fraud losses and special hazard
losses. The failure of the Company to negotiate favorable terms for its loan
sales would adversely affect the Company's revenues.
SUBSTANTIAL DEPENDENCE ON WHOLESALE BROKERS
The Company depends largely on independent mortgage brokers, financial
institutions and mortgage bankers for its originations of mortgage loans.
Substantially all of the independent mortgage brokers with whom the Company
does business deal with multiple loan originators for each prospective
borrower. Non-conforming originators, including the Company, compete for
business based upon pricing, service, loan fees and costs and other factors.
The Company's competitors also seek to establish relationships with such
independent mortgage brokers, financial institutions and mortgage bankers,
none of whom is contractually obligated to continue to do business with the
Company. In addition, the Company expects the volume of wholesale loans that
it originates to increase which will depend in large part on maintaining and
expanding its relationships with its independent mortgage brokers. The
Company's future results may become increasingly exposed to fluctuations in
the volume and cost of its wholesale loans resulting from competition from
other originators and purchasers of such loans, market conditions and other
factors.
SUBSTANTIAL RISKS RELATED TO LENDING TO LOWER CREDIT GRADE BORROWERS
The Company is a lender in the non-conforming mortgage banking industry,
which means that the Company focuses its marketing efforts on borrowers who
may be unable to obtain mortgage financing from conventional mortgage sources.
Approximately 3.9% of the total principal amount of loans originated by the
Company during each of the six months ended December 31, 1997 and the year
ended June 30, 1997 were to borrowers with a Company risk classification of
"C-," which includes borrowers with numerous derogatory credit items up to and
including a bankruptcy in the most recent 12 month period. In addition, for
the six months ended December 31, 1997 and the year ended June 30, 1997,
approximately 50.9% and 48.8%, respectively, of the Company's total loan
originations were made under its "Stated Income Documentation" program
pursuant to which the Company does not require any income documentation. As a
result, the Company does not independently verify in writing the accuracy of
the stated income of such borrowers on their mortgage loan applications which
may subject the Company to a greater risk of borrower misrepresentations.
Also, an undeterminable percentage of the Company's loans are made based on
exceptions to the Company's underwriting guidelines; any exception may cause a
borrower to be placed in a more favorable borrower risk classification and
thereby be provided loan terms which such borrower may not have qualified for
absent such exception. Loans made to such non-conforming borrowers generally
entail a higher risk of delinquency and higher losses than loans made to
borrowers who utilize conventional mortgage sources. Delinquencies,
foreclosures and losses generally increase during economic slowdowns or
recessions. Further, any material decline in real estate values increase the
loan-to-value ratios of loans previously made by the Company, thereby
weakening collateral coverage and increasing the possibility of a loss in the
event of a borrower default. Any sustained period of increased delinquencies,
foreclosures or losses after the loans are sold could adversely affect the
pricing of the Company's future loan sales and the ability of the Company to
sell its loans in the future. In the past, certain of these factors have
caused revenues and net income of many participants in the non-conforming
mortgage industry, including the Company, to fluctuate from quarter to
quarter. See "Business--Underwriting."
SUBSTANTIAL COMPETITION MAY ADVERSELY AFFECT THE COMPANY'S ABILITY TO
ORIGINATE, SELL OR FINANCE MORTGAGE LOANS
As an originator of mortgage loans, the Company faces intense competition,
primarily from mortgage banking companies, commercial banks, credit unions,
thrift institutions and finance companies. Many of these competitors are
substantially larger and have more capital and other resources than the
Company. Competition can take many forms, including convenience in obtaining a
loan, customer service, marketing distribution channels and loan pricing. If
the Company is unable to remain competitive in these areas, the volume of the
10
<PAGE>
Company's loan originations may be materially adversely affected as borrowers
seek out other lenders for their financing needs. Lower originations may have
an adverse effect on the Company's ability to negotiate and obtain sufficient
financing under warehouse lines of credit upon acceptable terms. Furthermore,
the current level of gains realized by the Company and its competitors on the
sale of the type of loans they originate and purchase is attracting and may
continue to attract additional competitors into this market with the possible
effect of lowering gains that may be realized on the Company's loan sales.
Establishing a broker-sourced loan business typically requires a substantially
smaller commitment of capital and personnel resources than a direct-sourced
loan business. This relatively low barrier to entry permits new competitors to
enter the broker-sourced loan market quickly, particularly existing direct-
sourced lenders which can draw upon existing branch networks and personnel in
seeking to sell products through independent brokers. Competition may be
affected by fluctuations in interest rates and general economic conditions.
During periods of rising rates, competitors which have locked in low borrowing
costs may have a competitive advantage. See "Business--Competition."
Increased competition could have the possible effects of (i) lowering gains
that may be realized on the Company's loan sales, (ii) reducing the volume of
the Company's loan originations and loan sales, (iii) increasing the demand
for the Company's experienced personnel and the potential that such personnel
will be recruited by the Company's competitors and (iv) lowering the industry
standard for non-conforming underwriting guidelines (i.e., providing for
higher loan-to-value ratios) as competitors attempt to increase or maintain
market share in the face of increased competition. In the past, certain of
these factors have caused revenues and net income of many participants in the
non-conforming mortgage industry, including the Company, to fluctuate from
quarter to quarter. See "--Risk of Variations in Quarterly Operating Results."
There can be no assurance that the Company will be able to continue to
compete successfully in the markets it serves. Inability to compete
successfully would have a material adverse effect on the Company's results of
operations and financial condition.
RISK OF COMPETITION IN NEW MARKETS
As the Company expands into new geographic markets, it may face competition
from lenders with established positions in these locations. There can be no
assurance that the Company will be able to successfully compete with such
established lenders, the effect of which may have a material adverse effect on
the Company's results of operations and financial condition.
RISK OF COMPETITION FROM GOVERNMENT-SPONSORED ENTITIES
In the future, the Company may also face competition from, among others,
government-sponsored entities which may enter the non-conforming mortgage
market. Existing or new loan purchase programs may be expanded by the Federal
National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage
Corporation ("FHLMC"), or the Government National Mortgage Association
("GNMA") to include non-conforming mortgages, particularly those in the "A-"
category, which constitute a significant portion of the Company's loan
production. For example, the FHLMC has announced that it is entering the non-
conforming market in 1998. Entries of such government-sponsored entities into
the non-conforming market may have an adverse effect on loan yields on
mortgage loans originated by the Company and reduce or eliminate premiums on
loan sales.
GENERAL ECONOMIC CONDITIONS MAY ADVERSELY AFFECT COMPANY OPERATIONS
The Company's business may be adversely affected by periods of economic
slowdown or recession which may be accompanied by decreased demand for
consumer credit and declining real estate values. Any material decline in real
estate values reduces the ability of borrowers to use home equity to support
borrowings and increases the loan-to-value ratios of loans previously made by
the Company, thereby weakening collateral coverage and increasing the
possibility of a loss in the event of default. To the extent that the loan-to-
value ratios of prospective borrowers' home equity collateral do not meet the
Company's underwriting criteria, the volume of loans originated by the Company
could decline. Further, delinquencies, foreclosures and losses generally
11
<PAGE>
increase during economic slowdowns or recessions. Because of the Company's
focus on borrowers who are unable or unwilling to obtain mortgage financing
from conventional mortgage sources, whether for reasons of credit impairment,
income qualification or credit history or a desire to receive funding on an
expedited basis, the actual rates of delinquencies, foreclosures and losses on
such loans could be higher under adverse economic conditions than those
currently experienced in the mortgage lending industry in general. Any
sustained period of such increased delinquencies, foreclosures or losses could
adversely affect the pricing of the Company's loan sales whether through whole
loan sales or future securitizations. A decline in loan origination volumes
could have a material adverse effect on the Company's operations and financial
condition.
CHANGES IN INTEREST RATES MAY ADVERSELY AFFECT NET INCOME AND PROFITABILITY
Profitability may be directly affected by the level of and fluctuations in
interest rates which affect the Company's ability to earn a spread between
interest received on its loans held for sale and rates paid on warehouse
lines. The Company's profitability may be adversely affected during any period
of unexpected or rapid change in interest rates due to the fact that the
Company does not currently hedge its portfolio of mortgage loans held for
sale. A substantial and sustained increase in interest rates could adversely
affect the Company's ability to originate loans. Also, a significant decline
in interest rates could increase the level of loan prepayments and require the
Company to write down the value of the interest-only and residual certificates
retained in any future securitizations, thereby adversely impacting earnings.
Adjustable-rate mortgage loans originated by the Company amounted to $48.9
million, $110.9 million and $96.9 million in principal amount during the six
months ended December 31, 1997 and the years ended June 30, 1997 and 1996,
respectively. Substantially all such adjustable-rate mortgage loans included a
"teaser" rate, i.e., an initial interest rate significantly below the fully
indexed interest rate at origination. Although these loans are underwritten at
1.0% above the initial or start rate at origination, borrowers may encounter
financial difficulties as a result of increases in the interest rate over the
life of the loan, which may adversely impact the performance of the Company's
loans in the secondary market. Any sustained period of increased
delinquencies, foreclosures or losses after the loans are sold could adversely
affect the pricing of the Company's future loan sales and the ability of the
Company to sell its loans in the future.
ELIMINATION OF LENDER PAYMENTS TO BROKERS COULD ADVERSELY AFFECT RESULTS OF
OPERATIONS
Lawsuits have been filed against several mortgage lenders, not including the
Company, alleging that such lenders have made certain payments to independent
mortgage brokers in violation of the Federal Real Estate Settlement Procedures
Act of 1974, as amended ("RESPA"). These lawsuits have generally been filed on
behalf of a purported nationwide class of borrowers alleging that payments
made by a lender to a broker in addition to payments made by the borrower to a
broker are prohibited by RESPA and are therefore illegal. If these cases are
resolved against the lenders, it may cause an industry-wide change in the way
independent mortgage brokers are compensated. The Company's broker
compensation programs permit such payments. The Company makes such payments in
the ordinary course of business. Due to competitive conditions, these payments
have increased in recent periods, which adversely affected the Company's cash
gain on sale of mortgage loans for the six months ended December 31, 1997.
Management expects this increased level of payments to continue for the three
months ending March 31, 1998 and possibly thereafter. Although the Company
believes that its broker compensation programs comply with all applicable laws
and are consistent with long-standing industry practice and regulatory
interpretations, in the future new regulatory interpretations or judicial
decisions may require the Company to change its broker compensation practices.
Such a change may have a material adverse effect on the Company and the entire
mortgage lending industry.
POTENTIAL ADVERSE EFFECT OF REPRESENTATIONS AND WARRANTIES IN LOAN SALES
Loan sales are made to DLJ on a non-recourse basis pursuant to the Master
Loan Purchase Agreement containing customary representations and warranties by
the Company regarding the underwriting criteria and the origination process.
The Company is required to provide similar representations and warranties to
those
12
<PAGE>
institutional purchasers to whom DLJ sells the subject loans. The Company,
therefore, may be required to repurchase or substitute loans in the event of a
breach of a representation or warranty to DLJ or the institutional purchaser,
any misrepresentation during the mortgage loan origination process or, in some
cases, upon any fraud or first payment default on such mortgage loans. In an
environment of rapid whole loan sales, the Company may not have substitute
loans which are not previously committed for sale readily available in which
case the Company would be required to effect a repurchase. During the year
ended June 30, 1997, the Company repurchased $178,000 of loans; no loans were
repurchased during the six months ended December 31, 1997 and the year ended
June 30, 1996. There can be no assurance that such repurchase levels will not
substantially increase in future periods. Any claims asserted against the
Company in the future by its loan purchasers may result in liabilities or
legal expenses that could have a material adverse effect on the Company's
results of operations and financial condition. In addition, any material
repurchase or substitution of loans may have an adverse effect on the market
for and pricing of the Company's loans.
DEPENDENCE ON A LIMITED NUMBER OF KEY PERSONNEL
The Company's growth and development to date have been largely dependent
upon the services of Evan R. Buckley, the Company's Chief Executive Officer,
and Kelly W. Monahan, the Company's President and Chief Financial Officer. The
loss of Messrs. Buckley's or Monahan's services for any reason could have a
material adverse effect on the Company. The Company does not maintain key
person life insurance on the lives of any of its employees. In addition, the
Company's future success will require it to recruit additional key personnel,
including additional sales and marketing personnel. The Company believes that
its future success also substantially depends on its ability to attract,
retain and motivate highly skilled employees, who are in great demand. There
can be no assurance that the Company will be successful in doing so.
SUBSTANTIAL RISKS ASSOCIATED WITH FUTURE SECURITIZATIONS
The Company may in the future sell loans through securitizations which
involve substantial risks, including the following:
Inability to Securitize Mortgage Loans. The Company anticipates that it may
in the future acquire and accumulate mortgage loans until a sufficient
quantity has been acquired for securitization. There can be no assurance that
the Company will be successful in securitizing mortgage loans. During the
accumulation period, the Company will be subject to risks of borrower defaults
and bankruptcies, fraud losses and special hazard losses. In the event of any
default under mortgage loans held by the Company, the Company will bear the
risk of loss of principal to the extent of any deficiency between the value of
the mortgage collateral and the principal amount of the mortgage loan. Also
during the accumulation period, the costs of financing the mortgage loans
through warehouse lines of credit or reverse repurchase agreements could
exceed the interest income on the mortgage loans. It may not be possible or
economical for the Company to complete the securitization of all mortgage
loans that it acquires, in which case the Company will continue to hold the
mortgage loans and bear the risks of borrower defaults and special hazard
losses.
Potential Recourse Against Company in Securitizations. To the extent that
the Company engages in securitizations, the Company intends to transfer loans
originated by the Company to a trust in exchange for cash, "interest-only" and
residual certificates issued by the trust. The trustee will have recourse to
the Company with respect to the breach of standard representations or
warranties made by the Company at the time such loans are transferred, the
effect of which may have a material adverse effect on the Company's results of
operations and financial condition.
Value of Interest-Only, Principal-Only, Residual Interest and Subordinated
Securities Subject to Fluctuation. To the extent that the Company engages in
securitizations, the Company's assets will likely include "interest-only,"
"principal-only," residual interest and subordinated securities, which will be
valued by the Company in accordance with SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities." The Company will record its retained interest in securitizations
(including
13
<PAGE>
"interest-only," "principal-only" and subordinated securities) as investments
classified as trading securities. Realization of these "interest-only,"
"principal-only," residual interest and subordinated securities in cash is
subject to the timing and ultimate realization of cash flows associated
therewith, which is in turn effected by the prepayment and loss
characteristics of the underlying loans. The Company will estimate future cash
flows from these "interest-only," "principal-only," residual interest and
subordinated securities and will value such securities with assumptions that
it believes to be consistent with those that would be utilized by an
unaffiliated third-party purchaser. If actual experience differs from the
assumptions used in the determination of the asset value, future cash flows
and earnings could be negatively impacted, and the Company could be required
to reduce the value of its "interest-only," "principal-only," residual
interest and subordinated securities in accordance with SFAS 125. The value of
such securities can fluctuate widely and may be extremely sensitive to changes
in discount rates, projected mortgage loan prepayments and loss assumptions.
Risks Regarding Hedging. In the future the Company may hedge its variable-
rate mortgage loans and any interest-only and residual certificates retained
in connection with any future securitizations with hedging transactions which
may include forward sales of mortgage loans or mortgage-backed securities,
interest rate caps and floors and buying and selling of futures and options on
futures. The nature and quantity of hedging transactions will be determined by
the Company's management based on various factors, including market conditions
and the expected volume of mortgage loan originations and purchases. No
assurance can be given that such hedging transactions will offset the risks of
changes in interest rates, and it is possible that there will be periods
during which the Company could incur losses after accounting for its hedging
activities.
COMPANY PERFORMANCE MAY BE AFFECTED BY CONTRACTED SUB-SERVICING
While the Company currently sells substantially all of the mortgage loans it
originates servicing released, it is required to service the loans from the
date of funding through the date of sale. Since the Company conducts whole
loan sales monthly, the Company currently does not have a substantial
servicing portfolio. Nonetheless, the Company currently contracts for the sub-
servicing of all mortgage loans it originates through the date of sale and is
subject to risks associated with inadequate or untimely services. To the
extent that the Company decides to retain servicing rights in the future or
conduct securitizations, it currently intends to contract for the sub-
servicing of such mortgage loans, which would expose it to more substantial
risks associated with contracted sub-servicing. In such event, it is expected
that many of the Company's borrowers will require notices and reminders to
keep their mortgage loans current and to prevent delinquencies and
foreclosures. A substantial increase in the Company's delinquency rate or
foreclosure rate could adversely affect its ability to access profitably the
capital markets for its financing needs, including any future securitizations.
Any of the Company's sub-servicing agreements with its third-party sub-
servicers are expected to provide that if the Company terminates the agreement
without cause (as defined in the agreement), the Company may be required to
pay the third-party sub-servicer a fee. Depending upon the size of the
Company's loan portfolio sub-serviced at any point in time, the termination
penalty that the Company would be obligated to pay upon termination without
cause, may be substantial.
The Company intends to subcontract with sub-servicers to service the
mortgage loans for any of its public securitizations. With respect to such
mortgage loans, the related pooling and servicing agreements would permit the
Company to be terminated as master servicer under specific conditions
described in such agreements, which generally include the failure to make
payments, including advances, within specific time periods. Such termination
would generally be at the option of the trustee but not at the option of the
Company. If, as a result of a sub-servicer's failure to perform adequately,
the Company were terminated as master servicer of a securitization, the value
of any servicing rights held by the Company would be adversely impacted. In
addition, if a new sub-servicer were selected with respect to any such
securitization, the change in sub-servicing may result in greater
delinquencies and losses on the related loans, which would adversely impact
the value of any "interest-only," "principal-only," residual interest and
subordinated securities held by the Company in connection with such
securitization.
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CONCENTRATION OF OPERATIONS MAY ADVERSELY AFFECT COMPANY OPERATIONS
Approximately 28.3%, 36.9% and 53.6% of the dollar volume of loans
originated by the Company during the six months ended December 31, 1997 and
the years ended June 30, 1997 and 1996, respectively, were secured by
properties located in California. No other state contained properties securing
more than 10% of the dollar volume of loans originated by the Company during
such periods, other than Florida which accounted for 10.3% for the six months
ended December 31, 1997, Illinois which accounted for 16.7% and 10.4% for the
six months ended December 31, 1997 and year ended June 30, 1997, respectively,
and Hawaii which accounted for 12.0% for the year ended June 30, 1997.
Although the Company has a growing independent broker network outside of
California, the Company is likely to continue to have a significant amount of
its loan originations in California for the foreseeable future, primarily
because California represents a significant portion of the national mortgage
marketplace. Consequently, the Company's results of operations and financial
condition are dependent upon general trends in the California economy and its
residential real estate market. The California economy experienced a slowdown
or recession in recent years that has been accompanied by a sustained decline
in the California real estate market. Residential real estate market declines
may adversely affect the values of the properties securing loans such that the
principal balances of such loans will equal or exceed the value of the
mortgaged properties. Reduced collateral value will adversely affect the
volume of the Company's loans as well as the pricing of the Company's mortgage
loans and the Company's ability to sell its loans.
In addition, California historically has been vulnerable to certain natural
disaster risks, such as earthquakes and erosion-caused mudslides, which are
not typically covered by the standard hazard insurance policies maintained by
borrowers. Uninsured disasters may adversely impact borrowers' ability to
repay mortgage loans made by the Company, any sustained period of increased
delinquencies or defaults could adversely affect the pricing of the Company's
future loan sales and the ability of the Company to sell its loans. The
existence of adverse economic conditions or the occurrence of such natural
disasters in California could have a material adverse effect on the Company's
results of operations and financial condition.
REAL PROPERTY WITH ENVIRONMENTAL PROBLEMS MAY CREATE LIABILITY FOR THE COMPANY
In the course of its business, the Company may acquire real property
securing loans that are in default. There is a risk that hazardous substances
or waste, contaminants, pollutants or sources thereof could be discovered on
such properties after acquisition by the Company. In such event, the Company
might be required to remove such substances from the affected properties at
its sole cost and expense. The cost of such removal may substantially exceed
the value of the affected properties or the loans secured by such properties.
There can be no assurance that the Company would have adequate remedies
against the prior owners or other responsible parties, or that the Company
would not find it difficult or impossible to sell the affected real properties
either prior to or following any such removal, the effect of which may have a
material adverse effect on the Company's results of operations and financial
condition.
COMPANY SUBJECT TO EXTENSIVE LEGISLATIVE AND REGULATORY RISKS
The Company's business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and is
subjected to various laws and judicial and administrative decisions imposing
requirements and restrictions on a substantial portion of its operations. The
Company's consumer lending activities are subject to the Federal Truth-in-
Lending Act and Regulation Z (including the Home Ownership and Equity
Protection Act of 1994), the Federal Equal Credit Opportunity Act and
Regulation B, as amended ("ECOA"), the Fair Credit Reporting Act of 1970, as
amended, RESPA and Regulation X, the Fair Housing Act, the Home Mortgage
Disclosure Act and the Federal Debt Collection Practices ACT, as well as other
federal and state statutes and regulations affecting the Company's activities.
The Company is also subject to the rules and regulations of and examinations
by the Department of Housing and Urban Development ("HUD") and state
regulatory authorities with respect to originating, processing, underwriting,
selling, securitizing and servicing loans. These rules and regulations, among
other things, impose licensing obligations on the Company, establish
eligibility criteria for mortgage loans, prohibit discrimination, provide for
inspections
15
<PAGE>
and appraisals of properties, require credit reports on loan applicants,
regulate assessment, collection, foreclosure and claims handling, investment
and interest payments on escrow balances and payment features, mandate certain
disclosures and notices to borrowers and, in some cases, fix maximum interest
rates, fees and mortgage loan amounts. Failure to comply with these
requirements can lead to loss of approved status, termination or suspension of
servicing contracts without compensation to the servicer, demands for
indemnifications or mortgage loan repurchases, certain rights of rescission
for mortgage loans, class action lawsuits and administrative enforcement
actions.
In October 1997, HUD issued proposed regulations regarding the treatment and
disclosure of fees charged and collected by mortgage brokers providing certain
safe harbors for the payment of fees by lenders to mortgage brokers and
setting forth standards to determine whether payments to mortgage brokers
violate RESPA. Whether such regulations will be adopted and the form and
content of any final regulations is unknown.
The Company is subject to licensing by state authorities. In addition, any
person who acquires more than 10% of the Company's stock will become subject
to certain state licensing regulations requiring such person periodically to
file certain financial and other information. If any person holding more than
10% of the Company's stock refuses to adhere to such filing requirements, the
Company's existing licensing arrangements could be jeopardized. The loss of
required licenses could have a material adverse effect on the Company's
results of operations and financial condition.
Although the Company believes that it has systems and procedures to
facilitate compliance with these requirements and believes that it is in
compliance in all material respects with applicable local, state and federal
laws, rules and regulations, there can be no assurance that more restrictive
laws, rules and regulations will not be adopted in the future that could make
compliance more difficult or expensive.
Members of Congress and government officials have from time to time
suggested the elimination of the mortgage interest deduction for federal
income tax purposes, either entirely or in part, based on borrower income,
type of loan or principal amount. Because many of the Company's loans are made
to borrowers for the purpose of consolidating consumer debt or financing other
consumer needs, the competitive advantage of tax deductible interest, when
compared with alternative sources of financing, could be eliminated or
seriously impaired by such government action. Accordingly, the reduction or
elimination of these tax benefits could have a material adverse effect on the
demand for loans of the kind offered by the Company.
POSSIBLE NEED FOR ADDITIONAL EQUITY FINANCING
The Company's primary operating cash requirements include the funding or
payment of (i) loan originations, (ii) interest expense incurred on borrowings
under warehouse lines of credit, (iii) income taxes, (iv) capital expenditures
and (v) other operating and administrative expenses. The Company funds these
cash requirements primarily through warehouse lines of credit and whole loan
sales. In addition, if the Company conducts securitizations, it would require
liquidity to fund its investments in "interest-only" and residual certificates
and for fees and expenses incurred with securitizations. The Company's ability
to implement its business strategy will depend upon its ability to establish
alternative long-term financing arrangements with parties other than DLJ and
obtain sufficient financing under warehouse facilities upon acceptable terms.
There can be no assurance that such financing will be available to the Company
on favorable terms, if at all. If such financing were not available or the
Company's capital requirements exceed anticipated levels, then the Company
would be required to obtain additional equity financing which would dilute the
interests of stockholders who invest in this Offering. The Company cannot
presently estimate the amount and timing of additional equity financing
requirements because such requirements are tied to, among other things, the
growth of the Company. If the Company were unable to raise such additional
capital, its results of operations and financial condition would be adversely
affected. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition--Liquidity and Capital Resources."
16
<PAGE>
ANY FUTURE ACQUISITIONS OF OTHER SPECIALTY FINANCE COMPANIES OR ASSETS MAY
HAVE ADVERSE EFFECTS ON THE COMPANY'S BUSINESS
The Company may, from time to time, engage in the acquisition of other
specialty finance companies or portfolios of loan assets. Any acquisition made
by the Company may result in potentially dilutive issuances of equity
securities, the incurrence of additional debt and the amortization of expenses
related to goodwill and other intangible assets, any of which could have a
material adverse effect on the Company's business and results of operations.
The Company also may experience difficulties in the assimilation of the
operations, services, products and personnel related to acquired companies or
loan portfolios, an inability to sustain or improve the historical revenue
levels of acquired companies, the diversion of management's attention from
ongoing business operations and the potential loss of key employees of such
acquired companies. The Company currently has no agreements with regard to any
potential acquisition and there can be no assurance that future acquisitions,
if any, will be consummated.
SIGNIFICANT INFLUENCE OF CURRENT MANAGEMENT
After the Offering, the officers and directors of the Company will
beneficially own 34.1% of the outstanding Common Stock of the Company (or
approximately 31.3% of the outstanding Common Stock if the Underwriters' over-
allotment option is exercised in full). As a result, the Company's current
management through its stock ownership and otherwise will be able to exert
significant influence over the business and affairs of the Company. See
"Management" and "Principal and Selling Stockholders."
NO ASSURANCE OF ACTIVE TRADING MARKET FOR COMMON STOCK; DETERMINATION OF
OFFERING PRICE; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Common Stock
of the Company. Although the Company has been approved, subject to official
notice of issuance, for quotation of the Common Stock on the Nasdaq National
Market, there can be no assurance that an active public trading market for the
Common Stock will develop after the Offering or that, if developed, it will be
sustained. The initial public offering price of the Common Stock offered
hereby has been determined by negotiations between the Company and the
Representatives of the Underwriters and may not be indicative of the price at
which the Common Stock will trade after the Offering. See "Underwriting."
The trading price of the Company's Common Stock could be subject to
significant fluctuations in response to variations in quarterly operating
results, changes in analysts' estimates, general conditions in the speciality
finance industry and other factors. For example, companies engaging in
securitizations record non-cash gain on sale of mortgage loans from the
revenue expected to be obtained from retained residual interests in future
payments on the loans. Realization of cash from these residual interests is
subject to the timing and ultimate realization of cash flows associated
therewith, which in turn is affected by the prepayment and loss
characteristics of the underlying loans. Several specialty finance companies
recently have been required to "write-down" the value of their retained
interests, and therefore reduce or eliminate reported earnings, largely as a
result of a higher than anticipated level of prepayments on the underlying
loans which has materially adversely affected their stock prices. Stock prices
of other specialty finance companies that utilize more conservative
assumptions in recording non-cash gain on sale and those, such as the Company,
that sell whole loans for cash and do not engage in material securitization
activities, also have been adversely impacted by these developments. There can
be no assurance the future market price of the Company's Common Stock will not
be adversely impacted by the results of operation of, and market reactions to,
other specialty finance companies. Consequently, there can be no assurance
that the market price for the Common Stock will not fall below the initial
public offering price.
The Company may increase its capital by making additional private or public
offerings of its Common Stock, securities convertible into its Common Stock or
debt securities. The actual or perceived effect of such offerings, the timing
of which cannot be predicted, may be the dilution of the book value or
earnings per share of the Common Stock outstanding, which may result in the
reduction of the market price of the Common Stock.
17
<PAGE>
ANTI-TAKEOVER EFFECT OF DELAWARE LAW
The Company intends to reincorporate as a Delaware corporation prior to
completion of the Offering and as such will be subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law. In general,
Section 203 prevents an "interested stockholder" (defined generally as a
person owning more than 15% or more of the Company's outstanding voting stock)
from engaging in a "business combination" with the Company for three years
following the date that person became an interested stockholder unless the
business combination is approved in a prescribed manner. This statute could
make it more difficult for a third party to acquire control of the Company.
See "Description of Capital Stock--Certain Provisions of Delaware Law."
ISSUANCE OF PREFERRED STOCK MAY ADVERSELY AFFECT HOLDERS OF COMMON STOCK
The Board of Directors has the authority to issue up to 5,000,000 shares of
undesignated Preferred Stock and to determine the rights, preferences,
privileges and restrictions of such shares without any further vote or action
by the stockholders. Although at present the Company has no plans to issue any
of the Preferred Stock, the Preferred Stock could be issued with voting,
liquidation, dividend and other rights superior to the rights of the Common
Stock. The issuance of Preferred Stock under certain circumstances could have
the effect of delaying or preventing a change in control of the Company. See
"Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET PRICE OF THE
COMPANY'S COMMON STOCK
The sales of substantial amounts of the Company's Common Stock in the public
market or the prospect of such sales could materially and adversely affect the
market price of the Common Stock. Upon completion of this Offering, the
Company will have outstanding 5,400,000 shares of Common Stock. The 3,173,196
shares of Common Stock offered hereby will be immediately eligible for sale in
the public market without restriction beginning on the date of this
Prospectus. The remaining 2,226,804 shares of Common Stock are restricted in
nature and are saleable to the extent permitted for "affiliates" pursuant to
Rule 144 under the Securities Act. The Company and its officers and directors
have agreed that they will not, without the prior written consent of CIBC
Oppenheimer Corp. (which consent may be withheld in its sole discretion) and
subject to certain limited exceptions, sell, transfer, or otherwise dispose of
any shares of Common Stock, options or warrants to acquire Common Stock, or
securities exchangeable or exercisable for or convertible into Common Stock
for a period commencing on the date of this Prospectus and continuing to a
date 180 days after such date. See "Shares Eligible for Future Sale" and
"Underwriting." The Stock Option Plan authorizes the grant of options to
purchase, and awards of, 700,000 shares; of this amount, options to acquire
163,265 shares of Common Stock were granted prior to this Offering at a per
share exercise price of $6.10. In addition, it is expected that stock options
for an additional 325,000 shares of Common Stock will be granted to certain
employees, officers and directors of the Company on the date of this Offering
at a per share exercise price equal to the initial public offering price. The
Company intends to register under the Securities Act of 1933, as amended (the
"Securities Act"), shares reserved for issuance pursuant to the Stock Option
Plan. The holders of the Representatives' Warrants are entitled to certain
registration rights. See "Description of Capital Stock--Registration Rights"
and "Shares Eligible for Future Sale."
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price is substantially higher than the book
value per outstanding share of the Common Stock. Purchasers of the Common
Stock will experience immediate and substantial dilution in pro forma net
tangible book value of $6.39 per share of Common Stock from the assumed
initial public offering price of $11.00 per share of Common Stock. See
"Dilution."
18
<PAGE>
ARRANGEMENTS WITH DLJ AND THE RECAPITALIZATION
Arrangements With DLJ
Prior to this Offering, the Company has benefitted from its relationship
with DLJ, which owned approximately 44% of the Company's outstanding Common
Stock as of December 31, 1997. Since commencement of operations, DLJ has
provided the Company with a $50.0 million warehouse line of credit to fund
loan production (the "DLJ Facility"), which has been the only financing
facility the Company has used to date. The interest rate under the DLJ
Facility was equal to the federal funds rate plus 100 basis points, subject to
increase based on the length of time loans are held by the Company, and DLJ
received a security interest on all loans, and other rights in connection
therewith, originated by the Company. Any loan not purchased by DLJ was not
allowed to remain subject to the warehouse line for more than nine months. The
term of the DLJ Facility was through August 31, 2000. As of December 31, 1997
and June 30, 1997 and 1996, $74.4 million, $54.6 million and $42.7 million,
respectively, was outstanding under the DLJ Facility.
In October 1997, the Company and DLJ modified the DLJ Facility and the terms
under which DLJ would purchase mortgage loans from the Company (the "Amended
DLJ Facility"). The Amended DLJ Facility has similar terms to the DLJ Facility
with certain modifications. The Amended DLJ Facility provides for advances of
up to $150.0 million. The interest rate of the DLJ Facility will remain
effective until the closing of this Offering; thereafter, borrowings under the
Amended DLJ Facility will bear an interest rate of the federal funds rate plus
50 basis points for 12 months after the closing of the Offering and,
thereafter, the federal funds rate plus 100 basis points. The Amended DLJ
Facility also modifies the termination date to two years after the closing of
the Offering. Furthermore, DLJ has agreed to provide the Company with up to
$5.0 million of financing for a term of one year for subordinated "interest-
only" securities to the extent they are retained by the Company in connection
with any future securitizations of loans originated by the Company. Advances
will be made only to the extent the Company does not have sufficient cash, in
excess of reasonable reserves, to fund the retention of such securities.
It is expected that the Amended DLJ Facility will not be extended beyond the
modified term. The Company is seeking to obtain additional and alternative
sources of financing on favorable terms to decrease its reliance on DLJ. While
the Company is currently negotiating with other lenders to obtain additional
warehouse lines of credit, the Company currently has no financing commitment
for such lines of credit. Any failure by DLJ to continue to provide financing
under the Amended DLJ Facility or the Company's failure to obtain adequate
funding under any additional or alternative facilities, on favorable terms or
otherwise, could cause the Company to curtail loan origination activities
which could have a material adverse effect on the Company's operations.
The Amended DLJ Facility modifies the exclusivity of the relationship
between DLJ and the Company. In connection with the DLJ Facility, DLJ,
pursuant to the Master Loan Purchase Agreement, agreed to purchase, and the
Company agreed to sell to DLJ, all mortgage loans originated by the Company.
While over the course of this relationship, the Company and DLJ have agreed
that certain of such loans will not be so purchased, the Company has
historically sold substantially all of its originated loans to DLJ as whole
loans on a servicing released basis. Under the Amended DLJ Facility, this
exclusive contractual arrangement will be modified and the Company, as of the
consummation of the Offering, will have no obligation to sell any loans to
DLJ, and DLJ will have no obligation to purchase any loans from the Company.
DLJ has purchased, and it is contemplated that it may continue to purchase,
loans under the Master Loan Purchase Agreement with a view towards
securitization or other resale transactions in the secondary mortgage market.
Since substantially all of the loans historically purchased by DLJ under the
Master Loan Purchase Agreement have been resold by DLJ to institutional
purchasers generally within 48 hours of the initial purchase from the Company,
DLJ has agreed to allow the Company to assist it in the marketing of loans so
resold by DLJ. Prior to the purchase of the loans by DLJ under the Master Loan
Purchase Agreement, the Company undertakes a process to identify the
institutional purchasers who will immediately buy the subject loans
from DLJ. This program utilizes a competitive bidding process typically
involving two to four potential purchasers (including Wall Street firms,
financial institutions and conduits, along with other institutional
19
<PAGE>
purchasers) who in most cases have purchased similar resold loans from DLJ in
the past. The successful bidder is committed to a minimum quantity of loans at
a determined price, and is generally granted the option to purchase more than
the minimum quantity at a negotiated price. DLJ then agrees to pay the Company
the determined price minus 50 basis points, which represents DLJ's fees. As a
result of this agreement, management is able to directly control the sales
process of its loans in an effort to obtain more favorable pricing and other
terms. A successful bidder is not obligated to purchase loans other than those
to which its bid applies. For the six months ended December 31, 1997 and the
years ended June 30, 1997 and 1996, an aggregate of $1.7 million, $2.1 million
and $1.8 million, respectively, was paid to DLJ as fees pursuant to the Master
Loan Purchase Agreement. Under the Amended DLJ Facility, DLJ and the Company
have agreed that DLJ will receive no fees in connection with any such
purchases for the first 12 months after the closing of the Offering and 12.5
basis points for the second 12 months after the closing.
The Master Loan Purchase Agreement, along with the Amended DLJ Facility,
terminates on August 31, 2000, or may be terminated earlier by DLJ upon an
event of default by the Company, including the occurrence of any proceeding
adversely affecting the Company's ability to perform its obligations to DLJ, a
material breach by the Company of any related agreement with DLJ or a material
adverse change in the Company's business. The Master Loan Purchase Agreement
may also be terminated by DLJ if the Company merges (other than the
reincorporation of the Company into Delaware to which DLJ has consented),
sells substantially all of its assets or fails to meet certain financial
criteria as agreed to by DLJ and the Company.
Since the Company commenced business, DLJ has purchased substantially all of
the Company's loan production through whole loan sales. During the six months
ended December 31, 1997 and the years ended June 30, 1997 and 1996, the
Company sold loans to DLJ having an aggregate principal balance of $331.4
million, $473.7 million and $153.2 million, respectively. Cash gain on sales
of loans represents the primary source of the Company's revenues and net
income. The Company relies almost entirely on proceeds from loan sales to
generate cash for repayment of borrowings under the Company's warehouse
facilities. There can be no assurance that DLJ will continue to purchase loans
originated by the Company or will be willing to purchase such loans on terms
under which it had historically purchased the Company's loans. Following the
completion of this Offering, the Company intends to sell loan production to
DLJ and other institutional purchasers in the secondary market. While the
Company has historically assisted DLJ in identifying purchasers of those loans
purchased by DLJ under the Master Loan Purchase Agreement, there can be no
assurance that the Company would be successful in identifying other
institutional purchasers or in negotiating favorable terms for such loan
sales.
The Recapitalization
The Company has endeavored to effectuate a series of corporate transactions
to properly position the Company prior to its initial public offering. The
transactions are as follows:
Repurchase of Preferred Stock. In November 1997, the Company redeemed all
outstanding shares of its Series A Preferred Stock for approximately $1.6
million; of this amount, $800,000 was paid to DLJ and $775,000 was paid to BNC
Equity Investors, LLC, an entity of which 37.2% and 6.5% is owned by Evan R.
Buckley and Gary Vander-Haeghen, the Company's Chief Executive Officer and
Vice President, Sales, respectively.
Reincorporation in Delaware. Prior to the consummation of this Offering, the
Company intends to reincorporate in Delaware to take advantage of certain
favorable provisions of Delaware law (see "Description of Capital Stock--
Certain Provisions of Delaware Law"). Further to the reincorporation, the
existing California corporation will be merged into a newly formed Delaware
corporation pursuant to which each outstanding share of Class A and Class B
Common Stock of the existing California corporation will be exchanged for
4,123.71134 shares of $.001 par value Common Stock of the new Delaware
corporation and the certificate of incorporation of the new Delaware
corporation will authorize 50,000,000 shares of Common Stock and 5,000,000
shares of Preferred Stock. As a result of the reincorporation, there will be
no outstanding shares of Class A or Class B Common Stock at the consummation
of this Offering.
20
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
1,400,000 shares of Common Stock offered by the Company at an assumed initial
public offering price of $11.00 (after deducting the estimated underwriting
discount and offering expenses payable by the Company), are estimated to be
$13.9 million. The Company intends to apply approximately 75% of the net
proceeds from this Offering to fund future loan originations and 25% for
general corporate purposes. Prior to their eventual use, the net proceeds will
be invested in high quality, short-term investment instruments such as short-
term corporate investment grade or United States Government interest-bearing
securities. The Company will not receive any proceeds from the sale of Common
Stock by the Selling Stockholder.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock. The
Company intends to retain all of its future earnings to finance its operations
and does not anticipate paying cash dividends in the foreseeable future. Any
decision made by the Company's Board of Directors to declare dividends in the
future will depend upon the Company's future earnings, capital requirements,
financial condition and other factors deemed relevant by the Company's
Directors.
21
<PAGE>
DILUTION
The pro forma net tangible book value of the Company at December 31, 1997
was $10,952,000 or $2.74 per share. Pro forma net tangible book value per
share represents the amount of the Company's total tangible assets less total
liabilities, divided by the number of shares of Common Stock outstanding.
After giving effect to the receipt by the Company of the net proceeds from the
sale of the shares of Common Stock offered hereby at an assumed initial public
offering price of $11.00 per share and the application of the net proceeds
therefrom, after deducting the estimated underwriting discount and offering
expenses, the pro forma as adjusted net tangible book value of the Company at
December 31, 1997 would have been $24,889,000 or $4.61 per share. This
represents an immediate increase in pro forma net tangible book value of $1.87
per share to the existing stockholders and an immediate dilution of $6.39 per
share to new investors purchasing shares in this Offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $11.00
Pro forma net tangible book value per share before this Offering. $2.74
Increase per share attributable to new investors................. 1.87
-----
Pro forma net tangible book value per share after this Offering.... 4.61
------
Dilution per share to new investors................................ $ 6.39
======
</TABLE>
The following table summarizes as of December 31, 1997, the differences
between existing stockholders and new investors (before deducting underwriting
discounts and commissions and estimated offering expenses) with respect to the
number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share:
<TABLE>
<CAPTION>
SHARES OWNED
AFTER THE
OFFERING TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 2,226,804 41.24% $ 6,300 0.02% --
New investors............... 3,173,196 58.76 34,905,156 99.98 $11.00
--------- ------ ----------- ------
Total..................... 5,400,000 100.00% $34,911,456 100.00%
========= ====== =========== ======
</TABLE>
22
<PAGE>
CAPITALIZATION
The following table sets forth, as of December 31, 1997, the Company's (i)
actual capitalization and (ii) capitalization as adjusted to reflect the sale
by the Company of the 1,400,000 shares of Common Stock offered by the Company
hereby at an assumed initial public offering price of $11.00 per share and
application of the net proceeds therefrom (after deducting the estimated
underwriting discount and offering expenses payable by the Company). This
table should be read in conjunction with the Consolidated Financial Statements
and the Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT DECEMBER 31,
1997
-------------------
AS
ACTUAL ADJUSTED(1)
------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Warehouse line of credit................................ $74,369 $74,369
======= =======
Stockholders' equity(2):
Preferred Stock, $.001 par value; 5,000,000 shares
authorized,
none issued and outstanding actual and as adjusted... $ -- $ --
Common Stock, $.001 par value; 50,000,000 shares
authorized(3); 4,000,000 shares issued and
outstanding actual; 5,400,000 shares issued and
outstanding as adjusted.............................. 6 7
Additional paid-in capital............................ -- 13,936
Retained earnings..................................... 10,946 10,946
------- -------
Total stockholders' equity and capitalization....... $10,952 $24,889
======= =======
</TABLE>
- -------
(1) After deducting the estimated underwriting discount and offering expenses
payable by the Company, and assuming no exercise of the Underwriters'
over-allotment option.
(2) Gives effect to the reincorporation of the Company in Delaware which will
be effected prior to the consummation of this Offering whereby the
existing California corporation will be merged into a newly formed
Delaware corporation and pursuant to which each outstanding share of Class
A and Class B Common Stock of the existing California corporation will be
exchanged for 4,123.71134 shares of $.001 par value Common Stock of the
new Delaware corporation and the certificate of incorporation of the new
Delaware corporation will authorize 50,000,000 shares of Common Stock and
5,000,000 shares of Preferred Stock. See "Arrangements with DLJ and the
Recapitalization."
(3) Excludes shares issuable pursuant to the Representatives' Warrants and
shares of Common Stock reserved for issuance pursuant to the Company's
Stock Option Plan. The Stock Option Plan authorizes the grant of options
to purchase, and awards of, 700,000 shares; of this amount, options to
acquire 163,265 were granted prior to this Offering at a per share
exercise price of $6.10. Options to acquire an additional 325,000 shares
are expected to be granted to employees, officers and directors of the
Company at the effective date of this Offering at a per share exercise
price equal to the initial public offering price. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
General" and "Management--Stock Options."
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data and ratios)
The following selected statement of operations data for the years ended June
30, 1996 and 1997 and the balance sheet data at June 30, 1996 and 1997 are
derived from consolidated financial statements of the Company included
elsewhere in this Prospectus, which have been audited by Ernst & Young LLP,
independent auditors, as indicated in their report included elsewhere in this
Prospectus, and are qualified by reference to such financial statements
including the related notes thereto. The selected statements of operations
data for the six months ended December 31, 1996 and 1997 and the balance sheet
data at December 31, 1997 have been derived from unaudited interim condensed
consolidated financial statements of the Company contained elsewhere herein
and reflect in management's opinion, all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of financial
position and results of operations for these periods. Results of operations
for the six months ended December 31, 1997 are not necessarily indicative of
results to be expected for the year ending June 30, 1998. The selected
financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements, notes thereto and the
independent auditors' report included elsewhere in this Prospectus. The
Company was formed on May 2, 1995 and began operations in August 1995. For the
period of May 2, 1995 through June 30, 1995, the Company did not have any
revenue and recorded start-up costs of $10,000. Financial statements are not
presented for the period May 2, 1995 through June 30, 1995 as the operations
were not material.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
JUNE 30, DECEMBER 31,
-------------- ---------------
1996 1997 1996 1997
------ ------- ------- -------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Gain on sale of mortgage loans................ $4,240 $21,855 $ 8,525 $13,543
Loan origination income....................... 1,978 5,473 2,383 2,767
Interest income............................... 1,960 5,182 2,215 3,447
Other income.................................. 52 250 91 220
------ ------- ------- -------
Total revenues.............................. 8,230 32,760 13,214 19,977
------ ------- ------- -------
Expenses:
Employees' salaries and commissions........... 3,624 11,052 4,396 8,326
General and administrative expense............ 2,400 5,543 2,279 3,257
Interest expense.............................. 1,452 3,693 1,595 2,471
------ ------- ------- -------
Total expenses.............................. 7,476 20,288 8,270 14,054
------ ------- ------- -------
Income before taxes............................. 754 12,472 4,944 5,923
Income tax expense.............................. 337 4,930 1,954 2,392
------ ------- ------- -------
Net income.................................... $ 417 $ 7,542 $ 2,990 $ 3,531
====== ======= ======= =======
Pro forma net income per share.................. $ 0.14 $ 1.80 $ 0.71 $ 0.86
====== ======= ======= =======
Shares used in computing pro forma net income
per share(1)................................... 2,906 4,201 4,200 4,177
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30,
--------------- AT DECEMBER 31,
1996 1997 1997
------- ------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 2,452 $ 8,268 $ 7,142
Restricted cash................................. -- -- 614
Mortgage loans held for sale.................... 42,723 55,145 76,196
Total assets.................................... 46,352 65,713 87,339
Warehouse line of credit........................ 42,723 54,625 74,369
Total liabilities............................... 44,506 56,509 76,387
Total stockholders' equity...................... 1,846 9,204 10,952
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
-------------------- --------------------
1996 1997 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING STATISTICS:
Loan originations:
Mortgage loan originations....... $ 199,963 $ 532,621 $ 223,859 $ 354,572
Average initial principal balance
per loan........................ $ 101 $ 98 $ 95 $ 96
Weighted average interest rate:
Fixed rate residential loans.... 10.7% 10.5% 10.8% 10.6%
Variable rate residential loans. 9.2% 9.4% 9.4% 9.6%
Small commercial rate loans(2).. -- 9.8% 9.2% --
Weighted average, initial loan-
to-value ratios................ 68.5% 69.3% 68.3% 72.9%
Whole loan sales................. $ 156,559 $ 519,909 $ 216,964 $ 333,045
Gain on sale as a percentage of
whole loan sales................ 2.7% 4.2% 3.9% 4.1%
Credit risk(3):
A+.............................. 9.7% 30.7% 22.8% 42.5%
A-.............................. 41.9% 26.7% 30.6% 21.8%
B............................... 26.0% 18.9% 21.0% 20.4%
C+.............................. 12.0% 10.7% 12.1% 8.0%
C............................... 7.7% 5.7% 6.9% 3.4%
C-.............................. 2.7% 3.9% 3.8% 3.9%
Small commercial(2)............. -- 3.4% 2.8% --
</TABLE>
- --------
(1) See Note 1 of Notes to Consolidated Financial Statements.
(2) The Company discontinued the origination of small commercial loans in April
1997.
(3) Credit ratings are based on the Company's classification of loan products.
See "Business--Underwriting Guidelines."
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto appearing elsewhere
herein.
GENERAL
The Company is a specialty finance company engaged in the business of
originating and selling non-conforming residential mortgage loans secured by
one-to-four family residences. The Company's principal borrower base consists
of individuals who do not qualify under traditional lending criteria
established by agencies such as FNMA and FHLMC, because of their credit
history, income or other factors. The Company originates loans through
independent mortgage brokers and, to a lesser extent, through its retail
origination division. Substantially all of the Company's mortgage loan
originations are sold in the secondary market through loan sales in which the
Company disposes of its entire economic interest in the loans including the
related servicing rights for cash. See "Business."
The following table shows the Company's mortgage loan originations, mortgage
loan sales, and origination locations with account executives for the periods
indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------- -----------------
1996 1997 1996 1997
--------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage loan originations............ $ 199,963 $ 532,621 $223,859 $354,572
Mortgage loan sales................... $ 156,559 $ 519,909 $216,964 $333,045
Origination locations at end of period
..................................... 19 38 26 46
</TABLE>
Revenues are derived primarily from gain on sales of loans and interest
income from loans held for sale. The major components of the Company's
revenues are (i) the volume of loans originated, (ii) the premium over
principal amount received in loan sales, (iii) origination points received or
paid, (iv) origination fees received and (v) the differential between the
interest rate on borrowings under revolving warehouse credit facilities and
the interest rate of loans held for sale. Cash gain on sale of mortgage loans
is affected by, among other things, borrower credit risk classification, loan-
to-value ratio, interest rate and margin of the loans. Revenues increased to
$20.0 million and $32.8 million for the six months ended December 31, 1997 and
the year ended June 30, 1997, respectively, compared to $13.2 million and $8.2
million for the six months ended December 31, 1996 and the year ended June 30,
1996, respectively.
The major components of expenses are employees' salaries and commissions,
general and administrative, and interest. Employees' salaries and commissions,
which for the six months ended December 31, 1997 and the years ended June 30,
1997 and 1996 accounted for 59.2%, 54.5% and 48.5% of total expenses,
respectively, is significantly related to the loan origination volume because
the Company's sales force is compensated on a commission basis in addition to
salaries. Total expenses increased to $14.1 million and $20.3 million for the
six months ended December 31, 1997 and the year ended June 30, 1997,
respectively, compared to $8.3 million and $7.5 million for the six months
ended December 31, 1996 and the year ended June 30, 1996, respectively.
The Company's net income increased to $3.5 million and $7.5 million for the
six months ended December 31, 1997 and the year ended June 30, 1997,
respectively, compared to $3.0 million and $417,000 for the six months ended
December 31, 1996, and the year ended June 30, 1996, respectively.
Increased competition in the non-conforming mortgage industry could have the
effect of (i) lowering gains that may be realized on loan sales, (ii) reducing
an individual company's volume of loan originations and sales,
(iii) increasing demand for experienced personnel increasing the likelihood
such personnel will be recruited by competitors and (iv) lowering the industry
standard for non-conforming underwriting guidelines as competitors
26
<PAGE>
attempt to increase or maintain market share in the face of increased
competition. In the past, certain of these factors have caused the revenues
and net income of many participants in the non-conforming mortgage industry,
including the Company, to fluctuate from quarter to quarter. The Company
intends to utilize its primary strengths and its growth and operating strategy
to remain competitive in the non-conforming mortgage industry. The Company
believes that its primary strengths are (i) the experience of its management,
account executives and staff in the non-conforming lending industry, which
enhances the Company's ability to establish and maintain long-term
relationships with mortgage brokers, (ii) its service oriented sales culture
whereby the Company strives to respond quickly and efficiently to customer
needs and market demands, (iii) its operating philosophy to create stable and
deliberate loan origination growth by utilizing consistent and prudent
underwriting guidelines designed to produce mortgage products readily saleable
in the secondary market and (iv) its ability to manage and control operating
costs in order for it to remain a low cost originator. For a description of
the contractual nature of the Company's relationships with its independent
mortgage brokers, see "Business--Mortgage Loan Originations--Wholesale
Division."
RESULTS OF OPERATIONS
Six Months Ended December 31, 1997 Compared to Six Months Ended December 31,
1996
Revenues. The following table sets forth the components of the Company's
revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
-----------------------
1996 1997
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Gain on sale of mortgage loans...................... $ 8,525 $ 13,543
Loan origination income............................. 2,383 2,767
Interest income..................................... 2,215 3,447
Other income........................................ 91 220
----------- -----------
$ 13,214 $ 19,977
=========== ===========
</TABLE>
The increase in revenues was due primarily to increased mortgage loan
originations and cash gain on sales of mortgage loans. Mortgage loan
originations increased $130.7 million to $354.6 million for the six months
ended December 31, 1997 from $223.9 million for the six months ended December
31, 1996.
Cash gain on sale of mortgage loans increased $5.0 million to $13.5 million
for the six months ended December 31, 1997 from $8.5 million for the six
months ended December 31, 1996. This was due primarily to a 5.1% increase in
weighted average cash gain on sale to 4.1% for the six months ended December
31, 1997 from 3.9% for the six months ended December 31, 1996, primarily due
to improved pricing of whole loan sales. There can be no assurance that the
Company will recognize comparable levels of cash gain on sale of mortgage
loans in future periods. The Company makes yield spread premium payments to
its mortgage broker customers in the ordinary course of business. Due to
competitive conditions, these payments have increased in recent periods, which
adversely affected the Company's cash gain on sale of mortgage loans for the
six months ended December 31, 1997. Management expects this increased level of
payments to continue for the three months ending March 31, 1998 and possibly
thereafter.
Loan origination income, which consists of loan origination fees, increased
to $2.8 million for the six months ended December 31, 1997 from $2.4 million
for the six months ended December 31, 1996 due to an increase in mortgage loan
originations. As a percentage of total revenues, loan origination income for
the six months ended December 31, 1997 decreased to 13.8% as compared to 18.0%
for the six months ended December 31, 1996 as a result of competitive
conditions as management was required to lower the amount of origination
points and fees charged on its loan products to satisfy mortgage broker and
consumer demands.
Interest income increased $1.2 million to $3.4 million for the six months
ended December 31, 1997 from $2.2 million for the six months ended December
31, 1996. This increase is due to an increase in loan originations during the
period.
27
<PAGE>
Other income, which is composed of investment income, prepayment penalties
and late charges, increased to $220,000 for the six months ended December 31,
1997 as compared to $91,000 for the six months ended December 31, 1996 largely
as a result of an increase in mortgage loan originations.
Expenses. The following table sets forth the components of the Company's
expenses for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
----------------------
1996 1997
----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Employees' salaries and commissions.................. $ 4,396 $ 8,326
General and administrative expenses.................. 2,279 3,257
Interest expense..................................... 1,595 2,471
---------- -----------
$ 8,270 $ 14,054
========== ===========
</TABLE>
Total expenses increased to $14.1 million for the six months ended December
31, 1997 from $8.3 million for the six months ended December 31, 1996. This
increase is related to geographical expansion to 46 origination locations at
December 31, 1997 from 26 at December 31, 1996, and to an increase in mortgage
loan originations.
Employee salaries and commissions increased $3.9 million to $8.3 million
during the six months ended December 31, 1997 from $4.4 million for the six
months ended December 31, 1996. The primary reason for the increase was due to
an increase in mortgage loan originations and continued geographical
expansion.
General and administrative expenses increased $978,000 to $3.3 million for
the six months ended December 31, 1997 from $2.3 million for the three months
ended December 31, 1996. This increase is due primarily to a corresponding
increase in the origination locations and the related increase in mortgage
loan originations.
Interest expense increased $876,000 to $2.5 million for the six months ended
December 31, 1997 from $1.6 million for the three months ended December 31,
1996 as a result of higher levels of warehouse borrowing.
It is expected that the Company's expansion plans will result in an increase
in operating expenses in the short-term. Furthermore, since management expects
that there will be a lag time between the incurrence of such expense and the
receipt of any revenues from such expansion efforts, the Company's results of
operations may be adversely affected in the short-term.
In October 1997, the Company issued stock options to purchase 163,265 shares
of the Company's Common Stock at a per share exercise price of $6.10. The
stock options vest 33 1/3% on each anniversary date from the date of the
grant. In connection therewith, the Company will recognize stock compensation
expense of $267,000 per year over the three-year period ended October 2000, or
$67,000 per quarter which commenced with the quarter ending December 31, 1997.
28
<PAGE>
Fiscal Year Ended June 30, 1997 Compared to Fiscal Year Ended June 30, 1996
Revenues. The following table sets forth the components of the Company's
revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------
1996 1997
----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Gain on sale of mortgage loans....................... $ 4,240 $ 21,855
Loan origination income.............................. 1,978 5,473
Interest income...................................... 1,960 5,182
Other income......................................... 52 250
---------- -----------
$ 8,230 $ 32,760
========== ===========
</TABLE>
Revenues increased to $32.8 million for the year ended June 30, 1997 from
$8.2 million for the year ended June 30, 1996 largely due to increased
mortgage loan originations and cash gain on sale of mortgage loans.
The increase in mortgage loan originations was due to both increased
production from existing branches and expansion into new markets. Origination
locations increased to 38 at June 30, 1997 from 19 at June 30, 1996.
Cash gain on sale of mortgage loans increased $17.6 million to $21.9 million
in the year ended June 30, 1997 from $4.2 million in the year ended June 30,
1996. The increase was due primarily to the $332.7 million increase in
mortgage loan originations during the year ended June 30, 1997. Total loans of
$519.9 million were sold in the year ended June 30, 1997 with a weighted
average cash gain on sale of 4.2%. During the year ended June 30, 1996, total
loans of $156.6 million were sold with a weighted average cash gain on sale of
2.7%. The increase in weighted average cash gain on sale was primarily
attributable to improved pricing of whole loan sales.
Loan origination income increased to $5.5 million in the year ended June 30,
1997 from $2.0 million in the year ended June 30, 1996 due to increased
mortgage loan originations.
Interest income increased $3.2 million to $5.2 million in the year ended
June 30, 1997 from $2.0 million in the year ended June 30, 1996 due to a
higher balance of loans held for sale as a result of the increase in mortgage
loan originations.
Other income increased to $250,000 for the year ended June 30, 1997 as
compared to $52,000 for the year ended June 30, 1996 largely as a result of
increased mortgage loan originations and an increase in cash and cash
equivalents.
Expenses. The following table sets forth the components of the Company's
expenses for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------
1996 1997
----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Employees' salaries and commissions................... $3,624 $11,052
General and administrative expenses................... 2,400 5,543
Interest expense...................................... 1,452 3,693
---------- -----------
$7,476 $20,288
========== ===========
</TABLE>
Expenses increased to $20.3 million for the year ended June 30, 1997 from
$7.5 million for the year ended June 30, 1996, due to the cost of geographical
expansion and in large part to increased compensation and other personnel
costs related to the 166% increase in mortgage loan originations. Expenses for
the year ended June 30, 1996 included a litigation reserve of $200,000
relating to potential exposure from a lawsuit against the Company which was
settled through payment during the year ended June 30, 1997.
29
<PAGE>
Employee salaries and commissions increased $7.4 million to $11.1 million in
the year ended June 30, 1997 from $3.6 million in the year ended June 30,
1996, primarily due to an increase in the number of employees to 257 at June
30, 1997 from 148 at June 30, 1996 and increases in commissions paid to
employees.
General and administrative expense increased $3.1 million to $5.5 million in
the year ended June 30, 1997 from $2.4 million in the year ended June 30,
1996. The increase was due to the expansion of the Company's loan origination
network and the related increase in mortgage loan originations.
Interest expense increased $2.2 million to $3.7 million in the year ended
June 30, 1997 from $1.5 million in the year ended June 30, 1996 due to greater
borrowings to fund the increased mortgage loan originations.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth results of operations for each of the
Company's last six quarters. In the opinion of management, this information
has been presented on the same basis as the audited consolidated financial
statements appearing elsewhere in this Prospectus, and includes all
adjustments, consisting only of normal recurring adjustments and accruals,
that the Company considers necessary for a fair presentation. The unaudited
quarterly information should be read in conjunction with the audited
consolidated financial statements of the Company and the notes thereto. The
operating results for any quarter are not necessarily indicative of results
for any future period.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1997 1997 1997 1997
------------- ------------ ------------ ------------ ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND OPERATING STATISTICS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Gain on sale of
mortgage loans........ $ 3,410 $ 5,116 $ 6,017 $ 7,312 $ 6,635 $ 6,908
Mortgage loan
origination income.... 1,022 1,360 1,453 1,638 1,240 1,527
Interest income........ 1,101 1,114 1,403 1,564 1,645 1,802
Other income........... 39 52 67 92 102 118
------- -------- -------- -------- -------- --------
Total revenues......... 5,572 7,642 8,940 10,606 9,622 10,355
Expenses:
Employees' salaries and
commissions........... 1,837 2,558 3,131 3,526 3,755 4,571
General and
administrative
expenses.............. 1,055 1,224 1,461 1,803 1,798 1,459
Interest expense....... 846 750 980 1,117 1,179 1,292
------- -------- -------- -------- -------- --------
Total expenses......... 3,738 4,532 5,572 6,446 6,732 7,322
------- -------- -------- -------- -------- --------
Income before taxes..... 1,834 3,110 3,368 4,160 2,890 3,033
Income tax expense...... 723 1,230 1,332 1,645 1,193 1,199
------- -------- -------- -------- -------- --------
Net income.............. $ 1,111 $ 1,880 $ 2,036 $ 2,515 $ 1,697 $ 1,834
======= ======== ======== ======== ======== ========
Operating statistics:
Mortgage loan
originations.......... $93,427 $130,432 $152,140 $156,622 $164,402 $190,170
Weighted average
interest rate......... 9.6% 9.7% 9.4% 9.6% 9.6% 9.8%
Weighted average
initial loan-to-value
ratios................ 68.2% 68.4% 69.3% 70.7% 72.0% 73.7%
Number of employees.... 181 220 254 257 309 332
Number of account
executives............ 38 50 64 59 81 86
Loan origination
locations with office. 25 24 28 30 32 34
Loan origination
locations without
office................ 2 2 7 8 21 12
</TABLE>
For each of the three months ended September 30, 1997 and December 31, 1997,
revenues, cash gain on sale of mortgage loans, and net income were at lower
levels than for the three months ended June 30, 1997, primarily due to
increased yield spread premium payments made by the Company to its mortgage
broker customers. These payments were necessitated due to competitive pressure
in the broker-originated non-
30
<PAGE>
conforming loan market. Loan origination income for each of the three months
ended September 30, 1997 and December 31, 1997 was also affected by
competitive pressure; the Company was required to lower the amount of
origination points and fees charged on its loan products to satisfy mortgage
broker and consumer demands. Management expects these competitive trends to
continue in the foreseeable future.
The Company will attempt to increase profitability through growth in loan
origination volume. Future managed growth will be related to the opening of
new origination locations, the hiring of additional account executives, the
recruitment of additional mortgage brokers into the Company's wholesale
network, the expansion of its Retail Division and its ability to control
costs. The Company plans to open up to 15 additional origination locations,
and increase the total number of account executives to 118 by the end of 1998
from 86 at December 31, 1997.
It is expected that the Company's expansion plans will result in an increase
in operating expenses in the short-term. Furthermore, since management expects
that there will be a lag time between the incurrence of such expenses and the
receipt of any revenues from such expansion efforts, the Company's results of
operations may be adversely affected in the short-term.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of cash flow include cash gain on sale of mortgage
loans, net interest income and borrowings. The Company sells its mortgage
loans generally on a monthly basis to generate cash for operations. The
Company's uses of cash in the short-term include the funding of mortgage loan
originations, payment of interest, repayment of amounts borrowed under
warehouse lines of credit, operating and administrative expenses, start-up
costs for new origination locations, income taxes and capital expenditures.
Long-term uses of cash may also include the funding of securitization
activities and selective acquisitions of other specialty finance companies or
portfolios of loan assets. The Company currently has no agreements with regard
to any potential acquisition and there can be no assurance that future
acquisitions, if any, will be consummated. Capital expenditures totaled
$364,000, $448,000 and $488,000 for the six months ended December 31, 1997 and
the years ended June 30, 1997 and 1996, respectively. In November 1997, the
Company repurchased all outstanding shares of the Company's shares of Series A
Preferred Stock for approximately $1.6 million. See "Arrangements with DLJ and
the Recapitalization."
Cash and cash equivalents were $7.1 million, $8.3 million and $2.5 million
at December 31, 1997 and at June 30, 1997 and 1996, respectively.
The Company funds its business through cash reserves and from August 1995
through October 1997, the DLJ Facility under which it borrowed money to
finance the origination of loans. The DLJ Facility provided a $50.0 million
warehouse line of credit to the Company, subject to periodic upward
adjustments to facilitate increases in the Company's loan production. The
interest rate under the DLJ Facility was equal to the federal funds rate plus
100 basis points, subject to increase based on the length of time loans are
held by the Company. The term of the DLJ Facility was through August 31, 2000.
In October 1997, the Company and DLJ modified the DLJ Facility and the terms
under which DLJ would purchase mortgage loans from the Company (the "Amended
DLJ Facility"). The Amended DLJ Facility provides borrowings up to $150.0
million. The interest rate from the DLJ Facility will remain effective until
the closing of the Offering; thereafter, borrowings under the Amended DLJ
Facility will bear an interest rate of the federal funds rate plus 50 basis
points for 12 months after the closing of the Offering and, thereafter, the
federal funds rate plus 100 basis points. The Amended DLJ Facility also
modifies the termination date to two years after the closing of the Offering.
It is expected that the Amended DLJ Facility will not be extended beyond the
modified term. The Company is currently negotiating with other lenders to
obtain additional warehouse lines of credit and interest rates and terms that
are consistent with management's objectives. The Company repays borrowings
with the proceeds of its loan sales.
The Company's ability to continue to originate loans is dependent in large
part upon its ability to sell the mortgage loans at par or for a premium in
the secondary market in order to generate cash proceeds to repay borrowings
under the warehouse facility, thereby creating borrowing capacity to fund new
originations. The
31
<PAGE>
value of and market for the Company's loans are dependent upon a number of
factors, including the borrower credit risk classification, loan-to-value
ratios and interest rates, general economic conditions, warehouse facility
interest rates and governmental regulations. During the six months ended
December 31, 1997 and the years ended June 30, 1997 and 1996, the Company used
cash of $354.6 million, $532.6 million and $200.0 million, respectively, for
new loan originations. During the same periods, the Company received cash
proceeds from the sale of loans of $333.0 million, $519.9 million and $156.6
million, respectively, representing the principal balance of loans sold. The
Company received cash proceeds from the premiums on such sale of loans of
$13.5 million, $21.9 million and $4.2 million, respectively, for the six
months ended December 31, 1997 and the years ended June 30, 1997 and 1996,
respectively. A significant amount of the Company's loan production in any
month is funded during the last several business days of that month.
RECENTLY ISSUED ACCOUNTING CONSIDERATIONS
In October 1995, the Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation", was issued and is
effective for the Company's 1998 fiscal year end. The Company intends to
account for employee stock options in accordance with Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees", and related
interpretations in accounting for its stock options. The Company will make the
pro forma disclosures required by FAS 123 beginning in the year ending June
30, 1998.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share" which is effective for financial statements issued
for periods ending after December 15, 1997. It replaces the presentation of
primary earnings per share with a presentation of basic earnings per share. It
also requires the presentation of diluted earnings per share for entities with
complex capital structures. Diluted earnings per share takes into account the
potential dilution that could occur if securities or other contracts to issue
common stock, such as options, were exercised or converted into common stock.
The Company does not believe that SFAS No. 128 will have a material impact on
its financial statements.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure." This Statement shall be effective for financial
statements for both interim and annual periods ending after December 15, 1997.
At this time the Company has determined that this Statement will have no
significant impact on the financial position or results of operations for
1998.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This Statement shall be
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes
is required. At this time the Company has determined that this Statement will
have no impact on the financial position or results of operations for 1998.
32
<PAGE>
BUSINESS
The Company is a specialty finance company that originates and sells, on a
whole loan basis, for cash non-conforming residential mortgage loans secured
by one-to-four family residences. The Company's loans are made primarily to
refinance existing mortgages, consolidate other debt, finance home
improvements, education and other similar needs, and, to a lesser extent, to
purchase single family residences. Non-conforming loans are loans made to
borrowers who are unable or unwilling to obtain mortgage financing from
conventional mortgage sources, whether for reasons of credit impairment,
income qualification or credit history or a desire to receive funding on an
expedited basis. The Company has two divisions: (i) a wholesale division which
has relationships with approximately 2,500 approved independent loan brokers
and which historically accounted for substantially all of the Company's total
loan originations and (ii) a retail division which is being developed to
market loans directly to homeowners.
Since it commenced operations in August 1995, the Company has experienced
significant growth in loan originations, with approximately $532.6 million of
originations in 33 states during the year ended June 30, 1997 compared to
$200.0 million in 21 states during its first full fiscal year ended June 30,
1996. Total originations were $354.6 million during the six months ended
December 31, 1997, as compared to $223.9 million during the six months ended
December 31, 1996, a 58% increase. This growth in originations resulted in an
increase in revenues to $20.0 million and $32.8 million for the six months
ended December 31, 1997 and the year ended June 30, 1997, respectively,
compared to $13.2 million and $8.2 million for the six months ended December
31, 1996 and the year ended June 30, 1996, respectively. In addition, as a
result total expenses to $14.1 million and $20.3 million for the six months
ended December 31, 1997 and the year ended June 30, 1997, respectively,
compared to $8.3 million and $7.5 million for the six months ended
December 31, 1996 and the year ended June 30, 1996, respectively. The
Company's net income rose to $7.5 million for the year ended June 30, 1997 as
compared to $417,000 for the year ended June 30, 1996. Net income was
$3.5 million for the six months ended December 31, 1997 as compared to
$3.0 million for the six months ended December 31, 1996.
The Company currently sells substantially all of its mortgage loans through
whole loan sales resulting in cash gain on sale of mortgage loans. For the six
months ended December 31, 1997 and the years ended June 30, 1997 and 1996, the
Company had mortgage loan sales of $333.0 million, $519.9 million and
$156.6 million, respectively, with resulting cash gain on sale of mortgage
loans of $13.5 million, $21.9 million and $4.2 million, respectively.
The Company believes its primary strengths are the following:
Experience of Management. The Company believes that it derives substantial
benefits from the experience of its management, account executives and staff,
in the non-conforming lending industry, including the establishment of long-
term relationships with mortgage brokers. Evan R. Buckley, the Company's
founder and Chief Executive Officer, and Kelly W. Monahan, the Company's
President and Chief Financial Officer, have over 21 and five years of non-
conforming mortgage industry experience, respectively, and have assembled a
management team with substantial experience in the non-conforming mortgage
loan origination industry. Through equity ownership and other incentives, the
Company has developed a highly motivated management team whose goals are
aligned with the overall performance of the Company. The Company believes that
its long-term relationships with mortgage brokers enhance the likelihood of
loan origination growth. For a description of the contractual nature of the
Company's relationships with its independent mortgage brokers, see "--Mortgage
Loan Originations--Wholesale Division."
Service Oriented Sales Culture. The Company strives to respond quickly and
efficiently to customer needs and market demands. The Company believes that
its ongoing emphasis on prompt and responsive customer service provides
support for an increased level of originations and repeat lending
opportunities from its independent broker network. Typically, the Company
approves loan applications (subject to credit verification, an independent
third-party appraisal and other documentation) within 24 to 48 hours of
receipt and funds within 15 to 40 days thereafter. The Company funds and
closes substantially all loan production under the BNC name. The Company is
continuously seeking to improve its customer service efforts as its operations
expand.
33
<PAGE>
Stable and Managed Loan Origination Growth. A key element of the Company's
operating philosophy is to create stable and managed loan origination growth
by utilizing consistent and prudent underwriting guidelines designed to
provide high quality products acceptable to the secondary market. The
Company's policy is to underwrite loans in accordance with its underwriting
guidelines to ensure that its loans receive optimal pricing in the secondary
market. Since inception, the Company has successfully sold substantially all
of its production to third parties without having to retain a substantial
amount of rejected loans. The Company has been able to achieve this standard
by continually reevaluating its underwriting guidelines and quality control
criteria.
Low Cost Originator of Non-conforming Mortgage Loans. The Company's success
has been due in part on its ability to manage and control operating costs. The
Company has established a low-cost origination network, which during the six
months ended December 31, 1997 originated non-conforming mortgage loans in 36
states. For the six months ended December 31, 1997 and the year ended June 30,
1997, the Company's cost to originate averaged 3.3% and 3.1% of loan volume,
respectively. Low cost origination is driven in part by the Company's
wholesale expansion strategy; the Company initially penetrates a market with a
limited number of employees to recruit brokers for the Company's wholesale
network. The Company typically opens an office in a market only after it
achieves a minimum loan volume. By utilizing this strategy, the Company
believes it can maintain lower overhead expenses compared with companies
utilizing a more extensive branch office system. In addition, the Company has
the flexibility to expand or contract its operations quickly in response to
local demand.
Substantially all loans originated by the Company are secured by a first
priority mortgage on the subject property. During the six months ended
December 31, 1997, less than 0.2% of the principal balance of the loans
originated were secured by second priority mortgages; none of such loans were
originated for the years ended June 30, 1997 or 1996. The Company's core
borrower base consists of individuals who do not qualify for traditional "A"
credit because their credit history, income or other factors cause them not to
conform to standard agency lending criteria. During the six months ended
December 31, 1997 and the year ended June 30, 1997, approximately 64.3% and
57.4% of the principal balance of the loans originated by the Company,
respectively, were to borrowers with a Company risk classification of "A+" or
"A-" while the remainder were to borrowers with a Company risk classification
of "B," "C+," "C" or "C-," respectively, representing approximately 35.7% and
42.6% of the total principal amount of loans originated by the Company.
Borrowers with a Company risk classification of "A+" or "A-" have a very good
credit history within the last 12 to 24 months with minor late payments
allowed on a limited basis. Borrowers with a "B" Company risk classification
generally have good credit within the last 12 months with some late payments.
Borrowers with a "C+" Company risk classification have some significant
derogatory credit in the past 12 months while those in the "C" category have
frequent derogatory consumer credit. Borrowers with a Company risk
classification of "C-" have numerous derogatory credit items up to and
including a bankruptcy in the most recent 12 month period. During each of the
six months ended December 31, 1997 and the year ended June 30, 1997,
approximately 3.9% of the principal balance of the loans originated by the
Company were to borrowers with a Company risk classification of "C-." For a
tabular presentation of the Company's loan production by borrower risk
classification, see "--Loan Production by Borrower Risk Classification."
Historically, the Company's primary source of mortgage loans has been its
Wholesale Division which originates mortgage loans through approved
independent mortgage loan brokers. Mortgage loan brokers qualify to
participate in the Wholesale Division's program only after a formal
application process that includes obtaining the broker's financial statements,
state licensing qualifications and references and general lending expertise.
At December 31, 1997, the Company had approved relationships with
approximately 2,500 mortgage loan brokers compared with approximately 1,300 as
of December 31, 1996. During the six months ended December 31, 1997 and the
year ended June 30, 1997, approximately 1,000 and 1,100 brokers, respectively,
funded mortgage loans through the Company. At December 31, 1997, the Wholesale
Division originated loans through a sales force of 75 account executives
located in 46 origination locations in 23 states that solicit these mortgage
loan brokers for loan applications that meet the Company's underwriting
criteria. Each mortgage loan is accepted for funding by the Company only after
approval by the Company's loan underwriters. Of the mortgage loan applications
34
<PAGE>
submitted during the six months ended December 31, 1997 and the year ended
June 30, 1997, approximately 38.5% and 38.4%, respectively, were approved and
funded with the remaining 61.5% and 61.6%, respectively, either rejected by
the Company's underwriters or withdrawn by the brokers.
By concentrating on wholesale mortgage banking services through independent
mortgage loan brokers, the Company is able to originate mortgage loans in a
cost effective manner. By monitoring and controlling the number of branch
offices and personnel needed to generate mortgage loans, the Company has
effectively transferred the overhead burden of mortgage origination to the
independent mortgage loan brokers who originate the loans, with a commensurate
reduction in fee income obtained. As a result, the Company can match its costs
more directly with loan origination volume so that a substantial portion of
the Company's cost is variable rather than fixed. Loans originated through the
Wholesale Division accounted for $347.6 million and $507.3 million or 98.0%
and 95.2% of the Company's mortgage loan production during the six months
ended December 31, 1997 and the year ended June 30, 1997, respectively.
The Company, while maintaining its focus on its Wholesale Division, has
recently formulated a low cost retail marketing strategy designed to produce
growth in its Retail Division. The Company's strategy focuses on loan
originations from borrowers through telemarketing and advertising coordinated
by its retail sales staff primarily at the Company's executive offices and, to
a lesser extent, at local sales offices. This focus on centralization enables
the Company to conduct its retail operations with less overhead than a retail
business that operates exclusively through a sales office network. The Company
believes this centralized strategic approach also allows the Company to
originate mortgage loans at a competitive cost while maintaining credit
quality. In connection with mortgage loan originations, the Company obtains
origination fees which offset the costs of retail lending. The Retail Division
accounted for $7.0 million and $7.5 million or 2.0% and 1.4% of the Company's
mortgage loan production during the six months ended December 31, 1997 and the
year ended June 30, 1997, respectively.
The Company's growth and operating strategy is based on the following key
elements:
Whole Loan Sales for Cash. The Company sells substantially all of its
originated mortgage loans monthly for cash, historically at a premium over the
principal balance of the mortgage loans. The Company enhances earnings and
cash flows from whole loan sales by tailoring the composition of its whole
loan pools to meet the investment preferences of specific buyers. This
strategy, as opposed to securitizations, in which a residual interest in
future payments on the loans is retained, provides certain benefits. The
Company receives cash revenue, rather than recognizing non-cash revenue
attributable to residual interests, as is the case in securitizations, thereby
avoiding the risk of having to adjust revenue in future periods to reflect a
lower realization on residual interests because actual prepayments or defaults
exceeded levels assumed at the time of securitization. By selling its
originated loans, the Company also reduces its exposure to default risk (other
than certain first payment defaults) and the prepayment risk normally inherent
in a mortgage lender's business. Management believes that the cash received in
loan sales provides the Company greater flexibility and operating leverage
than a traditional portfolio lender, which holds the loans it originates, by
allowing the Company to generate income through interest on loans held for
sale and gain on loans sold. This strategy of frequent loan sales has been an
important factor in generating the Company's earnings, creating cash flow to
fund operations, decreasing the need for other forms of financing and reducing
the level of interest rate and default risk borne by the Company.
Continuing Growth of Wholesale Production. The Company intends to continue
the growth of its Wholesale Division through greater penetration in existing
markets and selective geographic expansion. Greater market penetration is
expected to be accomplished through additional sales personnel to existing
origination locations in order to provide continued high levels of service to
brokers to increase loan origination and further the basis for repeat
business, referral and other future lending opportunities. For each of the six
months ended December 31, 1997 and year ended June 30, 1997, the Company's
loan originations primarily were in California, Illinois, Florida, Hawaii,
Utah, Wisconsin, Oregon, Massachusetts, Maryland, Colorado, Ohio and Indiana.
The Company will seek to improve and enhance relationships with mortgage
brokers by continuing to (i) improve response times to loan applications, (ii)
streamline wholesale origination and funding activities and (iii) provide
35
<PAGE>
a broad selection of attractive product offerings. The Company anticipates
that short-term geographic expansion will focus on the development of lending
operations in Texas, Pennsylvania, North Carolina, Virginia and Tennessee. The
Company plans to open up to 10 additional origination locations and to
increase the total number of account executives to approximately 118 by the
end of 1998. Management intends to focus further expansion on those geographic
regions which it believes represent the most attractive markets for the
Company's products.
Expanding Product Offerings. The Company frequently reviews and tailors its
products and pricing for competitiveness, as well as introducing new products
to meet the needs of its borrowers and brokers, expand its customer base and
diversify its product mix. The Company utilizes long-term relationships with
mortgage loan brokers to quickly and efficiently tailor existing products or
introduce new products to satisfy its broker and consumer product needs. Also,
the Company attempts to anticipate changing demands and formulate new products
accordingly. Examples of recently introduced products include loans with
higher loan-to-value ratios for borrowers with good credit histories (see "--
Product Types"). The Company believes that these mortgage products enable the
Company to increase loan production from brokers who have customers seeking
such products and from borrowers identified through the Company's retail
marketing efforts.
Securitization Flexibility. While a substantial majority of the Company's
mortgage loan originations will continue to be sold through whole loan sales
in cash transactions, the Company may in the future sell a portion of its
loans through securitizations. The ability to conduct securitizations may
provide the Company with the flexibility to take advantage of favorable
pricing differentials between the securitization and whole loan sales markets
that may exist from time to time. The Company may seek to enhance earnings by
securitizing loans with characteristics which the securitization market
considers most favorable. The percentage of loans, if any, sold through
securitizations will be based on economic conditions, secondary market
conditions and available financial resources.
The Company intends to utilize its primary strengths and growth and
operating strategy to remain competitive in the non-conforming mortgage
industry. Increased competition in the non-conforming mortgage industry could
have the effect of (i) lowering gains that may be realized on loan sales, (ii)
reducing an individual company's volume of loan originations and sales,
(iii) increasing demand for experienced personnel increasing the likelihood
such personnel will be recruited by competitors and (iv) lowering the industry
standard for non-conforming underwriting guidelines as competitors attempt to
increase or maintain market share in the face of increased competition. In the
past, certain of these factors have caused the revenues and net income of many
participants in the non-conforming mortgage industry, including the Company,
to fluctuate from quarter to quarter.
36
<PAGE>
MORTGAGE LOAN ORIGINATIONS
The Company originates mortgage loans through its Wholesale and Retail
Divisions. The Wholesale Division originates loans through a network of
independent mortgage brokers and the Retail Division is being developed to
solicit loans directly from prospective borrowers. The following table sets
forth selected data regarding the Company's mortgage loan originations for the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED JUNE SIX MONTHS
30, ENDED
------------------ DECEMBER 31,
1996 1997 1997
-------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loan originations:
Wholesale Division principal balance..... $199,963 $507,250 $347,555
Retail Division principal balance........ -- 7,451 7,017
Small Commercial principal balance(1).... -- 17,920 --
-------- -------- --------
$199,963 $532,621 $354,572
======== ======== ========
Number of mortgage loans................... 1,988 5,425 3,704
Average principal balance per loan......... $ 101 $ 98 $ 96
Weighted average loan-to-value ratio(2).... 68.5% 69.3% 72.9%
Weighted average fixed interest rate....... 10.7% 10.5% 10.6%
Weighted average adjustable interest rate.. 8.6% 9.2% 9.5%
Weighted average fixed/adjustable interest
rate...................................... 10.0% 9.5% 9.6%
"A+" and "A-" loans as a percentage of
total mortgage loans originated(3)........ 51.6% 57.5% 64.3%
</TABLE>
- --------
(1) The Company discontinued the origination of small commercial loans in
April 1997.
(2) Determined by dividing the amount of the loan by the lesser of the
purchase price or the appraised value of the mortgaged property at
origination.
(3) Based on initial principal balance.
Substantially all mortgage loans originated by the Company are secured by a
first priority mortgage on the subject property and for the six months ended
December 31, 1997, less than 0.2% of the principal balance of the mortgage
loans originated were secured by second priority mortgages; none of such
mortgage loans were originated for the years ended June 30, 1997 and 1996.
Wholesale Division. Historically, the Company's primary source of mortgage
loans has been its Wholesale Division, which maintains relationships with
approximately 2,500 independent mortgage brokers which, during the six months
ended December 31, 1997, originated mortgage loans in 36 states. During the
six months ended December 31, 1997 and the year ended June 30, 1997,
approximately 1,000 and 1,100 brokers, respectively, funded loans through the
Company. At December 31, 1997, the Company had 43 origination locations in
23 states and employed 75 account executives who service mortgage brokers. The
states in which the Company had origination locations at December 31, 1997
were California, Illinois, Florida, Hawaii, Utah, Wisconsin, Oregon,
Massachusetts, Maryland, Colorado, Indiana, Ohio, Washington, Idaho, Missouri,
Michigan, Georgia, South Carolina, Rhode Island, Oklahoma, Texas, North
Carolina and Minnesota. The Wholesale Division funded $347.6 million in loans,
or 98% of the Company's total mortgage loan production, during the six months
ended December 31, 1997. During the six months ended December 31, 1997, the
Company's 10 largest producing brokers originated approximately 11.5% of the
Company's mortgage loans, with the largest broker accounting for approximately
1.8%.
Mortgage loan brokers act as intermediaries between property owners and the
Company in arranging mortgage loans. The Company enters into a mortgage broker
agreement with each of its independent mortgage brokers. Pursuant to the
agreement, the Company and the mortgage broker establish a non-exclusive
relationship whereby the mortgage broker will, from time to time and at its
option, submit completed mortgage loan application packages from the general
public to the Company for funding consideration and facilitate the
37
<PAGE>
closing of mortgage loan application packages approved for funding by the
Company. The broker's role is to identify the applicant, assist in completing
the loan application form, gather necessary information and documents and
serve as the Company's liaison with the borrower through the lending process.
The Company reviews and underwrites the applications submitted by the broker,
approves or denies the application, sets the interest rate and other terms of
the loan and, upon acceptance by the borrower and satisfaction of all
conditions imposed by the Company, funds the loan. Because brokers conduct
their own marketing and employ their own personnel to obtain loan applications
and maintain contact with borrowers, originating loans through the Wholesale
Division allows the Company to increase its loan volume without incurring the
higher marketing, labor and other overhead costs associated with increased
retail originations. The Company has no obligation to pay a mortgage broker
any sum owed to the mortgage broker by a borrower, nor does the Company have
any obligation to pay a mortgage broker any sum with respect to accounts of
any mortgage loan application package which the Company does not fund and
close.
Loan applications generally are submitted by mortgage brokers to an account
executive in one of the Company's sales offices. The loan is logged-in for
RESPA and other regulatory compliance purposes, underwritten and, in most
cases, conditionally approved or denied within 24 to 48 hours of receipt.
Because mortgage brokers generally submit individual loan files to several
prospective lenders simultaneously, the Company attempts to respond to each
application as quickly as possible. If approved, a "conditional approval" will
be issued to the broker with a list of specific conditions to be met (for
example, credit verifications and independent third-party appraisals) and
additional documents to be supplied prior to the funding of the loan. The
originating account executive and a production assistant will work directly
with the submitting mortgage broker to collect the requested information and
to meet the underwriting conditions and other requirements. In most cases, the
Company funds loans within 15 to 40 days after approval of the loan
application.
All independent mortgage brokers who submit loan applications to the Company
must be registered or licensed as required by the jurisdiction in which they
operate and must be approved by the Company. The Company audits 100% of its
brokers on an annual basis in order to confirm possession of a current
license, updated financials on file and any changes in broker staff or
address.
The Company believes that an important element in developing, maintaining
and expanding its independent mortgage broker relationships is to provide a
high level of product knowledge and customer service to its brokers. Each
account executive receives training prior to being assigned to a territory
which, in most cases, includes experience in the loan production department so
that the account executive will be familiar with all phases of loan
origination and production. This training enables the account executive to
quickly review a loan application in order to identify the borrower's probable
risk classification and then assist the broker in identifying the appropriate
product for the borrower, thereby enhancing the likelihood that the loan will
be approved at the rate and on the terms anticipated by the borrower. After a
loan package is submitted to the Company, the account executive and production
assistant provide assistance to the broker to complete the loan transaction.
Account executives are compensated based on the number and the dollar volume
of loans funded.
38
<PAGE>
The following table sets forth selected information relating to wholesale
loan originations during the periods shown:
<TABLE>
<CAPTION>
YEAR ENDED JUNE SIX MONTHS
30, ENDED
------------------ DECEMBER 31,
1996 1997 1997
-------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Principal balance.......................... $199,963 $507,250 $347,555
Average principal balance per loan......... $ 101 $ 96 $ 96
Weighted average initial loan-to-value
ratio..................................... 68.5% 69.5% 73.0%
Weighted average interest rate............. 9.4% 9.6% 9.7%
Occupancy:
Owner occupied........................... 86.6% 85.1% 86.6%
Non-owner occupied....................... 13.4% 14.9% 13.4%
</TABLE>
Retail Division. The Company's Retail Division, which markets mortgage loans
directly to homeowners, began operations in March 1996. The Company operates
the Retail Division, which as of December 31, 1997 consisted of 31 persons,
including 11 account executives, to further diversify loan production sources
and to capture origination fees typically collected by retail brokers. By
creating a direct relationship with the borrower, retail lending provides a
sustainable loan origination franchise, offering greater control over the
lending process while generating loan origination fees to offset the higher
costs of retail lending. The cash gain on sales of retail loans is generally
greater than the cash gain on sales of broker-sourced loans because, unlike in
the case of broker-sourced originations, a third party does not share in the
fees and points paid by the borrower. The Company's Retail Division offers the
same products as those of its Wholesale Division.
The Company, while maintaining its focus on its Wholesale Division, has
recently formulated a low cost retail marketing strategy designed to produce
growth in its Retail Division. The Company's strategy focuses on loan
originations from borrowers through telemarketing and advertising coordinated
by its retail sales staff primarily at the Company's executive offices and, to
a lesser extent, at local sales offices. This focus on centralization enables
the Company to conduct its retail operations with less overhead than a retail
business that operates exclusively through a sales office network. During the
six months ended December 31, 1997 and the year ended June 30, 1997, the
Company originated $7.0 million and $7.5 million, respectively, in loans, or
2.0% and 1.4%, respectively, of its total mortgage loan production, through
its Retail Division.
The Company emphasizes telemarketing and advertising to attract borrowers
for the Retail Division. Using database screening, the Company selects the
areas of concentration for the Company's retail activities and a target group
of borrowers within these areas. This database screening involves a marketing
analysis intended to identify current homeowners who are likely to be
qualified candidates for the Company's loan products. Factors considered by
the Company identifying homeowners for its telemarketing activities include
the length of time the homeowner has owned the home and the individual's
credit profile. Longer periods of home ownership increase the likelihood that
the homeowner has substantial equity in the home and will satisfy the
Company's loan-to-value requirements. Aspects of an individual's credit
profile, such as credit problems, limited credit history and prior borrowings
from consumer finance companies, also indicate that the individual is a likely
candidate for the Company's loan programs.
The Company then provides this profile information to selected telemarketing
organizations which provide phone lists of potential borrowers for use by the
Retail Division. Concurrently, the Company runs radio and television
advertising to heighten borrower awareness within the subject areas. The
Company tracks the success of its marketing efforts and regularly assesses the
accuracy of its database screening, telemarketing efforts and advertising
campaigns in identifying likely candidates for its products. By utilizing
centralized retail activities focused at a limited group of likely borrowers,
the Company believes it more efficiently utilizes its retail marketing
expenditures.
39
<PAGE>
The following table sets forth selected information relating to retail loan
originations during the periods shown:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
JUNE 30, ENDED
-------------- DECEMBER 31,
1996(1) 1997 1997
------- ------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Principal balance.................................. -- $7,451 $7,017
Average principal balance per loan................. -- $ 83 $ 74
Weighted average initial loan-to-value ratio....... -- 70.1% 69.9%
Weighted average interest rate..................... -- 9.6% 9.4%
Occupancy:
Owner occupied................................... -- 87.8% 95.6%
Non-owner occupied............................... -- 12.2% 4.4%
</TABLE>
- --------
(1) The Company did not originate any loans in the Retail Division for the
year ended June 30, 1996.
Other Activities. In August 1996, the Company formed a division to originate
commercial and multi-family loans. Of total loan originations for the year
ended June 30, 1997, this division originated $17.9 million or 3.4% of total
originations. This division was discontinued in April 1997.
PRODUCT TYPES
The Company offers both fixed-rate and adjustable-rate loans, as well as
loans with an interest rate that is initially fixed for a period of time and
subsequently converts to an adjustable-rate. Most of the adjustable-rate loans
originated by the Company are offered at a low initial rate, sometimes
referred to as a "teaser" rate. At each interest rate adjustment date, the
Company adjusts the rate, subject to certain limitations on the amount of any
single adjustment, until the rate charged equals the fully indexed rate. The
Company's borrowers fall into six non-conforming risk classifications and
products are available at different interest rates and with different
origination and application points and fees depending on the particular
borrower's risk classification (see "Underwriting"). The Company offers a wide
variety of interest rate and points paid combinations on many of its products
so that customers may elect to pay higher points at closing to secure a lower
rate over the life of the loan or pay a higher interest rate and reduce or
eliminate points payable at closing. The interest rate on the Company's
adjustable rate mortgages is typically tied to six-month LIBOR and the Company
offers 1.0% or 1.5% semi-annual interest rate caps and 6.5% or 7.0% life caps.
The Company sets mortgage loan coupons and fees after considering several
factors, including the borrower's credit rating, the loan-to-value ratio of
the property, the state in which the loan was originated and competitive and
market conditions. The Company's maximum loan amounts are generally $500,000
with a loan-to-value ratio of up to 85%. The Company does, however, offer
larger loans with lower loan-to-value ratios on a case-by-case basis, and also
offers products that permit a loan-to-value ratio of up to 90% for selected
borrowers with a Company risk classification of "A+" or "A-."
Loans originated by the Company for the six months ended December 31, 1997
and the year ended June 30, 1997 had an average principal balance per loan of
approximately $95,727 and $98,179, respectively, and a weighted average
initial loan-to-value ratio of approximately 72.9% and 69.3%, respectively.
Unless prohibited by state law or otherwise waived by the Company upon the
payment by the related borrower of higher origination fees and a higher
interest rate, the Company generally imposes a prepayment penalty on the
borrower. Approximately 61.0% and 58.1% of the loans the Company originated
during the six months ended December 31, 1997 and the year ended June 30,
1997, respectively, provided for the payment by the borrower of a prepayment
charge in limited circumstances on certain full or partial prepayments.
40
<PAGE>
The Company's current products are as follows:
Standard Products
2-Year or 5-Year Fixed/Adjustable Rate Programs--A 30-year fully amortized
program with the initial interest rate fixed for the first two or five years
of the loan. Beginning with the 25th or 61st monthly payment, the loan
converts to an adjustable rate, LIBOR-indexed loan. There is no rate cap on
the first adjustment (at conversion). Thereafter, all interest rate caps apply
as described in the LIBOR loan product.
6-Month LIBOR Adjustable--An adjustable rate first mortgage program indexed
to six-month LIBOR, featuring a semi-annual interest rate cap of 1.0%-1.5%,
and a life cap of 6.5%-7.0%. This product is fully amortized over a 30-year
life.
15- or 30-Year Fixed Rate Program--A fixed rate first mortgage loan program
fully amortized over a 15- or 30-year period.
All of the standard mortgage products have prepayment penalties (where
legally allowed) for a period of one to five years with the exception of the
2-Year Fixed/Adjustable Rate product which has a two-year prepayment penalty
period.
Other Products
90% LTV First Mortgage Loan--A 30-year fully amortized adjustable rate or
fixed rate program. The adjustable rate program is indexed to LIBOR featuring
a semi-annual interest rate cap of 1.0% and a life cap of 6.5%. This product
is limited to the A+ and A- credit risk categories.
Conforming Mortgage Products--Both fixed rate and adjustable rate loan
programs that meet the guidelines for purchase by government sponsored
entities, such as FNMA and FHLMC, which guarantee mortgage backed securities
and permanent investors in mortgage backed securities secured by or
representing an ownership interest in such mortgage loans.
Second Mortgage Program--Fixed rate amortizing and fixed rate with balloon
payments are offered. This product is limited to the A+ through B credit risk,
with a maximum combined loan-to-value ratio equal to 100%. Underwriting
guidelines are similar to that of the Company's standard products.
125% LTV Program--A fixed rate first or second mortgage with an initial
loan-to-value ratio of up to 125% with terms ranging from five to 25 years
limited to borrowers with good credit histories. The use of loan proceeds is
limited to debt consolidation, home improvements and/or asset purchases.
Underwriting guidelines are primarily credit score and mortgage history
driven.
41
<PAGE>
The following table sets forth selected information relating to loan
originations by product type for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31, 1997
------------------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE
PRINCIPAL NUMBER AVERAGE AVERAGE WEIGHTED INITIAL
AMOUNT % OF TOTAL OF BALANCE INTEREST AVERAGE LOAN-TO-VALUE
TYPE ORIGINATED ORIGINATIONS LOANS PER LOAN RATE(1) MARGIN(2) RATIO
---- ---------- ------------ ------ -------- -------- --------- -------------
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE BALANCE)
<S> <C> <C> <C> <C> <C> <C> <C>
2-Year Fixed............ $253,046 71.4% 2,502 $101,137 9.6% 6.3% 73.7%
6-Month Adjustable...... 48,943 13.8 421 $116,254 9.5% 6.5% 73.8%
30-Year Fixed........... 34,965 9.8 525 $ 66,600 10.6% -- 69.3%
5-Year Fixed............ 11,596 3.3 117 $ 99,107 9.5% 6.7% 70.7%
15-Year Fixed........... 5,416 1.5 123 $ 44,034 10.6% -- 63.7%
Second Mortgages........ 606 0.2 16 $ 37,891 13.0% -- 36.4%
-------- ----- -----
$354,572 100.0% 3,704 $ 95,727 9.7% 6.4% 72.9%
======== ===== =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997
------------------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE
PRINCIPAL NUMBER AVERAGE AVERAGE WEIGHTED INITIAL
AMOUNT % OF TOTAL OF BALANCE INTEREST AVERAGE LOAN-TO-VALUE
TYPE ORIGINATED ORIGINATIONS LOANS PER LOAN RATE(1) MARGIN(2) RATIO
---- ---------- ------------ ------ -------- -------- --------- -------------
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE BALANCE)
<S> <C> <C> <C> <C> <C> <C> <C>
2-Year Fixed............ $289,549 54.4% 2,838 $102,027 9.5% 6.4% 70.5%
6-Month LIBOR
Adjustable............. 110,870 20.8 1,066 $104,005 9.2% 6.5% 70.2%
30-Year Fixed........... 74,162 13.9 1,011 $ 73,355 10.5% -- 66.1%
5-Year Fixed............ 30,379 5.7 286 $106,221 9.2% 6.5% 67.4%
15-Year Fixed........... 9,741 1.8 198 $ 49,198 10.6% -- 62.6%
Small Commercial(3)..... 17,920 3.4 26 $689,231 9.8% -- 63.8%
-------- ----- -----
$532,621 100.0% 5,425 $ 98,179 9.6% 6.4% 69.3%
======== ===== =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1996
------------------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE
PRINCIPAL NUMBER AVERAGE AVERAGE WEIGHTED INITIAL
AMOUNT % OF TOTAL OF BALANCE INTEREST AVERAGE LOAN-TO-VALUE
TYPE ORIGINATED ORIGINATIONS LOANS PER LOAN RATE(1) MARGIN(2) RATIO
---- ---------- ------------ ------ -------- -------- --------- -------------
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE BALANCE)
<S> <C> <C> <C> <C> <C> <C> <C>
2-Year Fixed............ $ 61,141 30.6% 592 $103,280 10.0% 5.5% 67.6%
6-Month LIBOR
Adjustable............. 96,866 48.4 901 $107,509 8.6% 5.9% 70.6%
30-Year Fixed........... 29,993 15.0 371 $ 80,843 10.7% -- 65.4%
5-Year Fixed............ 10,020 5.0 94 $106,595 10.0% 5.7% 64.9%
15-Year Fixed........... 1,943 1.0 30 $ 64,764 10.7% -- 65.6%
-------- ----- -----
$199,963 100.0% 1,988 $100,585 9.4% 5.7% 68.5%
======== ===== =====
</TABLE>
- --------
(1) Each fixed rate loan bears interest at a fixed rate set on its date of
funding and lasting through the term of the loan. Loans bearing interest
at the adjustable rate adjust every six months to a new rate through the
term of the loan. The weighted average interest rate for loans bearing
interest at an adjustable rate is the weighted average of the rates of
such loans during the initial six month period. Loans bearing interest at
the fixed/adjustable rate bear interest at a fixed rate for an initial
period commencing on the date of funding (e.g., two years or five years)
and thereafter adjust to new rates every six months for the remaining term
of the loans. The weighted average interest rate for loans bearing
interest at a fixed/adjustable rate is the weighted average of the rates
of such loans during the initial period.
(2) The margin for a loan is a fixed amount set for the life of the loan,
which when added to the index (as described below) determines the interest
rate on the loan (subject to interest rate floors, ceilings and caps). The
index used by the Company is the six-month LIBOR, as published each Monday
in the Wall Street Journal. Fixed rate loans have no margin because such
loans are not tied to an index.
(3) The Company discontinued the origination of small commercial loans in
April 1997.
42
<PAGE>
GEOGRAPHIC CONCENTRATION
The following table sets forth aggregate dollar amounts and the percentage
of all loans originated by the Company by state for the periods shown:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
----------------------------------------------- SIX MONTHS ENDED
1996 1997 DECEMBER 31, 1997
----------------------- ----------------------- -----------------------
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL
ORIGINATED ORIGINATIONS ORIGINATED ORIGINATIONS ORIGINATED ORIGINATIONS
---------- ------------ ---------- ------------ ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
California.............. $107,063 53.6% $196,526 36.9% $100,218 28.3%
Illinois................ 13,741 6.9 55,351 10.4 59,217 16.7
Florida................. 7,430 3.7 28,597 5.4 36,440 10.3
Hawaii.................. 12,021 6.0 63,868 12.0 23,890 6.7
Utah.................... 6,934 3.5 20,486 3.8 17,504 4.9
Wisconsin............... 5,251 2.6 22,174 4.2 14,415 4.0
Oregon.................. 12,420 6.2 21,123 4.0 10,853 3.1
Massachusetts........... -- -- 6,277 1.2 10,805 3.0
Maryland................ -- -- 5,010 0.9 10,170 2.9
Ohio.................... 2,472 1.2 19,938 3.7 9,805 2.8
Indiana................. -- -- 12,757 2.4 9,282 2.6
Colorado................ 14,693 7.3 24,102 4.5 9,107 2.6
Washington.............. 9,564 4.8 9,495 1.8 7,744 2.2
Idaho................... 2,246 1.1 8,314 1.6 7,091 2.0
Missouri................ 27 0.0 10,712 2.0 6,463 1.8
Michigan................ -- -- 2,353 0.4 5,113 1.5
Other(1)................ 6,101 3.1 25,538 4.8 16,455 4.6
-------- ----- -------- ----- -------- -----
$199,963 100.0% $532,621 100.0% $354,572 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
- --------
(1) Except for Texas which accounted for 1.3% for the year ended June 30,
1996, no other state accounted for greater than 1.0%.
QUALITY CONTROL
The Company has implemented a loan quality control process designed to
ensure sound lending practices and compliance with the Company's policies and
procedures. Prior to the funding of a loan, the Company performs a "pre-
funding quality control audit" which consists of the verification of a
borrower's credit and employment, utilizing automated services and verbal
verifications.
Properties underlying the potential mortgage loans are appraised by an
appraiser selected by the submitting broker. Every independent appraisal is
reviewed by the Company's chief appraiser (the "Chief Appraiser"), other
Company appraisers or by another independent appraiser approved by the
Company's Chief Appraiser to confirm the adequacy of the property as
collateral prior to funding.
Subsequent to funding, the Company's quality assurance department audits
100% of all closed loans. The department performs a review of documentation
for compliance with established underwriting guidelines and lending procedures
along with independent appraisal reviews and recertifications. All funding
documents are reviewed for accuracy, completeness and adherence to corporate,
state and federal requirements. As a part of this audit process, deficiencies
are reported to the Company's senior management to determine trends and the
need for additional training of Company personnel.
43
<PAGE>
UNDERWRITING
The Company originates its mortgage loans in accordance with the
underwriting criteria (the "Underwriting Guidelines") described below. The
loans the Company originates generally do not satisfy underwriting standards
such as those utilized by FNMA and FHLMC; therefore, the Company's loans are
likely to result in rates of delinquencies and foreclosures that are higher,
and may be substantially higher, than those rates experienced by portfolios of
mortgage loans underwritten in a more traditional manner. The Underwriting
Guidelines are intended to evaluate the credit history of the potential
borrower, the capacity of the borrower to repay the mortgage loan, the value
of the real property and the adequacy of such property as collateral for the
proposed loan. Based upon the underwriter's review of the loan application and
related data and application of the Underwriting Guidelines, the loan terms,
including interest rate and maximum loan-to-value, are determined.
The Company employs experienced underwriters and the Company's chief
underwriter (the "Chief Underwriter") must approve the hiring of all
underwriters, including those located in the regional offices and branch
locations. The Company's underwriters are required to have had either
substantial underwriting experience with a consumer finance company or other
non-conforming lender or substantial experience with the Company in other
aspects of the non-conforming mortgage finance industry before becoming part
of the Company's underwriting department. As of December 31, 1997, 36
underwriters with an average of approximately five years of non-conforming
mortgage lending experience were employed by the Company. All underwriters
participate in ongoing training, including regular supervisory critiques of
each underwriter's work. The Company believes that its experienced
underwriting personnel have the ability to analyze the specific
characteristics of each loan application and make appropriate credit
judgments.
The underwriting staff reviews the value of the underlying collateral based
on a full appraisal completed by pre-approved qualified licensed independent
appraisers. All appraisers are required to conform to the Uniform Standards of
Professions Appraisal Practice adopted by the Appraisal Standards Board of the
Appraisal Foundation. In addition, every independent appraisal is reviewed by
the Company's Chief Appraiser, other Company appraisers or by another
independent appraiser approved by the Company's Chief Appraiser to confirm the
adequacy of the property as collateral.
The Underwriting Guidelines include three levels of applicant documentation
requirements, referred to as the "Full Documentation," "Lite Documentation"
and "Stated Income Documentation" programs. Under each of the programs, the
Company reviews the applicant's source of income, calculates the amount of
income from sources indicated on the loan application or similar
documentation, reviews the credit history of the applicant, calculates the
debt service-to-income ratio to determine the applicant's ability to repay the
loan, reviews the type and use of the property being financed, and reviews the
property. In determining the ability of the applicant to repay the loan, the
Company's underwriters use (i) a qualifying rate that is equal to the stated
interest rate on fixed-rate loans, (ii) the initial interest rate on loans
which provide for two or five years of fixed payments before the initial
interest rate adjustment, or (iii) one percent above the initial interest rate
on other adjustable-rate loans. The Underwriting Guidelines require that
mortgage loans be underwritten in a standardized procedure which complies with
applicable federal and state laws and regulations and requires the Company's
underwriters to be satisfied that the value of the property being financed, as
indicated by an appraisal and the appraisal review. In general, the maximum
loan amount for mortgage loans originated under the programs is $500,000;
however, larger loans may be approved on a case-by-case basis. The
Underwriting Guidelines permit one-to-four family residential property loans
to have loan-to-value ratios at origination of generally up to 80%, or up to
90% for borrowers in the Company's highest credit grade categories, depending
on, among other things, the purpose of the mortgage loan, a borrower's credit
history, repayment ability and debt service-to-income ratio, income
documentation, as well as the type and use of the property.
Under the Full Documentation program, applicants are generally required to
submit two written forms of verification of stable income for at least 12
months. Under the Lite Documentation program, one such form of verification is
required for six months. Under the Stated Income Documentation program, an
applicant may
44
<PAGE>
be qualified based upon monthly income as stated on the mortgage loan
application if the applicant meets certain criteria. All the foregoing
programs require that with respect to salaried employees there be a telephone
verification of the applicant's employment. Verification of the source of
funds required to be deposited by the applicant into escrow in the case of a
purchase money loan is generally required under the Full Documentation program
guidelines and on all purchase loans where the loan-to-value ratio is greater
than 80%. No such verification is required under any of the programs where the
loan-to-value ratio is less than 80%. The maximum loan-to-value ratio is
reduced by 5% to 10% for the Lite Documentation and Stated Income
Documentation programs. The level of documentation percentages of loan
originations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
JUNE 30, ENDED
------------ DECEMBER 31,
1996 1997 1997
----- ----- ------------
<S> <C> <C> <C>
Full.............................................. 50.9% 50.5% 47.4%
Stated Income..................................... 49.1 48.8 50.9
Lite.............................................. -- 0.7 1.7
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
The Company's categories and criteria for grading the credit history of
potential borrowers is set forth in the table below. Generally, borrowers in
lower credit grades are less likely to satisfy the repayment obligations of a
mortgage loan and, therefore, are subjected to lower loan-to-value ratios and
are charged higher interest rates and loan origination fees. Loans made to
lower credit grade borrowers, including credit-impaired borrowers, entail a
higher risk of delinquency and may result in higher losses than loans made to
borrowers who use conventional mortgage sources. The Company believes that the
amount of equity present in the collateral securing its loans generally
mitigates these risks.
45
<PAGE>
UNDERWRITING GUIDELINES(1)
<TABLE>
<CAPTION>
A+ RISK A- RISK B RISK C+ RISK C RISK C- RISK
------------ ------------ ------------ -------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Existing Mortgage One 30-day Maximum of Maximum of Maximum six Unlimited Unlimited 30-
late payment two 30-day four 30-day 30-day late number of and 60-day
in the last late late payments; or, 30-day and late payments
12 months. payments in payments four 30-days, 60-day late and a maximum
the last 12 within the one 60-day and payments and of one 150-
months. last 12 one 90-day a maximum of day late
months late payment one 120-day payment if
allowed if in the last 12 late payment LTV is
LTV is months if LTV within the greater than
greater is 75% or last 12 65%, maximum
than 80%. less. Maximum months. one 180-day
Maximum four five 30-day There may be late payment
30-day late late payments a current if LTV is
payments; and no 60-day notice of less than
or, two 30- late payments default, 65%.
day late if LTV is however the Delinquencies
payments and greater than maximum more than 180
one 60-day 75%. Maximum delinquency days may be
late payment six 30-day cannot allowed if
in the last payments if exceed 120 LTV is less
12 months if LTV is greater days. than 60%.
LTV is 80% than 65% and
or less. loan is under
the Stated
Income
Documentation
program.
Other Credit Very good to Very good Generally Some Frequent Significant
excellent credit good credit significant derogatory credit
credit history within the derogatory consumer defaults.
within the within the last 12 credit in the credit. Collections
last 24 last 12 months. Some past 12 Collections and
months. months. late months. and chargeoffs
Minor late Minor late payments Generally, chargeoffs may remain
payments payments (not more collections may remain open after
(not more (not more than 90 and chargeoffs open after closing.
than 30 than 60 days) may be not more than funding.
days) may be days) may be allowed. $2,000 may
allowed on a allowed on a remain open
limited limited after closing.
basis. basis.
Bankruptcy filings Generally, Generally, Generally, Chapter 7 Chapter 7 Current
no no no Bankruptcy Bankruptcy Bankruptcy
bankruptcy bankruptcy bankruptcy must have been must have allowed on a
filings in filings in filings in discharged at been case by case
the last two the last two the last two least 12 discharged basis;
years. years. years. months prior at least six Bankruptcy
to months prior must be paid
application. to or discharged
Chapter 13 application. at closing.
Bankruptcy Chapter 13
must have been Bankruptcy
filed for at must have
least 24 been filed
months and for at least
borrower must 18 months
have paid and borrower
according to must have
the Chapter 13 paid
Plan. Chapter according to
13 Bankruptcy the Chapter
must be paid 13 Plan.
or discharged Chapter 13
at closing. Bankruptcy
must be paid
or
discharged
at closing.
Debt service-to- 45% 45% to 90% 45% to 85% 50% to 80% LTV 60% 60%
income ratio LTV 50% to LTV 50% to 55% to 75% LTV
80% LTV 80% LTV 55% 60% to 70% LTV
to 75% LTV
Maximum LTV(2) 90% 90% 85% 80% 70% 70%
</TABLE>
- -------
(1) The letter grades applied to each risk classification reflect the
Company's internal standards and do not necessarily correspond to the
classifications used by other mortgage lenders. "LTV" means loan-to-value
ratio.
(2) The maximum LTV set forth in the table is for borrowers providing Full
Documentation. The LTV is reduced for Lite Documentation and Stated Income
Documentation, if applicable.
46
<PAGE>
The Company evaluates its Underwriting Guidelines on an ongoing basis and
periodically modifies the Underwriting Guidelines to reflect the Company's
current assessment of various issues related to an underwriting analysis. In
addition, the Company adopts underwriting guidelines appropriate to new loan
products, such as those offered by the Retail Division. The conventional
mortgage loans and second mortgage loans, including 125% loan-to-value loans,
offered by the Retail Division are underwritten to the standards of the
intended buyers thereof and utilize information not considered by the Company
in its standard Underwriting Guidelines, including credit scores.
Exceptions. As described above, the Company uses the foregoing categories
and characteristics as underwriting guidelines only. On a case-by-case basis,
the Company's underwriters may determine that the prospective borrower
warrants a risk category upgrade, a debt service-to-income ratio exception, a
pricing exception, a loan-to-value exception or an exception from certain
requirements of a particular risk category (collectively called an "upgrade"
or an "exception"). An upgrade or exception may generally be allowed if the
application reflects certain compensating factors, including among others: low
loan-to-value ratio; pride of ownership; stable employment; and the length or
residence in the subject property. Accordingly, the Company may classify
certain mortgage loan applications in a more favorable risk category than
other mortgage loan applications that, in the absence of such compensating
factors, would only satisfy the criteria of a less favorable risk category.
47
<PAGE>
LOAN PRODUCTION BY BORROWER RISK CLASSIFICATION
The following tables set forth information concerning the Company's loan
production by borrower risk classification for the six months ended December
31, 1997 and the years ended June 30, 1997 and 1996.
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31, 1997
---------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE
PRINCIPAL % OF NUMBER AVERAGE WEIGHTED INITIAL
AMOUNT TOTAL OF INTEREST AVERAGE LOAN-TO-VALUE
CREDIT RATING ORIGINATED ORIGINATIONS LOANS RATE(1) MARGIN(2) RATIO
- ------------- ---------- ------------ ------ -------- --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Adjustable Rate (6-Month
LIBOR):
A+.................... $ 18,271 37.3% 126 8.7% 6.1% 74.4%
A-.................... 11,232 22.9 95 9.4% 6.4% 77.1%
B..................... 9,781 20.0 89 9.6% 6.6% 75.1%
C+.................... 4,635 9.5 42 10.5% 7.0% 69.3%
C..................... 2,528 5.2 32 11.3% 7.7% 67.8%
C-.................... 2,496 5.1 37 12.5% 8.1% 63.4%
-------- ----- -----
$ 48,943 100.0% 421 9.5% 6.6% 73.8%
======== ===== =====
Fixed/Adjustable Rate
(2-Year; 5-Year):
A+.................... $116,580 44.0% 933 8.8% 5.9% 75.9%
A-.................... 55,244 20.9 507 9.6% 6.3% 75.0%
B..................... 54,302 20.5 594 9.9% 6.5% 72.6%
C+.................... 20,315 7.7 295 11.0% 7.1% 68.7%
C..................... 8,444 3.2 141 12.2% 7.6% 63.6%
C-.................... 9,684 3.7 148 12.7% 7.9% 60.9%
-------- ----- -----
$264,569 100.0% 2,618 9.6% 6.3% 73.6%
======== ===== =====
Fixed Rate (15-Year; 30-
Year):
A+.................... $ 15,786 38.5% 214 9.8% 0.0% 69.4%
A-.................... 10,968 26.7 164 10.3% 0.0% 69.3%
B..................... 8,142 19.8 145 11.0% 0.0% 68.3%
C+.................... 3,348 8.2 78 11.9% 0.0% 65.8%
C..................... 1,207 2.9 30 13.0% 0.0% 55.5%
C-.................... 1,609 3.9 34 13.7% 0.0% 59.1%
-------- ----- -----
$ 41,060 100.0% 665 10.6% 0.0% 68.2%
======== ===== =====
$354,572 3,704
======== =====
</TABLE>
- --------
(1) Each fixed rate loan bears interest at a fixed rate set on its date of
funding and lasting through the term of the loan. Loans bearing interest
at the adjustable rate adjust every six months to a new rate through the
term of the loan. The weighted average interest rate for loans bearing
interest at an adjustable rate is the weighted average of the rates of
such loans during the initial six month period. Loans bearing interest at
the fixed/adjustable rate bear interest at a fixed rate for an initial
period commencing on the date of funding (e.g., two years or five years)
and thereafter adjust to new rates every six months for the remaining term
of the loans. The weighted average interest rate for loans bearing
interest at a fixed/adjustable rate is the weighted average of the rates
of such loans during the initial period.
(2) The margin for a loan is a fixed amount set for the life of the loan,
which when added to the Index (as described below) determines the interest
rate on the loan (subject to interest rate floors, ceiling and caps). The
index used by the Company is the six-month LIBOR, as published each Monday
in The Wall Street Journal. Fixed rate loans have no margin because such
loans are not tied to an index.
48
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997
---------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE
PRINCIPAL % OF NUMBER AVERAGE WEIGHTED INITIAL
AMOUNT TOTAL OF INTEREST AVERAGE LOAN-TO-VALUE
CREDIT RATING ORIGINATED ORIGINATIONS LOANS RATE(1) MARGIN(2) RATIO
- ------------- ---------- ------------ ------ -------- --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Adjustable Rate (6-Month
LIBOR):
A+.................... $ 21,238 19.1% 181 8.0% 6.0% 71.4%
A- ................... 32,913 29.7 280 8.5% 6.2% 72.6%
B..................... 24,915 22.5 236 9.0% 6.6% 72.4%
C+.................... 16,481 14.9 179 10.0% 6.7% 68.8%
C..................... 9,398 8.5 114 10.9% 7.3% 63.0%
C-.................... 5,925 5.3 76 12.7% 8.0% 59.3%
-------- ----- -----
$110,870 100.0% 1,066 9.2% 6.5% 70.2%
======== ===== =====
Fixed/Adjustable Rate
(2-Year; 5-Year):
A+.................... $116,138 36.4% 927 8.5% 6.1% 71.8%
A-.................... 82,402 25.8 708 9.2% 6.2% 71.9%
B..................... 60,570 18.9 613 9.7% 6.5% 71.0%
C+.................... 32,031 10.0 416 10.8% 6.9% 67.3%
C..................... 16,790 5.2 271 11.9% 7.2% 63.6%
C-.................... 11,997 3.7 189 12.4% 7.6% 57.7%
-------- ----- -----
$319,928 100.0% 3,124 9.5% 6.4% 70.2%
======== ===== =====
Fixed Rate (15-Year; 30-
Year):
A+.................... $ 26,249 31.2% 299 9.6% -- 64.2%
A-.................... 27,110 32.3 347 10.1% -- 66.4%
B..................... 14,980 17.9 225 10.9% -- 68.3%
C+.................... 8,529 10.2 177 11.8% -- 66.9%
C..................... 4,373 5.2 107 13.2% -- 63.5%
C-.................... 2,662 3.2 54 13.6% -- 57.9%
-------- ----- -----
$ 83,903 100.0% 1,209 10.5% -- 65.7%
======== ===== =====
Small Commercial(3)..... $ 17,920 26 9.8% -- 63.8%
======== =====
$532,621 5,425
======== =====
</TABLE>
- --------
(1) Each fixed rate loan bears interest at a fixed rate set on its date of
funding and lasting through the term of the loan. Loans bearing interest
at the adjustable rate adjust every six months to a new rate through the
term of the loan. The weighted average interest rate for loans bearing
interest at an adjustable rate is the weighted average of the rates of
such loans during the initial six month period. Loans bearing interest at
the fixed/adjustable rate bear interest at a fixed rate for an initial
period commencing on the date of funding (e.g., two years or five years)
and thereafter adjust to new rates every six months for the remaining term
of the loans. The weighted average interest rate for loans bearing
interest at a fixed/adjustable rate is the weighted average of the rates
of such loans during the initial period.
(2) The margin for a loan is a fixed amount set for the life of the loan,
which when added to the index (as described below) determines the interest
rate on the loan (subject to interest rate floors, ceiling and caps). The
index used by the Company is the six-month LIBOR, as published each Monday
in The Wall Street Journal. Fixed rate loans have no margin because such
loans are not tied to an index.
(3) The Company discontinued the origination of small commercial loans in
April 1997.
49
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1996
---------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE
PRINCIPAL % OF NUMBER AVERAGE WEIGHTED INITIAL
AMOUNT TOTAL OF INTEREST AVERAGE LOAN-TO-VALUE
CREDIT RATING ORIGINATED ORIGINATIONS LOANS RATE(1) MARGIN(2) RATIO
- ------------- ---------- ------------ ------ -------- --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Adjustable Rate (6-Month
LIBOR):
A+.................... $ 5,788 6.0% 48 7.8% 5.6% 69.1%
A- ................... 44,400 45.8 389 8.1% 5.5% 72.3%
B..................... 24,967 25.8 237 8.6% 6.1% 71.8%
C+.................... 11,932 12.3 125 9.5% 6.4% 68.1%
C..................... 7,809 8.1 76 10.0% 6.5% 64.4%
C-.................... 1,970 2.0 26 10.9% 6.8% 58.9%
-------- ----- -----
$ 96,866 100.0% 901 8.6% 5.9% 70.6%
======== ===== =====
Fixed/Adjustable Rate
(2-Year; 5-Year):
A+.................... $ 12,530 17.6% 117 9.1% 4.9% 65.8%
A-.................... 21,899 30.8 197 9.6% 5.2% 67.4%
B..................... 19,717 27.7 171 10.1% 5.8% 70.1%
C+.................... 8,680 12.2 105 10.8% 6.1% 66.9%
C..................... 5,960 8.4 66 11.0% 6.3% 64.3%
C-.................... 2,375 3.3 30 12.5% 6.7% 58.6%
-------- ----- -----
$ 71,161 100.0% 686 10.0% 5.6% 67.2%
======== ===== =====
Fixed Rate (15-Year; 30-
Year):
A+.................... $ 1,121 3.5% 11 10.3% -- 70.3%
A-.................... 17,469 54.7 200 10.2% -- 65.6%
B..................... 7,263 22.7 91 10.9% -- 66.6%
C+.................... 3,483 10.9 54 12.0% -- 66.5%
C..................... 1,590 5.0 26 12.2% -- 61.2%
C-.................... 1,010 3.2 19 13.1% -- 50.9%
-------- ----- -----
$ 31,936 100.0% 401 10.7% -- 65.3%
======== ===== =====
$199,963 1,988
======== =====
</TABLE>
- --------
(1) Each fixed rate loan bears interest at a fixed rate set on its date of
funding and lasting through the term of the loan. Loans bearing interest
at the adjustable rate adjust every six months to a new rate through the
term of the loan. The weighted average interest rate for loans bearing
interest at an adjustable rate is the weighted average of the rates of
such loans during the initial six month period. Loans bearing interest at
the fixed/adjustable rate bear interest at a fixed rate for an initial
period commencing on the date of funding (e.g., two years or five years)
and thereafter adjust to new rates every six months for the remaining term
of the loans. The weighted average interest rate for loans bearing
interest at a fixed/adjustable rate is the weighted average of the rates
of such loans during the initial period.
(2) The margin for a loan is a fixed amount set for the life of the loan,
which when added to the index (as described below) determines the interest
rate on the loan (subject to interest rate floors, ceiling and caps). The
index used by the Company is the six-month LIBOR, as published each Monday
in The Wall Street Journal. Fixed rate loans have no margin because such
loans are not tied to an index.
FINANCING AND SALE OF LOANS
Warehouse Facility
From August 1995 through October 1997, the Company funded its business
primarily through the DLJ Facility under which it borrowed money to finance
the origination of loans. The DLJ Facility provided a $50.0 million warehouse
line of credit to the Company, subject to periodic upward adjustments to
facilitate increases in the Company's loan production. The interest rate under
the DLJ Facility was equal to the federal funds rate plus 100 basis points
subject to increase based on the length of time loans are held by the Company,
and DLJ received a security interest on all loans, and other rights in
connection therewith, originated by the
50
<PAGE>
Company. Any loan not purchased by DLJ was not allowed to remain subject to
the warehouse line for more than nine months. The term of the DLJ Facility was
through August 31, 2000.
In October 1997, the Company and DLJ modified the DLJ Facility and the
terms under which DLJ would purchase mortgage loans from the Company (the
"Amended DLJ Facility"). The Amended DLJ Facility has similar terms to the DLJ
Facility with certain modifications. The Amended DLJ Facility provides for
advances of up to $150.0 million. The interest rate of the DLJ Facility will
remain effective until the closing of this Offering; thereafter, borrowings
under the Amended DLJ Facility will bear an interest rate of the federal funds
rate plus 50 basis points for 12 months after the closing of the Offering and,
thereafter, the federal funds rate plus 100 basis points. The Amended DLJ
Facility also modifies the termination date to two years after the closing of
the Offering. The Amended DLJ Facility further provides that as of the closing
of the Offering, DLJ will no longer have the exclusive right to purchase loans
from the Company. Furthermore, DLJ has agreed to provide the Company with up
to $5.0 million of financing for a term of one year for subordinated
"interest-only" securities to the extent they are retained by the Company in
connection with any future securitizations of loans originated by the Company.
Advances will be made only to the extent the Company does not have sufficient
cash, in excess of reasonable reserves, to fund the retention of such
securities.
The Company is currently negotiating with other lenders to obtain additional
warehouse lines of credit at interest rates and terms that are consistent with
management's objectives.
Loan Sales
The Company follows a strategy of selling for cash substantially all of its
loan originations through loan sales in which the Company disposes of its
entire economic interest in the loans for a cash price that represents a
premium over the principal balance of the loans sold. The Company sold $333.0
million, $519.9 million and $156.6 million of loans through loan sales during
the six months ended December 31, 1997 and the years ended June 30, 1997 and
1996, respectively. Loan sales are typically made monthly. The Company did not
sell any loans directly through securitizations during these periods.
The Amended DLJ Facility modifies the exclusivity of the relationship
between DLJ and the Company. In connection with the DLJ Facility, DLJ,
pursuant to the Master Loan Purchase Agreement, agreed to purchase, and the
Company agreed to sell to DLJ, all mortgage loans originated by the Company.
While over the course of this relationship, the Company and DLJ have agreed
that certain of such loans will not be so purchased, the Company has
historically sold substantially all of its originated loans to DLJ as whole
loans on a servicing released basis. Under the Amended DLJ Facility, this
exclusive contractual arrangement will be modified and the Company, as of the
consummation of the Offering, will have no obligation to sell any loans to
DLJ, and DLJ will have no obligation to purchase any loans from the Company.
DLJ has purchased, and it is contemplated that it may continue to purchase,
loans under the Master Loan Purchase Agreement with a view towards
securitization or other resale transactions in the secondary mortgage market.
Since substantially all of the loans historically purchased by DLJ under the
master repurchase agreement have been resold by DLJ to institutional
purchasers generally within 48 hours of the initial purchase from the Company,
DLJ has agreed to allow the Company to assist it in the marketing of loans so
resold by DLJ. Prior to the purchase of the loans by DLJ under the Master Loan
Purchase Agreement, the Company undertakes a process to identify the
institutional purchasers who will immediately buy the subject loans from DLJ.
This program utilizes a competitive bidding process typically involving two to
four potential purchasers (including Wall Street firms, financial institutions
and conduits, along with other institutional purchasers) who in most cases
have purchased similar resold loans from DLJ in the past. The successful
bidder is committed to a minimum quantity of loans at a determined price, and
is generally granted the option to purchase more than the minimum quantity at
a negotiated price. DLJ then agrees to pay the Company the determined price
minus 50 basis points, which represents DLJ's fees. As a result of this
agreement, Management is able to directly control the sales process of its
loans in an effort to obtain more favorable pricing and other terms. A
successful bidder is not obligated to purchase loans other than those to which
its bid applies. For the six months ended December 31, 1997 and the
51
<PAGE>
years ended June 30, 1997 and 1996, an aggregate of $1.7 million, $2.1 million
and $1.8 million, respectively, was paid to DLJ as fees pursuant to the Master
Loan Purchase Agreement. Under the Amended DLJ Facility, DLJ and the Company
have agreed that DLJ will receive no fees in connection with any such
purchases for the first 12 months after the closing of the Offering and 12.5
basis points for the second 12 months after the closing.
The Master Loan Purchase Agreement, along with the Amended DLJ Facility,
terminates on August 31, 2000, or may be terminated earlier by DLJ upon an
event of default by the Company, including the occurrence of any proceeding
adversely affecting the Company's ability to perform its obligations to DLJ, a
material breach by the Company of any related agreement with DLJ or a material
adverse change in the Company's business. The Master Loan Purchase Agreement
may also be terminated by DLJ if the Company merges (other than the
reincorporation of the Company into Delaware to which DLJ has consented),
sells substantially all of its assets or fails to meet certain financial
criteria as agreed to by DLJ and the Company.
Cash gain on sale of mortgage loans represented 67.8% and 66.7% and 51.5% of
the Company's total revenues for the six months ended December 31, 1997 and
the years ended June 30, 1997 and June 30, 1996, respectively. The Company
maximizes its cash gain on sale of mortgage loan revenue by closely monitoring
institutional purchasers' requirements and focusing on originating the types
of loans that meet those requirements and for which institutional purchasers
tend to pay higher rates. During the six months ended December 31, 1997 and
the years ended June 30, 1997 and 1996, the Company sold loans to DLJ having
an aggregate principal balance of $331.4 million, $473.7 million and $153.2
million, respectively.
Loan sales are made to DLJ on a non-recourse basis pursuant to the Master
Loan Purchase Agreement containing customary representations and warranties by
the Company regarding the underwriting criteria and the origination process.
The Company is required to provide similar representations and warranties to
those institutional purchasers to whom DLJ sells the subject loans. The
Company, therefore, may be required to repurchase or substitute loans in the
event of a breach of its representations and warranties. In addition, the
Company sometimes commits to repurchase or substitute a loan if a payment
default occurs within the first month following the date the loan is funded.
The Company is also required in some cases to repurchase or substitute a loan
if the loan documentation is alleged to contain fraudulent misrepresentations
made by the borrower. Any claims asserted against the Company in the future by
its loan purchasers may result in liabilities or legal expenses that could
have a material adverse effect on the Company's results of operations and
financial condition. In addition, any material repurchase or substitution may
have an adverse effect on the market for and pricing of the Company's loans.
Since the Company commenced operations in August 1995 through December 31,
1997, the Company has not been obligated to repurchase or substitute any loan
sold to DLJ due to breaches of representations and warranties, fraudulent
misrepresentations or borrower default in the first month. During such period,
the Company had repurchased loans with an aggregate principal balance of
$178,000 from other institutional purchasers.
52
<PAGE>
Securitization Capability
While the Company has not sold loans directly through securitizations, part
of the Company's loan sale strategy may include the sale of loans directly
through securitizations in the future if management determines that such sales
are more beneficial. Management has significant securitization experience in
that several members were involved in securitization prior to their employment
with the Company. In addition, rating agencies and bond insurers have
evaluated and are familiar with the Company's procedures and underwriting
guidelines in connection with such securitizations.
Typically in a securitization, the issuer aggregates mortgages into a real
estate mortgage investment conduit trust. The regular interests or the senior
tranches of the trust are investment grade. While the issuer generally retains
the residual interests in the trust, it immediately sells the regular
interests and generally uses the proceeds to repay borrowings that were used
to fund or purchase the loans in the securitized pool. The holders of the
regular interests are entitled to receive scheduled principal collected on the
pool of securitized loans and interest at the pass-through interest rate on
the certificate balance for such interests. The residual interests represents
the subordinated right to receive cash flows from the pool of securitized
loans after payment of the required amounts to the holders of the regular
interests and the cost associated with the securitization. The issuer
recognizes non- cash revenue relating to the residual interest at the time of
the securitization.
SUB-SERVICING
While the Company currently sells substantially all of the mortgage loans it
originates servicing released (meaning the Company does not retain the
servicing rights to such loans), it is required to service the loans from the
date of funding through the date of sale. Since the Company conducts whole
loan sales monthly, the Company currently does not have a substantial
servicing portfolio. Nonetheless, the Company currently contracts for the sub-
servicing of all mortgage loans it originates through the date of sale and is
subject to risks associated with inadequate or untimely services. To the
extent that the Company decides to retain servicing rights in the future or
conduct securitizations, it currently intends to contract for the sub-
servicing of such mortgage loans, which would expose it to more substantial
risks associated with contracted sub-servicing. In such event, it is expected
that many of the Company's borrowers will require notices and reminders to
keep their mortgage loans current and to prevent delinquencies and
foreclosures. A substantial increase in the Company's delinquency rate or
foreclosure rate could adversely affect its ability to access profitably the
capital market for its financing needs, including any future securitizations.
Any of the Company's sub-servicing agreements with its third-party sub-
servicers are expected to provide that if the Company terminates the agreement
without cause (as defined in the agreement), the Company may be required to
pay the third-party sub-servicer a fee. Depending upon the size of the
Company's loan portfolio sub-serviced at any point in time, the termination
penalty that the Company would be obligated to pay upon termination without
cause, may be substantial.
INTEREST RATE RISK MANAGEMENT
The Company's profits depend, in part, on the difference, or "spread,"
between the effective rate of interest received by the Company on the loans it
originates or purchases and the interest rates payable by the Company under
its warehouse facilities or for securities issued in any future
securitizations. The spread can be adversely affected because of interest rate
increases during the period from the date the loans are originated until the
closing of the sale or securitization of such loans.
Since the Company historically has retained loans for a short period of time
pending sale, it has not engaged in hedging activities to date. However, in
the future the Company may hedge its variable-rate mortgage loans and any
interest-only and residual certificates retained in connection with any future
securitizations with hedging transactions which may include forward sales of
mortgage loans or mortgage-backed securities, interest rate caps and floors
and buying and selling of futures and options on futures. The nature and
quantity of hedging
53
<PAGE>
transactions will be determined by the Company's management based on various
factors, including market conditions and the expected volume of mortgage loan
originations and purchases. No assurance can be given that such hedging
transactions will offset the risks of changes in interest rates, and it is
possible that there will be periods during which the Company could incur
losses after accounting for its hedging activities.
COMPETITION
The Company faces intense competition in the business of originating and
selling mortgage loans. The Company's competitors in the industry include
other consumer finance companies, mortgage banking companies, commercial
banks, credit unions, thrift institutions, credit card issuers and insurance
finance companies. Many of these competitors are substantially larger and have
considerably greater financial, technical and marketing resources than the
Company. In addition, many financial services organizations that are much
larger than the Company have formed national loan origination networks
offering loan products that are substantially similar to the Company's loan
programs. Competition among industry participants can take many forms,
including convenience in obtaining a loan, customer service, marketing and
distribution channels, amount and term of the loan, loan origination fees and
interest rates. In addition, the current level of gains realized by the
Company and its competitors on the sale of non-conforming loans could attract
additional competitors into this market. Additional competition may lower the
rates the Company can charge borrowers, thereby potentially lowering gain on
future loan sales and future securitizations. The Company may in the future
also face competition from, among others, government-sponsored entities which
may enter the non-conforming mortgage market. Existing or new loan purchase
programs may be expanded by FNMA, FHLMC, or GNMA to include non-conforming
mortgages, particularly those in the "A-" category, which constitute a
significant portion of the Company's loan production. For example, the FHLMC
has announced that it is entering the non-conforming market in 1998. Entries
of such government-sponsored entities into the non-conforming market may have
an adverse effect on loan yields on mortgage loans originated by the Company
and reduce or eliminate premiums on loan sales. To the extent any of these
competitors significantly expand their activities in the Company's market, the
Company could be materially adversely affected. Fluctuations in interest rates
and general economic conditions may also affect the Company's competition.
During periods of rising rates, competitors that have locked in low borrowing
costs may have a competitive advantage. During periods of declining rates,
competitors may solicit the Company's customers to refinance their loans. See
"Risk Factors--Substantial Competition May Adversely Affect the Company's
Ability to Originate, Sell or Finance Mortgage Loans."
REGULATION
The consumer financing industry is a highly regulated industry. The
Company's business is subject to extensive and complex rules and regulations
of, and examinations by, various federal, state and local government
authorities. These rules impose obligations and restrictions on the Company's
loan origination, credit activities and secured transactions. In addition,
these rules limit the interest rates, finance charges and other fees the
Company may assess, mandate extensive disclosure to the Company's customers,
prohibit discrimination and impose multiple qualification and licensing
obligations on the Company. Failure to comply with these requirements may
result in, among other things, loss of approved status, demands for
indemnification or mortgage loan repurchases, certain rights of rescission for
mortgage loans, class action lawsuits, administrative enforcement actions and
civil and criminal liability. Management believes that the Company is in
compliance with these rules and regulations in all material respects.
The Company's loan origination activities are subject to the laws and
regulations in each of the states in which those activities are conducted. For
example, state usury laws limit the interest rates the Company can charge on
its loans. The Company's lending activities are also subject to various
federal laws, including the Truth in Lending Act, Homeownership and Equity
Protection Act of 1994, the Equal Credit Opportunity Act, the Fair Credit
Reporting Act, the Real Estate Settlement Procedures Act and the Home Mortgage
Disclosure Act.
The Company is subject to certain disclosure requirements under the Truth-
in-Lending Act ("TILA") and Regulation Z promulgated under TILA. TILA is
designed to provide consumers with uniform, understandable
54
<PAGE>
information with respect to the terms and conditions of loan and credit
transactions. TILA also guarantees consumers a three-day right to cancel
certain credit transactions, including loans of the type originated by the
Company. In addition, TILA gives consumers, among other things, a right to
rescind loan transactions in certain circumstances if the lender fails to
provide the requisite disclosure to the consumer.
The Company is also subject to the Homeownership and Equity Protection Act
of 1994 (the "High Cost Mortgage Act"), which makes certain amendments to
TILA. The High Cost Mortgage Act generally applies to consumer credit
transactions secured by the consumer's principal residence, other than
residential mortgage transactions, reverse mortgage transactions or
transactions under an open end credit plan, in which the loan has either (i)
total points and fees upon origination in excess of the greater of eight
percent of the loan amount or $400, or (ii) an annual percentage rate of more
than ten percent points higher than United States Treasury securities of
comparable maturity ("Covered Loans"). The High Cost Mortgage Act imposes
additional disclosure requirements on lenders originating Covered Loans. In
addition, it prohibits lenders from, among other things, originating Covered
Loans that are underwritten solely on the basis of the borrower's home equity
without regard to the borrower's ability to repay the loan and including
prepayment fee clauses in Covered Loans to borrowers with a debt-to-income
ratio in excess of 50% or Covered Loans used to refinance existing loans
originated by the same lender. The High Cost Mortgage Act also restricts,
among other things, certain balloon payments and negative amortization
features.
The Company is also required to comply with the Equal Credit Opportunity Act
of 1974, as amended ("ECOA") and Regulation B promulgated thereunder, the Fair
Credit Reporting Act, as amended, the Real Estate Settlement Procedures Act of
1975, as amended, and the Home Mortgage Disclosure Act of 1975, as amended.
ECOA prohibits creditors from discriminating against applicants on the basis
of race, color, sex, age, religion, national origin or marital status.
Regulation B restricts creditors from requesting certain types of information
from loan applicants. The Fair Credit Reporting Act, as amended, requires
lenders, among other things, to supply an applicant with certain information
if the lender denied the applicant credit. RESPA mandates certain disclosure
concerning settlement fees and charges and mortgage servicing transfer
practices. It also prohibits the payment or receipt of kickbacks or referral
fees in connection with the performance of settlement services. In addition,
beginning with loans originated in 1997, the Company must file an annual
report with HUD pursuant to the Home Mortgage Disclosure Act, which requires
the collection and reporting of statistical data concerning loan transactions.
In October 1997, HUD issued proposed regulations regarding the treatment and
disclosure of fees charged and collected by mortgage brokers providing certain
safe harbors for the payment of fees by lenders to mortgage brokers and
setting forth standards to determine whether payments to mortgage brokers
violate RESPA. Whether such regulations will be adopted and the form and
content of any final regulations is unknown.
In the course of its business, the Company may acquire properties securing
loans that are in default. There is a risk that hazardous or toxic waste could
be found on such properties. In such event, the Company could be held
responsible for the cost of cleaning up or removing such waste, and such cost
could exceed the value of the underlying properties.
Because the Company's business is highly regulated, the laws, rules and
regulations applicable to the Company are subject to regular modification and
change. There are currently proposed various laws, rules and regulations
which, if adopted, could impact the Company. There can be no assurance that
these proposed laws, rules and regulations, or other such laws, rules or
regulations, will not be adopted in the future which could make compliance
much more difficult or expensive, restrict the Company's ability to originate,
broker, purchase or sell loans, further limit or restrict the amount of
commissions, interest and other charges earned on loans originated, brokered,
purchased or sold by the Company, or otherwise adversely affect the business
or prospects of the Company.
EMPLOYEES
At December 31, 1997, the Company employed 332 persons. None of the
Company's employees is subject to a collective bargaining agreement. The
Company believes that its relations with its employees are satisfactory.
55
<PAGE>
PROPERTIES
The Company's executive and administrative offices are located at 1063 McGaw
Avenue, Irvine, California 92614, which consists of approximately 54,768
square feet. The lease on the premises expires on November 30, 2002 and the
current monthly rent is approximately $42,782.
The Company also leases space for its other offices. These facilities
aggregate approximately 64,752 square feet, with monthly aggregate base rental
of approximately $74,163. The terms of these leases vary as to duration and
rent escalation provisions. In general, the leases expire between February 28,
1998 and August 31, 2001 and provide for rent escalations tied to either
increases in the lessor's operating expenses or fluctuations in the consumer
price index in the relevant geographical area.
LEGAL PROCEEDINGS
The Company occasionally becomes involved in litigation arising from the
normal course of business. Management believes that any liability with respect
to pending legal actions, individually or in the aggregate, will not have a
material adverse effect on the Company's financial position or results of
operations.
56
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth the name, age and position with the Company
of each person who is a director or executive officer and of certain key
employees of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Evan R. Buckley............. 45 Chief Executive Officer, Secretary and Director
Kelly W. Monahan............ 41 President, Chief Financial Officer and Director
Al Lapena................... 38 Vice President, Operations
Gary Vander-Haeghen......... 43 Vice President, Sales
Keith C. Honig.............. 37 Director
Joseph R. Tomkinson......... 49 Director
Key Employees
Karen N. Neyman............. 44 Vice President, Compliance
David A. Littlefield........ 53 Chief Underwriter
David J. Rae................ 38 Chief Appraiser
</TABLE>
The Company intends to add one additional non-management director to the
Board of Directors within 60 days after the completion of this Offering.
EVAN R. BUCKLEY has been the Chief Executive Officer, Secretary and a
Director of the Company since its inception. Mr. Buckley was the President of
the Company from its inception to December 1997. Prior to founding the
Company, Mr. Buckley was a co-founder of Quality Mortgage USA, Inc. ("Quality
Mortgage"), a residential mortgage banker. From November 1991 to May 1995, Mr.
Buckley was the Vice President of Loan Production of Quality Mortgage, where
he was responsible for assembling and managing the loan production activities.
Mr. Buckley brings over 21 years of experience in real estate financing and
mortgage banking to the Company.
KELLY W. MONAHAN has been Chief Financial Officer of the Company since its
inception, its President since December 1997 and a Director of the Company
since October 1997. From the Company's inception through December 1997, Mr.
Monahan was the Company's Executive Vice President. From July 1992 to July
1995, Mr. Monahan served as Vice President and the Chief Financial Officer of
Quality Mortgage, where his responsibilities included the management of all
financial aspects of a national mortgage banker, including the issuance of
mortgage backed securities, secondary marketing, interest rate hedging, cash
management, financial reporting, and strategic planning. From February of 1989
to July 1992, Mr. Monahan was a practitioner for Monahan and Associates, an
accounting and consulting firm, and from 1987 to 1989, he was Equities
Controller at the Koll Company, a real estate development company. Mr. Monahan
is a certified public accountant.
AL LAPENA has been Vice President of Operations for the Company since
February 1998. From February 1997 to February 1998, Mr. Lapena was Director of
Secondary Marketing for the Company. From 1992 to 1997, Mr. Lapena was the
Vice-President of the Real Estate Finance Group of the Taxable Fixed Income
Division for Donaldson, Lufkin & Jenrette, Inc. where he was responsible for
the management of whole loan trades involving prime and subprime mortgage
loans purchased from sellers/originators with contractual relationships with
DLJ Mortgage Capital, Inc. From 1989 to 1992, he was an independent secondary
market mortgage consultant and from 1988 to 1989, he was Vice-
President/Operations Manager of the West Coast Region for U.S. Mortgage Co.,
Inc.
GARY VANDER-HAEGHEN has been the Vice-President of Sales of the Company
since September 1996. From November 1995 through September 1996, Mr. Vander-
Haeghen was with the Company in a non-executive capacity. From December 1991
to November 1995, Mr. Vander-Haeghen was a Branch Manager for Quality
Mortgage, where he opened and managed its San Diego branch. Mr. Vander-Haeghen
has been in the real estate financing industry for over 20 years.
57
<PAGE>
KEITH C. HONIG has been a director of the Company since February 1998.
Mr. Honig has been Associate Counsel of SunAmerica Inc., a financial services
company, since December 1994 and, in addition, its Director of Mortgage
Lending and Real Estate since May 1997. From October 1991 through December
1994, Mr. Honig was an associate at Gibson, Dunn & Crutcher, a law firm. Mr.
Honig is also a certified public accountant.
JOSEPH R. TOMKINSON has been a director of the Company since October 1997.
Mr. Tomkinson has been the Chairman of the Board and Chief Executive Officer
of Impac Commercial Holdings, Inc. (formerly IMH Commercial Holdings, Inc.)
(AMEX-ICH) ("ICH") and, Chairman of the Board and Chief Executive Officer of
Impac Commercial Capital Corporation (formerly Imperial Commercial Capital
Corporation) since February 1997, and Chairman and Chief Executive Officer of
RAI Advisors, LLC, the Manager of ICH, since August 1997. Mr. Tomkinson has
been the Vice Chairman of the Board and Chief Executive Officer of Impac
Mortgage Holdings, Inc. (formerly Imperial Credit Mortgage Holdings, Inc.)
(AMEX-IMH) and Chairman of the Board of Impac Funding Corporation (formerly
ICI Funding Corporation and Impac Warehouse Lending Group, Inc. (formerly
Imperial Warehouse Lending Group, Inc.) since August 1995. Mr. Tomkinson
served as President of Imperial Credit Industries, Inc. (Nasdaq-ICII) ("ICII")
from January 1992 to February 1996 and, from 1986 to January 1992, he was
President of Imperial Bank Mortgage, a subsidiary of Imperial Bank, one of the
companies that combined to become ICII in 1992. Mr. Tomkinson has been a
Director of ICII since December 1991. From 1984 to 1986, he was employed as
Executive Vice President of Loan Production for American Mortgage Network, a
privately owned mortgage banker.
KEY EMPLOYEES
KAREN N. NEYMAN has been Vice President of Compliance for the Company since
February 1998. Prior to that, since September 1995, Ms. Neyman was the
Compliance Officer and Director of Quality Assurance for the Company. From
March 1992 to September 1995, Ms. Neyman was Vice-President and Compliance
Officer for Quality Mortgage, where her responsibilities included monitoring
compliance with state and federal laws, monitoring adherence to internal
underwriting and appraisal guidelines and consumer protection laws, and
coordinating the preparation of reports to Management and the Board of
Directors. From 1991 to 1992, she was Vice-President and Compliance Officer of
TOPA Savings Bank.
DAVID A. LITTLEFIELD has been the Chief Underwriter of the Company since
September 1995. Mr. Littlefield is responsible for the coordination, training
and supervision of the underwriting staff of the Company's corporate and
branch offices. From August 1992 to August 1995, Mr. Littlefield was a Senior
Underwriter for Quality Mortgage with the responsibility of training and
supervising underwriters. From January 1992 to August 1992, he was a Senior
Lending Officer for Transamerica Equity, Inc., a mortgage lender. From 1990 to
1992, he was the Executive Vice-President of Tennecal Funding Corporation, a
mortgage lender, and from 1988 to 1990, he was the Vice-President of Mortgage
Banking for First Pacific Bank.
DAVID J. RAE has been the Chief Appraiser of the Company since August 1995.
Mr. Rae is responsible for the coordination and development of the Company
internal appraisers and outside third party review appraisers. From 1992 to
August 1995, Mr. Rae was the Assistant Chief Appraiser for Quality Mortgage,
where he was responsible for recruiting and training of management for the
western region staff review appraisers. From 1985 to 1992, he was Regional
Supervisor and Senior Staff Appraiser for Hawthorne Savings & Loan
Association.
The Company's Board of Directors currently has four members. One additional
non-management director will be added to the Board of Directors within 60 days
after the completion of this Offering. The Board of Directors is divided into
three classes. Class I Directors will serve until the annual meeting of
stockholders in 1998 and thereafter for the terms of three years until their
successors have been elected and qualified. Class II Directors will serve
until the annual meeting of stockholders in 1999 and thereafter for terms of
three years until their successors have been elected and qualified. Class III
Directors will serve until the annual meeting of stockholders in 2000 and
thereafter for terms of three years until their successors have been elected
and qualified. Evan R. Buckley is a Class I Director; Kelly W. Monahan and
Keith C. Honig are Class II Directors; and Joseph R. Tomkinson is and the
remaining to-be-added Board member will be a Class III Director.
58
<PAGE>
The Company plans to pay its non-employee directors an annual fee of $10,000
payable quarterly, $2,500 for each board meeting attended (up to a maximum of
four meetings) and to reimburse them for reasonable expenses incurred in
attending meetings. Concurrently with this Offering, the Company will grant
options to purchase 12,000 shares of Common Stock under its Stock Option Plan
to each of its non-employee directors at a per share exercise price equal to
the initial public offering price. See "--Stock Options." No family
relationships exist between any of the executive officers, directors or key
employees of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee
The Board of Directors will establish an audit committee (the "Audit
Committee"). The Audit Committee, among other things, will make
recommendations to the Board of Directors concerning the engagement of
independent public accountants; monitor and review the quality and activities
of the Company's internal audit function and those of its independent
accountants; and monitor the adequacy of the Company's operating and internal
controls as reported by management and the independent or internal auditors.
The members of the Audit Committee will be Evan R. Buckley (Chairman), Keith
C. Honig and at least one other non-management director.
Compensation Committee
The Board of Directors will establish a compensation committee (the
"Compensation Committee"). The Compensation Committee, among other things,
will review salaries, benefits and other compensation, including stock based
compensation under the Company's Stock Option Plan, of directors, officers and
other employees of the Company and make recommendations to the Board of
Directors. The members of the Compensation Committee will be Kelly W. Monahan
(Chairman), Joseph R. Tomkinson and at least one other non-management
director.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company does not currently have a compensation committee. Messrs.
Buckley and Monahan participated in deliberations concerning compensation of
executive officers during fiscal 1997. None of the executive officers of the
Company has served on the board of directors or on the compensation committee
of any other entity which had officers who served on the Company's Board of
Directors.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning the annual and long-
term compensation earned by the Company's Chief Executive Officer and each of
the two other executive officers whose annual salary and bonus during fiscal
1997 exceeded $100,000 (the "Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------
NAME AND ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION
------------------ -------- -------- ------------
<S> <C> <C> <C>
Evan R. Buckley............................ $155,769 $189,200 $ 325(1)
President, Chief Executive Officer and
Director(2)
Kelly W. Monahan........................... $116,584 $ 52,500 $ 583(1)
Executive Vice President and Chief
Financial Officer(2)
Gary Vander-Haeghen ....................... $119,800 $ 13,400 $1,900(1)
Vice President, Sales
</TABLE>
- --------
(1) Represents a contribution under the Company's 401(k) Plan.
(2) Mr. Monahan became President in December 1997.
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<PAGE>
Employment Agreements
The Company has entered into a two and three-year employment agreement with
Messrs. Buckley and Monahan, respectively, pursuant to which they would
receive an annual base salary of $250,000, and $200,000, respectively, plus an
annual bonus of up to 100% of base salary. Compensation would be subject to
increase as recommended by the Compensation Committee of the Board of
Directors of the Company. Pursuant to the employment agreements, if either
employee's employment is terminated by the Company without cause or by either
of Messrs. Buckley or Monahan for good reason (meaning the Company's uncured
breach of any material term of the agreement or any diminution of Messrs.
Buckley's or Monahan's powers, duties or authority), Messrs. Buckley or
Monahan, as the case may be, would be paid his annual salary, a semi-annual
bonus equal to 50% of his annual salary, $70,000 annually on a pro rata basis,
and would receive benefits, such as health insurance through the term of the
agreement.
STOCK OPTIONS
In October 1997, the Board of Directors and stockholders of the Company
adopted the 1997 Stock Option, Deferred Stock and Restricted Stock Plan (the
"Stock Option Plan"), which provides for the grant of qualified incentive
stock options ("ISOs") that meet the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), stock options not so
qualified ("NQSOs"), deferred stock, restricted stock, stock appreciation
rights and limited stock appreciation rights awards ("Awards"). The Stock
Option Plan may be administered by a committee of directors appointed by the
Board of Directors or by the Board (the "Administrator"). ISOs may be granted
to the officers and key employees of the Company, any of its subsidiaries or
parent corporation. The exercise price for any option granted under the Stock
Option Plan may not be less than 100% (or 110% in the case of ISOs granted to
an employee who is deemed to own in excess of 10% of the outstanding Common
Stock) of the fair market value of the shares of Common Stock at the time the
option is granted. The purpose of the Stock Option Plan is to provide a means
of performance-based compensation in order to attract and retain qualified
personnel and to provide an incentive to those whose job performance affects
the Company.
The Stock Option Plan authorizes the grant of options to purchase, and
awards of 700,000 shares of the Company's Common Stock. The number of shares
reserved for issuance under the Stock Option Plan is subject to anti-dilution
provisions for stock splits, stock dividends and similar events. If an option
granted under the Stock Option Plan expires or terminates, or an Award is
forfeited, the shares subject to any unexercised portion of such option or
Award will again become available for the issuance of further options or
Awards under the Stock Option Plan.
Under the Stock Option Plan, the Company may make loans available to stock
option holders, subject to the Administrator's approval, in connection with
the exercise of stock options granted under the Stock Option Plan. If shares
of Common Stock are pledged as collateral for such indebtedness, such shares
may be returned to the Company in satisfaction of such indebtedness. If so
returned, such shares shall again be available for issuance in connection with
future stock options and Awards under the Stock Option Plan.
Unless the Stock Option Plan is previously terminated by the Board of
Directors, no options or Awards may be granted under the Stock Option Plan ten
years after the effective date of the Stock Option Plan.
Options granted under the Stock Option Plan will become exercisable
according to the terms of the grant made by the Administrator. Awards will be
subject to the terms and restrictions of the award made by the Administrator.
The Administrator has discretionary authority to select participants from
among eligible persons and to determine at the time an option or Award is
granted and in the case of options, whether it is intended to be an ISO or a
NQSO, and when and in what increments shares covered by the option may be
purchased.
Under current law, ISOs may not be granted to any individual who is not also
an officer or employee of the Company, any subsidiary or parent corporation.
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<PAGE>
The exercise price of any option granted under the Stock Option Plan is
payable in full (i) in cash, (ii) by surrender of shares of the Company's
Common Stock already owned by the option holder having a market value equal to
the aggregate exercise price of all shares to be purchased including, in the
case of the exercise of NQSOs, restricted stock subject to an Award under the
Stock Option Plan, (iii) by cancellation of indebtedness owed by the Company
to the optionholder, (iv) by a full recourse promissory note executed by the
optionholder, (v) by requesting that the Company withhold whole shares of
Common Stock then issuable upon exercise of an option, (vi) by arrangement
with a broker which is acceptable to the Administrator, or (vii) by any
combination of the foregoing. The terms of any promissory note may be changed
from time to time by the Board of Directors to comply with applicable Internal
Revenue Service or Commission regulations or other relevant pronouncements.
The Board of Directors may from time to time revise or amend the Stock
Option Plan, and may suspend or discontinue it at any time. However, no such
revision or amendment may impair the rights of any participant under any
outstanding Award without such participant's consent or may, without
stockholder approval, increase the number of shares subject to the Stock
Option Plan, materially modify the class of participants eligible to receive
options or Awards under the Stock Option Plan, or extend the maximum option
term under the Stock Option Plan.
The Company has granted options to purchase 163,265 shares of Common stock
at a per share exercise price of $6.10, vesting 33 1/3% on each anniversary of
the date of grant. On the effective date of this Offering, the Company will
also grant options to purchase an additional 325,000 shares of Common Stock at
a per share exercise price equal to the initial public offering price, vesting
33 1/3% on each anniversary of the date of grant.
401(k) PLAN
The Company adopted a 401(k) savings plan (the "40l(k) Plan") effective on
July 1, 1996. Eligible employees may participate in the 401(k) Plan.
Participants in the 401(k) Plan may defer compensation in an amount not in
excess of the annual statutory limit ($10,000 in 1998). The Company may make
matching contributions in the amount determined annually by the Board of
Directors. All contributions are credited to separate accounts maintained in
trust for each participant and are invested, at the participant's direction,
in one or more of the investment funds made available under the 401(k) Plan.
Matching contributions if any, vest after three years. The 401(k) Plan is
intended to qualify under Section 401 and 501 of the Code, so that
contributions to the 401(k) Plan and income earned on the plan contributions
are not taxable to employees until withdrawn and so that the contributions
will be deductible by the Company when made.
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<PAGE>
CERTAIN TRANSACTIONS
OFFERING TO BENEFIT EXISTING STOCKHOLDERS
This Offering will provide substantial benefits to existing stockholders of
the Company. First, the assumed initial public offering price of $11.00 per
share is substantially higher than the $2.74 per share book value on the
shares held by existing stockholders. New investors will invest $34.9 million
or 99.98% of the total consideration paid for 58.76% of the shares of Common
Stock to be outstanding after the Offering. The shares of Common Stock owned
by existing stockholders would be valued at $24.5 million at the effective
time of the Offering at an assumed initial public offering price of $11.00 per
share; such shares had an aggregate book value of $6,096,989 at December 31,
1997. The shares owned by each of Evan R. Buckley, Kelly W. Monahan and Gary
Vander-Haeghen, the Company's Chief Executive Officer, President and Chief
Financial Officer and Vice President, Sales, respectively, and by all
directors and officers as a group would be valued at $17.0 million,
$2.3 million, $460,933 and $20.2 million, respectively, at the effective time
of the Offering at an assumed initial public offering price of $11.00 per
share; such shares had an aggregate book value of $4,243,125, $564,535,
$114,730 and $5,035,303, respectively, at December 31, 1997. Second, DLJ will
receive monies as a result of the Offering. As a selling stockholder, DLJ will
receive approximately $17.7 million of the net proceeds of this Offering at an
assumed initial public offering price of $11.00 per share; after such shares
had an aggregate book value of $4,855,011 at December 31, 1997.
ARRANGEMENTS WITH DLJ
In October 1995, the Company entered into a Stock Purchase Agreement with
DLJ pursuant to which DLJ purchased shares of the Company's Class A Common
Stock, Class B Common Stock, and Series A Preferred Stock. All shares of
Series A Preferred Stock were redeemed by the Company in November 1997 for
approximately $1.6 million; of this amount $800,000 was paid to DLJ and
$775,000 was paid to BNC Equity Investors, LLC ("BNC LLC") (see "--
Arrangements with BNC Equity Investors, LLC"). DLJ currently holds
1,773,196 shares of the Company's Common Stock, all of which is being sold
pursuant to this Offering. In October 1995, the Company, DLJ and Evan R.
Buckley, the Chief Executive Officer and a director of the Company, entered
into a shareholders agreement restricting certain actions by the shareholders.
This agreement will be terminated at or before the closing of the Offering.
The DLJ Facility provided a $50.0 million warehouse line of credit to the
Company, subject to periodic upward adjustments to facilitate increases in the
Company's loan production. The interest rate under the DLJ Facility was equal
to the federal funds rate plus 100 basis points subject to increase based on
the length of time loans are held by the Company, and DLJ received a security
interest on all loans, and other rights in connection therewith, originated by
the Company. Any loan not purchased by DLJ was not allowed to remain subject
to the warehouse line for more than nine months. The term of the DLJ Facility
was through August 31, 2000. The Company from August 1995 through October 1997
financed its origination of loans primarily with the proceeds of borrowings
under the DLJ Facility. As of December 31, 1997 and June 30, 1997 and 1996,
$74.4 million, $54.6 million and $42.7 million, respectively, was outstanding
under the DLJ Facility.
In October 1997, the Company and DLJ modified the DLJ Facility and the
terms under which DLJ would purchase mortgage loans from the Company (the
"Amended DLJ Facility"). The Amended DLJ Facility has similar terms to the DLJ
Facility with certain modifications. The Amended DLJ Facility provides for
advances of up to $150.0 million. The interest rate of the DLJ Facility will
remain effective until the closing of this Offering; thereafter, borrowings
under the Amended DLJ Facility will bear an interest rate of the federal funds
rate plus 50 basis points for 12 months after the closing of the Offering and,
thereafter, the federal funds rate plus 100 basis points. The Amended DLJ
Facility also modifies the termination date to two years after the closing of
the Offering. The Amended DLJ Facility further provides that as of the closing
of the Offering, DLJ will no longer have the exclusive right to purchase loans
from the Company. Furthermore, DLJ has agreed to provide the Company with up
to $5.0 million of financing for a term of one year for subordinated
"interest-only"
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<PAGE>
securities to the extent they are retained by the Company in connection with
any future securitizations of loans originated by the Company. Advances will
be made only to the extent the Company does not have sufficient cash, in
excess of reasonable reserves, to fund the retention of such securities.
The Amended DLJ Facility modifies the exclusivity of the relationship
between DLJ and the Company. In connection with the DLJ Facility, DLJ,
pursuant to the Master Loan Purchase Agreement, agreed to purchase, and the
Company agreed to sell to DLJ, all mortgage loans originated by the Company.
While over the course of this relationship, the Company and DLJ have agreed
that certain of such loans will not be so purchased, the Company has
historically sold substantially all of its originated loans to DLJ as whole
loans on a servicing released basis. Under the Amended DLJ Facility, this
exclusive contractual arrangement will be modified and the Company, as of the
consummation of the Offering, will have no obligation to sell any loans to
DLJ, and DLJ will have no obligation to purchase any loans from the Company.
DLJ has purchased, and it is contemplated that it may continue to purchase,
loans under the Master Loan Purchase Agreement with a view towards
securitization or other resale transactions in the secondary mortgage market.
Since substantially all of the loans historically purchased by DLJ under the
master repurchase agreement have been resold by DLJ to institutional
purchasers generally within 48 hours of the initial purchase from the Company,
DLJ has agreed to allow the Company to assist it in the marketing of loans so
resold by DLJ. Prior to the purchase of the loans by DLJ under the Master Loan
Purchase Agreement, the Company undertakes a process to identify the
institutional purchasers who will immediately buy the subject loans from DLJ.
This program utilizes a competitive bidding process typically involving two to
four potential purchasers (including Wall Street firms, financial institutions
and conduits, along with other institutional purchasers) who in most cases
have purchased similar resold loans from DLJ in the past. The successful
bidder is committed to a minimum quantity of loans at a determined price, and
is generally granted the option to purchase more than the minimum quantity at
a negotiated price. DLJ then agrees to pay the Company the determined price
minus 50 basis points, which represents DLJ's fees. As a result of this
agreement, management is able to directly control the sales process of its
loans in an effort to obtain more favorable pricing and other terms. A
successful bidder is not obligated to purchase loans other than those to which
its bid applies. For the six months ended December 31, 1997 and the years
ended June 30, 1997 and 1996, an aggregate of $1.7 million, $2.1 million and
$1.8 million, respectively, was paid to DLJ as fees pursuant to the Master
Loan Purchase Agreement. Under the Amended DLJ Facility, DLJ and the Company
have agreed that DLJ will receive no fees in connection with any such
purchases for the first 12 months after the closing of the Offering and 12.5
basis points for the second 12 months after the closing. During the six months
ended December 31, 1997 and the years ended June 30, 1997 and 1996, the
Company sold loans to DLJ having an aggregate principal balance of $331.4
million, $473.7 million and $153.2 million, respectively. See "Arrangements
with DLJ and the Recapitalization" and "Risk Factors--Discontinuance of
Exclusive Arrangements with DLJ could adversely affect the Company's Operating
Results."
ARRANGEMENTS WITH BNC EQUITY INVESTORS, LLC
BNC LLC is a California limited liability company which was formed to
acquire and hold an ownership interest in the Company. BNC LLC currently holds
329,896 shares of the Company's Common Stock. Mr. Buckley and Mr. Vander-
Haeghen own approximately 32.2% and 6.5%, respectively, of BNC LLC. BNC LLC's
manager is the Company.
OTHER TRANSACTIONS
In January 1996, Kelly W. Monahan purchased 206,185 shares of Class B Common
Stock for $1,000, and in July 1996 and September 1996, each of David J. Rae
and Al Lapena, and Gary Vander-Haeghen, respectively, purchased 20,619 shares
of Class B Common Stock for $1,375 and $1,375 and $100, respectively. All
shares of Class B Common Stock will convert into Common Stock prior to the
consummation of the Offering. Each person purchased their shares pursuant to
an Executive Stock Purchase and Repurchase Rights Agreement which set forth
certain transfer restrictions and repurchase rights by the Company which will
terminate upon the closing of the Offering.
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In August 1997, the Company loaned Evan R. Buckley an aggregate of $150,000
at an annual rate equal to the federal funds rate. The principal balance, with
interest, is due upon the sale of shares of Common Stock owned by Mr. Buckley.
As of December 31, 1997, no payments had been made on the loan.
In August 1997, the Company loaned Kelly W. Monahan $100,000 at an annual
rate equal to the federal funds rate. The note is secured by 41,237 shares of
the Common Stock of the Company held by Mr. Monahan. The principal balance,
with interest, is due upon the sale of such shares of Common Stock. As of
December 31, 1997, no payments had been made on the loan.
For the year ended June 30, 1997, the Company sold $5.8 million of mortgage
loans to Impac Funding Corporation (formerly ICI Funding Corporation), a
company of which Joseph R. Tomkinson, a director of the Company, is the Chief
Executive Officer, a director and a significant common stockholder.
INDEMNIFICATION AGREEMENTS
The Company will enter into indemnification agreements with its executive
officers and directors which require the Company to indemnify each in certain
circumstances, in the manner and to the fullest extent permitted by the
Delaware General Corporation Law.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of January 31, 1997, and as
adjusted to reflect the sale of 1,400,000 shares by the Company and 1,773,196
shares by the Selling Stockholder, by (i) each director of the Company, (ii)
each of the Named Executive Officers, (iii) each person known to the Company
to be beneficial owner of more than 5% of the Common Stock and (iv) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
COMMON STOCK
OWNED COMMON STOCK
PRIOR TO TO BE OWNED
OFFERING(1) AFTER THE OFFERING(2)
----------------- NUMBER ------------------------
NUMBER OF SHARES NUMBER OF
NAME OF SHARES PERCENT BEING OFFERED SHARES PERCENT
- ---- --------- ------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
DLJ Mortgage Capital,
Inc.(3)................ 1,773,196 44.3% 1,773,196 -- --
BNC Equity Investors,
LLC(4)................. 329,896 8.2% -- 329,896 6.1%
Evan R. Buckley(4)(5)... 1,549,717 38.7% -- 1,549,717 28.7%
Kelly W. Monahan(4)..... 206,185 5.2% -- 206,185 3.8%
Gary Vander-
Haeghen(4)(6).......... 41,903 1.1% -- 41,903 *
All Directors and
Officers as a Group (7
persons)............... 1,839,043 46.0% -- 1,839,043 34.1%
</TABLE>
- --------
*Less than 1%.
(1) The persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned.
(2) Certain officers and directors of the Company are being offered the
opportunity to purchase shares of Common Stock at the initial public
offering price. In addition, certain officers and directors of the Company
are being granted options to purchase shares of Common Stock pursuant to
the Company's Stock Option Plan. See "Management--Stock Options."
(3) DLJ Mortgage Capital, Inc. may be reached at 277 Park Avenue, New York,
New York 10172.
(4) Each of such persons may be reached through the Company at 1063 McGaw
Avenue, Irvine, California 92614.
(5) Included in this amount are 106,418 and 1,443,299 shares which Mr. Buckley
is deemed to beneficially own through his ownership interest in BNC LLC
and the Buckley Family Trust, respectively.
(6) Included in this amount are 21,284 shares which Mr. Vander-Haeghen is
deemed to beneficially own through his ownership interest in BNC LLC.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock and 5,000,000 shares of Preferred Stock. After giving effect to
this Offering, there will be 5,400,000 shares of Common Stock outstanding and
no shares of Preferred Stock outstanding.
COMMON STOCK
As of December 31, 1997, there were approximately 4,000,000 shares of Common
Stock outstanding held by approximately 13 stockholders of record. There will
be 5,400,000 shares of Common Stock outstanding after giving effect to the
sale of the shares of Common Stock offered hereby. The holders of Common Stock
are entitled to one vote per share on all matters to be voted on by
stockholders. Subject to preferences that may be applicable to any outstanding
Preferred Stock, if any, the holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared from time to time by the
Board of Directors in its discretion out of funds legally available therefor.
See "Dividend Policy." In the event of a liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled to share ratably
in all assets remaining after payment of liabilities, subject to prior rights
of Preferred Stock, if any, then outstanding. The Common Stock has no
preemptive or other subscription rights and there are no conversion rights or
redemption or sinking fund provisions with respect to such shares. All of the
outstanding shares of Common Stock are fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders of the Company, to issue up to 5,000,000 shares of Preferred
Stock in one or more series, and to fix the designations, rights, preferences,
privileges, qualifications and restrictions thereof including dividend rights,
conversion rights, voting rights, rights and terms of redemption, liquidation
preferences and sinking fund terms, any or all of which may be greater than
the rights of the Common Stock. The Board of Directors, without stockholder
approval, can issue Preferred Stock with voting, conversion and other rights
which could adversely affect the voting power and other rights of the holders
of Common Stock. Preferred Stock could thus be issued quickly with terms
calculated to delay or prevent a change in control of the Company or to make
removal of management more difficult. In certain circumstances, such issuance
could have the effect of decreasing the market price of the Common Stock. The
issuance of Preferred Stock may have the effect of delaying, deterring or
preventing a change in control of the Company without any further action by
the stockholders including, but not limited to, a tender offer to purchase
Common Stock at a premium over then current market prices. The Company has no
present plan to issue any shares of Preferred Stock.
REGISTRATION RIGHTS
The Representatives' Warrants provides certain rights with respect to the
registration under the Securities Act of up to 317,319 shares of Common Stock
issuable upon exercise thereof. The holders of the shares issuable upon
exercise of the Representatives' Warrants may require the Company to file a
registration statement under the Securities Act with respect to such shares.
In addition, if the Company registers any of its Common Stock either for its
own account or for the account of other securityholders, the holders of the
shares issuable upon exercise of the Representatives' Warrants are entitled to
include their shares of Common Stock in the registration.
CERTAIN PROVISIONS OF DELAWARE LAW
Prior to the consummation of this Offering, the Company intends to
reincorporate in Delaware. On the date of reincorporation the Company will
become subject to Section 203 of the Delaware General Corporation Law. In
general, Section 203 prevents an "interested stockholder" (defined generally
as a person owning 15% or more of the Company's outstanding voting stock) from
engaging in a "business combination" (as defined in Section 203) with the
Company for three years following the date that person became an interested
stockholder unless: (i) before that person became an interested stockholder,
the Board of Directors approved the transaction in which the interested
stockholder became an interested stockholder or approved the business
combination; (ii) upon
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<PAGE>
completion of the transaction that resulted in such person becoming an
interested stockholder, such person owned at least 85% of the voting stock of
the Company outstanding at the time the transaction commenced (excluding stock
held by directors who are also officers of the Company and by employee stock
plans that do not provide employees with the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer); or, (iii) on or following the date on which that person
became an interested stockholder, the business combination is approved by the
Company's Board of Directors and authorized at a meeting of stockholders by
the affirmative vote of the holders of at least 66 2/3% of the outstanding
voting stock of the Company not owned by the interested stockholder.
Under Section 203, these restrictions also do not apply to certain business
combinations proposed by an interested stockholder following the announcement
or notification of one of certain extraordinary transactions involving the
Company and a person who was not an interested stockholder during the previous
three years or who became an interested stockholder with the approval of a
majority of the Company's directors, if that extraordinary transaction is
approved or not opposed by a majority of the directors (but not less than one)
who were directors before any person became an interested stockholder in the
previous three years or who were recommended for election or elected to
succeed such directors by a majority of such directors then in office.
Pursuant to Section 162 of the Delaware General Corporation Law, the Board
of Directors of the Company can, without stockholder approval, issue shares of
capital stock, which may have the effect of delaying, deferring or preventing
a change of control of the Company. The Company has no plan or arrangement for
the issuance of any shares of capital stock other than in the ordinary course
pursuant to the Stock Option Plan.
CERTAIN CHARTER AND BYLAW PROVISIONS
The Company's Certificate of Incorporation will provide that no action which
has not been previously approved by the Board of Directors may be taken by the
stockholders except at an annual meeting or a special meeting of the
stockholders.
The Company's Bylaws will require stockholders to provide advance notice of
any stockholder nominations for directors and of any business to be brought
before any meeting of stockholders. Stockholders will not be entitled to
cumulative voting in connection with the election of directors. As a result, a
person or a group controlling the majority of shares of Common Stock could
elect all of the directors.
The Certificate of Incorporation of the Company contain certain provisions
permitted under the Delaware General Corporation Law relating to the liability
of directors. These provisions will eliminate the directors' liability for
monetary damages for a breach of fiduciary duty, except in certain
circumstances involving wrongful acts, including the breach of a director's
duty of loyalty or acts or omissions which involve intentional misconduct or a
knowing violation of a law. The Company's Certificate of Incorporation will
also contain provisions to indemnify its directors and officers to the fullest
extent permitted by the Delaware General Corporation Law.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is U.S. Stock
Transfer, Glendale, California.
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SHARES ELIGIBLE FOR FUTURE SALE
After this Offering, the Company will have outstanding 5,400,000 shares of
Common Stock. Of the outstanding shares, the 3,173,196 shares to be sold in
this Offering will be freely tradeable without restriction or further
registration under the Securities Act unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act.
The remaining 2,226,804 shares of Common Stock outstanding upon completion
of this Offering (assuming no exercise of the Underwriters' over-allotment
option) are "restricted securities" as that term is defined in Rule 144, all
of which will be eligible for sale under Rule 144 upon completion of this
Offering, subject to the lock-up described below. As described below, Rule 144
permits resales of restricted securities subject to certain restrictions.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who beneficially owned shares for at least one
year, including any person who may be deemed an "affiliate" of the Company (as
the term "affiliate" is defined under the Securities Act), would be entitled
to sell within any three month period a number of such shares that does not
exceed the greater of 1% of the shares of the Company's Common Stock then
outstanding 5,400,000 shares immediately after this Offering) or the average
weekly trading volume in the Company's Common Stock during the four calendar
weeks preceding the date on which notice of the sale is filed with the
Commission. A person who is not deemed to have been an "affiliate" of the
Company any time during the three months immediately preceding a sale and who
has beneficially owned shares for at least two years would be entitled to sell
such shares under Rule 144 without regard to the volume limitation described
above.
The Company and its officers and directors have agreed that they will not,
without the prior written consent of CIBC Oppenheimer Corp. (which consent may
be withheld in its sole discretion) and subject to certain limited exceptions,
directly or indirectly, sell, offer, contract or grant any option to sell,
make any short sale, pledge, transfer, establish an open "put equivalent
position" within the meaning of Rule 16a-1(h) under the Exchange Act, or
otherwise dispose of any shares of Common Stock, options or warrants to
acquire Common Stock, or securities exchangeable or exercisable for or
convertible into Common Stock currently owned either of record or beneficially
by them or announce the intention to do any of the foregoing, for a period
commencing on the date of this Prospectus and continuing to a date 180 days
after such date. CIBC Oppenheimer Corp. may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to
these lock up agreements. In addition, the Company has agreed that, for a
period of 180 days after the date of this Prospectus, it will not, without the
consent of CIBC Oppenheimer Corp. issue, offer, sell or grant options to
purchase or otherwise dispose of any equity securities or securities
convertible into or exchangeable for equity securities except for (i) the
issuance of shares of Common stock offered hereby and (ii) the grant of
options to purchase shares of Common Stock pursuant to the Stock Option Plan
and shares of Common Stock issued pursuant to the exercise of such options,
provided that such options shall not vest, or the Company shall obtain the
written consent of the grantee not to transfer such shares, until the end of
such 180-day period. See "Underwriting."
Holders of shares issuable upon exercise of the Representatives' Warrants
are entitled to certain registration rights. See "Description of Capital
Stock--Registration Rights."
The Stock Option Plan authorizes the grant of options to purchase, and
awards of 700,000 shares of the Company's Common Stock; of this amount,
options to acquire 163,265 shares were granted prior to this Offering at a per
share exercise price of $6.10. Options to purchase an additional 325,000
shares are expected to be granted to employees, officers and directors of the
Company on the effective date of this Offering. The Company intends to file a
Registration Statement on Form S-8 covering the shares that have been reserved
for issuance under the Stock Option Plan, thus permitting the resale of such
shares in the public market.
68
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") among the Company, the Selling Stockholder and
CIBC Oppenheimer Corp. and Piper Jaffray Inc., as the representatives (the
"Representatives") of the Underwriters of this Offering, the Company and the
Selling Stockholder have agreed to sell to the Underwriters, and the
Underwriters named below have severally agreed to purchase from the Company
and the Selling Stockholder, the number of shares of Common Stock set forth
opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITERS OF COMMON STOCK
- ------------ ----------------
<S> <C>
CIBC Oppenheimer Corp..........................................
Piper Jaffray Inc..............................................
---------
Total...................................................... 3,173,196
=========
</TABLE>
The Underwriters propose to offer the shares of Common Stock directly to the
public at the offering price set forth on the cover page of this Prospectus
and at such price less a concession of not in excess of $ per share to
certain securities dealers, of which a concession of not in excess of $ per
share may be reallowed to certain other securities dealers. After this
offering, the public offering price, allowances, concessions and other selling
terms may be changed by the Representatives.
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase shares of Common Stock are subject to certain conditions,
including that if any of the shares of Common Stock are purchased by the
Underwriters pursuant to the Underwriting Agreement, all such shares must be
so purchased.
The Company has granted an option to the Underwriters, exercisable within 30
days after the date of this Prospectus, to purchase from the Company up to an
aggregate of 475,979 additional shares of Common Stock to cover over-
allotments, if any, at the public offering price less the underwriting
discount set forth on the cover page of this Prospectus. If the Underwriters
exercise their over-allotment option to purchase any of such 475,979
additional shares of Common Stock, the Underwriters have severally agreed,
subject to certain conditions, to purchase approximately the same percentage
thereof as the number of shares to be purchased by each of them bears to the
3,173,196 shares of Common Stock offered hereby. The Company will be obligated
to sell shares of Common Stock to the Underwriters to the extent such over-
allotment option is exercised.
The Company has agreed to sell the Representatives' Warrants to the
Representatives for an aggregate consideration of $3,173. The Representatives'
Warrants evidence the right to purchase from the Company up to 317,319 shares
of Common Stock at an exercise price per share equal to 110% of the initial
public offering price per share. The Representatives' Warrants are exercisable
for a period of four years beginning one year from the date of this
Prospectus. In addition, the Company has granted certain rights to the holders
of the Representatives' Warrants to register the Common Stock underlying the
Representatives' Warrants under the Securities Act. See "Description of
Capital Stock--Registration Rights."
The Company's officers and directors have agreed that they will not, without
the prior written consent of CIBC Oppenheimer Corp., offer, sell, contract to
sell, make any short sale, pledge or otherwise dispose of any shares of Common
Stock or securities convertible into or exchangeable or exercisable for or any
other rights to purchase Common Stock until 180 days after the effective date
of this Offering. The Company has also agreed that it will not, without the
consent of CIBC Oppenheimer Corp., offer, sell, contract to sell, make any
short sale, pledge or otherwise dispose of any shares of Common Stock or
securities convertible into or exchangeable or exercisable for or other rights
to purchase Common Stock until 180 days after the effective date of this
69
<PAGE>
Offering (except for (i) shares issued pursuant to stock options outstanding
on the date hereof and (ii) stock options issued pursuant to employee benefit
or incentive compensation plans in effect on the date hereof). See
"Management--Stock Options" and "Shares Eligible for Future Sale."
The Company and the Selling Stockholder have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to certain payments that the Underwriters
may be required to make in respect thereof.
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined by
negotiations among the Company, the Selling Stockholder and the
Representatives. Among the factors to be considered in such negotiations are
the history of, and prospects for, the Company and the industry in which it
competes, an assessment of the Company management, its past and present
operations and financial performance, the prospects for further earnings of
the Company, the present state of the Company's development, the general
condition of the securities markets at the time of the Offering, the market
prices of and demand for publicly traded common stocks of comparable companies
in recent periods and other factors deemed relevant.
The Representatives do not intend to confirm sales of the Common Stock to
any account over which it exercises discretionary authority.
The Representatives, on behalf of the Underwriters, may engage in over-
allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act. Over-
allotment involves syndicate sales in excess of the offering size, which
creates a syndicated short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed
a specified maximum. Syndicate covering transactions involve purchases of
shares of Common Stock in the open market after the distribution has been
completed in order to cover syndicate short positions. Penalty bids permit the
Representatives to reclaim a selling concession from a syndicate member when
the shares of Common Stock originally sold by such syndicate member are
purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the Common Stock to be higher than it
would otherwise be in the absence of such transactions. These transactions may
be effected on the Nasdaq National Market or otherwise and, if commenced, may
be discontinued at any time.
70
<PAGE>
LEGAL MATTERS
Certain matters relating to this offering are being passed upon for the
Company and the Selling Stockholder by Freshman, Marantz, Orlanski, Cooper &
Klein, a law corporation, Beverly Hills, California. Certain legal matters
will be passed upon for the Underwriters by Gibson, Dunn & Crutcher LLP,
Orange County, California.
EXPERTS
The consolidated financial statements of BNC Mortgage, Inc. at June 30, 1996
and 1997, and for the years then ended, 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.
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-1 under the
Securities Act with the Commission with respect to the Common Stock offered
hereby. This Prospectus, which constitutes part of the Registration Statement,
omits certain of the information contained in the Registration Statement and
the exhibits thereto on file with the Commission pursuant to the Securities
Act and the rules and regulations of the Commission. Statements contained in
this Prospectus, such as the descriptions of the contents of any contract or
other document referred to, are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. A copy of the Registration Statement,
including the exhibits thereto, may be inspected without charge at the
Commission's principal office at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, and copies of all or any part thereof may be obtained
from the Commission upon the payment of certain fees prescribed by the
Commission. The Commission also maintains a World Wide Web site that contains
reports, proxy and information statements and other information regarding
registrants, such as the Company, that file electronically with the
Commission. The address of the site is http:/ / www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by an independent accounting firm and
quarterly reports containing unaudited financial information for the first
three quarters of each fiscal year.
71
<PAGE>
BNC MORTGAGE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors............................................ F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet................................................ F-3
Consolidated Statement of Income.......................................... F-4
Consolidated Statement of Stockholders' Equity............................ F-5
Consolidated Statement of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
BNC Mortgage, Inc.
We have audited the accompanying consolidated balance sheet of BNC Mortgage,
Inc. as of June 30, 1996 and 1997, and the related consolidated statements of
income, stockholders' equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of BNC
Mortgage, Inc. at June 30, 1996 and 1997, and the results of its operations
and its cash flows for the years then ended, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Orange County, California
August 2, 1997, except for Note 10,
as to which the date is November 26, 1997
F-2
<PAGE>
BNC MORTGAGE, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30,
----------------------- DECEMBER
1996 1997 31, 1997
----------- ----------- -----------
(UNAUDITED)
ASSETS
------
<S> <C> <C> <C>
Cash and cash equivalents....................... $ 2,452,000 $ 8,268,000 $ 7,142,000
Restricted cash................................. -- -- 614,000
Mortgage loans held for sale.................... 42,723,000 55,145,000 76,196,000
Property and equipment, net..................... 411,000 609,000 790,000
Deferred income taxes........................... 567,000 1,154,000 1,319,000
Notes receivable from officers.................. -- -- 250,000
Other assets.................................... 199,000 537,000 1,028,000
----------- ----------- -----------
Total assets................................ $46,352,000 $65,713,000 $87,339,000
=========== =========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Liabilities:
Warehouse line-of-credit...................... $42,723,000 $54,625,000 $74,369,000
Accounts payable and accrued liabilities...... 879,000 1,358,000 1,558,000
Income taxes payable.......................... 904,000 526,000 460,000
----------- ----------- -----------
Total liabilities........................... 44,506,000 56,509,000 76,387,000
----------- ----------- -----------
Commitments and contingencies (Note 8)
Stockholders' equity:
Series A preferred stock, $0.001 par value:
Authorized shares--1,000
Issued and outstanding shares--160 at
June 30, 1996 and 1997 and 0 at December
31, 1997................................... 1,575,000 1,575,000 --
Series A common stock, voting, no par value:
Authorized shares--2,886,598
Issued and outstanding shares--2,886,598 at
June 30, 1996 and 1997 and December 31,
1997....................................... -- -- --
Series B common stock, nonvoting, no par
value:
Authorized shares--1,237,113
Issued and outstanding shares--1,072,165 at
June 30, 1996, 1,237,113 at June 30, 1997
and 1,113,402 at December 31, 1997......... 2,000 7,000 6,000
Retained earnings............................. 269,000 7,622,000 10,946,000
----------- ----------- -----------
Total stockholders' equity................ 1,846,000 9,204,000 10,952,000
----------- ----------- ===========
Total liabilities and stockholders'
equity................................... $46,352,000 $65,713,000 $87,339,000
=========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
BNC MORTGAGE, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
---------------------- -----------------------
1996 1997 1996 1997
---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Gain on sale of mortgage
loans........................ $4,240,000 $21,855,000 $ 8,525,000 $13,543,000
Loan origination income....... 1,978,000 5,473,000 2,383,000 2,767,000
Interest income............... 1,960,000 5,182,000 2,215,000 3,447,000
Other income.................. 52,000 250,000 91,000 220,000
---------- ----------- ----------- -----------
Total revenues.............. 8,230,000 32,760,000 13,214,000 19,977,000
---------- ----------- ----------- -----------
Expenses:
Employees' salaries and
commissions.................. 3,624,000 11,052,000 4,396,000 8,326,000
General and administrative
expenses..................... 2,400,000 5,543,000 2,279,000 3,257,000
Interest expense.............. 1,452,000 3,693,000 1,595,000 2,471,000
---------- ----------- ----------- -----------
Total expenses.............. 7,476,000 20,288,000 8,270,000 14,054,000
---------- ----------- ----------- -----------
Income before income taxes...... 754,000 12,472,000 4,944,000 5,923,000
Income tax expense.............. 337,000 4,930,000 1,954,000 2,392,000
---------- ----------- ----------- -----------
Net income.................. $ 417,000 $ 7,542,000 $ 2,990,000 $ 3,531,000
========== =========== =========== ===========
Pro forma net income per share.. $ 0.14 $ 1.80 $ 0.71 $ 0.86
========== =========== =========== ===========
Shares used in computing pro
forma net income per share..... 2,905,860 4,200,958 4,200,360 4,117,102
========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
BNC MORTGAGE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A SERIES A SERIES B
PREFERRED STOCK COMMON STOCK COMMON STOCK TOTAL
------------------ ---------------- ------------------ RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT EARNINGS EQUITY
------ ----------- --------- ------ --------- ------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1995................... 25 $ 250,000 1,443,299 $-- -- $ -- $ (10,000) $ 240,000
Issuance of preferred
stock.................. 135 1,325,000 -- -- -- -- -- 1,325,000
Issuance of common
stock.................. -- -- 1,443,299 -- 1,072,165 2,000 -- 2,000
Cash dividends on
preferred stock ($863
per share)............. -- -- -- -- -- -- (138,000) (138,000)
Net income.............. -- -- -- -- -- -- 417,000 417,000
---- ----------- --------- ---- --------- ------- ----------- -----------
Balance at June 30,
1996................... 160 1,575,000 2,886,598 -- 1,072,165 2,000 269,000 1,846,000
Issuance of common
stock.................. -- -- -- -- 185,567 6,000 -- 6,000
Repurchase of common
shares................. -- -- -- -- (20,619) (1,000) -- (1,000)
Cash dividends on
preferred stock ($1,181
share)................. (189,000) (189,000)
Net income.............. -- -- -- -- -- -- 7,542,000 7,542,000
---- ----------- --------- ---- --------- ------- ----------- -----------
Balance at June 30,
1997................... 160 1,575,000 2,886,598 -- 1,237,113 7,000 7,622,000 9,204,000
Repurchase of common
shares (unaudited)..... -- -- -- -- (123,711) (1,000) (131,000) (132,000)
Repurchase of preferred
stock (unaudited)...... (160) (1,575,000) -- -- -- -- -- (1,575,000)
Cash dividends on
preferred stock ($295
per share) (unaudited). -- -- -- -- -- -- (76,000) (76,000)
Net income (unaudited).. -- -- -- -- -- -- 3,531,000 3,531,000
---- ----------- --------- ---- --------- ------- ----------- -----------
Balance at December 31,
1997 (unaudited)....... -- -- 2,886,598 -- 1,113,402 6,000 $10,946,000 $10,952,000
==== =========== ========= ==== ========= ======= =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
BNC MORTGAGE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER
YEAR ENDED JUNE 30, 31,
---------------------------- ----------------------------
1996 1997 1996 1997
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.............. $ 417,000 $ 7,542,000 $ 2,990,000 $ 3,531,000
Adjustment to reconcile
net income to net cash
used in operating
activities:
Depreciation.......... 77,000 250,000 107,000 183,000
Origination of
mortgage loans held
for sale............. (199,963,000) (532,621,000) (223,859,000) (354,572,000)
Sales and principal
repayments of
mortgage loans held
for sale............. 157,240,000 520,600,000 217,369,000 333,086,000
Deferred loan
orgination costs
(fees)............... -- (401,000) (286,000) 435,000
Change in other
assets............... (199,000) (338,000) (109,000) (491,000)
Change in notes
receivable from
officers............. -- -- -- (250,000)
Change in accounts
payable and accrued
liabilities.......... 879,000 479,000 38,000 200,000
Change in income taxes
payable.............. 904,000 (378,000) 342,000 (66,000)
Change in deferred
income taxes......... (567,000) (587,000) (364,000) (165,000)
------------- ------------- ------------- -------------
Net cash used in
operating activities... (41,212,000) (5,454,000) (3,772,000) (18,109,000)
------------- ------------- ------------- -------------
INVESTING ACTIVITIES
Capital expenditures.... (488,000) (448,000) (255,000) (364,000)
------------- ------------- ------------- -------------
Net cash used in
investing activities... (488,000) (448,000) (255,000) (364,000)
------------- ------------- ------------- -------------
FINANCING ACTIVITIES
Payment of dividends on
preferred stock........ (138,000) (189,000) (94,000) (76,000)
Repurchase of common
stock.................. -- (1,000) -- (132,000)
Repurchase of preferred
stock.................. -- -- -- (1,575,000)
Proceeds from the
issuance of preferred
stock.................. 1,325,000 -- -- --
Proceeds from issuance
of common stock........ 2,000 6,000 6,000 --
Increase in restricted
cash................... -- -- -- (614,000)
Change in warehouse
line-of-credit......... 42,723,000 11,902,000 5,829,000 19,744,000
------------- ------------- ------------- -------------
Net cash provided by
financing activities... 43,912,000 11,718,000 5,741,000 17,347,000
------------- ------------- ------------- -------------
Net increase (decrease)
in cash and cash
equivalents............ 2,212,000 5,816,000 1,714,000 (1,126,000)
Cash and cash
equivalents at
beginning of year...... 240,000 2,452,000 2,452,000 8,268,000
------------- ------------- ------------- -------------
Cash and cash
equivalents at end of
year................... $ 2,452,000 $ 8,268,000 $ 4,166,000 $ 7,142,000
============= ============= ============= =============
SUPPLEMENTAL CASH FLOWS
INFORMATION
Interest paid........... $ 1,452,000 $ 3,693,000 $ 1,595,000 $ 2,471,000
============= ============= ============= =============
Taxes paid.............. $ -- $ 5,351,000 $ 1,262,000 $ 2,623,000
============= ============= ============= =============
</TABLE>
See accompanying notes.
F-6
<PAGE>
BNC MORTGAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AT DECEMBER 31, 1997 AND FOR THE SIX-MONTH PERIODS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION
The Company is a specialty finance company engaged in the business of
originating, purchasing and selling non-conforming residential mortgage loans
secured by one-to-four family residences. The Company's loans are made to
owners of single family residence who typically use the loan proceeds for
purposes such as refinancing existing mortgages, debt consolidation, financing
of home improvements, education and other similar needs, and, to a lesser
extent, to purchase residences. The Company originates loans through its
wholesale division, which originates mortgage loans through approved
independent loan brokers, and through its retail division, which markets loans
directly to homeowners. The Company currently sells all of its mortgage loans
to institutional purchasers such as investment banks, real estate investment
trusts and other large mortgage bankers for cash through whole loan sales.
DLJ Mortgage Capital, Inc. (DLJ) owns approximately 44% of the Company's
outstanding stock. During the years ended June 30, 1996 and 1997, and the six
months ended December 31, 1997, the Company sold loans to DLJ having an
aggregate principal balance of $153.2 million, $473.7 million and $331.4
million, respectively, pursuant to a Master Loan Purchase Agreement. In
connection with such sales, the Company paid fees to DLJ of $1.8 million, $2.1
million and $1.7 million for the years ended June 30, 1996 and 1997, and the
six months ended December 31, 1997, respectively.
The Company was formed on May 2, 1995 and began originating mortgage loans
in October 1995. For the period May 2, 1995 through June 30, 1995, the Company
did not have any revenue and recorded start-up costs of $10,000. Financial
statements are not presented for the period May 2, 1995 through June 30, 1995
as the operations were not material.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts of
the Company and all of its wholly owned subsidiaries. All significant
intercompany transactions and balances are eliminated.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of the consolidated financial statements of the Company
requires management to make estimates and assumptions that affect reported
amounts. These estimates are based on information available as of the date of
the financial statements. Therefore, actual results could differ from those
estimates.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are stated at the lower of cost or aggregate
market value. Market value is determined by purchase commitments from
investors and prevailing market prices.
LOAN ORIGINATION FEES
Loan origination fees and certain direct loan origination costs for mortgage
loans held for sale are deferred until the related loans are sold.
GAIN ON SALE OF MORTGAGE LOANS HELD FOR SALE
Gains or losses on the sale of mortgage loans held for sale are recognized
at the date of sale.
CASH AND CASH EQUIVALENTS
The Company accounts for all highly liquid investments with a maturity of
three months or less when purchased as cash equivalents.
F-7
<PAGE>
BNC MORTGAGE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT DECEMBER 31, 1997 AND FOR THE SIX-MONTH PERIODS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
PROPERTY AND EQUIPMENT
Property and equipment, consisting primarily of computer hardware and
software, is stated at cost, net of accumulated depreciation and amortization.
Depreciation is provided using the straight line method over their estimated
useful lives of three years.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the FASB issued SFAS No. 129, Disclosure of Information
about Capital Structure. This Statement shall be effective for financial
statements for both interim and annual periods ending after December 15, 1997.
At this time the Company has determined that this Statement will have no
significant impact on the financial position or results of operations for
1998.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This Statement shall be
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes
is required. At this time the Company has determined that this Statement will
have no significant impact on the financial position or results of operations
for 1998.
INCOME TAXES
The Company accounts for income taxes using Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (FAS 109). FAS 109
requires the use of the asset and liability method of accounting for taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under FAS 109,
the effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
PRO FORMA NET INCOME PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants,
and convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share.
Pro forma net income per share is computed using the weighted average number
of shares of common stock outstanding. In accordance with Securities and
Exchange Commission Staff Accounting Bulletins, common equivalents shares
issued by the Company at prices substantially below the anticipated initial
public offering price during the period beginning one year prior to the
proposed public offering have been included in the calculation as if they were
outstanding for all periods presented (using the treasury stock method and the
estimated initial public offering price).
INTERIM RESULTS
The accompanying balance sheet as of December 31, 1997 and the statements of
income, stockholders' equity and cash flows for the six months ended December
31, 1996 and 1997 are unaudited. In the opinion of
F-8
<PAGE>
BNC MORTGAGE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT DECEMBER 31, 1997 AND FOR THE SIX-MONTH PERIODS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
management, the statements have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for the fair statement of the results of
interim periods.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values presented in Note 6 are estimates of the fair values of the
financial instruments at a specific point in time using available market
information and appropriate valuation methodologies. These estimates are
subjective in nature and involve uncertainties and significant judgment in the
interpretation of current market data. Therefore, the fair values presented
are not necessary indicative of amounts the Company could realize or settle
currently.
2. MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are collateralized by first trust deeds on
underlying real properties and are used as collateral for the Company's
borrowings. Approximately 32% of these properties are located in California.
Mortgage loans held for sale include net deferred origination fees and (costs)
of $3,000, $401,000 and $(810,000) at June 30, 1996 and 1997 and December 31,
1997, respectively.
Subsequent to June 30, 1997, substantially all of the mortgage loans were
sold to DLJ pursuant to the Master Mortgage Loan Purchase Agreement.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at June 30, 1996 and 1997:
<TABLE>
<CAPTION>
JUNE 30,
------------------- DECEMBER 31,
1996 1997 1997
-------- --------- ------------
<S> <C> <C> <C>
Office equipment........................... $406,000 $ 840,000 $1,047,000
Software................................... 82,000 96,000 253,000
-------- --------- ----------
488,000 936,000 1,300,000
Less accumulated depreciation.............. (77,000) (327,000) (510,000)
-------- --------- ----------
$411,000 $ 609,000 $ 790,000
======== ========= ==========
</TABLE>
4. INCOME TAXES
Income tax expense for the years ended June 30, 1996 and 1997 are summarized
as follows:
<TABLE>
<CAPTION>
1996 1997
--------- ----------
<S> <C> <C>
Current:
Federal............................................. $ 749,000 $4,119,000
State............................................... 155,000 1,398,000
--------- ----------
904,000 5,517,000
Deferred:
Federal............................................. (504,000) (603,000)
State............................................... (63,000) 16,000
--------- ----------
(567,000) (587,000)
--------- ----------
$ 337,000 $4,930,000
========= ==========
</TABLE>
F-9
<PAGE>
BNC MORTGAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT DECEMBER 31, 1997 AND FOR THE SIX-MONTH PERIODS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
The reconciliation of income tax expense at the U.S. federal statutory tax
rate to the income tax expense for the years ended June 30, 1996 and 1997 is
as follows:
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
Tax computed at the statutory rate...................... $272,000 $4,365,000
State income tax, net of federal income tax benefit..... 61,000 665,000
Other................................................... 4,000 (100,000)
-------- ----------
Income tax expense...................................... $337,000 $4,930,000
======== ==========
</TABLE>
The components of the Company's deferred income tax assets and liabilities
as of June 30, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
Deferred tax assets (liabilities):
Depreciation........................................ $ (7,000) $ (16,000)
State income taxes.................................. 32,000 479,000
Reserve for loan repurchases........................ 68,000 263,000
Accrued vacation.................................... 37,000 104,000
Litigation reserve.................................. 104,000 15,000
Mark-to-market adjustments.......................... 289,000 491,000
Deferred loan fees.................................. -- (186,000)
Other accrued liabilities........................... 44,000 4,000
-------- ----------
Total deferred tax assets............................. $567,000 $1,154,000
======== ==========
</TABLE>
5. WAREHOUSE LINE-OF-CREDIT
The Company has entered into a Master Mortgage Loan Purchase Agreement (the
Agreement) with DLJ whereby DLJ will purchase substantially all mortgage loans
originated by the Company.
The Agreement provides for borrowings up to $50,000,000 with interest
payable monthly at the Federal Funds rate plus 1% (7.25% at June 30, 1997). At
June 30, 1997, borrowings under this line of $54,625,000 are collateralized by
mortgage loans held for sale. The Agreement provides that the amount borrowed
under the facility can exceed the maximum amount available from time to time
as the Company's production increases so as to enable the Company to continue
to fund mortgage loans without delay or interruption. The line-of-credit
matures and is subject to renewal on August 31, 2000. The weighted average
interest rate for the fiscal year ended June 30, 1997 was 6.4%.
6. FINANCIAL INSTRUMENTS
The following describes the methods and assumptions used by the Company in
estimating fair value:
Mortgage loans held for sale--Fair value is estimated using the quoted
market prices for securities backed by similar types of loans and investor
commitments to purchase loans on a service-released basis.
Warehouse line-of-credit--Fair value is estimated using rates currently
available to the Company for debt with similar terms and remaining
maturities.
F-10
<PAGE>
BNC MORTGAGE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT DECEMBER 31, 1997 AND FOR THE SIX-MONTH PERIODS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
The carrying values and the estimated fair values of the Company's financial
instruments for which it is practical to calculate a fair value are as
follows:
<TABLE>
<CAPTION>
JUNE 30, 1996 JUNE 30, 1997 DECEMBER 31, 1997
----------------------- ----------------------- -----------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans held for
sale................... $42,723,000 $43,188,000 $55,145,000 $56,816,000 $76,196,000 $79,817,000
Warehouse line-of-
credit................. 42,723,000 42,723,000 54,625,000 54,625,000 74,369,000 74,369,000
</TABLE>
7. RELATED PARTY TRANSACTION
In July 1997, the Company loaned an aggregate of $250,000 to two officers of
the Company. The loans accrue interest monthly at the Federal Funds rate and
are due upon the sale of common stock. For the six months ended December 31,
1997 interest income of $7,000 was recorded related to these notes.
For the year ended June 30, 1997, the Company sold $5.8 million of mortgage
loans to ICI Funding Corporation, a company of which Joseph R. Tomkinson, a
director of the Company, is the Chief Executive Officer, a director and a
significant common stockholder.
8. COMMITMENTS AND CONTINGENCIES
Repurchase Obligation
The Company engages in bulk loan sales pursuant to agreements that generally
require the Company to repurchase or substitute loans in the event of a breach
of a representation or warranty made by the Company to the loan purchaser, any
misrepresentation during the mortgage loan origination process or, in some
cases, upon any fraud or first payment default on such mortgage loans. A
reserve for potential repurchases of $150,000, $503,000 and $503,000 at June
30, 1996 and 1997 and December 31, 1997, respectively, is included in accounts
payable and accrued liabilities.
Leases
The Company's executive and administrative offices are occupied under
various month to month leases with aggregate monthly payments of approximately
$23,000. In June 1997, the Company entered into a noncancelable operating
lease which expires in 2002. The lease agreement, requires the Company to
deliver a letter of credit to the lessor in the amount of $600,000. Cash
deposited into escrow to secure the letter of credit and accrued interest
thereon is classified as restricted cash on the balance sheet.
The Company's loan offices are occupied under noncancelable operating leases
which expire between October 31, 1997 and August 31, 2001 and provide for rent
escalations tied to either increases in the lessor's operating expenses or
fluctuations in the consumer price index in the relevant geographical area.
The minimum annual rental payments under these operating leases is as
follows:
<TABLE>
<S> <C>
1998........................................................... $ 836,000
1999........................................................... 1,033,000
2000........................................................... 916,000
2001........................................................... 832,000
2002........................................................... 832,000
Thereafter..................................................... 347,000
----------
$4,796,000
==========
</TABLE>
F-11
<PAGE>
BNC MORTGAGE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT DECEMBER 31, 1997 AND FOR THE SIX-MONTH PERIODS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
Rent expense for the years ended June 30, 1996 and 1997 and the six months
ended December 31, 1997 was $169,000, $597,000 and $482,000, respectively.
9. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Series A Preferred stock has a par value of $0.001 per share and has no
voting rights. The holders of the Preferred stock are entitled to receive, to
the extent of available funds from the operations of the Company, dividends on
a cumulative basis at a rate equal to $1,200 per annum per share.
No dividends or other distributions on any other class of stock may be made
until the Series A Preferred stock has been fully redeemed. The Company may at
its option, redeem the Series A Preferred stock at any time, in whole or in
part, at a price per share in cash equal to the liquidation value. The
liquidation value shall be the sum of (i) $10,000 per share plus (ii) all
accrued but unpaid dividends as of the date the liquidation value of such
share is determined.
COMMON STOCK
The relative rights, privileges and limitations of the Class A common stock
and the Class B common stock are identical except that the Class A common
stock has exclusive voting rights and the Class B common stock does not.
401(k) PLAN
The Company adopted a 401(k) savings plan (the "401(k) Plan") effective on
July 1, 1996. Eligible employees may participate in the 401(k) Plan.
Participants in the 401(k) Plan may defer compensation in an amount not in
excess of the annual statutory limit ($10,000 in 1998). The Company may make
matching contributions in the amount determined annually by the Board of
Directors. Matching contributions if any, vest after three years.
Contributions made for the year ended June 30, 1997 and the six months ended
December 31, 1997 were 39,000 and 24,000, respectively.
10. SUBSEQUENT EVENTS
Reorganization
In October 1997, the Board of Directors authorized management of the Company
to file a registration statement with the Securities and Exchange Commission
authorizing the issuance of 1,400,000 shares of common stock to the public
(the Offering). If the Offering is consummated under the terms presently
anticipated, the Company will reincorporate in Delaware. Further to the
reincorporation, the existing California corporation will be merged into a
newly formed Delaware corporation pursuant to which each outstanding share of
Class A and Class B common stock of the existing California corporation will
be exchanged for 4,123.71134 shares of $.001 par value common stock of the new
Delaware corporation and the certificate of incorporation of the new Delaware
corporation would authorize 50,000,000 shares of common stock and 5,000,000
shares of preferred stock. As a result of the reincorporation, there will be
no outstanding shares of Class A or Class B common stock at the consummation
of this Offering. In November 1997, the Company redeemed all shares of Series
A Preferred Stock for $1,575,000.
All common share and per share amounts included in the consolidated
financial statements have been retroactively adjusted to reflect the stock
split discussed above.
F-12
<PAGE>
BNC MORTGAGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT DECEMBER 31, 1997 AND FOR THE SIX-MONTH PERIODS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
Stock Option Plan
In October 1997, the Company adopted the 1997 Stock Option, Deferred Stock
and Restricted Stock Plan (the Stock Option Plan), which provides for a
committee of the Board of Directors (the Committee) to authorize the grant of
incentive stock options, nonqualified stock options, deferred stock,
restricted stock, stock appreciation rights and limited stock appreciation
rights awards to any officer or key employee of the Company. The Stock Option
Plan authorizes the grant of options to purchase, and awards of, an aggregate
of 700,000 shares. Incentive stock options are granted at a price not less
than 100% (110% in the case of incentive stock options granted to an employee
who is deemed to own in excess of 10% of the outstanding common stock) of the
fair market value of the shares of common stock at the time the option is
granted. Incentive stock options and nonqualified stock options become
exercisable according to the terms of the grant made by the Committee and
remain exercisable until their specified expiration date.
The Committee has authorized the issuance of nonqualified stock options to
an employee for the purchase of 163,265 shares of common stock at $6.10 per
share. The options vest ratably over a three year period beginning on the
effective date of the Offering. The difference between the fair market value
of the common stock and the exercise price of the options of $800,000 will be
recorded as compensation expense over the vesting period of the options
beginning with the reporting of the Company's first quarterly results of
operations subsequent to the effective date of the Offering.
The Company has elected to follow Accounting Principles Board No. 25,
Accounting for Stock Issued to Employees and related Interpretations in
accounting for its employee stock options and make the required pro forma
disclosures regarding net income and earnings per share required by FASB
Statement No. 123, Accounting for Stock-Based Compensation in the notes to
financial statements for its fiscal year ended June 30, 1998.
Warehouse Line of Credit
In October 1997, the Company renegotiated its warehouse line-of-credit with
DLJ, to increase the maximum borrowing to $150 million with interest payable
monthly at the Federal Funds rate plus 50 basis points during the first 12
months and 100 basis points during the second 12 months. The maturity of the
warehouse line-of-credit is two years following the closing date of the
initial public offering. Additionally, DLJ has agreed to provide the Company
with up to $5.0 million of financing for a term of one year for subordinated
"interest-only" securities to the extent they are retained by the Company in
connection with any future securitizations of loans originated by the Company.
F-13
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE IN THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, ANY OF THE UNDERWRITERS OR THE SELLING
STOCKHOLDER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF, ANY OFFER TO BUY ANY SHARES OF COMMON STOCK OTHER THAN THE
SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION
OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD
BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary ....................................................... 3
Risk Factors.............................................................. 8
Arrangements with DLJ and the Recapitalization............................ 19
Use of Proceeds........................................................... 21
Dividend Policy........................................................... 21
Dilution.................................................................. 22
Capitalization............................................................ 23
Selected Consolidated Financial Data...................................... 24
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 26
Business.................................................................. 33
Management................................................................ 57
Certain Transactions...................................................... 62
Principal and Selling Stockholders........................................ 65
Description of Capital Stock.............................................. 66
Shares Eligible for Future Sale........................................... 68
Underwriting.............................................................. 69
Legal Matters............................................................. 71
Experts................................................................... 71
Available Information..................................................... 71
Index to Financial Statements............................................. F-1
</TABLE>
------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,173,196 SHARES
[LOGO of BNC MORTGAGE, INC.]
BNC MORTGAGE, INC.
COMMON STOCK
---------------
PROSPECTUS
---------------
CIBC OPPENHEIMER
PIPER JAFFRAY INC.
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The Registrant estimates that expenses in connection with the offering
described in this registration statement will be as follows:
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
---------
<S> <C>
Securities and Exchange Commission registration fee............... $ 14,154
NASD filing fee................................................... 5,298
Nasdaq National Market Listing fee................................ 50,000
Printing expenses................................................. 200,000
Accounting fees and expenses...................................... 200,000
Legal fees and expenses........................................... 300,000
Fees and expenses (including legal fees) for qualifications under
state securities laws............................................ 50,000
Transfer agent's fees and expenses................................ 10,000
Miscellaneous..................................................... 20,548
--------
Total......................................................... $850,000*
========
</TABLE>
- --------
* Of this amount, $465,000 is payable by the Selling Stockholder.
All amounts except the Securities and Exchange Commission registration fee
and the NASD filing fee are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits the Registrant
to, and Article 8 of the Certificate of Incorporation provides that the
Registrant may, indemnify each person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was, or has agreed to become, a director or
officer of the Registrant, or is or was servicing, or has agreed to serve, at
the request of the Registrant, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust
or other enterprise (including any employee benefit plan), or by reason of any
action alleged to have been taken or omitted in such capacity, against all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him or on his behalf in
connection with such action, suit or proceeding and any appeal therefrom. The
Company will enter into indemnification agreements with its executive officers
and directors which require the Company to indemnify each in certain
circumstances, in the manner and to the fullest extent permitted by the
Delaware General Corporation Law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years the Registrant issued unregistered securities in
the following transactions (shares and dollar amounts have not been adjusted
to reflect the reincorporation of the Registrant in Delaware to be effected by
the Registrant prior to the consummation of this Offering whereby each
outstanding share of the Registrant's Class A and Class B Common Stock will be
exchanged for 4,123.71134 shares of $.001 par value Common Stock):
(a) In October 1995, in connection with its organization, the Registrant
issued 350 shares of its Class A Common Stock and 25 shares of its Series A
Preferred Stock to Evan R. Buckley for an aggregate consideration of
$250,000.
II-1
<PAGE>
(b) In October 1995, in connection with its organization, the Registrant
issued 350 shares of its Class A Common Stock, 80 shares of its Class B
Common Stock and 80 shares of its Series A Preferred Stock to DLJ Mortgage
Capital Inc. for an aggregate consideration of $800,004.
(c) In October 1995, in connection with its organization, the Registrant
issued 55 shares of Class B Common Stock and 55 shares of its Series A
Preferred Stock to BNC Equity Investors, LLC for an aggregate consideration
of $250,000.
(d) In January 1996, the Registrant issued 80 shares of its Class B
Common Stock to two of its employees for an aggregate consideration of
$1,600.
(e) In February 1996, the Registrant issued 20 shares of its Class B
Common Stock to one of its employees for an aggregate consideration of
$400.
(f) In June 1996, the Registrant issued 20 shares of its Class B Common
Stock to four of its employees for an aggregate consideration of $400.
(g) In July 1996, the Registrant issued 20 shares of its Class B Common
Stock to four of its employees for an aggregate consideration of $5,500.
(h) In September 1996, the Registrant issued 5 shares of its Class B
Common Stock to one of its employees for an aggregate consideration of
$100.
The aforementioned issuances of stock were deemed to be exempt from
registration under the Securities Act in reliance in Section 4(2) promulgated
under the Securities Act as transactions by an issuer not involving a public
offering or on Rule 701 promulgated under the Securities Act. In addition, the
recipients of securities in each such transaction represented their intentions
to acquire the securities for investment only and not with a view to or for
sale in connection with any distribution thereof and appropriate legends were
affixed to the share certificates issued in such transactions. All recipients
had adequate access, through their relationships with the Company, to
information about the Company.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
1.1* Form of Underwriting Agreement
1.2* Form of Representatives' Warrant
2.1 Agreement of Reorganization and Plan of Merger
3.1 Certificate of Incorporation of BNC Mortgage, Inc., a Delaware
corporation
3.2 Bylaws of BNC Mortgage, Inc., a Delaware corporation
4.1* Specimen Stock Certificate
5.1* Opinion of Freshman, Marantz, Orlanski, Cooper & Klein
10.1 Office Lease, as amended, between the Registrant and Shuwa
Investments Corporation dated June 15, 1997
10.2* 1997 Stock Option Plan and Form of Agreements
10.3 Form of Indemnification Agreement
10.4 Employment Agreement between the Registrant and Evan R. Buckley
10.5 Employment Agreement between the Registrant and Kelly W. Monahan
10.6(a)* Letter Agreement, dated October 22, 1997, from DLJ Mortgage
Capital, Inc. to the Registrant.
(b)* Form of Whole Loan Financing Facility between the Registrant and
DLJ Mortgage Capital, Inc.
II-2
<PAGE>
(c)* Form of Promissory Note, by the Registrant made in favor of DLJ
Mortgage Capital, Inc.
(d)* Form of Pledge Agreement, between the Registrant and DLJ Mortgage
Capital, Inc.
(e)* Whole Loan Financing Program Tri-Party Custody Agreement, dated
September 26, 1995, among the Registrant, DLJ Mortgage Capital,
Inc. and Bankers Trust Company
(f)* Form of Master Mortgage Loan Purchase Agreement, between the
Registrant and DLJ Mortgage Capital, Inc.
11.1 Statement re: Computation of Per Share Earnings
21.1+ Subsidiaries
23.1 Consent of Ernst & Young LLP
23.2* Consent of Freshman, Marantz, Orlanski, Cooper & Klein (contained in
Exhibit 5.1)
24.1 Power of Attorney (included on signature page of Registration
Statement)
27* Financial Data Schedule
- --------
+ Previously filed
* To be filed by amendment
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 of 1933 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
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 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 of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the 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 is 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-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SANTA ANA, STATE OF
CALIFORNIA ON FEBRUARY 2, 1998.
By /s/ Evan R. Buckley
_____________________________________
Evan R. Buckley
Chief Executive Officer (Principal
Executive Officer)
POWER OF ATTORNEY
We, the undersigned directors and officers of BNC Mortgage, Inc. do hereby
constitute and appoint Evan R. Buckley and Kelly W. Monahan, or either of
them, our true and lawful attorneys and agents, to do any and all acts and
things in our names in the capacities indicated below, which said attorneys
and agents, or either of them, may deem necessary or advisable to enable said
corporation to comply with the Securities Act of 1933, and as amended, and any
rules, regulations, and requirements of the Securities and Exchange
Commission, in connection with this Registration Statement, including
specifically, but without limitation, power and authority to sign for us or
any of us in our names and in the capacities indicated below, any and all
amendments (including post-effective amendment) to this Registration
Statement, or any related registration statement that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended;
and we do hereby ratify and confirm all that the said attorneys and agents, or
either of them, shall do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITY INDICATED ON FEBRUARY 2, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Evan R. Buckley Chief Executive Officer
____________________________________ and Director (Principal
Evan R. Buckley Executive Officer)
/s/ Kelly W. Monahan President, Chief Financial
____________________________________ Officer and Director
Kelly W. Monahan (Principal Accounting
Officer)
/s/ Keith C. Honig Director
____________________________________
Keith C. Honig
/s/ Joseph R. Tomkinson Director
____________________________________
Joseph R. Tomkinson
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT DESCRIPTION PAGE
------- -------------------- ------------
<C> <S> <C>
1.1* Form of Underwriting Agreement
1.2* Form of Representatives' Warrant
2.1 Agreement of Reorganization and Plan of Merger
3.1 Certificate of Incorporation of BNC Mortgage, Inc.,
a Delaware corporation
3.2 Bylaws of BNC Mortgage, Inc., a Delaware corporation
4.1* Specimen Stock Certificate
5.1* Opinion of Freshman, Marantz, Orlanski, Cooper &
Klein
10.1 Office Lease, as amended, between the Registrant and
Shuwa Investments Corporation dated June 15, 1997
10.2* 1997 Stock Option Plan and Form of Agreements
10.3 Form of Indemnification Agreement
10.4 Employment Agreement between the Registrant and Evan
R. Buckley
10.5 Employment Agreement between the Registrant and
Kelly W. Monahan
10.6(a)* Letter Agreement, dated October 22, 1997, from DLJ
Mortgage Capital, Inc. to the Registrant.
(b)* Form of Whole Loan Financing Facility between the
Registrant and DLJ Mortgage Capital, Inc.
(c)* Form of Promissory Note, by the Registrant made in
favor of DLJ Mortgage Capital, Inc.
(d)* Form of Pledge Agreement, between the Registrant and
DLJ Mortgage Capital, Inc.
(e)* Whole Loan Financing Program Tri-Party Custody
Agreement, dated September 26, 1995, among the
Registrant, DLJ Mortgage Capital, Inc. and Bankers
Trust Company
(f)* Form of Master Mortgage Loan Purchase Agreement,
between the Registrant and DLJ Mortgage Capital,
Inc.
11.1 Statement re: Computation of Per Share Earnings
21.1+ Subsidiaries
23.1 Consent of Ernst & Young LLP
23.2* Consent of Freshman, Marantz, Orlanski, Cooper &
Klein (contained in Exhibit 5.1)
24.1 Power of Attorney (included on signature page of
Registration Statement)
27* Financial Data Schedule
</TABLE>
- --------
+ Previously filed
* To be filed by amendment
<PAGE>
EXHIBIT 2.1
AGREEMENT OF REORGANIZATION
AND PLAN OF MERGER
This Agreement of Reorganization and Plan of Merger (this "Agreement")
dated this 2nd day of February, 1998, by and between BNC Mortgage Inc., a
Delaware corporation ("BNC Delaware") and BNC Mortgage, Inc., a California
corporation ("BNC Cal"), is made with respect to the following facts:
A. BNC Delaware and BNC Cal desire that BNC Cal merge with and into
BNC Delaware, pursuant to Delaware law, with BNC Delaware being the
surviving entity (the "Merger"), as set forth in the Registration Statement
of BNC Delaware on Form S-1, No. 333-38651, including all amendments
thereto (the "Registration Statement"), filed with the Securities and
Exchange Commission (the "SEC") pursuant to the Securities Act of 1933, as
amended (the "Act").
B. Section 252 of the General Corporation Law of the State of
Delaware, 8 Del.C. Section 101, et seq. (the "DGCL"), authorizes the merger
of a Delaware corporation and a foreign corporation. Sections 1100 and
1108 of the California Corporations Code authorizes the merger of
California corporations into foreign corporations.
C. BNC Delaware's Certificate of Incorporation and Bylaws permit, and
resolutions adopted by BNC Delaware's Board of Directors and BNC Cal's
Board of Directors authorize this Agreement and the consummation of the
Merger called for herein.
NOW THEREFORE, based upon the foregoing, and in consideration of the mutual
promises and covenants herein, the parties to this Agreement agree as follows:
ARTICLE I - THE MERGER
1.01 The Merger; Surviving Corporation. Subject to the terms and
---------------------------------
conditions set forth in this Agreement, at the Effective Time (as defined in
Section 1.02 below), BNC Cal shall be merged with and into BNC Delaware,
pursuant to Section 252 of the DGCL, and the separate existence of BNC Cal shall
cease. BNC Delaware shall be the surviving entity (the "Surviving Corporation")
and shall continue to be governed by the DGCL.
1.02 Effective Time. In accordance with Sections 103 and 252 of the DGCL,
--------------
the Merger shall become effective (the "Effective Time") upon the filing of a
Certificate of Merger (the "Certificate of Merger") with the Secretary of State
of the State of Delaware, or at such later time, not later than five business
days thereafter, as may be specified in the Certificate of Merger. All
<PAGE>
other filings or recordings required by Delaware and California law in
connection with the Merger shall also be made.
1.03 Effect of the Merger. The Merger shall have the effects set forth in
--------------------
section 259 and 260 of the DGCL.
ARTICLE II - THE SURVIVING CORPORATION
2.01 Name. The name of the surviving corporation shall be BNC Mortgage,
----
Inc. (sometimes referred to as the "Surviving Corporation").
2.02 Certificate of Incorporation and Bylaws. The Certificate of
---------------------------------------
Incorporation and Bylaws of the BNC Delaware as in effect immediately prior to
the Effective Time shall be the Certificate of Incorporation and Bylaws of
the Surviving Corporation unless and until amended in accordance with their
terms and applicable law.
2.03 Officers and Directors. The officers of BNC Delaware immediately
----------------------
prior to the Effective Time shall continue as officers of the Surviving
Corporation and remain officers until their successors are duly appointed or
their prior resignation, removal or death. The directors of BNC Delaware
immediately prior to the Effective Time shall continue as directors of the
Surviving Corporation and shall remain directors until their successors are duly
elected and qualified or their prior resignation, removal or death.
ARTICLE III - THE DISAPPEARING CORPORATION
3.01 Conversion of Stock BNC Cal. At the Effective Time, each issued and
---------------------------
outstanding share of both Class A and Class B Common stock of BNC Cal shall be
converted into 4,123.71134 shares of BNC Delaware's Common Stock, $.001 par
value per share (the "Common Stock").
3.02 Issuance of Shares.
------------------
(i) BNC Delaware shall designate an exchange agent (the "Exchange
Agent") to act as such in connection with the issuance of certificates
representing Common Stock pursuant to this Agreement.
(ii) As soon as practicable after the Effective Time, BNC Delaware
shall cause the Exchange Agent to distribute to each owner of BNC Cal
certificates representing the number of shares of Common Stock to which such
owner is entitled pursuant to section 3.01 of this Agreement.
3.03 Characterization of Merger. For federal income tax purposes, the
--------------------------
conversion of interests in BNC Cal pursuant to this Article III shall be deemed
a reorganization and mere change in place of organization pursuant to section
368 (a)(1) (F) of the Internal Revenue Code of 1986.
-2-
<PAGE>
ARTICLE IV - TRANSFER AND CONVEYANCE OF ASSETS
AND ASSUMPTION OF LIABILITIES
4.01 Transfer, Conveyance and Assumption. At the Effective Time, BNC
-----------------------------------
Delaware shall continue in existence as the Surviving Corporation, and without
further action on the part of BNC Cal or BNC Delaware, succeed to and possess
all the rights, privileges and powers of BNC Cal, and all the assets and
property of whatever kind and character of BNC Cal shall vest in BNC Delaware
without further act or deed. Thereafter, BNC Delaware, as the Surviving
Corporation, shall be liable for all of the liabilities and obligations of BNC
Cal, and any claim or judgment against BNC Cal may be enforced against BNC
Delaware, as the Surviving Corporation, in accordance with Section 259 of the
DGCL.
4.02 Further Assurances. If at any time BNC Delaware shall consider or be
------------------
advised that any further assignment, conveyance or assurance is necessary or
advisable to vest, perfect or confirm of record in it the title to any property
or right of BNC Cal, or otherwise to carry out the provisions hereof, members of
BNC Cal as of the Effective Time shall execute and deliver any and all proper
deeds, assignments and assurances, and do all things necessary and proper to
vest, perfect or convey title to such property or right in BNC Delaware and
otherwise to carry out the provisions hereof.
ARTICLE V - REPRESENTATIONS AND WARRANTIES
OF BNC CAL
BNC Cal represents and warrants to BNC Delaware as follows:
5.01 Validity of Actions. BNC Cal (i) is a corporation duly formed,
-------------------
validly existing and in good standing under the laws of the State of California,
(ii) has full power and authority to enter into this Agreement and to carry out
all acts contemplated by it. This Agreement has been duly executed and
delivered on behalf of BNC Cal. BNC Cal has received all necessary
authorization to enter into this Agreement, and this Agreement is a legal,
valid and binding obligation of BNC Cal, enforceable against BNC Cal in
accordance with its terms. The execution and delivery of this Agreement and
consummation of the transactions contemplated by it will not violate any
provision of BNC Cal's Articles of Incorporation or By-laws, nor violate,
conflict with or result in any breach of any of the terms, provisions or
conditions of, or constitute a default or cause acceleration of, any
indebtedness under any agreement or instrument to which BNC Cal is a party or by
which it or its assets may be bound, or cause a breach of any applicable Federal
or state law or governmental regulation, or any applicable order, judgment,
writ, award, injunction or decree of any court or governmental instrumentality.
ARTICLE VI - REPRESENTATIONS AND WARRANTIES
OF BNC DELAWARE
BNC Delaware represents and warrants to BNC Cal as follows:
-3-
<PAGE>
6.01. Validity of Actions. BNC Delaware (i) is duly organized, validly
-------------------
existing and in good standing under the laws of the State of Delaware, and (ii)
has full power and authority to enter into this Agreement and to carry out all
acts contemplated by it. This Agreement has been duly executed and delivered on
behalf of BNC Delaware, and BNC Delaware has received all necessary
authorization. This Agreement is a legal, valid and binding obligation of BNC
Delaware, enforceable against BNC Delaware in accordance with its terms. The
execution and delivery of this Agreement and consummation of the transactions
contemplated by it will not violate any provision of the Certificate of
Incorporation or bylaws of BNC Delaware nor violate, conflict with or result in
any breach of any of the terms, provisions or conditions of, or constitute a
default or cause acceleration of, any indebtedness under any agreement or
instrument to which BNC Delaware is a party or by which it or its assets may be
bound, or cause a breach of any applicable federal or state law or regulation,
or any applicable order, judgment, writ, award, injunction or decree of any
court or governmental instrumentality.
6.02. Capital Stock of BNC Delaware. The authorized capital stock of BNC
-----------------------------
Delaware consists of Fifty Million (50,000,000) shares of Common Stock, and Five
Million (5,000,000) shares of Preferred Stock. The shares of Common Stock of
BNC Delaware to be delivered to the shareholders of BNC Cal pursuant to this
Agreement have been duly and validly authorized, and when issued and delivered,
will be fully paid and nonassessable.
ARTICLE VII - FURTHER ACTIONS
7.01 Additional Documents. At the request of any party, each party will
--------------------
execute and deliver any additional documents and perform in good faith such acts
as reasonably may be required in order to consummate the transactions
contemplated by this Agreement.
ARTICLE VIII - CONDITIONS TO THE MERGER
The obligation of BNC Delaware, on the one hand, and of BNC Cal on the
other hand, to consummate the Merger shall be subject to compliance with or
satisfaction of the following conditions:
8.01 Bring Down. The representations and warranties set forth in this
----------
Agreement shall be true and correct in all material respects at and as of the
Effective Time as if then made (except for those representations and warranties
made as of a given date, which shall continue to be true and correct as of such
given date) as of the Effective Time.
8.02 No Statute, Rule or Regulation Affecting. At the Effective Time,
----------------------------------------
there shall be no statute, or regulation enacted or issued by the United States
or any State, or by a court, which prohibits or challenges the consummation of
the Merger.
8.03 Effectiveness of Registration Statement. Prior to the Effective
---------------------------------------
Time, the Registration Statement shall have been declared effective, no stop
order suspending the effectiveness of the
-4-
<PAGE>
Registration Statement shall have been issued, no proceedings for such purpose
shall have been initiated, and all necessary approvals under state securities or
blue sky laws shall have been received.
8.04 Satisfaction of Conditions. All other conditions to the Merger set
--------------------------
forth herein shall have been satisfied.
ARTICLE IX - TERMINATION; AMENDMENT; WAIVER
9.01 Termination. This Agreement and the transactions contemplated hereby
-----------
may be terminated at any time prior to the filing of the Certificate of Merger
with the Secretary of State of the State of Delaware, (i) by mutual consent of
the Board of Directors of BNC Delaware and the Board of Directors of BNC Cal, or
(ii) by action of the Board of Directors of BNC Delaware or of the Board of
Directors of BNC Cal in the event that the Merger is not consummated prior to
December 31, 1998, or such later date as the parties shall mutually agree in
writing.
9.02 Amendment. The parties hereto may, by written agreement, amend this
---------
Agreement at any time prior to the filing of the Certificate of Merger with the
Secretary of State of the State of Delaware, such amendment to be approved by
the Board of Directors of BNC Cal agreeing to such amendment with BNC Delaware.
9.03 Waiver. At any time prior to the Effective Time, any party to this
------
Agreement may extend the time for the performance of any of the obligations or
other acts of any other party hereto, or waive compliance with any of the
agreements of any other party or with any condition to the obligations
hereunder, in each case only to the extent that such obligations, agreements and
conditions are intended for its benefit.
ARTICLE X - MISCELLANEOUS
10.01 Expenses. If the Merger becomes effective, all of the expenses
--------
incurred in connection with the Merger shall be paid by BNC Delaware.
10.02 Notice. Except as otherwise specifically provided, any notices to
------
be given hereunder shall be in writing and shall be deemed given upon personal
delivery or upon mailing thereof, if mailed by certified mail, return receipt
requested, to the following addresses (or to such other address or addresses
shall be specified in any notice given):
In the case of BNC Delaware:
BNC Mortgage, Inc.
1063 McGaw Avenue
Irvine, California 92614
(714) 260-6000
In the case of BNC Cal:
BNC Mortgage, Inc.
1063 McGaw Avenue
-5-
<PAGE>
Irvine, California 92614
(714) 260-6000
10.03 Non-Assignability. This Agreement shall not be assignable by any of
-----------------
the parties hereto.
10.04 Entire Agreement. This Agreement contains the parties' entire
----------------
understanding and agreement with respect to its subject matter, and any and all
conflicting or inconsistent discussions, agreements, promises, representations
and statements, if any, between the parties or their representatives that are
not incorporated in this Agreement shall be null and void and are merged into
this Agreement.
10.05 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Delaware, without giving effect to
conflicts of law principles.
10.06 Headings. The various section headings are inserted for purposes of
--------
reference only and shall not affect the meaning or interpretation of this
Agreement or any provision hereof.
10.07 Gender; Number. All references to gender or number in this
--------------
Agreement shall be deemed interchangeably to have a masculine, feminine, neuter,
singular or plural meaning, as the sense of the context requires.
10.08 Severability. The provisions of this Agreement shall be severable,
------------
and any invalidity, unenforceability or illegality of any provision or
provisions of this Agreement shall not affect any other provision or provisions
of this Agreement, and each term and provision of this Agreement shall be
construed to be valid and enforceable to the full extent permitted by law.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed by an officer duly authorized to do so, all as of the day and year
first above written.
BNC MORTGAGE, INC., a California Corporation
By: /s/ KELLY W. MONAHAN
------------------------------
Name: Kelly W. Monahan
Title: President
BNC MORTGAGE, INC., a Delaware Corporation
By: /s/ KELLY W. MONAHAN
------------------------------
Name: Kelly W. Monahan
Title: President
-6-
<PAGE>
EXHIBIT 3.1
State of Delaware
Office of the Secretary of State
PAGE 1
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
INCORPORATION OF "BNC MORTGAGE, INC.", FILED IN THIS OFFICE ON THE THIRTEENTH
DAY OF JANUARY, A.D. 1998, AT 9 O'CLOCK A.M.
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 01/13/1998
981014110 - 2845659
CERTIFICATE OF INCORPORATION
OF
BNC MORTGAGE, INC.
ARTICLE I
The name of this corporation is BNC Mortgage, Inc.
ARTICLE II
The address of the registered office of the Corporation in the State of
Delaware is at 15 East North Street, Dover, Delaware 19901, and the name of its
registered agent at that address is Paracorp Incorporating Services.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
Section 1. Number of Authorized Shares. The total number of shares of
stock which the Corporation shall have the authority to issue shall be Fifty-
Five Million (55,000,000) shares. The Corporation shall be authorized to issue
two classes of shares of stock, designated, "Common Stock" and "Preferred
Stock." The Corporation shall be authorized to issue Fifty Million (50,000,000)
shares of Common Stock, each share to have a par value of $.001 per share, and
Five Million (5,000,000) shares of Preferred Stock, each share to have a par
value of $.001 per share.
Section 2. Common Stock. The Board of Directors of the Corporation may
authorize the issuance of shares of Common Stock from time to time. The
Corporation may reissue shares of Common Stock that are redeemed, purchased, or
otherwise acquired by the Corporation unless otherwise provided by law.
Section 3. Preferred Stock. The Board of Directors of the Corporation may
by resolution authorize the issuance of shares of Preferred Stock from time to
time in one or more series. The Corporation may reissue shares of Preferred
Stock that are redeemed, purchased, or otherwise acquired by the Corporation
-1-
<PAGE>
unless otherwise provided by law. The Board of Directors is hereby authorized to
fix or alter the designations, powers and preferences, and relative,
participating, optional or other rights, if any, and qualifications, limitations
or restrictions thereof, including, without limitation, dividend rights (and
whether dividends are cumulative), conversion rights, if any, voting rights
(including the number of votes, if any, per share, as well as the number of
members, if any, of the Board of Directors or the percentage of members, if any,
of the Board of Directors each class or series of Preferred Stock may be
entitled to elect), rights and terms of redemption (including sinking fund
provisions, if any), redemption price and liquidation preferences of any wholly
unissued series of Preferred Stock, and the number of shares constituting any
such series and the designation thereof, and to increase or decrease the number
of shares of any such series subsequent to the issuance of shares of such
series, but not below the number of shares of such series then outstanding.
Section 4. Dividends and Distributions. Subject to the preferences
applicable to Preferred Stock outstanding at any time, the holders of shares of
Common Stock shall be entitled to receive such dividends, payable in cash or
otherwise, as may be declared thereon by the Board of Directors from time to
time out of assets or funds of the Corporation legally available therefor.
Section 5. Voting Rights. Each share of Common Stock shall entitle the
holder thereof to one vote on all matters submitted to a vote of the
stockholders of the Corporation.
ARTICLE V
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in Delaware General Corporation Law) outside
the State of Delaware at such place or places as may be designated from time to
time by the Board of Directors or in the Bylaws of the Corporation.
ARTICLE VI
The number of directors of the Corporation shall be fixed from time to time
by or in the manner provided in the Bylaws of the Corporation or amendment
thereof duly adopted by the Board of Directors or by the stockholders of the
Corporation. Elections of directors need not be by written ballot unless the
Bylaws of the Corporation shall so provide.
-2-
<PAGE>
ARTICLE VII
No action, which has not been previously approved by the Board of
Directors, shall be taken by the stockholders except at an annual meeting or a
special meeting of the stockholders.
ARTICLE VIII
To the fullest extent permitted by the Delaware General Corporation Law, as
the same exists or may hereafter be amended (provided that the effect of any
such amendment shall be prospective only) (the "Delaware Law"), a director of
the Corporation shall not be liable to the Corporation or its stockholders for
monetary damages for breach of his or her fiduciary duty as a director. The
Corporation shall indemnify, in the manner and to the fullest extent permitted
by the Delaware Law (but in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than permitted prior thereto), any person (or the estate of any person)
who is or was a party to, or is threatened to be made a party to, any
threatened, pending or completed action, suit or proceeding, whether or not by
or in the right of the Corporation, and whether civil, criminal, administrative,
investigative or otherwise, by reason of the fact that such person is or was a
director or officer of the Corporation, or is or was serving at the request of
the Corporation as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise. The Corporation to the fullest extent
permitted by the Delaware Law, purchase and maintain insurance on behalf of any
such person against any liability which may be asserted against such person. The
Corporation may create a trust fund, grant a security interest or use other
means (including without limitation a letter of credit) to ensure the payment of
such sums as may become necessary or desirable to effect the indemnification as
provided herein. To the fullest extent permitted by the Delaware Law, the
indemnification provided herein shall include expenses as incurred (including
attorneys' fees), judgments, fines and amounts paid in settlement, and any such
expenses shall be paid by the Corporation in advance of the final disposition of
such action, suit or proceeding upon receipt of an undertaking by or on behalf
of the person seeking indemnification to repay such amounts if it is ultimately
determined that he or she is not entitled to be indemnified. Notwithstanding
the foregoing or any other provision of this Article, no advance shall be made
by the Corporation if a determination is reasonably and promptly made by the
Board by a majority vote of a quorum of disinterested directors, or (if such a
quorum is not obtainable or, even if
-3-
<PAGE>
obtainable, a quorum of disinterested directors so directs) by independent legal
counsel to the Corporation, that, based upon the facts known to the Board or
such counsel at the time such determination is made, (a) the party seeking an
advance acted in bad faith or deliberately breached his or her duty to the
Corporation or its stockholders, and (b) as a result of such actions by the
party seeking an advance, it is more likely than not that it will ultimately be
determined that such party is not entitled to indemnification pursuant to the
provisions of this Article VIII. The indemnification provided herein shall not
be deemed to limit the right of the Corporation to indemnify any other person
for any such expenses to the fullest extent permitted by the Delaware Law, nor
shall it be deemed exclusive of any other rights to which any person seeking
indemnification from the Corporation may be entitled under any agreement, the
Corporation's Bylaws, vote of stockholders or disinterested directors, or
otherwise, both as to action in such person's official capacity and as to action
in another capacity while holding such office. The Corporation may, but only to
the extent that the Board of Directors may (but shall not be obligated to)
authorize from time to time, grant rights to indemnification and to the
advancement of expenses to any employee or agent of the Corporation to the
fullest extent of the provisions of this Article VIII as it applies to the
indemnification and advancement of expenses of directors and officers of the
Corporation.
The undersigned incorporator hereby acknowledges that the foregoing
Certificate of Incorporation is his act and deed and that the facts stated
therein are true.
/s/ JEFFREY L. DAVIDSON
---------------------------------
JEFFREY L. DAVIDSON, Incorporator
-4-
<PAGE>
EXHIBIT 3.2
BNC MORTGAGE, INC.
A DELAWARE CORPORATION
BYLAWS
ARTICLE I: OFFICES
SECTION 1.1 Registered Office. The registered office of BNC Mortgage, Inc.,
(the "Corporation") shall be at 15 East North Street, Dover, Delaware 19901, and
the name of its registered agent at that address is Paracorp Incorporated.
SECTION 1.2 Principal Office. The principal office for the transaction of the
business of the Corporation shall be at 1063 McGaw Avenue, Irvine, California
92614 or otherwise as set forth in a resolution adopted by the Board.
SECTION 1.3 Other Offices. The Corporation may also have an office or offices at
such other place or places, either within or without the State of Delaware, as
the Board may from time to time determine or as the business of the Corporation
may require.
ARTICLE II: MEETINGS OF STOCKHOLDERS
SECTION 2.1 Place of Meetings. All annual meetings of stockholders and all other
meetings of stockholders shall be held either at the principal office of the
Corporation or at any other place within or without the State of Delaware that
may be designated by the Board pursuant to authority hereinafter granted to the
Board.
SECTION 2.2 Annual Meetings. Annual meetings of stockholders of the Corporation
for the purpose of electing directors and for the transaction of such other
business as may properly come before such meetings may be held at such time and
place and on such date as the Board shall determine by resolution.
SECTION 2.3 Special Meetings. A special meeting of the stockholders for the
transaction of any proper business may be called at any time exclusively by the
Board or the Chairman.
SECTION 2.4 Notice of Meetings. Except as otherwise required by law, notice of
each meeting of stockholders, whether annual or special, shall be given not less
than ten (10) days nor more than sixty (60) days before the date of the meeting
to each stockholder of record entitled to vote at such meeting by delivering a
typewritten or printed notice thereof to such stockholder personally, or by
depositing such notice in the United States mail, in a postage prepaid envelope,
directed to such stockholder at such stockholder's post office address furnished
by such stockholder to the Secretary of the Corporation for such purpose, or, if
such stockholder shall not have furnished an address to
<PAGE>
the Secretary for such purpose, then at such stockholder's post office address
last known to the Secretary, or by transmitting a notice thereof to such
stockholder at such address by telegraph, cable, wireless or facsimile. Except
as otherwise expressly required by law, no publication of any notice of a
meeting of stockholders shall be required. Every notice of a meeting of
stockholders shall state the place, date and hour of the meeting and, in the
case of a special meeting, shall also state the purpose for which the meeting is
called. Notice of any meeting of stockholders shall not be required to be given
to any stockholder to whom notice may be omitted pursuant to applicable Delaware
law or who shall have waived such notice, and such notice shall be deemed waived
by any stockholder who shall attend such meeting in person or by proxy, except a
stockholder who shall attend such meeting for the express purpose of objecting,
at the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. Except as otherwise expressly
required by law, notice of any adjourned meeting of stockholders need not be
given if the time and place thereof are announced at the meeting at which the
adjournment is taken.
SECTION 2.5 Fixing Date for Determination of Stockholders of Record. In order
that the Corporation may determine the stockholders entitled to notice of or to
vote at any meeting of stockholders or any adjournment thereof, or entitled to
receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any other change,
conversion or exchange of stock or for the purpose of any other lawful action
other than to consent to corporate action in writing without a meeting, the
Board may fix, in advance, a record date, which shall not be more than sixty
(60) nor less than ten (10) days before the date of such meeting, nor more than
sixty (60) days prior to any such other action. If in any case involving the
determination of stockholders for any purpose other than notice of or voting at
a meeting of stockholders the Board shall not fix such a record date, then the
record date for determining stockholders for such purpose shall be the close of
business on the day on which the Board shall adopt the resolution relating
thereto. A determination of stockholders entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of such meeting;
provided, however, that the Board may fix a new record date for the adjourned
meeting.
SECTION 2.6 Quorum. Except as otherwise required by law, the holders of record
of a majority in voting interest of the shares of stock of the Corporation
entitled to be voted thereat, present in person or by proxy, shall constitute a
quorum for the transaction of business at any meeting of stockholders of the
Corporation or any adjournment thereof. Subject to the requirement of a larger
percentage vote, if any, contained in the Certificate of Incorporation, these
Bylaws or by statute, the stockholders present at a duly called or held meeting
at which a quorum is present may continue to do business until adjournment,
notwithstanding any withdrawal of stockholders that may leave less than a quorum
remaining, if any action taken (other than adjournment) is approved by the vote
of at least a majority in voting interest of the shares required to constitute a
quorum. In the absence of a quorum at any meeting or any adjournment thereof, a
majority in voting interest of the stockholders present in person or by proxy
and entitled to vote thereat or, in the absence therefrom of all the
stockholders, any officer entitled to preside at, or to act as secretary of,
such meeting may adjourn such meeting from time to time. At any such adjourned
meeting at which a quorum is present, any business may be transacted that might
have been transacted at the meeting as originally called.
<PAGE>
SECTION 2.7 Voting.
(A) Each stockholder shall, at each meeting of stockholders, be entitled to
vote, in the manner prescribed by the Corporation's Certificate of
Incorporation, in person or by proxy each share of the stock of the Corporation
that has voting rights on the matter in question and that shall have been held
by such stockholder and registered in such stockholder's name on the books of
the Corporation:
(i) on the date fixed pursuant to Section 2.5 of these Bylaws as the record
date for the determination of stockholders entitled to notice of and to
vote at such meeting; or
(ii) if no such record date shall have been so fixed, then (a) at the close
of business on the business day next preceding the day upon which notice of
the meeting shall be given or (b) if notice of the meeting shall be waived,
at the close of business on the business day next preceding the day upon
which the meeting shall be held.
(B) Shares of the Corporation's own stock belonging to the Corporation or to
another corporation, if a majority of the shares entitled to vote in the
election of directors in such other corporation is held, directly or indirectly,
by the Corporation, shall neither be entitled to vote nor be counted for quorum
purposes. Persons holding stock of the Corporation in a fiduciary capacity shall
be entitled to vote such stock. Persons whose stock is pledged shall be entitled
to vote, unless in the transfer by the pledgor on the books of the Corporation
the pledgor shall have expressly empowered the pledgee to vote thereon, in which
case only the pledgee, or the pledgee's proxy, may represent such stock and vote
thereon. Stock having voting power standing of record in the names of two or
more persons, whether fiduciaries, members of a partnership, joint tenants,
tenants in common, tenants by the entirety or otherwise, or with respect to
which two or more persons have the same fiduciary relationship, shall be voted
in accordance with the provisions of the Delaware General Corporation Law, as
the same exists or may hereafter be amended (the "DGCL").
(C) Subject to the provisions of the Corporation's Certificate of Incorporation,
any such voting rights may be exercised by the stockholder entitled thereto in
person or by such stockholder's proxy appointed by an instrument in writing,
subscribed by such stockholder or by such stockholder's attorney thereunto
authorized and delivered to the secretary of the meeting. The attendance at any
meeting of a stockholder who may theretofore have given a proxy shall not have
the effect of revoking the same unless such stockholder shall in writing so
notify the secretary of the meeting prior to the voting of the proxy. At any
meeting of stockholders at which a quorum is present, all matters, except as
otherwise provided in the Certificate of Incorporation, in these Bylaws or by
law, shall be decided by the vote of a majority in voting interest of the
stockholders present in person or by proxy and entitled to vote thereat and
thereon. The vote at any meeting of stockholders on any question need not be by
ballot, unless so directed by the chairman of the meeting. On a vote by ballot,
each ballot shall be signed by the stockholder voting, or by such stockholder's
proxy, if there be such proxy, and it shall state the number of shares voted.
SECTION 2.8 Judges. Prior to each meeting of stockholders, the Chairman of such
meeting shall appoint a judge or judges to act with respect to any vote. Each
judge so appointed shall first subscribe
<PAGE>
an oath faithfully to execute the duties of a judge at such meeting with strict
impartiality and according to the best of such judge's ability. Such judges
shall decide upon the qualification of the voters and shall certify and report
the number of shares represented at the meeting and entitled to vote on any
question, determine the number of votes entitled to be cast by each share, shall
conduct the vote and, when the voting is completed, accept the votes and
ascertain and report the number of shares voted respectively for and against
each question, and determine, and retain for a reasonable period a record of the
disposition of, any challenge made to any determination made by such judges.
Reports of judges shall be in writing and subscribed and delivered by them to
the Secretary of the Corporation. The judges need not be stockholders of the
Corporation, and any officer of the Corporation may be a judge on any question
other than a vote for or against a proposal in which such officer shall have a
material interest. The judges may appoint or retain other persons or entities to
assist the judges in the performance of the duties of the judges.
SECTION 2.9 Advance Notice of Stockholder Proposals and Stockholder Nominations.
(A) At any meeting of the stockholders, only such business shall be conducted as
shall have been brought before the meeting (i) by or at the direction of the
Board or (ii) by any stockholder of the Corporation who complies with the notice
procedures set forth in this Section 2.9(A). For business to be properly brought
before any meeting of the stockholders by a stockholder, the stockholder must
have given notice thereof in writing to the Secretary of the Corporation not
less than ninety (90) days in advance of such meeting or, if later, the seventh
day following the first public announcement of the date of such meeting. A
stockholder's notice to the Secretary shall set forth as to each matter the
stockholder proposes to bring before the meeting (1) a brief description of the
business desired to be brought before the meeting and the reasons for conducting
such business at the meeting, (2) the name and address, as they appear on the
Corporation's books, of the stockholder proposing such business, (3) the class
and number of shares of the Corporation that are beneficially owned by the
stockholder, and (4) any material interest of the stockholder in such business.
In addition, the stockholder making such proposal shall promptly provide any
other information reasonably requested by the Corporation. Notwithstanding
anything in these Bylaws to the contrary, no business shall be conducted at any
meeting of the stockholders except in accordance with the procedures set forth
in this Section 2.9. The Chairman of any such meeting shall direct that any
business not properly brought before the meeting shall not be considered.
(B) Nominations for the election of directors may be made by the Board or by any
stockholder entitled to vote in the election of directors; provided, however,
that a stockholder may nominate a person for election as a director at a meeting
only if written notice of such stockholder's intent to make such nomination has
been given to the Secretary of the Corporation not later than ninety (90) days
in advance of such meeting or, if later, the seventh day following the first
public announcement of the date of such meeting. Each such notice shall set
forth: (i) the name and address of the stockholder who intends to make the
nomination and of the person or persons to be nominated; (ii) a representation
that the stockholder is a holder of record of stock of the Corporation entitled
to vote at such meeting and intends to appear in person or by proxy at the
meeting and nominate the person or persons specified in the notice; (iii) a
description of all arrangements or understandings between the stockholder and
each nominee and any other person or persons (naming such person or persons)
<PAGE>
pursuant to which the nomination or nominations are to be made by the
stockholder; (iv) such other information regarding each nominee proposed by such
stockholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the United States Securities and Exchange
Commission had the nominee been nominated, or intended to be nominated, by the
Board; and (v) the consent of each nominee to serve as a director of the
Corporation if so elected. In addition, the stockholder making such nomination
shall promptly provide any other information reasonably requested by the
Corporation. No person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section 2.9(B). The Chairman of any meeting of stockholders shall direct that
any nomination not made in accordance with these procedures be disregarded.
SECTION 2.10 Action Without Meeting. Any action required to be taken at any
annual or special meeting of stockholders of the Corporation, or any action
which may be taken at any annual or special meeting of such stockholders, may,
if such action has been earlier approved by the Board, be taken without a
meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, shall be signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted. Prompt notice of the taking of the
corporate action without a meeting by less than unanimous written consent shall
be given to those stockholders who have not consented in writing.
ARTICLE III: BOARD OF DIRECTORS
SECTION 3.1 General Powers. Subject to any requirements in the Certificate of
Incorporation, these Bylaws, or of the DGCL as to action which must be
authorized or approved by the stockholders, any and all corporate powers shall
be exercised by or under the authority of, and the business and affairs of the
Corporation shall be under the direction of, the Board to the fullest extent
permitted by law. Without limiting the generality of the foregoing, it is hereby
expressly declared that the Board shall have the following powers, to wit:
(A) to select and remove all the officers, agents and employees of the
Corporation, prescribe such powers and duties for them as may not be
inconsistent with law, the Certificate of Incorporation or these Bylaws, fix
their compensation, and require from them security for faithful service;
(B) to conduct, manage and control the affairs and business of the Corporation,
and to make such rules and regulations therefor not inconsistent with law, the
Certificate of Incorporation or these Bylaws, as it may deem best;
(C) to change the location of the registered office of the Corporation in
Section 1.1 hereof; to change the principal office and the principal office for
the transaction of the business of the Corporation from one location to another
as provided in Section 1.2 hereof; to fix and locate from time to time one or
more offices of the Corporation within or without the State of Delaware as
provided in Section 1.3 hereof; to designate any place within or without the
State of Delaware for the holding of any meeting or meetings of stockholders;
and to adopt, make and use a corporate seal, and to prescribe the forms
<PAGE>
of certificates of stock, and to alter the form of such seal and of such
certificates from time to time, and in its judgment as it may deem best,
provided such seal and such certificate shall at all times comply with the
provisions of law;
(D) to authorize the issuance of shares of stock of the Corporation from time to
time, upon such terms and for such considerations as may be lawful;
(E) to borrow money and incur indebtedness for the purposes of the Corporation,
and to cause to be executed and delivered therefor, in the corporate name,
promissory notes, bonds, debentures, deeds of trust and securities therefor; and
(F) by resolution adopted by a majority of the whole Board to designate an
executive and other committees of the Board, each consisting of one or more
directors, to serve at the pleasure of the Board, and to prescribe the manner in
which proceedings of such committee or committees shall be conducted.
SECTION 3.2 Number and Term of Office.
(A) Until this Section 3.2 is amended by a resolution duly adopted by the Board
or by the stockholders of the Corporation, the number of directors constituting
the entire Board shall be not less than five (5) members nor more than nine (9)
members and shall initially consist of five (5) members. Directors need not be
stockholders. Each of the directors of the Corporation shall hold office until
his successor shall have been duly elected or until he shall resign or shall
have been removed in the manner hereinafter provided.
(B) The Board shall be divided into three classes: Class I, Class II and Class
III. Each Director shall serve for a term ending on the date of the third annual
meeting following the annual meeting at which such director was elected;
provided, however, that the directors first elected to Class I shall serve for a
term ending on the date of the annual meeting next following the end of the
calendar year 1998, the director first elected to Class II shall serve for a
term ending on the date of the second annual meeting next following the end of
the calendar year 1998, and the directors first elected to Class III shall serve
for a term ending on the date of the third annual meeting next following the end
of the calendar year 1998. Notwithstanding the foregoing provisions of this
Article, each director shall serve until his successor is duly elected and
qualified or until his death, resignation or removal. No decrease in the number
of directors constituting the Board of Directors shall shorten the term of an
incumbent director.
SECTION 3.3 Chairman of the Board. The Chairman of the Board, when present,
shall preside at all meetings of the Board and all meetings of stockholders. The
Chairman of the Board shall perform other duties commonly incident to his office
and shall also perform such other duties and have such other powers as the Board
of Directors shall designate from time to time.
SECTION 3.4 Election of Directors. The directors shall be elected by the
stockholders of the Corporation, and at each election, the persons receiving the
greater number of votes, up to the
<PAGE>
number of directors then to be elected, shall be the persons then elected. The
election of directors is subject to any provision contained in the Certificate
of Incorporation relating thereto, including any provision regarding the rights
of holders of preferred stock to elect directors.
SECTION 3.5 Resignations. Any director of the Corporation may resign at any time
by giving written notice to the Board or to the Secretary of the Corporation.
Any such resignation shall take effect at the time specified therein, or, if the
time is not specified, it shall take effect immediately upon receipt; and,
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
SECTION 3.6 Vacancies. Except as otherwise provided in the Certificate of
Incorporation, any vacancy in the Board, whether because of death, resignation,
disqualification, an increase in the number of directors, removal, or any other
cause, may be filled by vote of the majority of the remaining directors,
although less than a quorum. Increases in the number of directors shall be
filled in accordance with the rule that each class of directors shall be as
nearly equal in number of directors as possible. Notwithstanding such rule, in
the event of any change in the authorized number of directors each director then
continuing to serve as such will nevertheless continue as a director of the
class of which he is a member, until the expiration of his current term or his
earlier death, resignation or removal. If any newly created directorship or
vacancy on the Board, consistent with the rule that the three classes shall be
as nearly equal in number of directors as possible, may be allocated to one or
two or more classes, the Board shall allocate it to that of the available class
whose term of office is due to expire at the earliest date following such
allocation. When the Board fills a vacancy, the director chosen to fill that
vacancy shall be of the same class as the director he succeeds and shall hold
office until such director's successor shall have been elected and shall qualify
or until such director shall resign or shall have been removed. No reduction of
the authorized number of directors shall have the effect of removing any
director prior to the expiration of such director's term of office.
SECTION 3.7 Place of Meeting. The Board or any committee thereof may hold any of
its meetings at such place or places within or without the State of Delaware as
the Board or such committee may from time to time by resolution designate or as
shall be designated by the person or persons calling the meeting or in the
notice or a waiver of notice of any such meeting. Directors may participate in
any regular or special meeting of the Board or any committee thereof by means of
conference telephone or similar communications equipment pursuant to which all
persons participating in the meeting of the Board or such committee can hear
each other, and such participation shall constitute presence in person at such
meeting.
SECTION 3.8 Regular Meetings. Regular meetings of the Board may be held at such
times as the Board shall from time to time by resolution determine.
SECTION 3.9 Special Meetings. Special meetings of the Board for any purpose or
purposes shall be called at any time by the Chairman of the Board or, if the
Chairman of the Board is absent or unable or refuses to act, by the President,
and may also be called by any two members of the Board. Except as otherwise
provided by law or by these Bylaws, written notice of the time and place of
special meetings shall be delivered personally or by facsimile to each director,
or sent to each director by mail
<PAGE>
or by other form of written communication, charges prepaid, addressed to such
director at such director's address as it is shown upon the records of the
Corporation, or, if it is not so shown on such records and is not readily
ascertainable, at the place in which the meetings of the directors are regularly
held. In case such notice is mailed or telegraphed, it shall be deposited in the
United States mail or delivered to the telegraph company in the County in which
the principal office for the transaction of the business of the Corporation is
located at least 48 hours prior to the time of the holding of the meeting. In
case such notice is delivered personally or by facsimile as above provided, it
shall be delivered at least 24 hours prior to the time of the holding of the
meeting. Such mailing, telegraphing, delivery or facsimile transmission as above
provided shall be due, legal and personal notice to such director. Except where
otherwise required by law or by these Bylaws, notice of the purpose of a special
meeting need not be given. Notice of any meeting of the Board shall not be
required to be given to any director who is present at such meeting, except a
director who shall attend such meeting for the express purpose of objecting, at
the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened.
SECTION 3.10 Quorum and Manner of Acting. Except as otherwise provided in these
Bylaws, the Certificate of Incorporation or by applicable law, the presence of a
majority of the authorized number of directors shall be required to constitute a
quorum for the transaction of business at any meeting of the Board, and all
matters shall be decided at any such meeting, a quorum being present, by the
affirmative votes of a majority of the directors present. A meeting at which a
quorum is initially present may continue to transact business notwithstanding
the withdrawal of directors, provided any action taken is approved by at least a
majority of the required quorum for such meeting. In the absence of a quorum, a
majority of directors present at any meeting may adjourn the same from time to
time until a quorum shall be present. Notice of any adjourned meeting need not
be given. The directors shall act only as a Board, and the individual directors
shall have no power as such.
SECTION 3.11 Action by Unanimous Written Consent. Any action required or
permitted to be taken at any meeting of the Board or of any committee thereof
may be taken without a meeting if consent in writing is given thereto by all
members of the Board or of such committee, as the case may be, and such consent
is filed with the minutes of proceedings of the Board or of such committee.
SECTION 3.12 Compensation. Directors, whether or not employees of the
Corporation or any of its subsidiaries, may receive an annual fee for their
services as directors in an amount fixed by resolution of the Board plus other
compensation, including options to acquire capital stock of the Corporation, in
an amount and of a type fixed by resolution of the Board, and, in addition, a
fixed fee, with or without expenses of attendance, may be allowed by resolution
of the Board for attendance at each meeting, including each meeting of a
committee of the Board. Nothing herein contained shall be construed to preclude
any director from serving the Corporation in any other capacity as an officer,
agent, employee, or otherwise, and receiving compensation therefor.
SECTION 3.13 Committees. The Board may, by resolution passed by a majority of
the whole Board, designate one or more committees, each committee to consist of
one or more of the directors of the Corporation. Any such committee, to the
extent provided in the resolution of the Board and subject to any restrictions
or limitations on the delegation of power and authority imposed by applicable
law,
<PAGE>
shall have and may exercise all the powers and authority of the Board in the
management of the business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed to all papers which may require it. Any
such committee shall keep written minutes of its meetings and report the same to
the Board at the next regular meeting of the Board. Unless the Board or these
Bylaws shall otherwise prescribe the manner of proceedings of any such
committee, meetings of such committee may be regularly scheduled in advance and
may be called at any time by the chairman of the committee or by any two members
thereof; otherwise, the provisions of these Bylaws with respect to notice and
conduct of meetings of the Board shall govern.
SECTION 3.14 Affiliated Transactions. Notwithstanding any other provision of
these Bylaws, each transaction, or, if an individual transaction constitutes a
part of a series of transactions, each series of transactions, proposed to be
entered into between the Corporation, on the one hand, and any affiliate of the
Corporation, on the other hand, must be approved by a majority of the
Independent Directors. Notwithstanding any other provision of these Bylaws, this
Section 3.14 may only be amended by the vote of the majority of the Independent
Directors. For the purposes of this Section 3.14, (a) "affiliate" shall mean (i)
any person that, directly or indirectly, controls or is controlled by or is
under common control with such person, (ii) any other person that owns,
beneficially, directly or indirectly, twenty percent (20%) or more of the
outstanding capital shares, shares or equity interests of such person, or (iii)
any officer, director, employee, partner or trustee of such person or any person
controlling, controlled by or under common control with such person (excluding
trustees and persons serving in similar capacities who are not otherwise an
Affiliate of such person); (b) "person" shall mean and include individuals,
corporations, general and limited partnerships, stock companies or associations,
joint ventures, associations, companies, trusts, banks, trust companies, land
trusts, business trusts or other entities and governments and agencies and
political subdivisions thereof; (c) "control" (including the correlative
meanings of the terms "controlled by" and "under common control with"), as used
with respect to any person, shall mean the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies of
such person, through the ownership of voting securities, partnership interests
or other equity interests; and (d) Independent Director shall mean a Director
who is not an officer or employee of the Corporation or any of its subsidiaries.
ARTICLE IV: OFFICERS
SECTION 4.1 Officers. The officers of the Corporation shall be a Chief Executive
Officer, a President, one or more Vice Presidents (the number thereof and their
respective titles to be determined by the Board), a Secretary, a Chief Financial
Officer, and such other officers as may be appointed at the discretion of the
Board in accordance with the provisions of Section 4.3 hereof.
SECTION 4.2 Election. The officers of the Corporation, except such officers as
may be appointed or elected in accordance with the provisions of Sections 4.3 or
4.5 hereof, shall be chosen annually by the Board at the first meeting thereof
after the annual meeting of stockholders, and each officer shall hold office
until such officer shall resign or shall be removed or otherwise disqualified to
serve, or until such officer's successor shall be elected and qualified.
<PAGE>
SECTION 4.3 Other Officers. In addition to the officers chosen annually by the
Board at its first meeting, the Board also may appoint or elect such other
officers as the business of the Corporation may require, each of whom shall have
such authority and perform such duties as are provided in these Bylaws or as the
Board may from time to time specify, and shall hold office until such officer
shall resign or shall be removed or otherwise disqualified to serve, or until
such officer's successor shall be elected and qualified.
SECTION 4.4 Removal and Resignation. Except as provided by DGCL Section 141(k),
any officer may be removed, either with or without cause, by resolution of the
Board, at any regular or special meeting of the Board, or except in case of an
officer chosen by the Board, by any officer upon whom such power of removal may
be conferred by the Board. Any officer or assistant may resign at any time by
giving written notice of his resignation to the Board or the Secretary of the
Corporation. Any such resignation shall take effect at the time specified
therein, or, if the time is not specified, upon receipt thereof by the Board or
the Secretary, as the case may be; and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
SECTION 4.5 Vacancies. A vacancy in any office because of death, resignation,
removal, disqualification or any other cause shall be filled in the manner
prescribed in these Bylaws for regular appointments to such office.
SECTION 4.6 Chief Executive Officer. The Chief Executive Officer shall preside
at all meetings of the stockholders and at all meetings of the Board of
Directors, unless the Chairman of the Board has been appointed and is present.
The Chief Executive Officer shall be the chief executive officer of the
Corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and affairs of the
Corporation. The Chief Executive Officer shall also perform such other duties
and have such other powers as the Board of Directors may designate from time to
time.
SECTION 4.7 President. The President shall preside at all meetings of the
stockholders and at all meetings of the Board of Directors, unless the Chairman
of the Board has been appointed and is present or, in the absence of the
Chairman of the Board, the Chief Executive Officer has been appointed and is
present. Subject to the provisions of these Bylaws and to the direction of the
Board of Directors and Chief Executive Officer, the President shall have the
responsibility for the general management and control of the business and
affairs of the Corporation and shall perform all duties and have all powers
which are commonly incident to the office of President or which are delegated to
him by the Board of Directors. The President shall have the power to sign all
stock certificates, contracts and other instruments of the Corporation which are
authorized and shall have general supervision and direction of all the other
officers, employees and agents of the corporation.
SECTION 4.8 Vice President. Each Vice President shall have such powers and
perform such duties with respect to the administration of the business and
affairs of the Corporation as are commonly incident to their office or as may
from time to time be assigned to such Vice President by the Chairman of the
Board, or the Board, or the President, or as may be prescribed by these Bylaws.
In the absence or disability of the Chairman of the Board and the President, the
Vice Presidents in order
<PAGE>
of their rank as fixed by the Board, or if not ranked, the Vice President
designated by the Board, shall perform all of the duties of the Chairman of the
Board, and when so acting shall have all the powers of, and be subject to all
the restrictions upon, the Chairman of the Board.
SECTION 4.9 Secretary.
(A) The Secretary shall attend all meetings of the stockholders and of the Board
of Directors and shall record all acts and proceedings thereof in the minute
book of the Corporation. The Secretary shall give notice in conformity with
these Bylaws of all meetings of the stockholders and of all meetings of the
Board of Directors and any committee thereof requiring notice. The Secretary
shall perform all other duties given him in these Bylaws and other duties
commonly incident to his office and shall also perform such other duties and
have such other powers as the Board shall designate from time to time.
(B) The Secretary shall keep, or cause to be kept, at the principal office of
the Corporation or such other place as the Board may order, a book of minutes of
all meetings of directors and stockholders, with the time and place of holding,
whether regular or special, and if special, how authorized and the notice
thereof given, the names of those present at meetings of directors, the number
of shares present or represented at meetings of stockholders, and the
proceedings thereof.
(C) The Secretary shall keep, or cause to be kept, at the principal office of
the Corporation's transfer agent, a share register, or a duplicate share
register, showing the name of each stockholder, the number of shares of each
class held by such stockholder, the number and date of certificates issued for
such shares, and the number and date of cancellation of every certificate
surrendered for cancellation.
SECTION 4.10 Chief Financial Officer. The Chief Financial Officer shall keep or
cause to be kept the books of account of the corporation in a thorough and
proper manner and shall render statements of the financial affairs of the
corporation in such form and as often as required by the Board of Directors or
the Chief Executive Officer. The Chief Financial Officer, subject to the order
of the Board, shall have the custody of all funds and securities of the
Corporation. The Chief Financial Officer shall perform other duties commonly
incident to his office and shall also perform such other duties and have such
other powers as the Board or the Chief Executive Officer shall designate from
time to time.
ARTICLE V: CORPORATE INSTRUMENTS, CHECKS,
DRAFTS, BANK ACCOUNTS, ETC.
SECTION 5.1 Execution of Corporate Instruments. The Board of Directors may, in
its discretion, determine the method and designate the signatory officer or
officers, or other person or persons, to execute on behalf of the Corporation
the corporate name without limitation, or enter into contracts on behalf of the
Corporation, except where otherwise provided by law or these Bylaws, and such
execution or signature shall be binding upon the Corporation. Such authority may
be general or confined to specific instances, and unless so authorized by the
Board or by these Bylaws, no officer,
<PAGE>
agent, or employee shall have any power or authority to bind the Corporation by
any contract or engagement or to pledge its credit or to render it liable for
any purpose or in any amount.
SECTION 5.2 Checks, Drafts, Etc. All checks, drafts or other orders for payment
of money, notes or other evidence of indebtedness, issued in the name of or
payable to the Corporation, shall be signed or endorsed by such person or
persons and in such manner as, from time to time, shall be determined by
resolution of the Board. Each such officer, assistant, agent or attorney shall
give such bond, if any, as the Board may require.
SECTION 5.3 Deposits. All funds of the Corporation not otherwise employed shall
be deposited from time to time to the credit of the Corporation in such banks,
trust companies or other depositories as the Board may select, or as may be
selected by any officer or officers, assistant or assistants, agent or agents,
or attorney or attorneys of the Corporation to whom such power shall have been
delegated by the Board. For the purpose of deposit and for the purpose of
collection for the account of the Corporation, the Chairman of the Board, the
Chief Executive Officer, the President, any Vice President (or any other officer
or officers, assistant or assistants, agent or agents, or attorney or attorneys
of the Corporation who shall from time to time be determined by the Board) may
endorse, assign and deliver checks, drafts and other orders for the payment of
money which are payable to the order of the Corporation.
SECTION 5.4 General and Special Bank Accounts. The Board may from time to time
authorize the opening and keeping of general and special bank accounts with such
banks, trust companies or other depositories as the Board may select or as may
be selected by any officer or officers, assistant or assistants, agent or
agents, or attorney or attorneys of the Corporation to whom such power shall
have been delegated by the Board. The Board may make such special rules and
regulations with respect to such bank accounts, not inconsistent with the
provisions of these Bylaws, as it may deem expedient.
ARTICLE VI: SHARES AND THEIR TRANSFER
SECTION 6.1 Certificates for Stock. Every owner of stock of the Corporation
shall be entitled to have a certificate or certificates, to be in such form as
the Board shall prescribe, certifying the number and class or series of shares
of the stock of the Corporation owned by such owner. The certificates
representing shares of such stock shall be numbered in the order in which they
shall be issued and shall be signed in the name of the Corporation by the
Chairman of the Board, the Chief Executive Officer, the President or any Vice
President, and by the Secretary. Any or all of the signatures on the
certificates may be a facsimile. In case any officer, transfer agent or
registrar who has signed, or whose facsimile signature has been placed upon, any
such certificate, shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, such certificate may nevertheless
be issued by the Corporation with the same effect as though the person who
signed such certificate, or whose facsimile signature shall have been placed
thereupon, were such an officer, transfer agent or registrar at the date of
issue. A record shall be kept of the respective names of the persons, firms or
corporations owning the stock represented by such certificates, the number and
class or series of shares represented by such certificates, respectively, and
the respective dates thereof, and in case of
<PAGE>
cancellation, the respective dates of cancellation. Every certificate
surrendered to the Corporation for exchange or transfer shall be canceled, and
no new certificate or certificates shall be issued in exchange for any existing
certificate until such existing certificate shall have been so canceled, except
in cases provided for in Section 6.4 hereof.
SECTION 6.2 Transfers of Stock. Transfers of shares of stock of the Corporation
shall be made only on the books of the Corporation by the registered holder
thereof, or by such holder's attorney thereunto authorized by power of attorney
duly executed and filed with the Secretary, or with a transfer clerk or a
transfer agent appointed as provided in Section 6.3 hereof, and upon surrender
of the certificate or certificates for such shares properly endorsed and the
payment of all taxes thereon. The person in whose name shares of stock stand on
the books of the Corporation shall be deemed the owner thereof for all purposes
as regards the Corporation. Whenever any transfer of shares shall be made for
collateral security, and not absolutely, such fact shall be so expressed in the
entry of transfer if, when the certificate or certificates shall be presented to
the Corporation for transfer, both the transferor and the transferee request the
Corporation to do so.
SECTION 6.3 Regulations. The Board may make such rules and regulations as it may
deem expedient, not inconsistent with these Bylaws, concerning the issue,
transfer and registration of certificates for shares of the stock of the
Corporation. It may appoint, or authorize any officer or officers to appoint,
one or more transfer clerks or one or more transfer agents and one or more
registrars, and may require all certificates for stock to bear the signature or
signatures of any of them.
SECTION 6.4 Lost, Stolen, Destroyed, and Mutilated Certificates. In any case of
loss, theft, destruction, or mutilation of any certificate of stock, another may
be issued in its place upon proof satisfactory to the Board of such loss, theft,
destruction, or mutilation and upon the giving of a bond of indemnity to the
Corporation in such form and in such sum as the Board may direct; provided,
however, that a new certificate may be issued without requiring any bond when,
in the judgment of the Board, it is proper so to do.
ARTICLE VII: INDEMNIFICATION
SECTION 7.1 Indemnification of Directors and Officers. To the fullest extent
permitted by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (provided that the effect of any such amendment shall be
prospective only) (the "Delaware Law"), a director of the Corporation shall not
be liable to the Corporation or its stockholders for monetary damages for breach
of his or her fiduciary duty as a director. The Corporation shall indemnify, in
the manner and to the fullest extent permitted by the Delaware Law (but in the
case of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than permitted prior
thereto), any person (or the estate of any person) who is or was a party to, or
is threatened to be made a party to, any threatened, pending or completed
action, suit or proceeding, whether or not by or in the right of the
Corporation, and whether civil, criminal, administrative, investigative or
otherwise, by reason of the fact that such person is or was a director or
officer of the Corporation, or is or was serving at the request of the
Corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise. The Corporation may, to the fullest
<PAGE>
extent permitted by the Delaware Law, purchase and maintain insurance on behalf
of any such person against any liability which may be asserted against such
person. The Corporation may create a trust fund, grant a security interest or
use other means (including without limitation a letter of credit) to ensure the
payment of such sums as may become necessary or desirable to effect the
indemnification as provided herein. To the fullest extent permitted by the
Delaware Law, the indemnification provided herein shall include expenses as
incurred (including attorneys' fees), judgments, fines and amounts paid in
settlement and any such expenses shall be paid by the Corporation in advance of
the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of the person seeking indemnification to repay such
amounts if it is ultimately determined that he or she is not entitled to be
indemnified. Notwithstanding the foregoing or any other provision of this
Section 7.1, no advance shall be made by the Corporation if a determination is
reasonably and promptly made by the Board by a majority vote of a quorum of
disinterested Directors, or (if such a quorum is not obtainable or, even if
obtainable, a quorum of disinterested Directors so directs) by independent legal
counsel to the Corporation, that, based upon the facts known to the Board or
such counsel at the time such determination is made, (a) the party seeking an
advance acted in bad faith or deliberately breached his or her duty to the
Corporation or its stockholders, and (b) as a result of such actions by the
party seeking an advance, it is more likely than not that it will ultimately be
determined that such party is not entitled to indemnification pursuant to the
provisions of this Section 7.1. The indemnification provided herein shall not be
deemed to limit the right of the Corporation to indemnify any other person for
any such expenses to the fullest extent permitted by the Delaware Law, nor shall
it be deemed exclusive of any other rights to which any person seeking
indemnification from the Corporation may be entitled under any agreement, the
Corporation's Bylaws, vote of stockholders or disinterested directors, or
otherwise, both as to action in such person's official capacity and as to action
in another capacity while holding such office. The Corporation may, but only to
the extent that the Board of Directors may (but shall not be obligated to)
authorize from time to time, grant rights to indemnification and to the
advancement of expenses to any employee or agent of the Corporation to the
fullest extent of the provisions of this Section 7.1 as it applies to the
indemnification and advancement of expenses of directors and officers of the
Corporation.
SECTION 7.2 Indemnification of Employees and Agents. Subject to Section 7.1, the
Corporation may, but only to the extent that the Board may (but shall not be
obligated to) authorize from time to time, grant rights to indemnification and
to the advancement of expenses to any employee or agent of the Corporation to
the fullest extent of the provisions of this Article VII as they apply to the
indemnification and advancement of expenses of directors and officers of the
Corporation.
SECTION 7.3 Enforcement of Indemnification. The rights to indemnification and
the advancement of expenses conferred above shall be contract rights. If a claim
under this Article VII is not paid in full by the Corporation within 60 days
after written claim has been received by the Corporation, except in the case of
a claim for an advancement of expenses, in which case the applicable period
shall be 20 days, the indemnitee may at any time thereafter bring suit against
the Corporation to recover the unpaid amount of such claim. If successful in
whole or in part in any such suit, or in a suit brought by the Corporation to
recover an advancement of expenses pursuant to the terms of an undertaking, the
indemnitee shall be entitled to be paid also the expenses of prosecuting or
defending such suit. In (i) any suit brought by the indemnitee to enforce a
right to indemnification hereunder (but not in
<PAGE>
a suit brought by the indemnitee to enforce a right to an advancement of
expenses) it shall be a defense that, and (ii) any suit by the Corporation to
recover an advancement of expenses pursuant to the terms of an undertaking the
Corporation shall be entitled to recover such expenses upon a final adjudication
that, the indemnitee has not met any applicable standard for indemnification set
forth in the DGCL. Neither the failure of the Corporation (including its Board,
independent legal counsel or stockholders) to have made a determination prior to
the commencement of such suit that indemnification of the indemnitee is proper
in the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the DGCL, nor an actual determination by the Corporation
(including its Board, independent legal counsel or stockholders) that the
indemnitee has not met such applicable standard of conduct, shall either create
a presumption that the indemnitee has not met the applicable standard of conduct
or, in the case of such a suit brought by the indemnitee, be a defense to such
suit. In any suit brought by the indemnitee to enforce a right to
indemnification or to an advancement of expenses hereunder, or by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the burden of proving that the indemnitee is not entitled to be
indemnified, or to such advancement of expenses, under this Article VII or
otherwise shall be on the Corporation.
ARTICLE VIII: MISCELLANEOUS
SECTION 8.1 Seal. The Board shall adopt a corporate seal, which shall be in the
form of two concentric circles with the name of the Corporation between the two
circles and the date and state of incorporation appearing in the inner circle.
SECTION 8.2 Waiver of Notices. Whenever notice is required to be given by these
Bylaws or the Certificate of Incorporation or by law, the person entitled to
said notice may waive such notice in writing, either before or after the time
stated therein, and such waiver shall be deemed equivalent to notice.
SECTION 8.3 Amendments. Except as otherwise provided herein or in the
Certificate of Incorporation, these Bylaws or any of them may be altered,
amended, repealed or rescinded and new Bylaws may be adopted by the Board or by
the stockholders at any annual or special meeting of stockholders, provided that
notice of such proposed alteration, amendment, repeal, rescission or adoption is
given in the notice of such meeting.
<PAGE>
CERTIFICATE OF SECRETARY
The undersigned, being the duly elected Secretary of BNC Mortgage, Inc., a
Delaware corporation, hereby certifies that the Bylaws to which this Certificate
is attached were duly adopted by the Board of Directors of said Corporation as
of January 13, 1998.
/s/ EVAN R. BUCKLEY
-------------------
Evan R. Buckley
<PAGE>
EXHIBIT 10.1
O F F I C E L E A S E
Between
Shuwa Investments Corporation,
a California corporation,
as
Landlord
and
BNC Mortgage, Inc.,
a California corporation
as
Tenant
June 15, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. Parties................................................................ 1
2. Definitions............................................................ 1
2.1. Basic Terms...................................................... 1
2.2. Additional Terms................................................. 2
3. Demise And Term........................................................ 2
4. Confirmation Of Commencement Date...................................... 3
5. Monthly Rent........................................................... 3
6. Security Deposit....................................................... 3
6.1. General.......................................................... 3
6.2.1. General................................................... 4
6.2.2. Application Of The L-C.................................... 4
7. Direct Expenses........................................................ 5
7.1. Definitions...................................................... 5
7.2. Comparison Year.................................................. 5
7.3. Direct Expenses.................................................. 5
7.3.1. Tax Expenses............................................. 5
7.4. Operating Expenses............................................... 6
7.5. Payment For Increases In Direct Expenses......................... 7
7.6. Manner Of Payment................................................ 7
7.7. Final Statement.................................................. 7
7.8. Changes For Which Tenant Is Directly Responsible................. 7
8. Use Of Premises........................................................ 8
8.1. Permitted Use.................................................... 8
8.2. Restrictions On Use.............................................. 8
8.3. Compliance With Laws............................................. 8
9. Alterations And Additions.............................................. 9
9.1. Landlord's Consent............................................... 9
9.1.1. Alterations Requiring Prior Notice....................... 9
9.1.2. Alterations Requiring Prior Consent...................... 9
9.1.3. Other Terms.............................................. 9
9.2. Ownership and Surrender.......................................... 9
9.2.1. Alterations.............................................. 9
9.2.2. Tenant's Property........................................ 10
9.3. Liens............................................................ 10
9.4. Additional Requirements.......................................... 10
10. Repairs................................................................ 10
11. Services And Utilities................................................. 11
11.1. Landlord's Services.............................................. 11
11.1.1. HVAC.................................................... 11
11.1.2. Electricity............................................. 11
11.1.3. Water................................................... 11
11.1.4. Janitorial.............................................. 11
11.1.5. Restrictions On Use..................................... 11
11.2. Extra Hours...................................................... 11
11.3. Interruption Of Use.............................................. 12
12. Entry By Landlord...................................................... 12
13. Tenant's Insurance..................................................... 12
13.1. Casualty Insurance............................................... 12
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TABLE OF CONTENTS
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13.2. Public Liability And Property Damage Insurance............... 13
13.3. Loss Of Income Insurance..................................... 13
13.4. Policy Requirements.......................................... 13
13.4.1. General Requirements................................ 13
13.4.2. Additional Insureds................................. 13
13.4.3. Waivers Of Subrogation.............................. 13
13.5. Tenant's Failure To Deliver Policies......................... 13
14. Damage Or Destruction; Eminent Domain............................... 13
14.1. Landlord's Restoration....................................... 14
14.2. Rent Abatement............................................... 14
14.3. Exception To Abatement....................................... 14
14.4. Election To Terminate........................................ 14
14.5. Eminent Domain............................................... 14
14.6. Business Interruption........................................ 15
14.7. Waiver....................................................... 15
15. Assignment And Subletting........................................... 15
15.1. Landlord's Consent Required.................................. 15
15.2. Landlord's Right To Terminate Lease.......................... 15
15.3. Consent By Landlord.......................................... 15
15.4. Corporate And Partnership Transactions....................... 16
15.5. No Release Of Tenant......................................... 16
15.6. Additional Charges........................................... 16
15.7. Additional Terms............................................. 17
15.8. Subleases To Affiliates...................................... 17
16. Quiet Enjoyment..................................................... 17
17. Mortgagee Protection................................................ 17
17.1. Subordination................................................ 17
17.2. Mortgagee's Liability........................................ 18
17.3. Mortgagee's Right To Cure.................................... 18
18. Estoppel Certificates............................................... 18
19. Default............................................................. 18
19.1. Vacation Or Abandonment...................................... 18
19.2. Monetary Obligations......................................... 18
19.3. Non-Monetary Obligations..................................... 18
19.4. Insolvency................................................... 19
19.5. Occupancy Obligations........................................ 19
19.6. Transfers.................................................... 19
19.7. Estoppel Obligations......................................... 19
19.8. Guaranty Obligations......................................... 19
19.9. Insurance Obligations........................................ 19
20. Remedies For Default................................................ 19
20.1. General...................................................... 19
20.2. Redemption................................................... 20
20.3. Performance By Landlord...................................... 20
20.4. Post-Judgment Interest....................................... 20
21. Holding Over........................................................ 20
22. Indemnification And Exculpation..................................... 20
22.1. Definitions.................................................. 20
22.1.1. Liabilities......................................... 20
22.1.2. Landlord's Affiliates And Tenant's Affiliates....... 20
</TABLE>
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TABLE OF CONTENTS
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22.2. Indemnity..................................................... 20
22.3. Exemption Of Landlord From Liability.......................... 21
22.4. Satisfaction Of Remedies...................................... 21
23. Rules And Regulations................................................ 21
24. Modification Of Lease................................................ 21
25. Brokers.............................................................. 21
26. Parking.............................................................. 22
27. Authority To Enter Into Lease........................................ 22
28. Relocation. [Intentionally Omitted].................................. 22
29. Landlord Renovations................................................. 22
30. Option To Extend Lease Term.......................................... 23
31. Successor Entity..................................................... 23
32. General Provisions................................................... 24
32.1. Joint Obligation.............................................. 24
32.2. Marginal Headings............................................. 24
32.3. Time.......................................................... 24
32.4. Successors And Assigns........................................ 24
32.5. Recordation................................................... 24
32.6. Late Charges.................................................. 24
32.7. Prior Agreements; Amendment, Waiver........................... 24
32.8. Inability To Perform.......................................... 25
32.9. Legal Proceedings............................................. 25
32.10. Conveyance Of Premises........................................ 25
32.11. Name.......................................................... 25
32.12. Severability.................................................. 25
32.13. Waiver Of Trial By Jury....................................... 25
32.14. Cumulative Remedies........................................... 25
32.15. Choice Of Law................................................. 25
32.16. Signs......................................................... 25
32.18. Right To Lease................................................ 26
32.19. Presumptions.................................................. 26
32.20. Exhibits...................................................... 26
32.21. Submission Of Lease........................................... 26
32.22. Meaning Of Terms.............................................. 26
32.23. Notices....................................................... 26
32.24. Intentionally Deleted......................................... 26
32.25. Transportation Management..................................... 26
</TABLE>
Table of Contents - 3
<PAGE>
LIST OF EXHIBITS
Exhibit "A" - Premises Floor Plan
Exhibit "B" - Tenant Work Letter
Exhibit "C" - Lease Confirmation
Exhibit "D" - Estoppel Certificate
Exhibit "E" - Rules & Regulations
Exhibit "F" - Letter Of Credit
i
<PAGE>
O F F I C E L E A S E
- --------------------------------------------------------------------------------
1. Parties.
-------
This Lease, dated for reference purposes only June 15, 1997, is made by and
between Shuwa Investments Corporation, a California corporation ("Landlord"),
and BNC Mortgage, Inc., a California corporation ("Tenant").
2. Definitions.
-----------
2.1 Basic Terms. As used in this Lease, the following terms shall have the
-----------
meanings set forth below, subject to the qualifications, adjustments and
exceptions set forth elsewhere in this Lease.
(a) Premises: Space A during the Space A Occupancy Period and the
Building for all periods after the Space A Occupancy
Period.
(b) Building: The office building located at 1063 McGaw, Irvine,
California 92714, including all plazas, lobbies, landscaped
areas, office and commercial space and parking facilities
located thereat.
(c) Permitted Professional and business office use (excluding any
Use: government and/or medical uses) consistent with the
character of the Building.
(d) Lease Term: Five (5) years.
(e) Commencement The earlier of (a) the date Tenant occupies all or a
Date: portion of Space A (other than in connection with the
construction of the same), and (b) the date that Space A is
Ready for Occupancy (as defined in Exhibit "B", Section
3.1), which Commencement Date is anticipated to be
September 1, 1997.
(f) Expiration The last day of the month in which the fifth (5th)
Date: anniversary of the Commencement Date occurs.
(g) Monthly Rent: $42,781.70 until the Space B Commencement Date and
thereafter $71,198.40. (If the Space B Commencement Date
occurs on a date other than the first day of a month, the
rent for such month shall be prorated accordingly based on
the number of days in such month that the Monthly Rent is
$42,781.70 and the number of days in such month that the
Monthly Rent is $71,198.40.)
(h) Rentable 32,909 rentable square feet until the Space B Commencement
Area: Date and thereafter 54,768 rentable square feet (which
amounts shall be conclusive for all purposes hereunder).
(i) Base Year: The calendar year 1998.
(j) Tenant's 100% (which shall be conclusive for all purposes
Share: hereunder).
(k) Security $71,198.40.
Deposit:
(l) Landlord's Shuwa Leasing Corporation.
Broker:
(m) Tenant's The MacArthur Group Commercial Real Estate Services.
Broker:
(n) Tenant's BNC Mortgage, Inc., 1740 East Garry Avenue, Suite 109,
Notice Santa Ana, California 92705, Attention: Evan R. Buckley,
Address Prior President; with copy to: Catherine Hanan, Esq., 2049
To Century Park East, Suite 3100, Los Angeles,
Commencement: California 90067.
1
<PAGE>
OFFICE LEASE BNC MORTGAGE, INC.
- --------------------------------------------------------------------------------
2.2 Additional Terms.
----------------
(a) Land: The parcel or parcels of land upon which the Building is
located.
(b) Lease Year: Each twelve (12) month period during the Lease Term with
the first Lease Year commencing upon the Commencement Date
and ending on the last day of the eleventh (11th) calendar
month thereafter and the second (2nd) and each succeeding
Lease Year commencing on the first day of the next calendar
month, and with the last Lease Year ending on the
Expiration Date.
(c) Space A That certain space consisting of approximately 32,909
rentable square feet of space as designated as Space A on
the attached Exhibit A.
(d) Space B That certain space consisting of approximately 21,859
rentable square feet of space as designated as Space B on
the attached Exhibit A.
(e) Space B The date that is the earlier of: (a) the date Tenant
Commencement occupies all or a portion of Space B for the purposes of
Date conducting business therein, or (b) the date which is one
hundred eighty (180) days following the Commencement Date
subject to the adjustments set forth in Section 3.1.
(f) Space A The period starting with the Commencement Date and ending
Occupancy on the Space B Commencement Date.
Period
(e) Landlord's Shuwa Investments Corporation, North America Building
Notice Management Corporation, 3200 Bristol Street, Suite 710,
Address: Costa Mesa, California 92626, Attention: Property
Management; with a copy to: Shuwa Investments Corporation,
North America Building Management Corporation, 515 South
Flower Street, Suite 500, Los Angeles, California 90071-
2205, Attention: Asset Management.
3. Demise And Term.
---------------
3.1 Landlord hereby leases the Premises to Tenant and Tenant hereby leases
the Premises from Landlord, subject to all of the terms, covenants and
conditions in this Lease. The Premises are leased for the Lease Term, which
shall commence on the Commencement Date and shall expire on the Expiration Date,
unless sooner terminated pursuant to the provisions of this Lease.
3.2 If the Commencement Date is specified as a specific calendar date and
Landlord shall fail to deliver the Premises on such date, Landlord shall not be
subject to any liability therefor, nor shall such failure affect the validity of
this Lease or the obligations of Tenant hereunder, or extend the term hereof;
but in such case, Tenant shall not, except as otherwise provided herein, be
obligated to pay rent or perform any other obligation of Tenant under the terms
of this Lease until Landlord delivers possession of the Premises to Tenant. If a
calendar date is referenced as an anticipated Commencement Date, or a Ready For
Occupancy date, such anticipated date shall not affect the determination of the
actual Commencement Date, or Ready For Occupancy date, nor shall Landlord be
subject to any liability because the Commencement Date, or Ready For Occupancy
date did not occur on such anticipated date
3.3 Provided that Tenant has not occupied Space B for the purpose of
conducting business at an earlier date, the Space B Commencement Date shall
occur one hundred eighty (180) days following the Commencement Date (and
thereupon Tenant shall commence paying the full rent of $71,198.40 per month)
whether or not Space B is Ready for Occupancy. Tenant shall be entitled for one
day of rent abatement for the rent proportionate to Space B (39.91%) for each
day that Landlord takes longer than the Space B Build-Out Period (as defined
below) to make Space B Ready for Occupancy pursuant to the work to be performed
to Space B (the "Space B Work") as provided in the Work Letter.
2
<PAGE>
OFFICE LEASE BNC MORTGAGE, INC.
- --------------------------------------------------------------------------------
3.3.1. The Space B Build-Out Period shall commence on the date Tenant has
submitted to Landlord the Final Space Plan for the Space B Work and shall end
one hundred twenty (120) days later, provided that such one hundred twenty (120)
day period shall be increased for each day that the Space B Work is delayed due
to: (i) Force Majeure (as defined in Section 30.8); (ii) any Tenant Delay (as
defined in the Work Letter); or (iii) due to the Final Plans for the Space B
Work requiring materials, components, finishes or improvements which are not
available in a commercially reasonable time given the expectation that the Space
B shall be built-out with standard office materials, components and finishes and
as permitted with a budget of Ten Dollars ($10.00) per rentable square foot of
space. To illustrate the application of the foregoing; in the event that: (i)
the Commencement Date was September 15, 1997; (ii) Tenant submitted to Landlord
Final Plans for Space B on March 1, 1998; (iii) Landlord made Space B Ready for
Occupancy on July 15, 1998; and (iv) two (2) days of Tenant Delays, one (1) day
of Force Majeure delays, one (1) day of delays attributable to non-standard
materials was applicable, then Tenant would pay the full rent for the Premises
($71,198.40 per month) commencing March 14, 1998, and as of July 15, 1998,
Landlord would compensate Tenant with thirteen (13) days of rent abatement for
Space B, for total rent abatement in the amount of Ten Thousand Eighty-Two and
78/100 Dollars ($10,082.78) ($71,198.40 x .3991 divided by 31 x 11).
3.3.2. For any period following the Space B Commencement Date and prior to
the commencement of the Space B Work, Tenant may use and occupy Space B,
provided: (i) Tenant shall be solely responsible for obtaining any certificate
of occupancy or other governmental approvals or authorizations (if any) that may
be required to occupy Space B and shall not receive any rent abatement for Space
B in the event such approval is not obtained or cannot be obtained; (ii) prior
to the commencement of the Space B Work, Tenant shall have entirely vacated
Space B, removed all personal property therefrom. Tenant shall not receive any
rent abatement for Space B during the performance of the Space B Work, except,
as provided 3.3.1. above to the extent that Space B is not Ready for Occupancy
at the end of the Space B Build-Out Period.
4. Confirmation Of Commencement Date.
---------------------------------
Upon Landlord's request, Tenant shall confirm the Commencement Date and the
Space B Commencement Date, each by executing a lease confirmation in the form
attached hereto as Exhibit "C", in writing, but Tenant's failure to do so shall
not affect the commencement of the Lease Term.
5. Monthly Rent.
------------
Tenant shall pay to Landlord as rent for the Premises the Monthly Rent as set
forth in Article 2.1 (g). The Monthly Rent shall be payable in advance on or
before the first day of the first full calendar month of the Lease Term (the
"First Month") and on or before the first day of each successive calendar month
thereafter during the Lease Term, except that the Monthly Rent for the First
Month shall be paid upon Tenant's execution of this Lease. The Monthly Rent for
any period during the Lease Term which is for less than one (1) month shall be
prorated based on a thirty (30) day month. The Monthly Rent and all other rent
hereunder shall be paid without prior notice or demand, without deduction or
offset, in lawful money of the United States of America which shall be legal
tender at the time of payment, at the office of the Building or to another
person or at another place as Landlord may from time to time designate in
writing. The term "additional rent" means all other amounts payable by Tenant to
Landlord hereunder (whether or not designated as additional rent).
6. Security Deposit.
----------------
6.1 General. Upon the execution of this Lease, Tenant shall deposit the
-------
Security Deposit with Landlord. The Security Deposit shall be held by Landlord
as security for the performance of all of Tenant's obligations during the Lease
Term. Each time the Monthly Rent is increased, Tenant shall deposit additional
cash with Landlord sufficient to increase the Security Deposit to an amount
which bears the same proportion to the increased Monthly Rent as the initial
Security Deposit bore to the initial Monthly Rent. Upon any default by Tenant
under this Lease, Landlord may, but shall not be obligated to, use, apply or
retain all or any part of the Security Deposit for the payment of any rent in
default, or any other Liabilities which Landlord may incur as a result of or in
connection with Tenant's default. If any portion of the Security Deposit is so
used or applied, Tenant shall, within five (5) days after written demand
therefor, deposit cash with Landlord in an amount sufficient to restore the
Security Deposit to its previous amount. Landlord shall not be required to keep
the Security Deposit separate from its general funds, and Tenant shall not be
entitled to receive interest on the Security Deposit. If Tenant complies with
all of the
3
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OFFICE LEASE BNC MORTGAGE, INC.
- --------------------------------------------------------------------------------
provisions of this Lease, the unused portion of the Security Deposit
shall be returned to Tenant (or, at Tenant's option, to the last assignee of
Tenant's interest hereunder) within thirty (30) days after the expiration or
sooner termination of the Lease Term and the surrender of possession of the
Premises to Landlord in the condition required hereby. Tenant hereby waives the
provisions of Section 1950.7 of the California Civil Code, and all other
provisions of law, now or hereafter in force, which provide that Landlord may
claim from a security deposit only those sums reasonably necessary to remedy
defaults in the payment of rent, to repair damage caused by Tenant or to clean
the Premises, it being agreed that Landlord may, in addition, claim those sums
reasonably necessary to compensate Landlord for any loss or damage, foreseeable
or unforeseeable, caused by the act or omission of Tenant or any officer,
employee, agent or invitee of Tenant.
6.2 Letter Of Credit.
----------------
6.2.1. General. In addition to depositing with Landlord a Security Deposit,
-------
Tenant shall deliver to Landlord concurrent with Landlord's execution of this
Lease, an unconditional, clean, irrevocable letter of credit (the "L-C") in the
initial amount of Six Hundred Thousand Dollars ($600,000.00) (the "L-C Amount"),
which L-C shall be issued by a money center bank (a bank which accepts deposits,
maintains accounts, has a local Los Angeles office which will negotiate a letter
of credit, and whose deposits are insured by the FDIC) reasonably acceptable to
Landlord, and which L-C shall be in a form and content as set forth in Exhibit
"F", attached hereto. Tenant shall pay all expenses, points and/or fees incurred
by Tenant in obtaining the L-C. Provided Tenant is not then in Default under the
Lease and has not been in Default more than twice under the Lease up to such
date, the amount of the L-C shall be reduced to Two Hundred Fifty Thousand
Dollars ($250,000.00) at the end of the forty-eighth month (48th) of the Lease
term.
6.2.2. Application Of The L-C. The L-C shall be held by Landlord as
security for the faithful performance by Tenant of all the terms, covenants and
conditions of the Lease to be kept and performed by Tenant during the Lease
Term. The L-C shall not be mortgaged, assigned or encumbered in any manner
whatsoever by Tenant without the prior written consent of Landlord. If a default
(as provided in Section 19) occurs with respect to any of Tenant's obligations
under the Lease (a "Default"), including, but not limited to the provisions
relating to the payment of rent, or if Tenant fails to renew the L-C at least
thirty (30) days before its expiration, Landlord may, but shall not be required
to, draw upon all or any portion of the L-C for payment of any rent or any other
sum in Default, or for the payment of any amount that Landlord may reasonably
spend or may become obligated to spend by reason of Tenant's Default, or to
compensate Landlord for any other loss or damage that Landlord may suffer by
reason of Tenant's Default, or to compensate Landlord for any other loss or
damage that Landlord may suffer by reason of Tenant's Default. The use,
application or retention of the L-C, or any portion thereof, by Landlord shall
not prevent Landlord from exercising any other right or remedy provided by the
Lease or by law, it being intended that Landlord shall not first be required to
proceed against the L-C and shall not operate as a limitation on any recovery to
which Landlord may otherwise be entitled. Any amount of the L-C which is drawn
upon by Landlord, but is not used or applied by Landlord, shall be held by
Landlord and deemed a security deposit (the "L-C Security Deposit"). If any
portion of the L-C is drawn upon, Tenant shall, within ten (10) days after
written demand therefor, either (i) deposit cash with Landlord (which cash shall
be applied by Landlord to the L-C Security Deposit) in an amount sufficient to
cause the sum of the L-C Security Deposit and the amount of the remaining L-C to
be equivalent to the amount of the L-C then required under the Lease, or (ii)
reinstate the L-C to the amount then required under the Lease, and if any
portion of the L-C Security Deposit is used or applied, Tenant shall, within ten
(10) days after written demand therefor, deposit cash with Landlord (which cash
shall be applied by Landlord to the L-C Security Deposit) in an amount
sufficient to restore the L-C Security Deposit to the amount then required under
the Lease, and Tenant's failure to do so shall be a Default under the Lease.
Tenant acknowledges that Landlord has the right to transfer or mortgage its
interest in the Project and the Building and in the Lease and Tenant agrees that
in the event of any such transfer or mortgage, Landlord shall have the right to
transfer or assign the L-C Security Deposit and/or the L-C to the transferee or
mortgagee for the return of the L-C Security Deposit and/or the L-C. If Tenant
shall fully and faithfully perform every provision of the Lease to be performed
by it, the L-C Security Deposit and/or the L-C, or any balance thereof, shall be
returned to Tenant within thirty (30) days following the expiration of the Lease
Term. No subletting or assignment of this Lease (including any subletting
pursuant to Section 15.8 or any assignment pursuant to 31 of the Lease) shall
affect the enforceability of the L-C unless, in the event of a complete
assignment of the Lease, a replacement L-C is executed by the assignee under the
same terms and conditions as the L-C. Landlord may condition the effectiveness
of any assignment of this Lease on such a replacement letter of credit.
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7. Direct Expenses.
---------------
7.1. Definitions. As used in this Lease, the following terms have the
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meanings set forth below.
7.2. Comparison Year. Each calendar year after the Base Year, all or any
---------------
portion of which falls within the Lease Term.
7.3. Direct Expenses. The sum of Tax Expenses and Operating Expenses.
---------------
7.3.1. Tax Expenses. All federal, state, county, or local governmental or
------------
municipal taxes, fees, charges or other impositions of every kind and nature,
whether general, special, ordinary or extraordinary (including, without
limitation, real estate taxes, general and special assessments, transit taxes or
charges, business or license taxes or fees, annual or periodic license or use
fees, open space charges, housing fund assessments, leasehold taxes or taxes
based upon the receipt of rent, including gross receipts or sales taxes
applicable to the receipt of rent, unless required to be paid by Tenant,
personal property taxes imposed upon the fixtures, machinery, equipment,
apparatus, systems and equipment, appurtenances, furniture and other personal
property used in connection with the Building), which Landlord shall pay or
incur because of or in connection with the ownership, leasing and operation of
the Building and Land.
7.3.1.1. Tax Expenses shall include, without limitation:
(i) Any assessment, tax, fee, levy or charge in addition to, or in
substitution, partially or totally, of any assessment, tax, fee, levy or
charge previously included within the definition of real property tax, it
being acknowledged by Tenant and Landlord that Proposition 13 was adopted by
the voters of the State of California in the June 1978 election ("Proposition
13") and that assessments, taxes, fees, levies and charges may be imposed by
governmental agencies for such services as fire protection, street, sidewalk
and road maintenance, conservation, refuse removal and for other governmental
services formerly provided without charge to property owners or occupants,
and, in further recognition of the decrease in the level and quality of
governmental services and amenities as a result of Proposition 13, Tax
Expenses shall also include any governmental or private assessments or the
Building's contribution towards a governmental or private cost-sharing
agreement for the purpose of augmenting or improving the quality of services
and amenities normally provided by governmental agencies. It is the intention
of Tenant and Landlord that all such new and increased assessments, taxes,
fees, levies, and charges and all similar assessments, taxes, fees, levies
and charges be included within the definition of Tax Expenses for purposes of
this Lease;
(ii) Any assessment, tax, fee, levy, or charge allocable to or
measured by the area of the Premises or the rent payable hereunder,
including, without limitation, any gross income tax with respect to the
receipt of such rent, or upon or with respect to the possession, leasing,
operating, management, maintenance, alteration, repair, use or occupancy by
Tenant of the Premises, or any portion thereof;
(iii) Any assessment, tax, fee, levy or charge, upon this transaction
or any document to which Tenant is a party, creating or transferring an
interest or an estate in the Premises; and
(iv) Any possessory taxes charged or levied in lieu of real estate
taxes.
7.3.1.2. The amount of Tax Expenses for the Base Year attributable to
the valuation of the Building and Land, inclusive of tenant improvements, shall
be known as "Base Taxes". If, in any Comparison Year subsequent to the Base
Year, the amount of the Tax Expenses decreases, then for purposes of all
subsequent Comparison Years, including the Comparison Year in which such
decrease in Tax Expenses occurred, the Base Taxes shall be deemed to be reduced
by the amount of such decrease
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in Tax Expenses.
7.3.1.3. Any expenses incurred by Landlord in attempting to protest,
reduce or minimize Tax Expenses shall be included in Operating Expenses in the
calendar year to which such Tax Expenses relate. Upon finalization of all
processes or procedures to reduce Tax Expenses for the calendar year in question
and any appeals in connection therewith, tax refunds shall be deducted from Tax
Expenses in the calendar year to which such tax refunds relate.
7.3.1.4. Notwithstanding anything to the contrary contained in this
Section 7.3.1.4 (except as set forth in Section 7.3.1.1 or levied in whole or
part in lieu of Tax Expenses), there shall be excluded from Tax Expenses (i) all
excess profits taxes, franchise taxes, gift taxes, capital stock taxes,
inheritance and succession taxes, estate taxes, federal and state income taxes,
and other taxes to the extent applicable to Landlord's general or net income (as
opposed to rents, receipts or income attributable to operations at the
Building), (ii) any items included as Operating Expenses, and (iii) any items
paid by Tenant under Section 7.5 of this Lease.
7.3.1.5. Notwithstanding anything to the contrary provided above,
assessments against the Property which may, at the owner's option, be paid in
installments or in one lump sum payment, shall be paid in installments and such
installments shall be included in the taxes payable under this section.
7.4. Operating Expenses. All costs and expenses of managing, operating,
------------------
maintaining and repairing the Building and the Land ("Operating Expenses"),
including, but not limited to: water and sewer charges; insurance premiums for
all insurance policies deemed necessary by Landlord; janitorial services; wages
of employees engaged in the operation, maintenance or repair of the Building or
the Land, including all customary employee benefits, Worker's Compensation and
payroll taxes; management fees, or, if no managing agent is retained for the
Project, a sum in lieu thereof which is not in excess of the prevailing rate, as
reasonably determined by Landlord, for management services charged by
professional management companies for the operation of similar buildings; legal,
accounting and other consulting fees; the cost of air conditioning, heating,
ventilation, electricity, water and other services and utilities; elevator
maintenance; costs incurred in connection with the Building which relate to the
operation, repair, maintenance and replacement of all systems, equipment or
facilities which serve the Building in the whole or in part, the cost of capital
improvements (i) which are intended as a labor-saving device or to effect other
economies in the operation or maintenance of the Building, or any portion
thereof, and (ii) that are required under any governmental law or regulation
that is then being enforced by a federal, state or local governmental agency;
provided, however, that each such permitted capital expenditure shall be
amortized (including interest on the unamortized cost with the interest rate
fixed at the time such expenditure is placed in service) over its useful or such
shorter life as Landlord shall reasonably determine; costs of the replacement of
floor coverings or wall treatments in the common areas of the Building,
supplies, materials, equipment and tools; and maintenance, restoration and
repair of all parking and common areas. Notwithstanding the foregoing, for
purposes of this Lease, Operating Expenses shall not, however, include (A)
except as otherwise set forth above in this Section 7.4, bad-debt expenses,
depreciation, interest and amortization on mortgages, or ground lease payments,
if any; (B) real estate brokers' leasing commissions; (C) the cost of providing
any service directly to and paid directly by any tenant; (D) any costs expressly
excluded from Operating Expenses elsewhere in this Lease; (E) costs of any items
to the extent Landlord receives reimbursement from insurance proceeds (such
proceeds to be excluded from Operating Expenses in the year in which received,
except that any deductible amount under any insurance policy shall be included
within Operating Expenses) or from a third party; (F) costs of capital
improvements, except those set forth in this Section 7.4, or those includable in
Operating Expenses pursuant to an application by Landlord of sound real estate
management principles; (G) marketing costs, including leasing commissions, space
planning costs and attorneys' fees in connection with the negotiation and
preparation of letters, deal memos, letters of intent, leases, and subleases
and/or assignments incurred in connection with present or prospective tenants or
other occupants of the Building, including attorneys' fees and other costs and
expenditures incurred in connection with disputes with present or prospective
tenants or other occupants of the Building (except to the extent such dispute
may benefit the Building or a majority of the tenants therein); (H) except as
otherwise permitted above in this Section 7.4, costs, including permit, license
and inspection costs, incurred with respect to the installation of other
tenants' or occupants' improvements made for tenants or other occupants in the
Building or incurred in renovating or otherwise improving, decorating, painting
or redecorating vacant space for tenants or other occupants in the Building; (I)
rentals and other related expenses for leasing a heating, ventilation and air
conditioning system, elevators, or other items (except when needed in connection
with normal repairs and maintenance of the Building) which if purchased, rather
than rented, would constitute a capital improvement not included in Operating
Expenses
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pursuant to this Lease; (J) expenses in connection with material services or
other material benefits which are not offered to Tenant or for which Tenant is
charged for directly but which are provided to another tenant or occupant of the
Building, without charge; (K) overhead and profit increment paid to subsidiaries
or affiliates of Landlord for goods and/or services in the Building to the
extent the same exceeds the costs of such by unaffiliated third parties on a
competitive basis; (L) advertising and promotional expenditures, and costs of
installing signs in or on the Building identifying the owner of the Building or
other tenants' signs; and (M) electric power costs or other utility costs for
which any tenant directly contracts with the local public service company.
Notwithstanding anything to the contrary, the costs of the initial improvements
to be constructed at the Building pursuant to this Lease shall not be included
(as a capital costs or otherwise) in determining the Operating Costs for the
Base Year or any Comparison Year.
7.5 Payment For Increases In Direct Expenses. If the Direct Expenses paid or
----------------------------------------
incurred by Landlord in any Comparison Year increase over the Direct Expenses
paid or incurred for the Base Year, Tenant shall pay, as additional rent,
Tenant's Share of the increase in the manner set forth in this article. If,
during any period in the Base Year or a Comparison Year, less than one hundred
percent (100%) of the rentable area of the Building is occupied, the Direct
Expenses for that year shall be adjusted to what the Direct Expenses would have
been if one hundred percent (100%) of the rentable area of the Building had been
occupied throughout that year. Tenant's Share of increases in Direct Expenses
shall be prorated for any partial Comparison Year which falls within the Lease
Term. In no event shall the components of Direct Expenses for any Expense Year
related to electrical costs be less than the components of Direct Expenses
related to electrical costs in the Base Year. Finally, notwithstanding anything
to the contrary set forth in this Article 7, when calculating Direct Expenses
for the Base Year, Operating Expenses shall exclude market-wide labor-rate
increases due to extraordinary circumstances, including, but not limited to,
boycotts and strikes, and utility rate increases due to extraordinary
circumstances including, but not limited to, conservation surcharges, boycotts,
embargoes or other shortages, and any capital improvement or expenditure and any
amortization of the costs of any capital improvements or expenditures.
7.6 Manner Of Payment. Landlord shall deliver to Tenant a statement showing
-----------------
Landlord's reasonable estimate of the Direct Expenses for each Comparison Year
(commencing with the first Comparison Year of 1999) and the amount of Tenant's
Share of any increase in Direct Expenses based on such estimate. Commencing as
of the first day of each Comparison Year, Tenant shall pay to Landlord, at the
times and in the manner provided herein for the payment of Monthly Rent, one-
twelfth (1/12) of Tenant's Share of any increases as shown by Landlord's
statement. If Landlord's statement is furnished after January 1 of a Comparison
Year, then on or before the first day of the first calendar month following
Tenant's receipt of Landlord's statement, in addition to the monthly installment
of Tenant's Share of any increases due on that date, Tenant shall pay the amount
of Tenant's Share of any increases for each calendar month or fraction thereof
that has already elapsed in such Comparison Year.
7.7 Final Statement. After the end of each Comparison Year (including the
---------------
Comparison Year in which the Lease Term terminates), Landlord shall deliver to
Tenant a final statement of the actual Direct Expenses for such Comparison Year.
Within ten (10) days of delivery of each final statement, Tenant shall pay
Landlord the amount due for Tenant's Share of any increases in the Direct
Expenses. Tenant shall have thirty (30) days after delivery of Landlord's final
statement to object in writing to the accuracy of the statement. If Tenant does
not object within such thirty (30) day period, Landlord's final statement shall
be conclusive and binding on Tenant. Objections by Tenant shall not excuse or
abate Tenant's obligation to make the payments required under this Section 7.7
(or under Section 7.6) pending the resolution of Tenant's objection. Any credit
due Tenant for overpayment of Tenant's Share of any increases in the Direct
Expenses shall be credited against the installments of Monthly Rent next coming
due, provided credits for overpayments for the Comparison Year in which this
Lease terminates shall be paid thirty (30) days following the delivery of the
final statement of such Comparison Year.
7.8 Changes For Which Tenant Is Directly Responsible. Tenant shall reimburse
------------------------------------------------
Landlord upon demand for any and all taxes or assessments required to be paid by
Landlord (except to the extent included in Tax Expenses by Landlord), excluding
state, local and federal personal or corporate income taxes measured by the net
income of Landlord from all sources and estate and inheritance taxes, whether or
not now customary or within the contemplation of the parties hereto, when: (i)
such taxes are measured by or reasonably attributable to the cost or value of
Tenant's equipment, furniture, fixtures and other personal property located in
the Premises, or by the cost or value of any leasehold improvements made in or
to the Premises by or for Tenant, to the extent the cost or value of such
leasehold improvements exceeds the cost or value of a building standard build-
out as determined by Landlord regardless of whether title to such improvements
shall be vested in Tenant or Landlord; (ii) such taxes are assessed upon or with
respect to
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the possession, leasing, operation, management, maintenance, alteration, repair,
use or occupancy by Tenant of the Premises or any portion of the Land or
Building or the parking spaces granted to Tenant under this Lease; (iii) such
taxes are assessed upon this transaction or any document to which Tenant is a
party creating or transferring an interest or an estate in the Premises; or (iv)
subject to the last sentence of Section 7.4 above, such assessments are levied
or assessed upon the Land or Building or any part thereof or upon Landlord
and/or by any governmental authority or entity, and relate to the construction,
operation, management, use, alteration or repair of mass transit improvements
including, but not limited to, any amounts paid in connection with Metrorail.
8. Use Of Premises.
---------------
8.1 Permitted Use. Tenant shall use the Premises only for the Permitted Use
-------------
and shall not use or permit the Premises to be used for any other purpose
without the prior written consent of Landlord, which may be withheld in
Landlord's sole discretion, provided Landlord shall not unreasonably withhold
its consent to any non-industrial, non-manufacturing change in use which is
permitted under all Applicable Laws (which permissibility shall be determined
without any conditional use permit or any other special permit that may be
obtainable) and which in no event increases the burden to the operating systems
(e.g. plumbing, electrical, HVAC or elevators) of the Premises, increases the
insurance payable with respect to the Premises or the likely use of any
hazardous materials.
8.2 Restrictions On Use. Tenant shall not do or permit anything to be done
-------------------
in or about the Premises nor bring or keep anything therein which will: (a)
increase the existing rate of, cause the cancellation of or otherwise adversely
affect any casualty or other insurance for the Building or any part thereof or
any of its contents; (b) impair the proper and economic maintenance, operation
and repair of the Building or any portion thereof; (c) obstruct or interfere
with the rights of other tenants or occupants of the Building or injure or annoy
them; or (d) cause any nuisance in or about the Premises or the Building. Tenant
shall not use or allow any part of the Premises to be used for the storage,
manufacturing or sale of food or beverages or for the manufacture, retail sale
or auction of merchandise, goods or property of any kind, or as a school or
classroom, or for any unlawful or objectionable purpose. Tenant shall not commit
or allow to be committed any waste to the Premises or the Building. In no event
shall the terms of this Section 8.2 prohibit the operation of a lunch room for
the employees and agents of Tenant.
8.3 Compliance With Laws. Tenant shall not use the Premises or permit
--------------------
anything to be done in or about the Premises, the Building or the Land which
will in any way conflict with or violate any present or future law, statute,
ordinance, code, rule, regulation, requirement, license, permit, certificate,
judgment, decree, order or direction of any present or future governmental or
quasi-governmental authority, agency, department, board, panel or court
(singularly and collectively "Laws"). Tenant shall, at its expense, promptly
comply with all Laws, and with the requirements of any board of fire insurance
underwriters or other similar bodies now or hereafter constituted, relating to
or affecting the condition, use or occupancy of the Premises, with respect to
the tenant improvements located in or about the Premises or with respect to the
Building common areas on the floor or floors containing the Premises. Tenant
shall not use or allow another person or entity to use any part of the Premises
for the storage, use, treatment, manufacture or sale of hazardous materials or
substances as defined pursuant to any applicable federal, state or local
governmental or quasi-governmental law, code, ordinance, rule, or regulation.
Landlord acknowledges, however, that Tenant will maintain products in the
Premises which are incidental to the operation of its offices, such as photocopy
supplies, secretarial supplies and limited janitorial supplies, which products
contain chemicals which are categorized as hazardous materials. Landlord agrees
that the use of such products in the Premises in compliance with all applicable
laws and in the manner in which such products are designed to be used shall not
be a violation by Tenant of this Section 8.3. The judgment of any court of
competent jurisdiction or the admission of Tenant in any action or proceeding
(whether Landlord is a party or not) that Tenant has violated any Laws shall be
conclusive of that fact as between Landlord and Tenant.
8.4 Landlord's Obligations Regarding Pre-Existing Hazardous Materials. In no
-----------------------------------------------------------------
event shall Tenant have any obligation to take any action with respect to
Hazardous Materials existing at the Premises as of the date Tenant occupies the
Premises ("Pre-Existing Hazardous Materials"). Landlord represents that, to the
best of its knowledge, as of the date hereof, no Hazardous Materials exist at
the Premises which will require any remediation action under any applicable, law
rule or regulation. Landlord shall comply at its own sole cost and expense with
any laws, rules or regulations requiring action with respect to such Pre-
Existing Hazardous Materials. In no event shall Tenant be deemed to have caused
or
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contributed to a hazardous substance being on the Premises if, in the course of
making tenant improvements, alterations or modifications, asbestos is found on
the Premises and is required to be inspected and/or removed. Any and all such
costs relating to asbestos in the Premises prior to its delivery to Tenant
(including investigation and removal of) shall be borne by Landlord.
9. Alterations And Additions.
-------------------------
9.1 Landlord's Consent.
------------------
9.1.1. Alterations Requiring Prior Notice. Tenant shall not make or
----------------------------------
permit to be made any alterations, additions or improvements (singularly and
collectively "Alterations") to or of the Building or the Premises or any part
thereof, without the prior written consent of Landlord in each instance.
However, Landlord's consent shall not be required (but Tenant must provide prior
written notice) for minor, cosmetic decorations of the Premises such as wall
coverings, wall hangings and built-in cabinetry, nor for the installation of
furnishings and, subject to the provisions of Section 11.2, office equipment,
computer and telephone cabling (provided Tenant shall, at its sole costs and
expense, repair any damage to the Premises caused by such installations)
(collectively, "Cosmetic Alterations"). "Alterations" shall not be deemed to
include the initial leasehold improvements described in Exhibit B.
9.1.2. Alterations Requiring Prior Consent. Landlord will not
-----------------------------------
unreasonably withhold its consent to any Alterations provided and upon the
condition that all of the following conditions (which shall not apply to
Cosmetic Alterations) shall be satisfied: (a) the Alterations do not affect the
outside appearance of the Building; (b) the Alterations are nonstructural; (c)
the Alterations are to the interior of the Premises and do not affect any part
of the Building outside of the Premises; (d) the Alterations do not affect the
functioning of the heating, ventilating and air conditioning ("HVAC"),
mechanical, electrical, sanitary or other utilities, systems and services of the
Building, or increase the usage thereof by Tenant; (e) Landlord shall have
approved the final plans and specifications for the Alterations and all
contractors (including subcontractors) who will perform them; (f) Tenant agrees
to pay to Landlord (i) a fee for Landlord's indirect costs, field supervision or
coordination in connection with the Alterations equal to five percent (5%) of
the estimated cost of the Alterations, and (ii) the reasonable costs and
expenses actually incurred by Landlord in reviewing Tenant's plans and
specifications and inspecting the Alterations to determine whether they are
being performed in accordance with the approved plans and specifications and in
compliance with Laws, including, without limitation, the fees of any architect
or engineer employed by Landlord for such purpose; and (g) before proceeding
with any Alteration which will cost more than Ten Thousand Dollars ($10,000.00)
(exclusive of the costs of items constituting Tenant's Property, as defined in
Section 9.2), Tenant obtains and delivers to Landlord, a lien and completion
bond or some alternate form of security satisfactory to Landlord in an amount
sufficient to ensure the lien-free completion of such Alterations and naming
Landlord as a co-obligee. Unless all of the foregoing conditions are satisfied,
Landlord shall have the right to withhold its consent to the Alterations in
Landlord's sole and absolute discretion.
9.1.3. Other Terms. Not less than fifteen (15) days nor more than twenty
-----------
(20) days prior to commencement of any Alterations (including, without
limitation, Cosmetic Alterations), Tenant shall notify Landlord of the work
commencement date so that Landlord may post notices of nonresponsibility about
the Premises. All Alterations must comply with all Laws, the other terms of this
Lease, and the final plans and specifications approved by Landlord, and Tenant
shall fully and promptly comply with and observe the rules and regulations of
Landlord then in force with respect to the making of Alterations. Landlord's
review and approval of Tenant's plans and specifications are solely for
Landlord's benefit. Landlord shall have no duty toward Tenant, nor shall
Landlord be deemed to have made any representation or warranty to Tenant, with
respect to the safety, adequacy, correctness, efficiency or compliance with Laws
of the design of the Alterations, the plans and specifications therefor, or any
other matter regarding the Alterations. Tenant shall deliver to Landlord a
complete set of "as built" plans and specifications for each Alteration.
9.2 Ownership and Surrender.
-----------------------
9.2.1. Alterations. Upon their installation, all Alterations, including,
-----------
but not limited to, cabling, wall covering, paneling and built-in cabinetry, but
excluding movable furniture, trade fixtures and office equipment ("Tenant's
Property"), shall become a part of the realty and belong to Landlord and shall
be surrendered with the Premises. However, upon the expiration or sooner
termination of the Lease Term, Tenant shall, upon demand by Landlord, at
Tenant's expense, immediately remove any Alterations made
9
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by Tenant which are designated by Landlord to be removed and repair any damage
to the Premises caused by such removal.
9.2.2. Tenant's Property. Upon the expiration or sooner termination of
-----------------
the Lease Term, Tenant shall immediately remove Tenant's Property from the
Premises and repair any damage to the Premises caused by the installation, use
or removal of Tenant's Property. If Tenant fails to remove Tenant's Property on
or before the expiration or sooner termination of the Lease Term, (i) Tenant's
Property shall be, at Landlord's option, deemed abandoned by Tenant, (ii) Tenant
hereby waives any statutory or common law rights to Tenant's Property or to
assert the means by which Landlord disposes of Tenant's Property, (iii) Tenant
agrees that Landlord may keep or dispose of Tenant's Property in any manner
Landlord desires, without liability to Tenant therefor, and (iv) Tenant shall be
obligated to promptly reimburse Landlord for any costs incurred by Landlord in
removing and disposing of Tenant's Property (and for any costs incurred by
Landlord in repairing the Premises as a result of the installation, use or
removal of Tenant's Property).
9.3 Liens. Tenant shall pay when due all claims for labor, materials and
-----
services furnished by or at the request of Tenant or Tenant's Affiliates. Tenant
shall keep the Premises, the Building and the Land free from all liens, security
interests and encumbrances (including, without limitation, all mechanic's liens
and stop notices) created as a result of or arising in connection with the
Alterations or any other labor, services or materials provided for or at the
request of Tenant or Tenant's Affiliates, or any other act or omission of Tenant
or Tenant's Affiliates, or persons claiming through or under them (such liens,
security interests and encumbrances singularly and collectively are herein
called "Liens"). Tenant shall not use materials in connection with the
Alterations that are subject to any Liens. Tenant shall indemnify Landlord and
Landlord's Affiliates for, and hold Landlord and Landlord's Affiliates harmless
from and against: (a) all Liens; (b) the removal of all Liens and any actions or
proceedings related thereto; and (c) all Liabilities incurred by Landlord or
Landlord's Affiliates in connection with the foregoing. If Tenant fails to keep
the Premises, the Building and the Land free from Liens, then, in addition to
any other rights and remedies available to Landlord, Landlord may take any
action necessary to discharge such Liens, including, but not limited to, payment
to the claimant on whose behalf the Lien was filed. Tenant shall indemnify
Landlord for, and hold Landlord harmless from and against, all Liabilities so
incurred by Landlord, without regard to any defense or offset that Tenant may
have had against the claimant. Neither Landlord's curative action nor the
reimbursement of Landlord by Tenant shall cure Tenant's default in failing to
keep the Premises, the Building and the Land free from Liens. In the event that
any lien is imposed against the Premises for which Tenant is responsible
hereunder and such lien is completely covered by an enforceable bond obtained by
Tenant in favor of Landlord, the existence of such lien shall not be a default
hereunder as long as such bond remains enforceable.
9.4 Additional Requirements. Alterations shall comply with all Laws and
-----------------------
Tenant shall be solely responsible for, shall comply with, and shall perform any
work required by any and all Laws in any way arising out of or in connection
with the Alterations. Tenant, at its expense, shall obtain all necessary permits
and certificates for the commencement and performance of Alterations and for
final approval thereof upon completion, and shall cause the Alterations to be
performed in compliance therewith and with all applicable insurance
requirements, and in a good, first-class and workmanlike manner. Tenant, at its
expense, shall diligently cause the cancellation or discharge of all notices of
violation arising from or otherwise connected with Alterations, or any other
work, labor, services or materials done for or supplied to Tenant or Tenant's
Affiliates, or by any person claiming through or under Tenant or Tenant's
Affiliates. Alterations shall be performed so as not to interfere with any other
tenant in the Building, cause labor disharmony therein, or delay or impose any
additional expense on Landlord in the construction, maintenance, repair or
operation of the Building. Throughout the performance of the Alterations,
Tenant, at its expense, shall carry, or cause to be carried, in addition to the
insurance described in Article 13, (a) Workers' Compensation insurance in
statutory limits, (b) "Builder's All Risk" insurance in an amount approved by
Landlord, and (c) such other insurance as Landlord may reasonably require, with
insurers reasonably satisfactory to Landlord. Tenant shall furnish Landlord with
satisfactory evidence that such insurance is in effect at or before the
commencement of the Alterations and, upon request, at reasonable intervals
thereafter until completion of the Alterations.
10. Repairs.
-------
Except as provided below, the Premises shall be delivered to Tenant in an "as
is" and "all faults" condition and Landlord shall have no obligation whatsoever
to alter, remodel, improve, repair, decorate or paint the Premises or any part
thereof either prior to or during the Lease Term except to the extent expressly
provided in the Tenant Work Letter. Except as otherwise set forth in this Lease,
by accepting possession
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of the Premises, Tenant shall be deemed to have acknowledged that the Premises
are suitable for its purposes and in good condition and repair. Subject to
Landlord's obligations with respect to the Building Structure and Systems (as
defined below) Tenant, at its expense, shall keep the Premises and every part
thereof in good condition and repair and shall, upon the expiration or sooner
termination of the Lease Term, surrender the Premises to Landlord broom clean
and in good condition and repair, ordinary wear and tear excepted. Tenant waives
all rights to make repairs at Landlord's expense under Sections 1941 and 1942 of
the California Civil Code or under any similar Laws now or hereafter in effect.
Subject to the terms of Section 14 in the event of a casualty, Landlord shall
maintain the following structural elements and systems of the Building that are
delivered as of the Commencement Date or the Space B Commencement Date (the
"Building Structure and Systems"): foundation, structural walls, roof,
elevators, plumbing, electrical system and HVAC system in good condition and
repair.
The parties acknowledge that certain settling problems have existed in the
recent past with respect to the Premises which may have affected or may in the
future affect the Building Structure and Systems. In the event any repair work
is required to the Building Structure and Systems due to settling problems such
work shall be deemed a repair of damage due to a casualty under Section 14
herein; provided, Landlord's right to terminate this Lease, as provided in
Section 14, shall arise only if the costs of repairing such damage exceeds One
Hundred Thousand Fifty Dollars ($150,000.00).
11. Services And Utilities.
----------------------
11.1. Landlord's Services. Subject to the rules and regulations of the
-------------------
Building and Section 30.8 herein, Landlord shall furnish to the Premises the
following.
11.1.1. HVAC. HVAC when necessary for normal comfort for normal office
----
use in the Premises, from Monday through Friday, during the period from 8:00
a.m. to 6:00 p.m., and on Saturdays during the period from 9:00 a.m. to 1:00
p.m. (collectively, the "Building Hours"), except for Sundays and New Year's
Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, Christmas Day
and any other nationally and locally recognized holidays as designated by
Landlord (collectively, the "Holidays").
11.1.2. Electricity. Adequate electrical wiring and facilities for
-----------
connection to Tenant's lighting fixtures and incidental use equipment, provided
in no event shall such wiring and facilities provided by Landlord exceed that
which is reasonable and customary for office usage. Tenant may, at its own cost
(or at costs covered by the tenant improvement allowance) install wiring and
facilities with reasonably larger capacities to cover the special needs of
Tenant's office operations, provided any usage of electricity in excess of the
standard set forth in Section 11.1.5, shall be paid by Tenant as provided in
Section 11.1.5 below. Installation of two hundred twenty (220) volt wiring and
facilities shall be deemed Tenant's obligation under this Section 11.1.2.
11.1.3. Water. City water from the regular Building outlets for
-----
drinking, lavatory and toilet purposes.
11.1.4. Janitorial. Janitorial services five (5) days per week except
----------
the date of observation of the Holidays, in and about the Premises.
11.1.5. Restrictions On Use. Without the prior written consent of
-------------------
Landlord in each instance, Tenant shall not use or install any apparatus, device
or equipment in the Premises, including, but not limited to, electronic data
processing machines, punch card machines and machines which will increase the
amount of water, electricity or HVAC needed for the Premises above that normally
furnished for the operation of normal business offices, provided the operation
of copy machines for the purpose of making copies of loan documents for parties
involved in loan transactions shall not be deemed a breach of these
restrictions. Landlord may condition its consent on, among other things, the
installation, at Tenant's cost, of additional HVAC equipment, risers, feeders
and other appropriate equipment to remedy such overuse by Tenant. Tenant shall
pay to Landlord on demand the cost of: (a) purchasing, installing, maintaining
and repairing such equipment and/or units; (b) all excess water, electricity and
HVAC consumed, at the rates charged by the local utility company; and (c) any
additional expense incurred in connection with the foregoing including, without
limitation, the cost of any increased wear and tear on equipment caused by such
consumption.
11.2 Extra Hours. If during any other hours or any other days Tenant
-----------
desires to have any services
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or utilities supplied to the Premises, and if Landlord is able to provide the
same and Tenant provides adequate notice thereof to Landlord, Tenant shall pay
Landlord such charge as Landlord shall establish from time to time for providing
such services or utilities. Any such charges which Tenant is obligated to pay
shall be deemed to be additional rent hereunder.
11.3. Interruption Of Use. Except as provided below, Tenant agrees that
-------------------
Landlord shall not be liable for damages, by abatement of rent or otherwise, for
failure to furnish or delay in furnishing any service (including telephone and
telecommunication services), or for any diminution in the quality or quantity
thereof, when such failure or delay or diminution is occasioned, in whole or in
part, by repairs, replacements, or improvements, by any strike, lockout or other
labor trouble, by inability to secure electricity, gas, water, or other fuel at
the Building after reasonable effort to do so, by any accident or casualty
whatsoever, by act or default of Tenant or other parties, or by any other cause
beyond Landlord's reasonable control; and such failures or delays or diminution
shall never be deemed to constitute an eviction or disturbance of Tenant's use
and possession of the Premises or relieve Tenant from paying rent or performing
any of its obligations under this Lease. Furthermore, Landlord shall not be
liable under any circumstances for a loss of, or injury to, property or for
injury to, or interference with, Tenant's business, including, without
limitation, loss of profits, however occurring, through or in connection with or
incidental to a failure to furnish any services or utilities.
Notwithstanding anything in the Lease to the contrary, in the event that Tenant
is prevented from using, and does not use, the Premises (or any portion
thereof), as a result of any repair work or the failure of Landlord to provide
services, utilities or access to the Premises and such event is attributable to
the settlement described in Section 10 above, then Tenant shall be entitled to
rent abatement (on a prorata basis with respect to a portion of the Premises)
for such time that Tenant continues to be so prevented from using, and does not
use, the Premises or a portion thereof, provided Tenant has given Landlord
advance written notice of its inability to use the Premises (or portion
thereof). Such right to rent abatement shall be Tenant's sole and exclusive
remedy at law or in equity. To the extent that Tenant is entitled to abatement
of rent because of an event described in Article 14 of this lease, this
paragraph shall not be applicable. This paragraph shall have no application and
Tenant shall have no right to any rent abatement if the inability to use the
Premises is the result of Tenant's breach of this Lease.
12. Entry By Landlord.
-----------------
Landlord shall at all times have the right to enter the Premises in order to:
inspect the Premises; post notices of non-responsibility; show the Premises to
prospective purchasers, lenders or tenants; perform its obligations and exercise
its rights hereunder; and make repairs, improvements, alterations or additions
to the Premises or the Building or any portion thereof as Landlord deems
necessary or desirable and to do all things necessary in connection therewith.
Landlord shall retain (or be given by Tenant) keys to unlock all of the doors to
or within the Premises, excluding doors to Tenant's vaults and files. Landlord
shall have the right to use any and all means necessary to obtain entry to the
Premises in an emergency. Landlord may make any such entries without abatement
of rent and may take such steps as required to accomplish the stated purposes;
provided, however, that any such entry shall be accomplished in a manner so as
to cause as little interference with Tenant as reasonably possible. Tenant
hereby waives any claims for damages or for any injuries or inconvenience to or
interference with Tenant's business, lost profits, any loss of occupancy or
quiet enjoyment of the Premises and any other loss occasioned by any such entry
by Landlord. Landlord's entry to the Premises shall not, under any
circumstances, be deemed to be a forcible or unlawful entry into, or a detainer
of, the Premises, or an eviction of Tenant from the Premises or any portion
thereof.
13. Tenant's Insurance.
------------------
13.1. Casualty Insurance. At all times during the Lease Term, Tenant, at
------------------
its expense, shall maintain in effect policies of casualty insurance covering:
(a) all Alterations made by Tenant and all leasehold improvements; and (b) all
of Tenant's Property and other personalty from time to time in, on or about the
Premises, in an amount not less than their full replacement cost (without
deduction for depreciation) from time to time during the term of this Lease.
Such policies shall contain clauses providing that the amount of coverage shall
be increased automatically by two and one-half percent (2 1/2%) at the end of
each calendar quarter, which rate of increase may be revised from time to time
at Landlord's request. Such policies shall provide for protection against any
perils normally included within the classification of "All Risks", and shall
contain endorsements covering: demolition and increased cost of construction;
water
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OFFICE LEASE BNC MORTGAGE, INC.
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damage, vandalism and malicious mischief; and liability for changes in Laws. The
proceeds of such insurance shall be used for the repair or replacement of the
property so insured, except that upon termination of this Lease following a
casualty as set forth herein, the proceeds applicable to the items described in
clause (a) above shall be paid to Landlord, and the proceeds applicable to the
items described in clause (b) above shall be paid to Tenant.
13.2. Public Liability And Property Damage Insurance. At all times during
----------------------------------------------
the Lease Term, Tenant, at its expense, shall maintain Comprehensive General
Liability Insurance (including property damage) with respect to the ownership,
maintenance, use, operation and condition of the Premises and the business
conducted therein. Such insurance shall at all times have limits of not less
than Five Million Dollars ($5,000,000.00) combined single limit per occurrence
for bodily injury, personal injury and property damage liability. At Landlord's
request, these limits shall be increased from time to time during the Lease Term
(but not more often than once every two [2] years) to such higher limits as
Landlord or its insurance consultant believe are necessary to protect Landlord.
The amount of such insurance shall not limit Tenant's liability nor relieve
Tenant of any obligation hereunder. Each policy shall contain cross liability
endorsements, if applicable, and shall insure Tenant's performance of the
indemnity provisions contained in Section 22.2 and elsewhere in this Lease and
any other obligations of Tenant to Landlord hereunder.
13.3. Loss Of Income Insurance. Loss-of-income and extra-expense insurance
------------------------
in such amounts as will reimburse Tenant for direct or indirect loss of earnings
attributable to all perils commonly insured against by prudent tenants or
attributable to prevention of access to the Premises or to the Building as a
result of such perils.
13.4. Policy Requirements.
-------------------
13.4.1. General Requirements. All insurance required to be carried by
--------------------
Tenant hereunder shall be issued by responsible insurance companies, qualified
to do business in the State of California, approved by Landlord and, if
required, by Landlord's Mortgagee. Copies of all policies and certificates
therefor shall be delivered to Landlord at least ten (10) days prior to Tenant's
occupancy of the Premises. Each policy shall provide that it may not be
cancelled or modified except after thirty (30) days' prior written notice to
Landlord and Landlord's Mortgagee named as an additional insured or loss payee
thereunder. Tenant shall furnish Landlord with renewals or "binders" of each
policy, together with evidence of payment of the premium therefor, at least
thirty (30) days prior to expiration. Tenant shall have the right to provide
insurance coverage pursuant to blanket policies obtained by Tenant if the
blanket policies expressly afford coverage as required by this Lease.
13.4.2. Additional Insureds. Landlord, any other party reasonably
-------------------
specified by Landlord and, if required, Landlord's Mortgagee shall be named as
additional insureds in each insurance policy and, if requested by Landlord, they
also shall be named as loss payees. The Comprehensive General Liability
Insurance shall: apply severally to Landlord, Landlord's Mortgagee and Tenant;
cover each of them as if separate policies had been issued to each of them; not
contain provisions affecting any rights which any of them would have had as
claimants if not named as insureds; be primary insurance and not considered
contributory, with any other valid and collectible insurance available to
Landlord and Landlord's Mortgagee constituting excess insurance; and be endorsed
as necessary to cover the foregoing requirements.
13.4.3. Waivers Of Subrogation. Each policy of All Risk and Loss of Income
----------------------
Coverage which Tenant obtains for the Premises, and which Landlord obtains for
the Building, shall include a clause or endorsement denying the insurer any
right of subrogation against the other party hereto to the extent that rights
have been waived by the insured party prior to the occurrence of injury or loss.
Landlord and Tenant each waive any rights of recovery against the other for
injury or loss due to hazards covered by its own insurance, to the extent of the
injury or loss covered thereby.
13.5. Tenant's Failure To Deliver Policies. If Tenant fails to deliver
------------------------------------
copies of the insurance policies and evidence of payment therefor within the
time required pursuant to Section 13.4, Landlord may, but shall not be obligated
to, obtain the required insurance, and the cost thereof, together with an
administrative fee established by Landlord, shall be payable by Tenant to
Landlord on demand. Nothing in this section shall be deemed to be a waiver of
any rights or remedies available to Landlord under this Lease or at law or in
equity if Tenant fails to obtain and deliver the required insurance policies and
evidence of payment.
14. Damage Or Destruction; Eminent Domain.
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14.1. Landlord's Restoration. If the Building or the Premises are partially
----------------------
damaged or totally destroyed by fire or other casualty, and if this Lease is not
terminated as provided in this article, Tenant shall instruct its insurers to
pay to Landlord any proceeds attributable to leasehold improvements and
Alterations and Landlord shall repair the damage and restore or rebuild the
Building or the Premises (except for Tenant's Property) after Landlord receives
notice of the damage or destruction and Landlord receives substantially all of
the insurance proceeds receivable on account of the casualty. However, Landlord
shall not be required to spend amounts in excess of the insurance proceeds
actually received for such repair, restoration or rebuilding. Subject to Article
22, Landlord shall attempt to make any required repairs or restoration promptly
and so as not to interfere unreasonably with Tenant's use and occupancy of the
Premises, but Landlord shall not be obligated to perform such work on an
overtime or premium-pay basis.
14.2. Rent Abatement. Subject to Section 14.3, if, in Landlord's sole
--------------
judgment, all or part of the Premises are rendered completely or partially
untenantable on account of fire or other casualty, the Monthly Rent shall be
abated in the proportion that the rentable area of the untenantable portion of
the Premises bears to the total rentable area of the Premises. Such abatement
shall commence on the date of the damage or destruction and shall continue until
the Premises have been substantially repaired and Tenant has reasonable access
to the Premises. However, if Tenant reoccupies the damaged portion of the
Premises prior to the date that the Premises are substantially repaired, the
Monthly Rent allocable to the reoccupied portion shall be payable by Tenant from
the date of such occupancy in the proportion that the rentable area of the
reoccupied portion of the Premises bears to the total rentable area of the
Premises. In the event that the parking provided Tenant in this Lease becomes
unusable on account of fire or other casualty, Tenant shall be entitled to an
equitable abatement of rent for the period of time parking spaces are unusable,
are not used, and based on Tenant's use of the parking facilities prior to such
event of fire or casualty, would have been used. The "equitable" rent abatement
as provided above shall in no event exceed $5.00 per space per day. Landlord may
avoid the application of this section with resect to parking spaces if Landlord
provides alternative parking within one-half mile of the Premises.
14.3. Exception To Abatement. Monthly Rent shall not be abated or reduced
----------------------
if: (a) the Premises or a portion thereof are rendered untenantable for a period
of five (5) consecutive days or less; (b) Landlord provides other space in the
Building reasonably suited for the temporary conduct of Tenant's business (but
Landlord shall have no obligation to provide such other space); (c) because of
acts or omissions of Tenant or Tenant's Affiliates, Landlord (or any Landlord's
Mortgagee) is unable to collect all of the insurance proceeds (including,
without limitation, rent insurance proceeds) for damage or destruction of the
Premises or the Building. In addition, if because of acts or omissions of Tenant
or Tenant's Affiliates the Premises or the Building was damaged or destroyed or
rendered completely or partially untenantable, then Tenant shall not receive any
abatement or reduction for any rent not covered by Landlord's loss of rental
income insurance. The collection of rent by Landlord under the circumstances
described in clause (c) above shall not preclude Landlord from seeking damages
from Tenant or exercising any other rights and remedies it may have under this
Lease or at law or in equity.
14.4. Election To Terminate. Landlord may terminate this Lease upon written
---------------------
notice to Tenant if: (a) repairs cannot reasonably be completed within one
hundred eighty (180) days of the date of damage (when such repairs are made
without the payment of overtime or other premiums); (b) Landlord's Mortgagee
shall require that the insurance proceeds or any portion thereof be used to
retire the mortgage debt, or shall terminate the ground lease, as the case may
be; (c) the damage or condition arising as a result of such damage is not fully
covered, except for deductible amounts, by insurance policies; or (d) less than
two (2) years remains in the Lease Term at the time of the damage or destruction
or events which render the Building or the Premises untenantable and the time
necessary to repair or restore the Building or the Premises would exceed ninety
(90) days (when such repairs are made without the payment of overtime or other
premiums). If Landlord elects to terminate this Lease, its notice of termination
shall be given within one hundred eighty (180) days after the date of the
damage, destruction or events causing untenantability and this Lease shall
terminate on the date specified in such notice. With respect to any settlement
problems as described in Section 10 hereof, Landlord's right of termination
shall not apply unless such the repair of such damage exceed One Hundred and
Fifty Thousand Dollars ($150,000) as provided in Section 10.
14.5. Eminent Domain. Landlord may terminate this Lease upon written notice
--------------
to Tenant if twenty-five percent (25%) or more of either the Premises, the
Building or the Land is condemned, taken or appropriated by any public or quasi-
public authority under the power of eminent domain, police power or otherwise
(or in the event of a sale in lieu thereof). Whether or not this Lease is so
terminated, Landlord
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shall be entitled to any and all income, rent, award, or interest thereon which
may be paid or made in connection with the taking or appropriation, and Tenant
shall have no claim against Landlord for the value of any unexpired term of this
Lease. If Landlord elects to terminate this Lease, its notice of termination
shall be given within sixty (60) days after the taking or appropriation. If such
notice is not given or if Landlord notifies Tenant of Landlord's election not to
terminate, this Lease shall continue in full force and effect, except that the
Monthly Rent shall be reduced in the proportion that the rentable floor area of
the Premises which is taken bears to the total Rentable Area of the Premises.
Nothing contained in this section shall prevent Tenant from bringing a separate
action or proceeding for compensation for any of Tenant's Property taken and
Tenant's moving expenses.
14.6. Business Interruption. Landlord shall not incur any Liabilities of any
---------------------
type to Tenant or Tenant's Affiliates arising from or in connection with any
damage or destruction of the Premises, the Building or the Land, or any taking
or appropriation thereof, or any repairs or restoration in connection therewith,
nor shall Tenant have any right to terminate this Lease as a result thereof.
However, in such event, Monthly Rent shall be abated if and to the extent that
abatement is allowed pursuant to this article.
14.7. Waiver. The provisions of this Lease, including this Article 14 and
------
Article 10, constitute an express agreement between Landlord and Tenant with
respect to any and all damage, destruction or condemnation of all or any part of
the Premises, the Building or any other portion of the Land and any statute or
regulation of the State of California, including, without limitation, Sections
1931 (2) and 1933 (4) of the California Civil Code, and Section 1265.130 of the
California Code of Civil Procedure, with respect to any rights or obligations
concerning damage or destruction or condemnation in the absence of an express
agreement between the parties, and any other similar Law now or hereafter in
effect, shall have no application to this Lease.
15. Assignment And Subletting.
-------------------------
15.1. Landlord's Consent Required. Subject to Section 15.8 and 31, Tenant
---------------------------
shall not voluntarily, involuntarily or by operation of any Laws sell, convey,
mortgage, assign, sublet or otherwise transfer or encumber all or any part of
Tenant's interest in this Lease or the Premises (each such action by Tenant to
be known as a "Transfer") without Landlord's prior written consent in each
instance which consent may be withheld in Landlord's sole and absolute
discretion except as otherwise provided in this article, and any attempt to do
so without this consent shall be null and void. (For purposes of this Article
15, a Transfer shall not include an assignment for security purposes, which
shall be governed by Section 15.1 or the change of Tenant as described in
Section 31).
15.2. Landlord's Right To Terminate Lease. Subject to Section 15.8 and 31,
-----------------------------------
if Tenant desires to make a Transfer, Tenant shall notify Landlord in writing.
This notice shall be accompanied by: (a) a statement setting forth the name and
business of the proposed transferee of the Transfer (the "Transferee"); (b) a
copy of the proposed documents evidencing the Transfer (and any collateral
agreements) setting forth all of the terms and the financial details of the
Transfer (including, without limitation, the term, the rent and any security
deposit, "key money", and amounts payable for Tenant's Property, the common use
of any personnel or equipment and a determination of any "Transfer Premium", as
that term is defined in Section 15.6, below); (c) financial statements certified
by an independent certified public accountant and other information requested by
Landlord relating to the Transferee; (d) an executed estoppel certificate from
Tenant in the form attached hereto as Exhibit "D"; and (e) any other information
concerning the proposed Transfer which Landlord may reasonably request. If
Tenant proposes to assign this Lease or sublet all or substantially all of the
Premises, Landlord shall have the right, in its sole and absolute discretion, to
terminate this Lease on written notice to Tenant within thirty (30) days after
receipt of Tenant's notice and the information described above or the receipt of
any additional information requested by Landlord, provided Landlord pays to
Tenant the present value of any portion of the Transfer Premium that Tenant
otherwise would have received. If Landlord elects to terminate this Lease, this
Lease shall terminate as of the effective date of the proposed assignment or
commencement of the term of the proposed sublease as set forth in Tenant's
notice, and Landlord shall have the right (but no obligation) to enter into a
direct lease with the proposed assignee or subtenant.
15.3. Consent By Landlord. Subject to Section 15.8 and 31, in connection
-------------------
with a proposed Transfer by Tenant, if Landlord elects not to terminate this
Lease pursuant to Section 15.2, Landlord shall not unreasonably withhold its
consent to a Transfer. Tenant agrees that the withholding of Landlord's consent
shall be deemed reasonable if all of the following conditions are not satisfied:
15
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15.3.1. The proposed Transferee shall use the Premises only for the
Permitted Use, and the business of the proposed Transferee is consistent with
the other uses and the standards of the Building, in Landlord's reasonable
judgment.
15.3.2. The proposed Transferee has financial credit reasonably
acceptable to Landlord, and otherwise has sufficient financial capabilities to
perform all of its obligations under the proposed Transfer, in Landlord's
reasonable judgment.
15.3.3. Intentionally Deleted.
15.3.4. The proposed Transferee is either a governmental agency or
instrumentality thereof (i) which is that of a foreign country, (ii) which is of
a character or reputation, is engaged in a business, or is of, or is associated
with, a political orientation or faction, which is inconsistent with the quality
of the Building, or which would otherwise reasonably offend a landlord of a
comparable building located in the vicinity of the Building, (iii) which is
capable of exercising the power of eminent domain or condemnation, or (iv) which
would significantly increase the human traffic in the Premises or Building.
15.3.5. All of the other terms of this article are complied with.
The conditions described above are not exclusive and shall not limit or prevent
Landlord from considering additional factors in determining if it should
reasonably withhold its consent.
15.4. Corporate And Partnership Transactions. Subject to Section 15.8 and
--------------------------------------
31, if Tenant is a corporation, a dissolution of the corporation or a transfer
(by one or more transactions) of a majority of the voting stock of Tenant shall
be deemed to be an assignment of this Lease subject to the provisions of this
article. However, these provisions shall not apply to transactions with a
corporation into or with which Tenant is merged or consolidated or to which
substantially all of Tenant's assets are transferred or which controls, is
controlled by, or is under common control with, Tenant, if a principal purpose
of the merger or transfer is not the assignment of this Lease and Tenant's
successor has a net worth not less than the net worth of Tenant on the execution
of this Lease and assumes all the obligations of Tenant under this Lease. Tenant
shall cause reasonably satisfactory proof of such net worth to be delivered at
least thirty (30) days prior to the effective date of the transaction. If Tenant
is a partnership, a dissolution of the partnership (including a "technical"
dissolution) or the withdrawal or change, voluntarily, involuntarily or by
operation of law, of twenty-five percent (25%) or more of the partners, or
transfer of twenty-five percent (25%) or more of the partnership interests
within a twelve (12) month period shall be deemed an assignment of this Lease
subject to the provisions of this article, regardless of whether the transfer is
made by one or more transactions, or whether one or more persons hold the
controlling interest prior to or after the transfer.
15.5. No Release Of Tenant. Notwithstanding the granting of Landlord's
--------------------
consent, no sale, conveyance, mortgage, pledge, subletting, assignment or other
transfer or encumbrance of this Lease or the Premises shall release or alter
Tenant's primary liability to pay rent and perform all of its other obligations
hereunder. The acceptance of rent by Landlord from any person other than Tenant
shall not be a waiver by Landlord of any provision hereof. Consent to one
assignment or subletting shall not be deemed to be consent to any subsequent
assignment or subletting. If any assignee or successor of Tenant defaults in the
performance of any of the terms hereof, Landlord may proceed directly against
Tenant without proceeding against or exhausting its remedies against the
assignee or successor. After any assignment, sublease or other transfer or
encumbrance, Landlord may consent to subsequent assignments, subleases,
transfers or encumbrances, or amendments to this Lease, without notifying Tenant
or any other person, without obtaining consent thereto, and without relieving
Tenant of liability under this Lease.
15.6. Additional Charges. Subject to Section 15.8 and 31, if Landlord
------------------
consents to an assignment or sublease, as a condition thereto which the parties
hereby agree is reasonable, Tenant shall pay to Landlord fifty percent (50%) of
any "Transfer Premium", as that term is defined in this Section 15.6, received
by Tenant from such assignee or subtenant. "Transfer Premium" shall mean all
rent, additional rent or other consideration payable by such assignee or
subtenant in excess of the Monthly Rent and Direct Expenses payable by Tenant
under this Lease, on a per rentable square foot basis if less than all of the
Premises is transferred, after deducting the reasonable expenses incurred by
Tenant for (a) any changes, alterations and improvements to the Premises in
connection with the assignment or sublease, (b) any brokerage commissions in
connection with the assignment or sublease, and (c) any costs to buy-out or
takeover the previous lease of an assignee or subtenant. "Transfer Premium"
shall also include, but not be limited to, key money and bonus money paid by an
assignee or subtenant to Tenant in connection with such
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OFFICE LEASE BNC MORTGAGE, INC.
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assignment or sublease, and any payment in excess of fair market value for
services rendered by Tenant to an assignee or subtenant or for assets, fixtures,
inventory, equipment, or furniture transferred by Tenant to an assignee or
subtenant. In the calculations of the Monthly Rent (as it relates to the
Transfer Premium calculated under this Section 15.6), the Monthly Rent paid
during each annual period for the portion of the Premises assigned or subleased
shall be computed after adjusting such rent to the actual effective rent to be
paid, taking into consideration any and all leasehold concessions granted in
connection therewith, including, but not limited to, any rent credit and tenant
improvement allowance. For purposes of calculating any such effective rent, all
such concessions shall be amortized on a straight-line basis over the relevant
term.
15.7. Additional Terms. Subject to Section 15.8 and 31, Tenant shall pay
----------------
Landlord Three Hundred Fifty Dollars ($350.00) to cover the reasonable
attorneys' fees and other costs and expenses of Landlord in connection with any
request for Landlord's consent to any sale, conveyance, mortgage, pledge,
assignment, sublease or other transfer or encumbrance. If this Lease is
terminated or Landlord re-enters or repossesses the Premises, Landlord may, at
its option, take over all of Tenant's right, title and interest as sublessor
and, at Landlord's option, the subtenant shall attorn to Landlord, but Landlord
shall not be (a) liable for any previous act or omission of Tenant under the
sublease, (b) subject to any existing defense or offset against Tenant, or (c)
bound by any previous modification of the sublease made without Landlord's prior
written consent or by any prepayment of more than one month's rent. Any
purported sublease or assignment shall be ineffective until Landlord gives its
written consent thereto. This article is binding on and shall apply to any
purchaser, mortgagee, pledgee, assignee, subtenant or other transferee or
encumbrancer, at every level. Notwithstanding anything to the contrary in this
Lease, if Tenant or any proposed transferee of Tenant claims that Landlord has
unreasonably withheld or delayed its consent under Section 15.3 or otherwise has
breached or acted unreasonably under this article, their sole remedies shall be
a declaratory judgment and an injunction for the relief sought without any
monetary damages and Tenant shall have no right and hereby waives any right
under all Laws to terminate this Lease, and Tenant waives all other remedies on
its own behalf and, to the extent permitted under all Laws, on behalf of
Tenant's proposed transferee.
15.8. Subleases To Affiliates. The term "Affiliate" shall mean any entity
-----------------------
which is controlled by, controls, or is under common control with, Tenant or
which merges with, is acquired by, or acquires all of Tenant's assets or stock.
"Control", as used in this Section 15.8, shall mean the possession, direct or
indirect, of the power to direct or cause the direction of the management and
policies of a person or entity, whether through the ownership of voting
securities, by contract or otherwise. Notwithstanding anything to the contrary
contained in this Article 15, any subletting of all or a portion of the Premises
to an "Affiliate" of Tenant shall not require Landlord's prior written consent,
nor shall any Transfer Premium be payable to Landlord in connection with such
sublease, provided that Tenant notifies Landlord in advance of any such sublease
and promptly supplies Landlord with any documents or information reasonably
required by Landlord regarding such sublease or such Affiliate, such sublease is
expressly made subject to this Lease, and further provided that such sublease is
not a subterfuge by Tenant to avoid its obligations under this Lease.
16. Quiet Enjoyment.
---------------
So long as Tenant pays all rent and performs all of its other obligations as
required hereunder, Tenant shall quietly enjoy the Premises without hindrance or
molestation by Landlord or any person lawfully claiming through or under
Landlord, subject to the terms of this Lease and the terms of any Superior
Leases and Mortgages, and all other agreements or matters of record or to which
this Lease is subordinate. As used in this Lease, the term "Superior Leases and
Mortgages" means all present and future ground leases, underlying leases,
mortgages, deeds of trust or other encumbrances, and all renewals,
modifications, consolidations, replacements or extensions thereof or advances
made thereunder, affecting all or any portion of the Premises, the Building or
the Land.
17. Mortgagee Protection.
--------------------
17.1. Subordination. This Lease is subordinate to all Superior Leases and
-------------
Mortgages. This section shall be self-operative and no further instrument of
subordination shall be required. However, in confirmation of such subordination,
Tenant shall execute, acknowledge and deliver any instrument that Landlord or
the lessor, mortgagee or beneficiary under any of the Superior Leases and
Mortgages may request, within ten (10) days after request. (Each of these
lessors, mortgagees or beneficiaries is called a "Landlord's Mortgagee").
However, if Landlord, Landlord's Mortgagee or any other successor to Landlord
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OFFICE LEASE BNC MORTGAGE, INC.
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elects in writing, this Lease shall be deemed superior to the Superior Leases
and Mortgages specified, regardless of the date of recording, and Tenant will
execute an agreement confirming this election on request. If Landlord's
Mortgagee or its successor or any successor to Landlord succeeds to Landlord's
interests under this Lease, whether voluntarily or involuntarily, Tenant shall
attorn to such person and recognize such person as Landlord under this Lease.
Tenant waives the provisions of any current or future Law which may give or
purport to give Tenant any right or election to terminate or otherwise adversely
affect this Lease and the obligations of the Tenant hereunder in the event of
any foreclosure proceeding or sale.
17.2. Mortgagee's Liability. The obligations and liabilities of each of
---------------------
Landlord or Landlord's Mortgagees, or their successors, under this Lease shall
exist only if and for so long as each of these respective parties owns fee title
to the Land and the Building or is the lessee under a ground lease therefor. No
Monthly Rent or additional rent shall be paid more than thirty (30) days prior
to the due date thereof and payments made in violation of this provision shall
(except to the extent that such payments are actually received by a Landlord's
Mortgagee) be a nullity as against Landlord's Mortgagees or their successors and
Tenant shall be liable for the amount of such payments to Landlord's Mortgagees
or their successors.
17.3. Mortgagee's Right To Cure. No act or omission by Landlord which would
-------------------------
entitle Tenant under the terms of this Lease or any Laws to be relieved of
Tenant's obligations hereunder, or to terminate this Lease, shall result in a
release or termination of such obligations or this Lease unless: (a) Tenant
first shall have given written notice of Landlord's act or omission to Landlord
and all Landlord's Mortgagees whose names and addresses shall have been
furnished to Tenant; and (b) Landlord's Mortgagees, after receipt of such
notice, fail to correct or cure the act or omission within a reasonable time
thereafter (but in no event less than sixty [60] days). However, nothing
contained in this section shall impose any obligation on Landlord's Mortgagees
to correct or cure any act or omission.
18. Estoppel Certificates.
---------------------
Tenant shall from time to time, within ten (10) days after request by Landlord,
execute and deliver to Landlord or any other person designated by Landlord an
estoppel certificate, in substantially the form of Exhibit "D" attached hereto
(or such other form as may be required by Landlord or Landlord's Mortgagee). An
estoppel certificate issued by Tenant pursuant to this article shall be a
representation and warranty by Tenant which may be relied on by Landlord and by
others with whom Landlord may be dealing, regardless of independent
investigation. If Tenant fails to execute and deliver an estoppel certificate as
required hereunder, Landlord's representations concerning the factual matters
covered by such estoppel certificate, as described above, shall be conclusively
presumed to be correct and binding on Tenant. At any time during the Lease Term,
Landlord may require Tenant to provide Landlord with a current financial
statement and financial statements of the two (2) years prior to the current
financial statement year. Such statements shall be prepared in accordance with
generally accepted accounting principles, consistently applied, and, if such is
the normal practice of Tenant, shall be audited by an independent certified
public accountant.
19. Default.
-------
The occurrence of any one or more of the following events shall be a default and
breach under this Lease by Tenant.
19.1. Vacation Or Abandonment. The abandonment of the Premises by Tenant.
-----------------------
19.2. Monetary Obligations. The failure by Tenant to make any payment of
--------------------
rent or any other payment required to be made by Tenant hereunder for a period
of five (5) days after written notice from Landlord that such payment was not
received when due.
19.3. Non-Monetary Obligations. The failure by Tenant to observe or
------------------------
perform any of the covenants, conditions or provisions of this Lease to be
observed or performed by Tenant, other than those described in subparagraphs
19.1, 19.2, 19.4, 19.5, 19.6, 19.7, 19.8 and 19.9 of this Article 19, where such
failure shall continue for a period of thirty (30) days after written notice
thereof by Landlord to Tenant. However, if the nature of these defaults is such
that more than thirty (30) days are reasonably required to cure, then Tenant
shall not be deemed to be in default if Tenant commences such cure within the
thirty (30) day period and thereafter continues to diligently work to complete
such cure. Any such notice shall
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be in lieu of, and not in addition to, any notice required under California Code
of Civil Procedure Section 1161 or any similar or successor Laws.
19.4. Insolvency. The making by Tenant or any guarantor of this Lease of any
----------
general assignment or general arrangement for the benefit of creditors; or the
filing by or against Tenant or any guarantor of this Lease of a petition or
order for relief under any Laws relating to bankruptcy or insolvency (unless, in
the case of a petition filed against Tenant or any guarantor of this Lease, the
petition is dismissed within sixty [60] days); or the appointment of a trustee,
custodian or receiver to take possession of substantially all of Tenant's assets
or the assets of any guarantor of this Lease or of Tenant's interest in this
Lease where possession is not restored to Tenant within thirty (30) days; or the
attachment, execution or judicial seizure of substantially all of Tenant's
assets or of Tenant's interest in this Lease, unless discharged within thirty
(30) days.
19.5. Occupancy Obligations. Tenant's failure to occupy the Premises within
---------------------
thirty (30) days after the Premises are Ready for Occupancy.
19.6. Transfers. A Transfer in violation of Article 15, where Tenant has
---------
failed to provide evidence to Landlord of such Transfer's rescission within
fifteen (15) following Landlord's written request therefor.
19.7. Estoppel Obligations. Tenant's failure to deliver the estoppel
--------------------
certificate required under Article 18, or any written instrument required under
Section 17 within the time required when such failure continues for ten (10)
days following written notice by Landlord.
19.8. Guaranty Obligations. Intentionally Deleted.
--------------------
19.9. Insurance Obligations. Tenant's failure to maintain the insurance
---------------------
policies required hereunder when such failure continues for ten (10) days
following written notice by Landlord.
20. Remedies For Default.
--------------------
20.1. General. In the event of any default by Tenant, Landlord may at any
-------
time thereafter, with or without notice or demand:
20.1.1 Terminate Tenant's right to possession of the Premises by any
lawful means, in which case this Lease shall terminate and Tenant shall
immediately surrender possession of the Premises to Landlord. In such event
Landlord shall be entitled to recover from Tenant all Liabilities incurred by
Landlord or Landlord's Affiliates by reason of Tenant's default, including but
not limited to: (a) the worth at the time of the award of the unpaid Monthly
Rent and additional rent which had been earned or was payable at the time of
termination; (b) the worth at the time of the award of the amount by which the
unpaid Monthly Rent and additional rent which would have been earned or payable
after termination until the time of the award exceeds the amount of such rental
loss that Tenant proves could have been reasonably avoided; (c) the worth at the
time of the award of the amount by which the unpaid Monthly Rent and additional
rent which would have been paid for the balance of the term after the time of
award exceeds the amount of such rental loss that Tenant proves could have been
reasonably avoided; and (d) any other amount necessary to compensate Landlord
for all Liabilities proximately caused by Tenant's failure to perform its
obligations under the Lease or which in the ordinary course of things would be
likely to result therefrom, including, but not limited to, any costs or expenses
incurred by Landlord in maintaining or preserving the Premises, the Building and
the Land after such default, the cost of recovering possession of the Premises,
expenses of reletting, including necessary renovation or alteration of the
Premises, Landlord's attorneys' fees and costs incurred in connection therewith,
and any real estate commissions paid or payable. As used in subparts 20.1.1 (a)
and 20.1.1 (b) above, the "worth at the time of the award" is computed by
allowing interest on unpaid amounts at the rate of eighteen percent (18%) per
annum, or such lesser amount as may then be the maximum lawful rate. As used in
subpart 20.1.1 (c) above, the "worth at the time of the award" is computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of the award, plus one percent (1%).
20.1.2 Pursue the remedy described in California Civil Code Section
1951.4 (lessor may continue lease in effect after lessee's breach and recover
rent as it becomes due, if lessee has the right to sublet or assign, subject
only to reasonable limitations). Accordingly, if Landlord does not elect to
terminate this Lease on account of any default by Tenant, Landlord may, from
time to time, without terminating this
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Lease, enforce all of its rights and remedies under this Lease, including the
right to recover all rent as it becomes due.
20.1.3. Pursue any other right or remedy now or hereafter available to
Landlord hereunder or at law or in equity.
20.2. Redemption. Intentionally Deleted.
----------
20.3. Performance By Landlord. If Tenant defaults under this Lease,
-----------------------
Landlord, without waiving or curing the default, may, but shall not be obligated
to, perform Tenant's obligations for the account and at the expense of Tenant.
Notwithstanding Section 19.3, in the case of an emergency, Landlord need not
give any notice prior to performing Tenant's obligations.
20.4. Post-Judgment Interest. The amount of any judgment obtained by
----------------------
Landlord against Tenant in any legal proceeding arising out of Tenant's default
under this Lease shall bear interest until paid at the lesser of eighteen
percent (18%) per annum or the maximum rate allowed by law. Notwithstanding
anything to the contrary contained in any Laws, with respect to any damages that
are certain or ascertainable by calculation, interest shall accrue from the day
that the right to the damages vests in Landlord, and in the case of any
unliquidated claim, interest shall accrue from the day the claim arose.
21. Holding Over.
------------
Tenant shall not hold over in the Premises after the expiration or sooner
termination of the Lease Term without the express prior written consent of
Landlord. Tenant shall indemnify Landlord for, and hold Landlord harmless from
and against, any and all Liabilities arising out of or in connection with any
delay by Tenant in surrendering and vacating the Premises, including, without
limitation, any claims made by any succeeding tenant based on any delay and any
Liabilities arising out of or in connection with these claims. If possession of
the Premises is not surrendered to Landlord on the expiration or sooner
termination of the Lease Term, in addition to any other rights and remedies of
Landlord hereunder or at law or in equity, Tenant shall pay to Landlord for each
month or portion thereof during which Tenant holds over in the Premises a sum
equal to one and one-half (1 1/2) times the then-current Monthly Rent in
addition to all other rent payable under this Lease. If any tenancy is created
by Tenant's holding over in the Premises, the tenancy shall be on all of the
terms and conditions of this Lease, except that rent shall be increased as set
forth above and the tenancy shall be a month-to-month tenancy. Nothing in this
Article 21 shall be deemed to permit Tenant to retain possession of the Premises
after the expiration or sooner termination
22. Indemnification And Exculpation.
-------------------------------
22.1. Definitions. As used in this Lease, the following terms have the
-----------
meanings set forth below:
22.1.1. Liabilities. All losses, costs, damages, expenses, claims,
-----------
injuries, liabilities and judgments, including, but not limited to, attorneys'
fees and costs (whether or not suit is commenced or judgment entered).
22.1.2. Landlord's Affiliates And Tenant's Affiliates. All affiliates,
---------------------------------------------
directors, officers, shareholders, partners, agents, employees, invitees,
customers, successors and assigns of Landlord and Tenant, respectively.
22.2. Indemnity. Except for Landlord's negligence and/or breach of express
---------
warranties, Tenant shall indemnify, protect, defend and hold harmless the
Premises, Landlord, Landlord's Affiliates and Landlord's Mortgagee, from and
against any and all Liabilities arising out of, involving, or in dealing with,
the occupancy of the Premises by Tenant, the conduct of Tenant's business, any
act, omission or neglect of Tenant, its agents, contractors, employees or
invitees, and out of any breach or default by Tenant in the performance in a
timely manner of any obligation on Tenant's part to be performed under this
Lease. The foregoing shall include, but not be limited to, the defense or
pursuit of any claim or any action or proceeding involved therein, and whether
or not (in the case of claims made against Landlord) litigated and/or reduced to
judgment, and whether well founded or not. In case any action or proceeding be
brought against Landlord by reason of any of the foregoing matters, Tenant upon
notice from Landlord shall defend the same at Tenant's expense by counsel
reasonably satisfactory to Landlord and Landlord shall cooperate with Tenant in
such defense. Landlord need not have first paid any such claim in order to be
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so indemnified.
22.3. Exemption Of Landlord From Liability. Landlord shall not be liable for
------------------------------------
injury or damage to goods, wares, merchandise or other property of Tenant,
Tenant's employees, contractors, invitees, customers, or any other person in or
about the Premises, whether such damage or injury is caused by or results from
fire, steam, electricity, gas, water or rain, or from the breakage, leakage,
obstruction or other defects of pipes, fire sprinklers, wires, appliances,
plumbing, air conditioning or lighting fixtures, or from any other cause,
whether the said injury or damage results from conditions arising upon the
Premises or upon other portions of the building of which the Premises are a
part, or from other sources or places, and regardless of whether the cause of
such damage or injury or the means of repairing the same is accessible or not.
Landlord shall not be liable for any damages arising from any act or neglect of
Landlord. Notwithstanding Landlord's negligence or breach of this Lease,
Landlord shall under no circumstances be liable for injury to Tenant's business
or for any loss of income or profit therefrom. Nothing in this section exempts
Landlord for liability caused solely by its gross negligence or willful
misconduct (in which case Landlord shall be liable only to the extent such
liability is not covered by insurance required to be carried by Tenant under
this Lease), but (as indicated in Section 11.3 of this Lease) Landlord shall not
be liable under any circumstances for consequential or punitive damages
(including, but not limited to, damage or injury to persons, property and the
conduct of Tenant's business [and any loss of revenue therefrom]). Tenant
immediately shall notify Landlord of any defects in the Premises or the Building
or any portion thereof and of any damage or injury thereto or to persons or
property in or about the Premises or the Building.
22.4. Satisfaction Of Remedies. Landlord and Landlord's Affiliates shall not
------------------------
be personally liable for the performance of Landlord's obligations under this
Lease. If Tenant or Tenant's Affiliates acquire any rights or remedies against
Landlord or Landlord's Affiliates (including, but not limited to, the right to
satisfy a judgment), these rights and remedies shall be satisfied solely from
the lesser of (a) Landlord's estate and interest in the Land and the Building
(or the proceeds therefrom), or (b) the estate and interest Landlord would have
in the Land and the Building (or the proceeds therefrom) if the Land and
Building were encumbered by third-party debt in an amount equal to eighty
percent (80%) of the value of the Land and Building (as such value is determined
by Landlord); such rights and remedies shall not be satisfied, in any event,
from any other property or assets of Landlord or Landlord's Affiliates. This
section shall be enforceable by Landlord and Landlord's Affiliates.
23. Rules And Regulations.
---------------------
Tenant shall faithfully observe and comply with the rules and regulations that
Landlord shall from time to time promulgate. Landlord reserves the right from
time to time in its discretion to make all reasonable additions and
modifications to the rules and regulations. Any additions and modifications to
the rules and regulations shall be binding on Tenant when delivered to Tenant.
Landlord shall not incur any Liabilities to Tenant or Tenant's Affiliates
arising from or in connection with the nonperformance of any rules and
regulations by any other tenants or occupants of the Building. Landlord's
current rules and regulations are attached hereto as Exhibit "E".
24. Modification Of Lease.
---------------------
Should any current or prospective Landlord's Mortgagee require a modification or
modifications of this Lease, which modification or modifications will not cause
an increased cost or expense to Tenant or in any other way materially and
adversely change the rights and obligations of Tenant hereunder, then and in
such event, Tenant agrees that this Lease may be so modified and agrees to
execute whatever documents are reasonably required therefor and to deliver the
same to Landlord within ten (10) days following a request therefor.
25. Brokers.
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Tenant represents and warrants to Landlord that Tenant has had no dealings with
any broker, finder, or similar person who is or might be entitled to a
commission or other fee in connection with introducing Tenant to the Building or
in connection with this Lease, except for Landlord's Broker and Tenant's Broker.
Tenant shall indemnify Landlord for, and hold Landlord harmless from and
against, any and all claims of any person other than Landlord's Broker and
Tenant's Broker who claims to have introduced Tenant to the Building or dealt
with Tenant in connection with this Lease and all Liabilities arising out of or
in
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connection with such claims. Landlord shall pay Tenant's Broker a commission
pursuant to a separate agreement.
26. Parking.
-------
The Premises shall include the parking facilities ("Parking Facilities") located
at the Building ("Tenant's Parking"). Tenant may use Tenant's Parking for the
parking of automobiles used by Tenant, its officers employees and business
visitors. The use of Tenant's Parking shall be governed by the parking rules and
regulations adopted from time to time by Landlord. or the operator of the
Parking Facilities. Neither Landlord nor Landlord's parking operator shall have
any Liability or responsibility to Tenant or any other party parking in the
Parking Facilities for any loss or damage that may be occasioned by or may arise
out of such parking, including, without limitation, loss of property or damage
to person or property from any cause whatsoever, and Tenant, in consideration of
the parking privileges hereby conferred on Tenant, waives any and all
Liabilities against Landlord, Landlord's Affiliates and Landlord's parking
operator by reason of occurrences in the Parking Facilities and the driveway
exits and entrances thereto.
27. Authority To Enter Into Lease.
-----------------------------
If Tenant is a corporation, each individual executing this Lease on behalf of
the corporation represents and warrants that he or she is duly authorized to
execute and deliver this Lease on behalf of the corporation, in accordance with
a duly adopted resolution of the board of directors of said corporation or in
accordance with the by-laws of said corporation, and that this Lease is binding
on the corporation in accordance with its terms. If Tenant is a partnership,
each individual executing this Lease on behalf of the partnership represents and
warrants that he or she is duly authorized to execute and deliver this lease on
behalf of the partnership, in accordance with the partnership agreement and any
statements of partnership or certificates of limited partnership of the
partnership, and that this Lease is binding on the partnership in accordance
with its terms. Tenant shall, within thirty (30) days of the execution of this
Lease, deliver to Landlord: (a) if Tenant is a corporation, a certified copy of
a resolution of the board of directors of the corporation; or (b) if Tenant is a
partnership, a copy of the Statement of Partnership or Certificate of Limited
Partnership of Tenant; and (c) other evidence reasonably satisfactory to
Landlord authorizing or ratifying the execution of this Lease.
28. Relocation. [Intentionally Omitted].
----------
29. Landlord Renovations.
--------------------
It is specifically understood and agreed that Landlord has made no
representation or warranty to Tenant and has no obligation to alter, remodel,
improve, renovate, repair or decorate the Premises, Building, or any part
thereof and that no representations respecting the condition of the Premises or
the Building have been made by Landlord to Tenant except as specifically set
forth herein or in the Tenant Work Letter. However, Tenant acknowledges that
Landlord may during the Lease Term renovate, improve, alter, or modify
(collectively, the "Renovations") the Building, Premises, and/or Land, including
without limitation the parking structure, common areas, systems and equipment,
roof, and structural portions of the same, which Renovations may include,
without limitation, (a) installing sprinklers in the Building common areas and
tenant spaces, (b) modifying the common areas and tenant spaces to comply with
applicable laws and regulations, including regulations relating to the
physically disabled, seismic conditions, and building safety and security, (c)
installing new floor covering, lighting, and wall coverings in the Building
common areas, and in connection with any Renovations, Landlord may, among other
things, erect scaffolding or other necessary structures in the Building, limit
or eliminate access to portions of the Land, including portions of the common
areas, or perform work in the Building, which work may create noise, dust or
leave debris in the Building, (d) renovation of the main entry to the Building
and the main Building lobby area, and (e) renovation of the elevator, lobbies,
elevator doors and frames. Tenant hereby agrees that such Renovations and
Landlord's actions in connection with such Renovations shall in no way
constitute a constructive eviction of Tenant nor entitle Tenant to any abatement
of Rent. Landlord shall have no responsibility or for any reason be liable to
Tenant for any direct or indirect injury to or interference with Tenant's
business arising from the Renovations, nor shall Tenant be entitled to any
compensation or damages from Landlord for loss of the use of the whole or any
part of the Premises or of Tenant's personal property or improvements resulting
from the Renovations or Landlord's actions in connection with such Renovations,
or for any inconvenience or annoyance occasioned by such Renovations or
Landlord's actions in connection with such Renovations.
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30. Option To Extend Lease Term.
---------------------------
30.1. Tenant (including the Successor Entity as defined in Section 31
below, or any affiliates as provided in Section 15.8) shall have the one time
option to extend the term of this Lease (the "Option") as to all (and not less
than all) of the Premises for an additional period of five (5) years (the
"Option Period") commencing on the Expiration Date of the initial Lease Term
subject to and upon the following terms and conditions:
(a) That Tenant is not in default under any of the terms, covenants,
conditions or provisions of this Lease either at the time Tenant exercises the
Option or as of the Expiration Date of the initial Lease Term; and the period of
time within which the Option may be exercised shall not be extended or enlarged
by reason of Tenant's inability to exercise such Option because of such default;
(b) Subject to Section 15.8 and 31, that Tenant shall not have assigned its
interest under this Lease, voluntarily or involuntarily, nor sublet more than
twenty-five percent (25%) of the Premises, it being the intent of the parties
hereto that the Option is for the sole benefit of BNC Mortgage, Inc., as Tenant
under this Lease, and as such the Option may only be exercised by BNC Mortgage,
Inc.;
(c) That Tenant shall have notified Landlord, in the manner provided in
Section 31.22, not earlier than nine (9) months nor later than seven (7) months
prior to the Expiration Date of the initial Lease Term, of Tenant's election to
exercise such Option, otherwise, in the event Tenant does not exercise the
Option during the aforementioned option exercise period in strict accordance
with the provisions contained herein, the Option shall forever terminate and be
null and void and of no further force or effect; and time is of the essence of
all of the provisions of this Article 30 relating to Tenant's exercise of its
Option;
(d) That there shall be no further right or option to extend the Lease Term
beyond the Option Period;
(e) That the Monthly Rent for the Premises during the Option Period shall
be the fair market value for the highest and best use of the Premises for a five
(5) year lease as of the Expiration Date, but in no event shall the Monthly Rent
for the Option Period be less than the total of the rent and additional rent
payable in the last full calendar month of the Lease Term (disregarding any rent
abatement or offset of any kind); and such fair market value shall be reasonably
determined by Landlord; and
(f) That Tenant's Option shall be subject and subordinate to any right,
option or obligation set forth in any lease in the Building which exists as of
the date hereof.
30.2. Unless all of the above conditions precedent have been satisfied,
Tenant's exercise of the Option shall be of no force or effect and the Option
shall lapse. If all of the above conditions precedent are satisfied, then the
Lease Term shall automatically be extended for the Option Period and all of the
terms conditions and provisions of this Lease shall continue in full force and
effect throughout the Option Period, except for the grant of the within Option
(which is the only extension option), the Work Letter (which shall no longer be
executory) and the Monthly Rent (which shall be determined as provided above).
Tenant shall execute, acknowledge and deliver any and all documents requested by
Landlord to memorialize such extension of the Lease Term. After the timely an
proper exercise of the Option, all references in the Lease to the "Lease Term"
shall be deemed to mean the Lease Term as extended and all references to the
-- --------
"Expiration Date" or the "end of the Lease Term" shall be deemed to mean the
expiration of the Lease Term as extended.
-- --------
A Successor Entity, or an any Affiliate taking a full assignment to the Lease,
shall have the right to exercise the Option Right in Section 30.
31. Successor Entity.
----------------
BNC Mortgage, Inc., has disclosed and herein discloses to Landlord that as part
of its business plan, it anticipates a change or modification in the name and/or
ownership (whether by merger, acquisition, sale, financing, refinancing,
transfer, leveraged buy-out or otherwise). Following such change or
modification, the successor entity ("Successor Entity") to BNC Mortgage, Inc.,
shall be deemed to be an assignee of the Lease which assignment shall not
require Landlord's consent as a Transfer under this Lease, nor the payment of
any Transfer Premium to Landlord, provided that: (i) prior to the change to the
Successor Entity Tenant shall provide to Landlord notice of the proposed change
together with financial information
23
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OFFICE LEASE BNC MORTGAGE, INC.
- --------------------------------------------------------------------------------
detailing the financial condition of such Successor Entity following such
change; (ii) the Successor Entity shall have a higher net worth than Tenant, and
shall otherwise have a materially improved financial condition than Tenant; and
(iii) prior to the assignment the L-C shall, at Landlord's option, be replaced
with a replacement letter of credit from the Successor Entity under the same
terms and conditions as the L-C, provided that if such replacement letter of
credit is not made, the L-C shall remain in full force and effect.
32. General Provisions.
------------------
32.1. Joint Obligation. If there is more than one person, firm,
----------------
corporation, partnership or other entity comprising Tenant, then (i) the term
"Tenant" as used herein shall include all of the undersigned; (ii) each and
every provision in this Lease shall be binding on each and every of the
undersigned; (iii) each of the undersigned shall be jointly and severally liable
hereunder; (iv) Landlord shall have the right to join one or all of the
undersigned in any proceeding or to proceed against them in any order; and (v)
Landlord shall have the right to release any one or more of the undersigned
without in any way prejudicing its right to proceed against the others. If
Tenant is a partnership, then all of the partners of Tenant existing as of the
date of execution of this Lease and all persons or entities admitted to the
partnership at any time after the date of execution of this Lease shall be
personally liable for all of Tenant's obligations and liabilities under this
Lease as the same may be amended from time to time. In connection with the
foregoing sentence, such liability shall (i) be joint and several, (ii) be
primary and direct (and not as a surety), (iii) continue notwithstanding the
fact that such partner may cease to be a partner of the partnership after the
date that Tenant executes this Lease, and (iv) continue notwithstanding the fact
that amendments may be made to this Lease from time to time following the date
that any such partner ceases to be a partner of the partnership.
32.2. Marginal Headings. The titles to the articles and sections of this
-----------------
Lease are not a part of this Lease and shall have no effect on the
construction or interpretation.
32.3. Time. Time is of the essence for the performance of each and every
----
provision of this Lease to be performed by Tenant.
32.4. Successors And Assigns. Subject to the restrictions contained in
----------------------
Article 15 above, this Lease binds the heirs, executors, administrators,
successors and assigns of the parties hereto.
32.5. Recordation. Tenant shall not record this Lease or a short form
-----------
memorandum hereof without the prior written consent of Landlord.
32.6. Late Charges. Tenant acknowledges that late payment of rent will cause
------------
Landlord to incur costs not contemplated by this Lease, the exact amount of
which will be extremely difficult to ascertain. These costs include, but are not
limited to, processing and accounting charges, and late charges which may be
imposed on Landlord by the terms of any Superior Leases and Mortgages.
Accordingly, if any installment of Monthly Rent or payment of additional rent
due from Tenant is not received by Landlord or Landlord's designee within ten
(10) days after the amount is due, Tenant shall pay to Landlord a late charge
equal to six percent (6%) of the overdue amount. Acceptance of late charges by
Landlord shall not constitute a waiver of Tenant's default with respect to the
overdue amount, nor prevent Landlord from exercising any of the other rights and
remedies granted hereunder or at law or in equity. In the event that a late
charge is payable hereunder, whether or not collected, for three (3) consecutive
installments of Monthly Rent and Tenant's Share of Direct Expenses then
notwithstanding any other provision of this Lease to the contrary, Monthly Rent
and Tenant's Share of Direct Expenses shall, at Landlord's option, become due
and payable quarterly in advance.
32.7. Prior Agreements; Amendment, Waiver. This Lease contains all of the
-----------------------------------
agreements of the parties hereto with respect to any matter covered or mentioned
in this Lease, and no prior agreements or understanding pertaining to any such
matters shall be effective for any purpose. No provision of this Lease may be
amended or added to except by an agreement in writing signed by the parties
hereto or their respective successors in interest. All waivers hereunder must be
in writing and specify the breach, act, omission, term, covenant or condition
waived, and acceptance of rent or other acts or omissions by Landlord shall not
be deemed to be a waiver. The waiver by Landlord of any breach, act, omission,
term, covenant or condition of this Lease shall not be deemed to be a waiver of
any other or subsequent breach, act, omission, term, covenant or condition.
24
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OFFICE LEASE BNC MORTGAGE, INC.
- --------------------------------------------------------------------------------
32.8. Inability To Perform. Any prevention, delay or stoppage due to
--------------------
strikes, lockouts, labor disputes, acts of God, inability to obtain services,
labor, or materials or reasonable substitutes therefor, governmental actions,
civil commotions, fire or other casualty, and other causes beyond the reasonable
control of the party obligated to perform (collectively, the "Force Majeure"),
except with respect to the obligations imposed with regard to Rent and other
charges to be paid by Tenant pursuant to this Lease, and except as to Tenant's
obligations under Article 8 of this Lease notwithstanding anything to the
contrary contained in this Lease, shall excuse the performance of such party for
a period equal to any such prevention, delay or stoppage and, therefore, if this
Lease specifies a time period for performance of an obligation of either party,
that time period shall be extended by the period of any delay in such party's
performance caused by a Force Majeure.
32.9. Legal Proceedings. In any action or proceeding involving or relating
-----------------
in any way to this Lease, the court or other person or entity having
jurisdiction in such action or proceeding shall award to the party in whose
favor judgment is entered the actual attorneys' fees and costs incurred. The
party in whose favor judgment is entered may, at its election submit proof of
fees and costs as an element of damages before entry of judgment or after entry
of judgment in a post-judgment cost bill. Tenant also shall indemnify Landlord
for, and hold Landlord harmless from and against, all Liabilities incurred by
Landlord if Landlord becomes or is made a party to any proceeding or action: (a)
instituted by Tenant, or by any third party against Tenant, or by or against any
person holding any interest under or using the Premises by license of or
agreement with Tenant; (b) otherwise arising out of or resulting from any act or
omission of Tenant or such other person; or (c) necessary to protect Landlord's
interest under this Lease in a bankruptcy proceeding, or other proceeding under
Title 11 of the United States Code, as amended. In any circumstance where Tenant
is obligated to indemnify or hold harmless Landlord or Landlord's Affiliates
under this Lease, Tenant also shall defend Landlord and Landlord's Affiliates
with counsel acceptable to Landlord or, at Landlord's election, Landlord or
Landlord's Affiliates may employ their own counsel and Tenant shall pay when due
all attorneys' fees and costs therefor.
32.10. Conveyance Of Premises. As used herein the term "Landlord" means only
----------------------
the current owner or owners of the fee title to the Building or the lessee under
a ground lease of the Land. Upon each conveyance (whether voluntary or
involuntary) of the Building, the conveying party shall be relieved of all
liability under any and all of its covenants and obligations contained in or
derived from this Lease or arising out of any act, occurrence or omission
occurring after the date of such conveyance. Landlord may sell, assign, convey,
encumber or otherwise transfer all or any portion of its interests in this
Lease, the Premises, the Building or the Land.
32.11. Name. Tenant shall not use the name of the Building or of the
----
development in which the Building is situated, if any, for any purpose other
than as an address of the business to be conducted by Tenant in the Premises.
32.12. Severability. Any provision of this Lease which shall be held
------------
invalid, void or illegal shall in no way affect, impair or invalidate any of the
other provisions hereof and such other provisions shall remain in full force and
effect.
32.13. Waiver Of Trial By Jury. Tenant hereby waives trial by jury in any
-----------------------
action, proceeding or counterclaim brought by either of the parties hereto on
any matters whatsoever arising out of or in any way connected with this Lease.
32.14. Cumulative Remedies. No right, remedy or election hereunder or at law
-------------------
or in equity shall be deemed exclusive but shall, wherever possible, be
cumulative with all other rights, remedies or elections.
32.15. Choice Of Law. This Lease shall be governed by the laws of the State
-------------
of California applicable to transactions to be performed wholly therein.
32.16. Signs. Landlord hereby agrees that Tenant, at Tenant's sole cost and
-----
expense, shall have the right during the Term to have installed on the exterior
face of the Premises, in accordance with the terms of this Section 32.16, two
(2) identity signs identifying Tenant's name and/or logo (the "Building Identity
Signs"). Additionally, Tenant, at Tenant's sole cost and expense, shall have the
right during the Term to have installed on the Premises, in accordance with the
terms of this Section 32.16, two (2) monument signs containing Tenant's name
and/or logo (the "Monument Signs"). The Monument Signs and Building Identity
Signs are hereinafter collectively referred to as the "Signage". The graphics,
materials, color, design, lettering, size, quality, specifications and exact
location of the Signage shall be subject to the prior written
25
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OFFICE LEASE BNC MORTGAGE, INC.
- --------------------------------------------------------------------------------
approval of Landlord, in Landlord's reasonable discretion, and shall also comply
with and be subject to all other applicable laws, statutes, ordinances, rules,
regulations, permits, approvals, and all covenants, conditions or restrictions
of record. The Signage shall be installed by Tenant, and Tenant shall pay the
costs incurred in the design, construction and installation of the Signage.
Tenant, at its sole cost and expense, shall maintain the Signage in accordance
with a maintenance program approved and supervised by Landlord. At the
expiration or earlier termination of the Lease, Tenant shall, at Tenant's sole
cost and expense, cause: (a) the Signage to be removed from the Premises, and
(b) the Premises to be restored to its condition existing prior to the
installation of the Signage. If Tenant fails to remove the Signage and restore
the Premises as provided in this Section 32.16 within thirty (30) days of the
expiration or earlier termination of the Lease, then Landlord may perform such
work and all costs and expenses incurred by Landlord in connection therewith
shall constitute additional rent under the Lease and shall be paid by Tenant to
Landlord within ten (10) days of Tenant's receipt of an invoice therefor. In the
event of any assignment or subletting made in compliance with this Lease, the
four signs described above may be changed (at no cost to Landlord) to reflect
the name(s) of an assignee or a subtenant provided: (i) no individual sign shall
identify more than assignee or subtenant; and (ii) no more than two assignees or
subtenants may be identified on the four signs. Any electrical or other utility
usage of the Signage shall be paid by Tenant. In no event shall Landlord have
any liability to Tenant in the event that any of the rights granted to Tenant
hereunder cannot be exercised (or fully exercised) because of the restrictions
of applicable governmental laws, rules and regulations.
32.17. Tenant shall not place any sign on the Premises, the Building or the
Land, or which is visible from anywhere outside of the Premises, without
Landlord's prior written consent.
32.18. Right To Lease. Landlord reserves the absolute right to effect such
--------------
other tenancies in the Building as Landlord may, in the exercise of its sole
business judgment, determine to best promote the interests of the Building.
Tenant does not rely on the fact, nor does Landlord represent, that any specific
tenant or type of number of tenants shall, during the Lease Term, occupy any
space in the Building. Landlord shall have the right at any time to change the
name of the Building and to install, affix and maintain any and all signs on the
exterior and on the interior of the Building as Landlord may, in Landlord's sole
discretion, desire.
32.19. Presumptions. This Lease shall be construed without regard to any
------------
presumption or other rule requiring construction against the party drafting the
document. It shall be construed neither for nor against Landlord or Tenant, but
shall be given reasonable interpretation in accordance with the plain meaning of
its terms and the intent of the parties.
32.20. Exhibits. All exhibits and any riders annexed to this Lease
--------
including, without limitation, Exhibits "A", "B", "C", "D", "E" and "F" are
incorporated herein by this reference.
32.21. Submission Of Lease. The submission of this Lease to Tenant or its
-------------------
broker, agent or attorney for review or signature does not constitute an offer
to Tenant to lease the Premises or grant an option to lease the Premises. This
document shall not be binding unless and until it is executed and delivered by
both Landlord and Tenant.
32.22. Meaning Of Terms. Whenever required by the context of this Lease, the
----------------
singular shall include the plural and the plural shall include the singular, and
the masculine, feminine and neuter genders shall each include the others, and
the word "person" shall include corporations, partnerships or other entities.
All monetary obligations of Tenant to Landlord under the terms of this Lease are
deemed to be rent.
32.23. Notices. All notices, demands or communications required or permitted
-------
under this Lease (the "Notices") shall be in writing and shall be personally
delivered or sent by certified mail, return receipt requested, postage prepaid.
Notices to Tenant shall be delivered to the address set forth in Section 2.1
(q), except that when Tenant takes possession of the Premises, the address of
the Premises always may be used for the purpose of delivering Notices to Tenant.
Notices to Landlord shall be delivered to the address set forth in Section 2.2
(c), or such other address as Landlord may specify in writing to Tenant. Notices
shall be effective on the earlier of delivery or two (2) days after they are
mailed in accordance with this section.
32.24. Intentionally Deleted.
----------------------
32.25. Transportation Management. Tenant shall fully comply with all present
-------------------------
or future programs intended to manage parking, transportation or traffic in and
around the Building, and in connection
26
<PAGE>
OFFICE LEASE BNC MORTGAGE, INC.
- --------------------------------------------------------------------------------
therewith, Tenant shall take responsible action for the transportation planning
and management of all employees located at the Premises by working directly with
Landlord, any governmental transportation management organization or any other
transportation-related committees or entities.
In Witness Whereof, the parties hereto have caused their duly authorized
representatives to execute this Lease as of the day and date first above
written.
"Landlord"
Shuwa Investments Corporation,
a California corporation
By: /s/ TAKAJI KOBAYASHI
--------------------
Takaji Kobayashi
Its: President
"Tenant"
BNC Mortgage, Inc.,
a California corporation
By: /s/ EVAN R. BUCKLEY
-------------------
Evan R. Buckley
Its: President
<PAGE>
E x h i b i t A
Premises Floor Plan
[FLOOR PLAN OF FIRST FLOOR]
<PAGE>
E x h i b i t A
Premises Floor Plan
[FLOOR PLAN OF SECOND FLOOR]
<PAGE>
E x h i b i t B
[LLBUILD]
Tenant Work Letter
This Tenant Work Letter shall set forth the terms and conditions relating to the
construction of the tenant improvements in the Premises. (For purposes of this
Tenant Work Letter "Premises" shall mean only Space A). This Tenant Work Letter
is essentially organized chronologically and addresses the issues of the
construction of the Premises, in sequence, as such issues will arise during the
actual construction of the Premises. All references in this Tenant Work Letter
to Articles or Sections of "this Lease" shall mean the relevant portion of the
Form Office Lease to which this Tenant Work Letter is attached as Exhibit B and
of which this Tenant Work Letter forms a part, and all references in this Tenant
Work Letter to Sections of "this Tenant Work Letter" shall mean the relevant
portion of Sections 1 through 6 of this Tenant Work Letter.
Section 1
Landlord's Initial Construction In The Premises
Landlord has constructed, at its sole cost and expense, the base, shell, and
core of the Building (collectively, the "Base, Shell, and Core"). The Base,
Shell and Core shall consist of those portions of the Premises which were in
existence prior to the construction of the tenant improvements in the Premises
for the prior tenant of the Premises.
Section 2
Tenant Improvements
2.1 Tenant Improvement Allowance. Tenant shall be entitled to a one-time
----------------------------
tenant improvement allowance (the "Tenant Improvement Allowance") in the
amount of Three Hundred Twenty-Nine Thousand Ninety Dollars ($329,090.00) for
the costs relating to the initial design and construction of Tenant's
improvements which are permanently affixed to the Premises (the "Tenant
Improvements"). In no event shall Landlord be obligated to make disbursements
pursuant to this Tenant Work Letter in a total amount which exceeds the Tenant
Improvement Allowance. All Tenant Improvements for which the Tenant
Improvement Allowance has been made available shall be deemed Landlord's
property under the terms of Section 9.2.1 of the Lease. If Tenant fails to
utilize any portion of the Tenant Improvement Allowance on or before the date
which is three (3) months after the Commencement Date (provided such three
month period shall be extended to the extent any delays are caused by force
majeure delays or delays due to settling problems as described in Section 10
of the Lease) such unused portion shall revert to Landlord and Tenant shall
have no further rights thereto.
2.2 Disbursement Of The Tenant Improvement Allowance. Except as otherwise set
------------------------------------------------
forth in this Tenant Work Letter, the Tenant Improvement Allowance shall be
disbursed by Landlord (each of which disbursements shall be made pursuant to
Landlord's disbursement process) for costs related to the construction of the
Tenant Improvements and for the following items and costs (collectively, the
"Tenant Improvement Allowance Items"): (i) payment of the fees of the
"Architect" and the "Engineers", as those terms are defined in Section 3.1 of
this Tenant Work Letter, and payment of the fees incurred by, and the cost,
not to exceed Five Hundred Dollars ($500.00), of documents and materials
supplied by, Landlord and Landlord's consultants in connection with the
preparation and review of the "Construction Drawings", as that term is defined
in Section 3.1 of this Tenant Work Letter; (ii) the cost of any changes in the
Base, Shell and Core when such changes are required by the Construction
Drawings; (iii) the cost of any changes to the Construction Drawings or Tenant
Improvements required by all applicable building codes (the "Code"); (iv) the
cost of window coverings (if any) existing in the Premises; (v) the "Landlord
Supervision Fee", as that term is defined in Section 4.3.2 of this Tenant Work
Letter; and (vi) a portion of the costs of the tenant demising walls and
public corridor walls and materials, if any, as designated by Landlord.
2.3 Standard Tenant Improvement Package. Landlord has established
-----------------------------------
specifications (the "Specifications") for the Building standard components to
be used in the construction of the Tenant Improvements in the Premises
(collectively, the "Standard Improvement Package"), which Specifications shall
be supplied to Tenant by Landlord. The quality of Tenant
B-1
<PAGE>
Improvements shall be equal to or of greater quality than the quality of the
Specifications, provided that Landlord may, at Landlord's option, require the
Tenant Improvements to comply with certain Specifications. Landlord may make
changes to the Specifications for the Standard Improvement Package from time
to time.
Section 3
Construction Drawings
3.1. Selection Of Architect/Construction Drawings. Tenant shall retain an
--------------------------------------------
architect/space planner reasonably approved by Landlord (the "Architect")
to prepare the "Construction Drawings", as that term is defined in this
Section 3.1. Tenant shall retain the engineering consultants designated by
Landlord (the "Engineers") to prepare all plans and engineering working
drawings relating to the structural, mechanical, electrical, plumbing,
HVAC, life/safety, and sprinkler work of the Tenant Improvements. The
plans and drawings to be prepared by Architect and the Engineers hereunder
shall be known collectively as the "Construction Drawings". All
Construction Drawings shall comply with the drawing format and
specifications as determined by Landlord, and shall be subject to
Landlord's approval. Tenant and Architect shall verify, in the field, the
dimensions and conditions of the Base, Shell and Core, and Tenant and
Architect shall be solely responsible for the same, and Landlord shall
have no responsibility in connection therewith. Landlord's review of the
Construction Drawings as set forth in this Section 3, shall be for its
sole purpose and shall not imply Landlord's review of the same, or
obligate Landlord to review the same, for quality, design, Code compliance
or other like matters. Accordingly, notwithstanding that any Construction
Drawings are reviewed by Landlord or its space planner, architect,
engineers and consultants, and notwithstanding any advice or assistance
which may be rendered to Tenant by Landlord or Landlord's space planner,
architect, engineers, and consultants, Landlord shall have no liability
whatsoever in connection therewith and shall not be responsible for any
omissions or errors contained in the Construction Drawings, and Tenant's
waiver and indemnity set forth in Section 22.2 of this Lease shall
specifically apply to the Construction Drawings.
3.2. Final Space Plan. On or before the date set forth in Schedule 1,
----------------
attached hereto, Tenant and the Architect shall prepare the final space
plan for Tenant Improvements in the Premises (collectively, the "Final
Space Plan"), which Final Space Plan shall include a layout and
designation of all offices, rooms and other partitioning, their intended
use, and equipment to be contained therein, and shall deliver the Final
Space Plan to Landlord for Landlord's reasonable approval.
3.3. Final Working Drawings. On or before the date set forth in Schedule 1,
----------------------
Tenant, the Architect and the Engineers shall complete the architectural
and engineering drawings for the Premises, and the final architectural
working drawings in a form which is complete to allow subcontractors to
bid on the work and to obtain all applicable permits (collectively, the
"Final Working Drawings") and shall submit the same to Landlord for
Landlord's reasonable approval.
3.4. Permits. The Final Working Drawings shall be approved by Landlord (the
-------
"Approved Working Drawings") prior to the commencement of the construction
of the Tenant Improvements. Tenant shall immediately submit the Approved
Working Drawings to the appropriate municipal authorities for all
applicable building permits necessary to allow "Contractor", as that term
is defined in Section 4.1, below, to commence and fully complete the
construction of the Tenant Improvements (the "Permits"), and, in
connection therewith, Tenant shall coordinate with Landlord in order to
allow Landlord, at its option, to take part in all phases of the
permitting process and shall supply Landlord, as soon as possible, with
all plan check numbers and dates of submittal and shall take all necessary
actions, on or before the date set forth in Schedule 1 in order to allow
Contractor to receive the Permits conditioned only upon the payment of the
appropriate Permit fees. Notwithstanding anything to the contrary set
forth in this Section 3.4, Tenant hereby agrees that neither Landlord nor
Landlord's consultants shall be responsible for obtaining any building
permit or certificate of occupancy for the Premises and that the obtaining
of the same shall be Tenant's responsibility; provided however that
Landlord shall, in any event, promptly cooperate with Tenant in executing
permit applications and performing all other ministerial acts reasonably
necessary to enable Tenant to obtain any such permit or certificate of
occupancy. No changes, modifications or alterations in the Approved
Working Drawings may be made without the prior written consent of
Landlord, provided that Landlord may withhold its consent, in its sole
discretion, to any change in the Approved Working Drawings if such change
would directly or indirectly delay the "Substantial Completion" of the
Premises as that
B-2
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OFFICE LEASE BNC MORTGAGE, INC.
- --------------------------------------------------------------------------------
term is defined in Section 5.1 of this Tenant Work Letter.
3.5. Time Deadlines. Tenant shall use its best, good faith, efforts and all
--------------
due diligence to cooperate with the Architect, the Engineers, and
Landlord to complete all phases of the Construction Drawings and the
permitting process and to receive the Permits, and with Contractor to
obtain the "Contract Cost", as that term is defined in Section 4.2 of
this Tenant Work Letter, as soon as possible after the execution of the
Lease, and, in that regard, shall meet with Landlord on a scheduled
basis to be determined by Landlord, to discuss Tenant's progress in
connection with the same. The applicable dates for approval of items,
plans and drawings as described in this Section 3, Section 4, below, and
in this Tenant Work Letter are set forth and further elaborated upon in
Schedule 1 (the "Time Deadlines"), attached hereto. Tenant agrees to
comply with the Time Deadlines.
Section 4
Construction Of The Tenant Improvements
4.1. Contractor. As set forth in Section 4.2, below, a contractor designated
----------
by Landlord ("Contractor") shall construct the Tenant Improvements.
4.2. Competitive Bidding. The Contractor shall be selected pursuant to a
-------------------
competitive bidding process. Landlord shall select three (3) qualified,
licensed and reputable general contractors to participate in the
process. Tenant may select one (1) contractor for bidding provided that
Tenant has provided to Landlord by the deadline established by Landlord
to insure no construction delays, such information as Landlord shall
reasonably require to establish that such contractor has the
qualifications to perform the work (including, without limitation,
qualifications to meet Landlord's bonding and insurance requirements).
Each such contractor shall be notified in the bidding package of the
time schedule for construction of the Tenant Improvements and that,
unless Landlord otherwise requires, such contractors shall be required
to use the fire, life/safety subcontractor designated by Landlord. The
bids shall be submitted promptly to Landlord and a reconciliation shall
be performed by Landlord to adjust inconsistent or incorrect assumptions
so that a like-kind comparison can be made. Landlord shall make final
selection of the contractor based on the contractors' qualifications
(including financials and insurance and/or bonding capabilities), the
contractors' understanding of scope of work and competitive bidding. The
date of selection of such contractor shall be known hereafter as the
"Selection Date" and the cost of all Tenant Improvement Allowance Items
to be incurred by Tenant in connection with the construction of the
Tenant Improvements may be referred to herein as the "Contract Cost".
4.3. Construction Of Tenant Improvements By Contractor Under The Supervision
-----------------------------------------------------------------------
Of Landlord.
-----------
4.3.1. Over-Allowance Amount. Within three (3) business days after the
---------------------
Selection Date, Tenant shall deliver to Landlord cash in an amount (the "Over-
Allowance Amount") equal to the difference, if any, between (i) the Contract
Cost and (ii) the amount of the Tenant Improvement Allowance. The Over-Allowance
Amount shall be disbursed by Landlord prior to the disbursement of any then
remaining portion of the Tenant Improvement Allowance, and such disbursement
shall be pursuant to the same procedure as the Tenant Improvement Allowance. In
the event that, after the Selection Date, any revisions, changes, or
substitutions shall be made to the Construction Drawings or the Tenant
Improvements, any additional costs which arise in connection with such
revisions, changes or substitutions or any other additional costs shall be paid
by Tenant to Landlord immediately upon Landlord's request as an addition to the
Over-Allowance Amount.
4.3.2. Landlord's Retention Of Contractor. Landlord shall independently retain
----------------------------------
Contractor, on behalf of Tenant, to construct the Tenant Improvements in
accordance with the Approved Working Drawings and Landlord shall supervise the
construction by Contractor, and Tenant shall pay a construction supervision and
management fee (the "Landlord Supervision Fee") to Landlord in an amount equal
to the product of (i) three percent (3%) and (ii) an amount equal to the Tenant
Improvement Allowance plus the Over-Allowance Amount (as such Over-Allowance
Amount may increase pursuant to the terms of this Tenant Work Letter).
4.3.3. Contractor's Warranties And Guaranties. Landlord hereby agrees to
--------------------------------------
assign to Tenant, to the extent assignable and to the extent reasonably
necessary in order to allow Tenant to pursue the particular claim against
Contractor, all warranties and guaranties by Contractor relating to the Tenant
Improvements, and Tenant hereby waives all claims against Landlord relating to,
or arising out of the construction of, the
B-3
<PAGE>
Tenant Improvements.
4.3.4. Tenant's Covenants. Tenant hereby indemnifies Landlord for any loss,
------------------
claims, damages or delays arising from the actions of Architect on the Premises
or in the Building. Within ten (10) days after completion of construction of the
Tenant Improvements, Tenant shall cause Contractor and Architect to cause a
Notice of Completion to be recorded in the office of the County Recorder of the
county in which the Building is located in accordance with Section 3093 of the
Civil Code of the State of California or any successor statute and furnish a
copy thereof to Landlord upon recordation, failing which, Landlord may itself
execute and file the same on behalf of Tenant as Tenant's agent for such
purpose. In addition, immediately after the Substantial Completion of the
Premises, Tenant shall have prepared and delivered to the Building a copy of the
"as built" plans and specifications (including all working drawings) for the
Tenant Improvements.
Section 5
Completion Of The Tenant Improvements; Commencement Date
5.1. Ready For Occupancy. The Premises shall be deemed "Ready for Occupancy"
-------------------
upon the Substantial Completion of the Premises. For purposes of this
Lease, "Substantial Completion" of the Premises shall occur upon the
completion of construction of the Tenant Improvements in the Premises
pursuant to the Approved Working Drawings, with the exception of any
punch list items detailed after a walk-through inspection of the
Premises by Landlord and Tenant, and any tenant fixtures, work-
stations, built-in furniture, or equipment that are not Landlord's
responsibility to install pursuant to the final Working Drawings.
5.2. Delay Of The Substantial Completion Of The Premises. Except as provided
---------------------------------------------------
in this Section 5.2, the Commencement Date shall occur as set forth in
the Lease and Section 5.1, above. If there shall be a delay or there
are delays in the Substantial Completion of the Premises or in the
occurrence of any of the other conditions precedent to the Commencement
Date, as set forth in the Lease, as a direct, indirect, partial, or
total result of the following (each a "Tenant Delay"):
5.2.1. Tenant's failure to comply with the Time Deadlines;
5.2.2. Tenant's failure to timely approve any matter requiring Tenant's
approval;
5.2.3. A breach by Tenant of the terms of this Tenant Work Letter or the
Lease;
5.2.4. Changes in any of the Construction Drawings after disapproval of the
same by Landlord or because the same do not comply with Code or other applicable
laws;
5.2.5. Tenant's request for changes in the Approved Working Drawings;
5.2.6. Tenant's requirement for materials, components, finishes or
improvements which are not available in a commercially reasonable time given the
anticipated date of Substantial Completion of the Premises, as set forth in the
Lease, or which are different from, or not included in, the Standard Improvement
Package;
5.2.7. Changes to the Base, Shell and Core required by the Approved Working
Drawings; or
5.2.8. Any other acts or omissions of Tenant, or its agents, or employees;
then, notwithstanding anything to the contrary set forth in the Lease or this
Tenant Work Letter and regardless of the actual date of the Substantial
Completion of the Premises, the Commencement Date shall be deemed to be the date
the Commencement Date would have occurred if no Tenant delay or delays, as set
forth above, had occurred.
Section 6
Miscellaneous
6.1. Tenant's Entry Into The Premises Prior To Substantial Completion.
----------------------------------------------------------------
Provided that Tenant and its agents do not interfere with Contractor's
work in the Building and the Premises, Contractor shall allow Tenant
access to the Premises prior to the Substantial Completion of the
Premises for the purpose of Tenant installing overstandard equipment or
fixtures (including Tenant's data
B-4
<PAGE>
and telephone equipment) in the Premises. Prior to Tenant's entry into
the Premises as permitted by the terms of this Section 6.1, Tenant
shall submit a schedule to Landlord and Contractor, for their approval,
which schedule shall detail the timing and purpose of Tenant's entry.
Tenant shall hold Landlord harmless from and indemnify, protect and
defend Landlord against any loss or damage to the Building or Premises
and against injury to any persons caused by Tenant's actions pursuant
to this Section 6.1.
6.2. Freight Elevators. Intentionally Deleted.
-----------------
6.3. Tenant's Representative. Tenant has designated Mr. Evan R. Buckley as
-----------------------
its sole representative with respect to the matters set forth in this
Tenant Work Letter, who, until further notice to Landlord, shall have
full authority and responsibility to act on behalf of the Tenant as
required in this Tenant Work Letter.
6.4. Landlord's Representative. Landlord has designated Mr. Tiberio
-------------------------
DiMartino as its sole representative with respect to the matters set
forth in this Tenant Work Letter, who, until further notice to Tenant,
shall have full authority and responsibility to act on behalf of the
Landlord as required in this Tenant Work Letter.
6.5. Time Of The Essence In This Tenant Work Letter. Unless otherwise
----------------------------------------------
indicated, all references herein to a "number of days" shall mean and
refer to calendar days. In all instances where Tenant is required to
approve or deliver an item, if no written notice of approval is given
or the item is not delivered within the stated time period, at
Landlord's sole option, at the end of such period the item shall
automatically be deemed approved or delivered by Tenant and the next
succeeding time period shall commence.
6.6. Tenant's Lease Default. Notwithstanding any provision to the contrary
----------------------
contained in this Lease, if an event of default as described in Section
19 of the Lease, or a default by Tenant under this Tenant Work Letter,
has occurred at any time on or before the Substantial Completion of the
Premises, then (i) in addition to all other rights and remedies granted
to Landlord pursuant to the Lease, Landlord shall have the right to
withhold payment of all or any portion of the Tenant Improvement
Allowance and/or Landlord may cause Contractor to cease the
construction of the Premises (in which case, Tenant shall be
responsible for any delay in the Substantial Completion of the Premises
caused by such work stoppage as set forth in Section 5 of this Tenant
Work Letter), and (ii) all other obligations of Landlord under the
terms of this Tenant Work Letter shall be forgiven until such time as
such default is cured pursuant to the terms of the Lease.
Section 7
Space B Tenant Improvements
Provided Tenant is not in Default under the Lease, this Tenant Work Letter shall
apply to construction of Tenant Improvements to Space B, subject to the
following modifications: (i) all references to Space A as or the Premises in
this Work Letter shall be replaced with reference to Space B, (ii) the Tenant
Improvement Allowance shall be the amount of $218,590.00 instead of $329,090.00;
(ii) the time deadlines set forth in Schedule 2 will apply instead of those set
forth in Schedule 1.
Section 8
Miscellaneous
8.1 Hazardous Substances. In no event shall Tenant be deemed to have caused or
--------------------
contributed to a hazardous substance being on the Premises if, in the course of
making tenant improvements, alterations or modifications, asbestos is found on
the Premises and is required to be inspected and/or removed. Any and all such
costs relating to asbestos in the Premises prior to its delivery to Tenant
(including investigation and removal of) shall be borne by Landlord.
8.2 Settling Problems. Notwithstanding anything to the contrary contained in
-----------------
this Tenant Work Letter, in the event that the settling problems as described in
Section 10 of the Lease require the drawings to be prepared hereunder to be
revised or require special work to be performed in order to accommodate such
problems, the costs of such revised drawings and/or special work shall, to the
extent attributable to the settling problems, be paid by Landlord, subject to
the right of Landlord to treat any such special work as damage occurring during
the Lease Term and subject to the terms of Section 10 and Section 14 of the
Lease.
B-5
<PAGE>
Schedule 1
Time Deadlines For Space A
<TABLE>
<CAPTION>
Dates Actions To Be Performed
----- -----------------------
<S> <C>
A. Ten (10) days following the mutual execution Final Space Plan to be completed by Tenant and
of the Lease. delivered to Landlord.
B. Twenty-Six (26) days following the mutual Tenant to deliver Final Working Drawings to
execution of the Lease. Landlord.
C. Forty-Seven (47) days following the mutual Tenant to cause Permits to be in position to
execution of the Lease. be picked up by Contractor.
</TABLE>
B-Schedule 1-1
<PAGE>
Schedule 2
Time Deadlines For Space B
<TABLE>
<CAPTION>
Dates Actions To Be Performed
----- -----------------------
<S> <C>
A. No established date. Final Space Plan to be completed by Tenant and
delivered to Landlord.
B. Sixteen Days (16) days following the date a Tenant to deliver Final Working Drawings to
Final Space Plan is delivered to Landlord. Landlord.
C. Thirty Seven (37) Days following the date the Tenant to cause Permits to be in position to
Final Space Plan is delivered to Landlord. be picked up by Contractor.
</TABLE>
B - Schedule 2-1
<PAGE>
E x h i b i t C
Lease Confirmation
_________________, 19___
To: BNC Mortgage, Inc.
1063 McGaw Avenue
Irvine, California 92714
"Tenant"
Re: Office Lease dated June 15, 1997, by and between Shuwa Investments
Corporation, a California corporation, as Landlord, and BNC Mortgage,
Inc., a California corporation, as Tenant (the "Lease").
In accordance with the Lease, we wish to advise you and/or confirm as follows:
1. The Premises are Ready For Occupancy, and the Lease Term shall commence on or
has commenced on [Date], for a term of [Beginning Term] ending on [End Term].
---- -------------- --------
2. Rent commenced to accrue on [Date], in the amount of $[Amount].
---- ------
3. If the Commencement Date is other than the first day of the month, the first
billing will contain a prorata adjustment. Each billing thereafter, with the
exception of the final billing, shall be for the full amount of the monthly
installment as provided for in the Lease.
4. Your rent checks should be made payable to [Payable To] at [Payable At].
---------- ----------
Very truly yours,
"Landlord"
Shuwa Investments Corporation,
a California corporation
By:
--------------------
Takaji Kobayashi
Its: President
Tenant hereby confirms the information set forth above, and further acknowledges
that Landlord has fulfilled its obligations under the above referenced Lease.
"Tenant"
[Tenant Name],
-----------
a [Type Of Entity]
--------------
By: EXHIBIT - DO NOT SIGN
----------------------
Evan R. Buckley
Its: President
Dated:
-------------------
C-1
<PAGE>
E x h i b i t D
Estoppel Certificate
To:
----------------------
----------------------
----------------------
[Tenant Name] ("Tenant") hereby certifies as follows:
-----------
1. The undersigned is the Tenant under that certain Office Lease dated [Date]
----
(the "Lease"), executed by Shuwa Investments Corporation, a California
corporation ("Landlord") as Landlord and the undersigned as Tenant, covering
a portion of the property located at [Building Address], (the "Property").
----------------
2. Pursuant to the Lease, Tenant has leased approximately [Number] square feet
------
of space (the "Premises") at the Property and has paid to Landlord a security
deposit of $[Amount]. The term of the Lease commenced on [Date] and the
------ ----
expiration date of the Lease is [Date]. Tenant has paid rent through [Date].
---- ----
The next rental payment in the amount of $[Amount] is due on [Date]. Tenant
------ ----
is required to pay [Number] percent ([Percent]%) of all annual operating
------ -------
expenses for the Property in excess of [Amount].
------
3. Tenant rents [Number] parking spaces at a charge of $[Amount] per month per
------ ------
space.
4. The Lease provides for an option to extend the term of the Lease for [Number]
------
years. The rental rate for such extension term is as follows: [Insert Rate
-----------
Information]. Except as expressly provided in the Lease, and other documents
-----------
attached hereto, Tenant does not have any right or option to renew or extend
the term of the Lease, to lease other space at the Property, nor any
preferential right to purchase all or any part of the Premises or the
Property.
5. True, correct and complete copies of the Lease and all amendments,
modifications and supplements thereto are attached hereto and the Lease, as
so amended, modified and supplemented, is in full force and effect, and
represents the entire agreement between Tenant and Landlord with respect to
the Premises and the Property. There are no amendments, modifications or
supplements to the Lease, whether oral or written, except as follows (include
the date of such amendment, modification or supplement):
-------------------
---------------------------------------------------------------------------
6. All space and improvements leased by Tenant have been completed and furnished
in accordance with the provisions of the Lease, and Tenant has accepted and
taken possession of the Premises.
7. Landlord is not in any respect in default in the performance of the terms and
provisions of the Lease. Tenant is not in any respect in default under the
Lease and has not assigned, transferred or hypothecated the Lease or any
interest therein or subleased all or any portion of the Premises.
8. There are no offsets or credits against rentals payable under the Lease and
no free periods or rental concessions have been granted to Tenant, except as
follows:
---------------------------------------------------------------------
-----------------------------------------------------------------------------
9. Tenant has no actual or constructive knowledge of any processing, use,
storage, disposal, release or treatment of any hazardous or toxic materials
or substances on the Premises or the Property except as follows (if none,
state "none"):
--------------------------------------------------------------
-----------------------------------------------------------------------------
This Certificate is given to [Name] with the understanding that [Name] will rely
---- ----
hereon in connection with the conveyance of the Property of which the Premises
constitute a part to [Name]. Following any such conveyance, Tenant agrees that
----
the Lease shall remain in full force and effect and shall bind and inure to the
benefit of the [Name] and its successor in interest as if no purchase had
----
occurred.
Dated:
------------------------
"Tenant"
[Tenant Name]
-----------
a [Type Of Entity]
--------------
By: EXHIBIT - DO NOT SIGN
---------------------
[Print Name]
Its:
---------------------
[Title]
[Attach Lease And Amendments To This Certificate]
D-1
<PAGE>
EXHIBIT E
Rules And Regulations
1. Nuisances - No rubbish or debris of any kind shall be placed or permitted to
accumulate upon or adjacent to the Premises, and no odors shall be permitted
to arise therefrom, so as to be offensive or detrimental to any of the
property in the vicinity thereof or to the occupants thereof. No nuisance
shall be permitted to exist or operate upon or in the Premises so as to be
offensive or detrimental.
1.1 Without limiting any of the foregoing, no exterior speakers, horns,
whistles/bells or other sound devices, except for security devices used
exclusively for security purposes, shall be used or located or placed
in the Premises.
1.2 No tenant shall install or operate any phonograph, musical instrument,
radio or receiver or similar device in the Premises in such manner as
to disturb or annoy any other tenants of the building or neighborhood.
2. Trash Containers - All garbage or trash shall be placed and kept in the
trash and rubbish receptacles maintained by Landlord.
3. Exterior Storage - No machinery, equipment, material or supplies shall be
placed, stored or operated at the exterior or adjacent to any leasehold
space, so as to be visible from outside the Premises.
4. Tenant must, upon termination of Tenant's tenancy, return to Landlord all
keys to stores, offices and toilet rooms, either furnished to or otherwise
procured by Tenant.
5. Damage - The toilets and urinals shall not be used for any purpose other
than those for which they were constructed, and no rubbish, newspapers or
other substance of any kind shall be thrown into them. Waste and excessive
or unusual use of water shall not be allowed.
6. Window Shades - No tenant shall install blinds, shades, awnings or other
forms of inside or outside window coverings, or window ventilators or
similar devices without the prior written consent of Landlord.
7. Wiring - Electric wiring of every kind shall be introduced and connected as
directed by Tenant and no boring or cutting of wires will be allowed except
with the prior consent of Landlord. Tenant shall not install any antennae,
aerial wires or other equipment outside the Premises without prior approval
of Landlord.
8. Installation of Floor Coverings - Tenant shall not lay tile or other similar
floor covering so that the same shall be affixed to the floor of the
Premises in any manner except by a paste or other material, which may be
easily be removed with water, the use of cement or other similar adhesive
materials being expressly prohibited. The method affixing any such vinyl
tile or similar floor covering to the floor, as well as the method of
affixing carpets or rugs to the Premises, shall be subject to approval by
Landlord. The expense of repairing any damage resulting from a violation of
this rule, shall be borne by Tenant.
E-1
<PAGE>
Exhibit F
Letter Of Credit
[Insert Date Of Issue]
----------------------
Irrevocable Standby Letter
Of Credit No. [Insert Number]
---------------
Shuwa Investments Corporation
515 South Flower Street, Suite 1270
Los Angeles, California 90071-2205
Attention: Legal Department
Ladies and Gentlemen:
At the request of our customer, , a California
-------------------- ---------------
(the "Account Party"), [Insert Name of Bank] (the
---------------------------------------------
"Bank") hereby establishes in your favor as beneficiary this irrevocable standby
letter of credit (the "Letter of Credit") in the aggregate amount of
------------
United States Dollars (U.S. $ ) (as such amount may be reduced
------
as provided herein, the "Stated Amount"). Such Stated Amount shall be available
for drawing by you as hereinafter set forth.
This Letter of Credit is issued with respect to that certain Office Lease dated
[Insert Date of Office Lease], by and between you, as Landlord, and the
- -----------------------------
Account Party, as Tenant, covering certain premises in the office building
located at ,
-------------------------------------------------------------------
California. Said Office Lease, and any modifications, renewals or extensions
thereof, or substitutes therefor, shall hereinafter be referred to as the
"Lease". Our obligations under this Letter of Credit are solely as set forth
herein and are completely independent of the obligations of the Account Party
under the Lease. You may at any time draw against any portion of this Letter of
Credit without regard to and without the Bank inquiring as to your right to
effect any such draw or to the existence of any defenses by the Account Party
with respect thereto.
This Letter of Credit shall be effective immediately and shall expire at 5:00
p.m., Los Angeles time, on [Insert Date of Expiration of First Year];
------------------------------------------
provided, however, that the expiration date of this Letter of Credit shall be
automatically extended for one (1) year from the present or any future
expiration date unless we give you written notice of our election not to extend
the expiration date ("Notice of Non-Renewal") not later than sixty (60) days
prior to the then-applicable expiration date. A Notice of Non-Renewal shall be
effective when actually delivered to your address set forth above (or such other
address in the State of California as you shall specify to us for such purpose
by written notice received by us prior to the time the Notice of Non-Renewal is
sent).
Subject to the provisions of this Letter of Credit, you are hereby irrevocably
authorized to draw on this Letter of Credit on or before the then-applicable
expiration date. Funds under this Letter of Credit are available to you upon
receipt by Bank of the following documents only;
----
(i) the original of this Letter of Credit; and
(ii) a site draft in an amount not exceeding the Stated Amount of this Letter
of Credit executed by the
F-1
<PAGE>
person executing the "Certificate" referred to below
and stating that such draft is "drawn under [Insert Name of Bank]
---------------------
Letter of Credit No. [Insert Number]"; and
---------------
(iii) a certificate (the "Certificate") executed by any person stating that
he or she is an officer of your company, and further stating:
(a) that, pursuant to the terms of the Lease, you are entitled at this
time to draw Dollars ($ ) under this Letter of
-------------- -----
Credit; or
(b) that (x) the Notice of Non-Renewal has been given, and (y) the Account
Party has not provided you with a satisfactory replacement letter of
credit; or
(c) that a petition has been filed by or against the Account Party (or its
successor-in-interest as the Tenant under the Lease) pursuant to
Section 301, Section 302, Section 303, or Section 304 of Title 11 of
the United States Code.
Bank hereby agrees with you that each request for payment hereunder presented in
compliance with the terms of this Letter of Credit to Bank will be duly honored
by the Bank. If the Bank receives those documents in full compliance with the
terms hereof at or before 5:00 p.m., Los Angeles time, on any day (a "Business
Day") other than a Saturday, Sunday, or day in which commercial banks in the
State of California are authorized or required by law to close, payment under
this Letter of Credit shall be made to you not later than 5:00 p.m., Los Angeles
time, on the third (3rd) succeeding Business Day.
Any document received by the Bank after 5:00 p.m., Los Angeles time, on any
Business Day, or at any time on a non-Business Day, shall be deemed received by
the Bank on the following Business Day.
This Letter of Credit shall be maintained at all times in the Stated Amount.
Partial drawings under this Letter of Credit are permitted. The amount and date
of presentation of any draft representing a partial drawing shall be noted on
the original Letter of Credit, which will be returned promptly to you if a
balance under the Letter of Credit is still available. Upon payment by the
undersigned with respect to any partial drawing, the Stated Amount shall be
automatically and permanently reduced by the amount of such payment.
All documents presented to the Bank in connection with a demand for payment
hereunder and all other communications and notices to the Bank with respect to
this Letter of Credit shall be in writing and delivered to the Bank at the
address set forth below the undersigned's signature and shall specifically refer
to " [Insert Name of Bank] Irrevocable Standby Letter of Credit No. [Insert
------------------------- -------
Number]".
- --------
If a demand for payment made by you hereunder does not, in any instance, conform
with the terms and conditions of this Letter of Credit, Bank shall promptly give
you notice that the purported negotiation was not effected in accordance with
the terms and conditions of this Letter of Credit, stating the reasons therefor
and that Bank is holding any documents at your disposal or is returning them to
you, as Bank may elect.
This Letter of Credit is transferable in its entirety to any successor of
Landlord under the Lease. We will honor complying drafts hereunder presented by
a transferee (and cease to honor drafts hereunder presented by you) upon receipt
of written notice from you that you have transferred all of your rights in this
Letter of Credit to such transferee. Upon receiving such written notice of
transfer, and upon presentation to us of this original Letter of Credit, we will
reissue this Letter of Credit naming such
F-2
<PAGE>
transferee as the beneficiary.
The terms and conditions of this Letter of Credit shall not be affected in any
manner whatsoever in the event the tenant under the Lease assigns the Lease or
sublets all or any portion of premises covered by the Lease.
This Letter of Credit shall be governed by and construed in accordance with the
Uniform Customs and Practice for Documentary Credits (1983 Revision),
International Chamber of Commerce Publication No. 400 and, to the extent not
inconsistent therewith, the laws of the State of California.
Very truly yours,
[Insert Name Of Bank]
- -------------------------------
By:
---------------------------
Its:
---------------------------
Address: [Insert Address]
-----------------------
-----------------------
-----------------------
F-3
<PAGE>
FIRST AMENDMENT TO OFFICE LEASE
- -------------------------------------------------------------------------------
This First Amendment to Lease, ("Amendment") dated for reference purposes only
December 9, 1997 is made by and between Shuwa Investments Corporation, a
California corporation ("Landlord"), and BNC Mortgage, Inc., a California
corporation ("Tenant"). This Amendment amends that certain lease (including
this amendment and all prior amendments thereto, the "Lease") dated June 15,
1997 by and between Landlord (or its predecessor in interest) and Tenant (or its
predecessor in interest) pursuant to which Tenant leases that certain space (the
"Premises") referred to therein located at 1063 McGaw, Irvine, California 92714.
All capitalized terms used but not defined herein shall have the same meaning as
set forth in the Lease.
RECITALS
A. In connection with the performance of the tenant improvement work to Space
A, certain disputes have arisen between Landlord and Tenant relating to the
delays in the completion of such work and the proper determination of the
Commencement Date.
B. To resolve their dispute regarding the proper determination of the
Commencement Date, Landlord and Tenant have reached the agreements contained
herein to conclusively determine both the Commencement Date and the Space B
Commencement Date.
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, Landlord and Tenant agree as follows:
1. Commencement Date. The definition at Section 2.1.(e) of the Lease is
replaced with the following: "The Commencement Date shall be December 5th,
1997."
2. Space B Commencement Date. The definition at Section 2.2.(e) of the Lease is
replaced with the following: "The Space B Commencement Date shall be the earlier
of: (a) the date Tenant occupies all or a portion of Space B for the purposes of
conducting business therein, and (b) March 22, 1998."
In addition, references in Section 3.3. of the Lease are accordingly modified to
reflect that the Space B Commencement Date is conclusively determined to be
March 22, 1998 (regardless of whether Space B is Ready for Occupancy at such
date), subject to Tenant's right to receive rent abatement for the Space B in
the event the actual build out of the Space B Premises exceeds the Build Out
Period in Section 3.3.
3. Whole Agreement. This Amendment sets forth the entire agreement between the
parties with respect to the matters set forth herein. There have been no other
additional oral or written representations or agreements.
4. Miscellaneous
4.1. Present Status. Intentionally Deleted.
4.2. Presumptions. This Lease shall be construed without regard to any
presumption or other rule requiring construction against the party drafting the
document. It shall be construed neither for nor against Landlord or Tenant, but
shall be given reasonable interpretation in accordance with the plain meaning of
its terms and the intent of the parties.
<PAGE>
4.3. Not an Offer. The submission of this document to Tenant or Tenant's
broker, agent or attorney for review or signature does not constitute an offer.
This document shall not be binding unless and until it is executed and delivered
by both parties hereto.
Landlord
Shuwa Investments Corporation,
a California corporation
/s/ TAKAJI KOBAYASHI
--------------------
By: Takaji Kobayashi
Its: President
In Witness Whereof, the parties hereto have caused their duly authorized
representatives to execute this Lease as of the day and date first above
written.
"Landlord"
Shuwa Investments Corporation,
a California corporation
By: /s/ TAKAJI KOBAYASHI
--------------------
Takaji Kobayashi
Its: President
"Tenant"
BNC Mortgage, Inc.,
a California corporation
By: /s/ EVAN R. BUCKLEY
-------------------
Evan R. Buckley
Its: President
<PAGE>
EXHIBIT C
---------
LEASE CONFIRMATION
------------------
December 18, 1997
TO: BNC Mortgage, Inc., a California corporation
"Tenant"
Re: Office Lease dated, by and between SHUWA INVESTMENTS CORPORATION,
a California corporation, as Landlord, and BNC Mortgage, Inc., a
California corporation, as Tenant (the "Lessee").
In accordance with the Lease, we wish to advise you and/or confirm as follows:
1. The Premises are Ready for Occupancy, and the Lease Term shall commence
on or has commenced on December 5, 1997 for a term of five (5) years
ending on December 31, 2002.
2. Rent commenced to accrue on December 5, 1997, in the amount of
$42,781.70 monthly pursuant to the lease.
3. If the Commencement Date is other than the first day of the month, the
first billing will contain a pro rata adjustment. Each billing
thereafter, with the exception of the final billing, shall be for the
full amount of the monthly installment as provided for in the Lease.
4. Your rent checks should be made payable to North America Building
Management Corporation, 3200 Bristol Street, Suite 710, Costa Mesa,
California 92626, Attention: Cory Blunt.
Very truly yours,
"Landlord":
SHUWA INVESTMENTS CORPORATION,
A California corporation
By:
---------------------------
Takkaji Kobayashi
Its: President
Tenant hereby confirms the information set forth above, and further acknowledges
that Landlord has fulfilled its obligations under the above referenced Lease.
"TENANT"
BNC Mortgage, Inc.
a California corporation
By: /s/ KELLY MONAHAN
------------------------
Kelly Monahan
Its: Executive Vice President
Dated: January 28, 1998
---------- --
<PAGE>
EXHIBIT 10.3
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT is made effective as of the ___th day of _______,
1998, by and between BNC Mortgage, Inc., a Delaware corporation (the "Company")
and _______________ ("Indemnitee").
WHEREAS, it is essential to the Company to retain and attract as directors the
most capable persons available;
WHEREAS, Indemnitee has recently become, or continues to serve as a(n)
_____________ of the Company;
WHEREAS, the Bylaws and the Certificate of Incorporation of the Company require
the Company to indemnify its directors to the fullest extent permitted by law
and Indemnitee is serving as a director of the Company, in part, in reliance of
such Bylaws and Certificate of Incorporation; and
WHEREAS, in recognition of Indemnitee's need for substantial protection against
personal liability, to maintain Indemnitee's continued service to the Company in
an effective manner in reliance on the aforesaid Bylaws and Certificate of
Incorporation, in part, to provide Indemnitee with specific contractual
assurance that the protection promised by such Bylaws and Certificate of
Incorporation will be available to Indemnitee (regardless of, among other
things, any amendment to or revocation of such Bylaws and Certificate of
Incorporation or any change in the composition of the Company's Board of
Directors or any acquisition transaction relating to the Company), the Company
desires to provide in this Agreement for the indemnification of and the advance
of expenses to Indemnitee to the fullest extent (whether partial or complete)
permitted by law, as set forth in this Agreement and, to the extent officers'
and directors' liability insurance is maintained by the Company, to provide for
continued coverage of Indemnitee under the Company's officers' and directors'
liability insurance policies.
NOW, THEREFORE, in consideration of the covenants contained herein and of
Indemnitee's continuing service to the Company directly, or at its request,
other enterprises, and intending to be legally bound thereby, the parties hereto
agree as follows:
1. CERTAIN DEFINITIONS
(a) Acquiring Person: shall mean any Person other than: (i) the
----------------
Company; (ii) any of the Company's Subsidiaries; (iii) any employee benefit plan
of the Company or of a Subsidiary of the Company or of a corporation owned
directly or indirectly by the stockholders of the Company in substantially the
same proportions as their ownership of stock of the Company; or (iv) any trustee
or other fiduciary holding securities under an employee benefit plan of the
Company or of a Subsidiary of the Company or of a corporation owned directly or
indirectly by the stockholders of the Company in substantially the same
proportions as their
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ownership of stock of the Company.
(b) Change in Control: shall be deemed to have occurred if: (i) any
-----------------
Acquiring Person is, or becomes the "beneficial owner" (as defined in Rule 13d-3
and 14d-1 under the Securities and Exchange Act of 1934, as amended (the
"Exchange Act")), directly or indirectly, of securities of the Company
representing 20% or more of the combined voting power or more of the then
outstanding Voting Securities of the Company; or (ii) members of the Incumbent
Board cease for any reason to constitute at least a majority of the Board of
Directors of the Company; or (iii) a public announcement is made of a tender or
exchange offer by an Acquiring Person for 50% or more of the outstanding Voting
Securities of the Company, and the Board of Directors of the Company approves or
fails to oppose that tender or exchange offer in its statements in Schedule 14D-
9 under the Exchange Act; or (iv) the stockholders of the Company approve a
merger or consolidation of the Company with any other corporation, partnership
or other entity (or, if no such approval is required, the consummation of such a
merger or consolidation of the Company), other than a merger or consolidation
that would result in the Voting Securities of the Company outstanding
immediately prior to the consummation thereof continuing to represent, either by
remaining outstanding or by being converted into Voting Securities of the
surviving entity or its parent, at least 80% of the total Voting Securities
outstanding immediately after that merger or consolidation; or (v) the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets (or, if no such approval is required,
the consummation of such a liquidation, sale, or disposition in one transaction
or series of related transactions) other than a liquidation, sale, or
disposition of all or substantially all of the Company's assets in one
transaction or a series of related transactions to a corporation owned directly
or indirectly by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company.
(c) Claim: any threatened, pending, or completed action, suit,
-----
proceeding or alternative dispute resolution mechanism (including, without
limitation, securities laws actions, suits, and proceedings), or any inquiry,
hearing or investigation (including discovery), whether conducted by the Company
or any other party, that Indemnitee in good faith believes might lead to the
institution of any action, suit, proceeding or alternative dispute resolution
mechanism whether civil, criminal, administrative, investigative, or other.
(d) Expenses: include attorneys' fees and all other costs, travel
--------
expenses, fees of experts, transcript costs, filing fees, witness fees,
telephone charges, postage, delivery service fees, expenses and obligations of
any nature whatsoever paid or incurred in connection with investigating,
defending, being a witness in or participating in (including on appeal), or
preparing to defend, be a witness in or participate in any Claim relating to any
Indemnifiable Event.
(e) Incumbent Board: individuals, who, as of January 13, 1998
---------------
constitute the Board of Directors of the Company and any other individual who
becomes a director of the Company after that date and whose election or
appointment by the Board of Directors or
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nomination for election by the Company's stockholders was approved by a vote of
at least a majority of the directors then comprising the Incumbent Board.
(f) Indemnifiable Event: any event or occurrence related to the fact
-------------------
that Indemnitee is or was a director, officer, employee, agent, or fiduciary of
the Company, or is or was serving at the request of the Company as a director,
officer, employee, trustee, agent, or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust, or other enterprise,
or by reason of anything done or not done by Indemnitee in any such capacity.
For purposes of this Agreement, the Company agrees that Indemnitee's service on
behalf of or with respect to any Subsidiary of the Company shall be deemed to be
at the request of the Company.
(g) Independent Legal Counsel: special, independent counsel selected
-------------------------
by Indemnitee and approved by the Company (which approval shall not be
unreasonably withheld), and who has not otherwise performed services for the
Company or for Indemnitee within the last five years (other than as Independent
Legal Counsel under this Agreement or similar agreements). Independent Legal
Counsel shall not be any person who, under the applicable standards of
professional conduct then prevailing, would have a conflict of interest in
representing either the Company or Indemnitee in an action to determine
Indemnitee's rights under this Agreement, nor shall Independent Legal Counsel be
any person who has been sanctioned or censured for ethical violations of
applicable standards of professional conduct.
(h) Person: any person or entity of any nature whatsoever,
------
specifically including an individual, a firm, a company, a corporation, a
partnership, a limited liability company, a trust, or other entity. A Person,
together with that Person's Affiliates and Associates (as those terms are
defined in Rule 12b-2 under the Exchange Act), and any Persons acting as a
partnership, limited partnership, joint venture, association, syndicate, or
other group (whether or not formally organized), or otherwise acting jointly or
in concert or in a coordinated or consciously parallel manner (whether or not
pursuant to any express agreement), for the purpose of acquiring, holding,
voting, or disposing of securities of the Company with such Person, shall be
deemed a single "Person."
(i) Potential Change in Control: shall be deemed to have occurred if
---------------------------
(i) the Company enters into an agreement, the consummation of which would result
in the occurrence of a Change in Control; (ii) any Person (including the
Company) publicly announces an intention to take or to consider taking actions
that, if consummated, would constitute a Change in Control; (iii) any Acquiring
Person who is or becomes the beneficial owner, directly or indirectly, of
securities of the Company representing 10% or more of the combined voting power
of the then outstanding Voting Securities of the Company increases its
beneficial ownership of such securities by 5% or more over the percentage so
owned by that Person on the date of this Agreement; or (iv) the Board of
Directors of the Company adopts a resolution to the effect that, for purposes of
this Agreement, a Potential Change in Control has occurred.
(j) Reviewing Party: any appropriate person or body consisting of a
---------------
member
3
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or members of the Company's Board of Directors or any other person or body
appointed by the Board who is not a party to the particular Claim for which
Indemnitee is seeking indemnification or Independent Legal Counsel.
(k) Subsidiary: with respect to any Person, any corporation or other
----------
entity of which a majority of the voting power of the voting equity securities
or equity interest is owned, directly or indirectly, by that Person.
(l) Voting Securities: any securities that vote generally in the
-----------------
election of directors, in the admission of general partners, or in the selection
of any other similar governing body.
2. BASIC INDEMNIFICATION AND EXPENSE REIMBURSEMENT ARRANGEMENT
(a) If Indemnitee was, is, or becomes a party to or witness or other
participant in, or is threatened to be made a party to or witness or other
participant in, a Claim by reason of (or arising in part out of) an
Indemnifiable Event, the Company shall indemnify Indemnitee to the fullest
extent permitted by law as soon as practicable but in any event no later than 30
days after written demand is presented to the Company, against any and all
Expenses, judgments, fines, penalties, or amounts paid in settlement (including
all interest, assessments, and other charges paid or payable in connection with
or in respect of such Expenses, judgments, fines, penalties, or amounts paid in
settlement) of or with respect to that Claim and any federal, state, local or
foreign taxes imposed on the Indemnitee as a result of the actual or deemed
receipt of any payments under this Agreement (including the creation of the
trust referred to in Section 4 hereof). Notwithstanding anything in this
Agreement to the contrary and except as provided in Section 5, prior to a Change
in Control, Indemnitee shall not be entitled to indemnification pursuant to this
Agreement in connection with any Claim initiated by Indemnitee against the
Company or any director or officer of the Company unless the Company has joined
in or consented to the initiation of such Claim. Notwithstanding the foregoing,
the obligations of the Company under Section 2(a) shall be subject to the
condition that the Reviewing Party shall not have determined (in a written
opinion, in any case in which Independent Legal Counsel referred to in Section 3
hereof is involved) that Indemnitee would not be permitted to be indemnified
under applicable law. Nothing contained in this Agreement shall require any
determination under this Section 2(a) to be made by the Reviewing Party prior to
the disposition or conclusion of the Claim against the Indemnitee; provided,
however, that Expense Advances shall continue to be made by the Company pursuant
to and to the extent required by the provisions of Section 2(b).
(b) If so requested by Indemnitee, the Company shall pay any and all
Expenses incurred by Indemnitee (or, if applicable, reimburse Indemnitee for any
and all Expenses incurred by Indemnitee and previously paid by Indemnitee)
within five business days after such request (an "Expense Advance"). The
Company shall be obligated to make or pay an Expense Advance in advance of the
final disposition or conclusion of any Claim. In connection with any request
for an Expense Advance, if requested by the Company, Indemnitee or
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<PAGE>
Indemnitee's counsel shall submit an affidavit stating that the Expenses
incurred were reasonable. Any dispute as to the reasonableness of any Expense
shall not delay an Expense Advance by the Company, and the Company agrees that
any such dispute shall be resolved only upon the disposition or conclusion of
the underlying Claim against the Indemnitee. If, when, and to the extent that
the Reviewing Party determines that Indemnitee would not be permitted to be
indemnified with respect to a Claim under applicable law, the Company shall be
entitled to be reimbursed by Indemnitee and Indemnitee hereby agrees to
reimburse the Company without interest (which agreement shall be an unsecured
obligation of Indemnitee) for all related Expense Advances theretofore made or
paid by the Company; provided, however, that if Indemnitee has commenced legal
proceedings in a court of competent jurisdiction to secure a determination that
Indemnitee should be indemnified under applicable law, any determination made by
the Reviewing Party that Indemnitee would not be permitted to be indemnified
under applicable law shall not be binding and Indemnitee shall not be required
to reimburse the Company for any Expense Advance, and the Company shall be
obligated to continue to make Expense Advances, until a final judicial
determination is made with respect thereto (as to which all rights of appeal
therefrom have been exhausted or lapsed). If there has not been a Change in
Control, the Reviewing Party shall be selected by the Board of Directors of the
Company. If there has been a Change in Control, the Reviewing Party shall be
advised by or shall be the Independent Legal Counsel referred to in Section 3
hereof, if and as Indemnitee so requests. If there has not been any
determination by the Reviewing Party or if the Reviewing Party determines that
Indemnitee substantively would not be permitted to be indemnified in whole or in
part under applicable law, Indemnitee shall have the right to commence
litigation in any court of the States of California or Delaware having subject
matter jurisdiction thereof and in which venue is proper seeking an initial
determination by the court or challenging any such determination by the
Reviewing Party or any aspect thereof, and the Company hereby consents to
service of process and to appear in any such proceeding. Any determination by
the Reviewing Party otherwise shall be conclusive and binding on the Company and
Indemnitee.
3. CHANGE IN CONTROL
The Company agrees that, if there is a Change in Control and if
Indemnitee requests in writing that Independent Legal Counsel advise the
Reviewing Party or be the Reviewing Party, then the Company shall not deny any
indemnification payments (and Expense Advances shall continue to be paid by the
Company pursuant to Section 2(b)) that Indemnitee requests or demands under this
Agreement or any other agreement or law now or hereafter in effect relating to
Claims for Indemnifiable Events. The Company further agrees not to request or
seek reimbursement from Indemnitee of any related Expense Advances unless, with
respect to a denied indemnification payment, Independent Legal Counsel has
rendered its written opinion to the Company and Indemnitee that the Company
would not be permitted under applicable law to pay Indemnitee such
indemnification payment. The Company agrees to pay the reasonable fees of
Independent Legal Counsel referred to in this Section 3 and to indemnify fully
Independent Legal Counsel against any and all expenses (including attorneys'
fees), claims, liabilities, and damages arising out of or relating to this
Agreement or Independent Legal Counsel's engagement
5
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pursuant hereto.
4. ESTABLISHMENT OF TRUST
In the event of a Potential Change in Control, the Company shall, upon
written request by Indemnitee, create a trust for the benefit of Indemnitee (the
"Trust") and from time to time upon written request of Indemnitee the Company
shall fund the Trust in an amount sufficient to satisfy any and all Expenses
reasonably anticipated at the time of each such request to be incurred in
connection with investigating, preparing for, and defending any Claim relating
to an Indemnifiable Event, and any and all judgments, fines, penalties, and
settlement amounts of any and all Claims relating to an Indemnifiable Event from
time to time actually paid or claimed, reasonably anticipated, or proposed to be
paid. The amount or amounts to be deposited in the Trust pursuant to the
foregoing funding obligation shall be determined by the Reviewing Party, in any
situation in which Independent Legal Counsel referred to in Section 3 is
involved. The terms of the Trust shall provide that, upon a Change in Control,
(i) the Trust shall not be revoked or the principal thereof invaded, without the
written consent of Indemnitee; (ii) the trustee of the Trust shall advance,
within five business days of a request by Indemnitee, any and all Expenses to
Indemnitee (and Indemnitee hereby agrees to reimburse the Trust under the
circumstances in which Indemnitee would be required to reimburse the Company for
Expense Advances under Section 2(b) of this Agreement); (iii) the Trust shall
continue to be funded by the Company in accordance with the funding obligation
set forth above; (iv) the trustee of the Trust shall promptly pay to Indemnitee
all amounts for which Indemnitee shall be entitled to indemnification pursuant
to this Agreement or otherwise; and (v) all unexpended funds in that Trust shall
revert to the Company upon a final determination by the Reviewing Party or a
court of competent jurisdiction, as the case may be, that Indemnitee has been
fully indemnified under the terms of this Agreement. The trustee of the Trust
shall be chosen by Indemnitee. Nothing in this Section 4 shall relieve the
Company of any of its obligations under this Agreement. All income earned on the
assets held in the trust shall be reported as income by the Company for federal,
state, local and foreign tax purposes.
5. INDEMNIFICATION FOR ADDITIONAL EXPENSES
The Company shall indemnify Indemnitee against any and all costs and
expenses (including attorneys' and expert witnesses' fees) and, if requested by
Indemnitee, shall (within five business days of that request) advance those
costs and expenses to Indemnitee, that are incurred by Indemnitee in connection
with any claim asserted against or action brought by Indemnitee for (i)
indemnification or advance payment of Expenses by the Company under this
Agreement or any other agreement or provision of the Company's Certificate of
Incorporation or Bylaws now or hereafter in effect relating to Claims for
Indemnifiable Events and/or (ii) recovery under any directors' and officers'
liability insurance policies maintained by the Company, regardless of whether
Indemnitee ultimately is determined to be entitled to that indemnification,
advance expense payment, or insurance recovery, as the case may be.
6
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6. PARTIAL INDEMNITY
If Indemnitee is entitled under any provision of this Agreement to
indemnification by the Company for some or a portion of the Expenses, judgments,
fines, penalties, and amounts paid in settlement of a Claim but not, however,
for all of the total amount thereof, the Company shall nevertheless indemnify
Indemnitee for the portion thereof to which Indemnitee is entitled. Moreover,
notwithstanding any other provision of this Agreement, to the extent that
Indemnitee has been successful on the merits or otherwise in defense of any or
all Claims relating in whole or in part to an Indemnifiable Event or in defense
of any issue or matter therein, including dismissal without prejudice,
Indemnitee shall be indemnified against all Expenses incurred in connection
therewith.
7. CONTRIBUTION
(a) Contribution Payment: To the extent the indemnification provided
--------------------
for under any provision of this Agreement is determined (in the manner
hereinabove provided) not to be permitted under applicable law, then if
Indemnitee was, is, or becomes a party to or witness or other participant in, or
is threatened to be made a party to or witness or other participant in, a Claim
by reason of (or arising in part out of) an Indemnifiable Event, the Company, in
lieu of indemnifying Indemnitee, shall contribute to the amount of any and all
Expenses, judgments, fines, or penalties assessed against or incurred or paid by
Indemnitee on account of that Claim and any and all amounts paid in settlement
of that Claim (including all interest, assessments, and other charges paid or
payable in connection with or in respect of such Expenses, judgments, fines,
penalties, or amounts paid in settlement) for which such indemnification is not
permitted ("Contribution Amounts"), in such proportion as is appropriate to
reflect the relative fault with respect to the Indemnifiable Event giving rise
to the Contribution Amounts of Indemnitee, on the one hand, and of the Company
and any and all other parties (including officers and directors of the Company
other than Indemnitee) who may be at fault with respect to such Indemnifiable
Event (collectively, including the Company, the "Third Parties") on the other
hand.
(b) Relative Fault: The relative fault of the Third Parties and the
--------------
Indemnitee shall be determined (i) by reference to the relative fault of
Indemnitee as determined by the court or other governmental agency assessing the
Contribution Amount, or (ii) to the extent such court or other governmental
agency does not apportion relative fault, by the Reviewing Party (which shall
include Independent Legal Counsel) after giving effect to, among other things,
the relative intent, knowledge, access to information, and opportunity to
prevent or correct the applicable Indemnifiable Event and other relevant
equitable considerations of each party. The Company and Indemnitee agree that
it would not be just and equitable if contribution pursuant to this Section 7
were determined by pro rata allocation or by any other method of allocation
which does take account of the equitable considerations referred to in this
Section 7(b).
8. BURDEN OF PROOF
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<PAGE>
It shall be a defense to any action brought by the Indemnitee against
the Company to enforce this Agreement (other than an action brought to enforce a
claim for expenses incurred in defending a Claim in advance of its final
disposition where the required undertaking has been tendered by the Company).
In connection with any determination by the Reviewing Party or otherwise as to
whether Indemnitee is entitled to be indemnified under any provision of this
Agreement or to receive contribution pursuant to Section 7 of this Agreement,
the burden of proof shall be on the Company to establish that Indemnitee is not
so entitled.
9. NO PRESUMPTION
For purposes of this Agreement, the termination of any claim, action,
suit, or proceeding, by judgment, order, settlement (whether with or without
court approval), or conviction, or upon a plea of nolo contendere, or its
equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by applicable law.
10. NON-EXCLUSIVITY
The rights of Indemnitee hereunder shall be in addition to any other
rights Indemnitee may have under the Company's Certificate of Incorporation or
Bylaws, the Delaware General Corporation Law or otherwise. To the extent that a
change in the Delaware General Corporation Law (whether by statute or judicial
decision) permits greater indemnification by agreement than would be afforded
currently under the Company's Certificate of Incorporation or Bylaws and this
Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by
this Agreement the greater benefits so afforded by that change.
11. NO CONSTRUCTION AS EMPLOYMENT AGREEMENT
Nothing contained herein shall be construed as giving Indemnitee any
right to be retained in the employ of the Company of any of its Subsidiaries.
12. LIABILITY INSURANCE
Except as otherwise agreed to by the Company and Indemnitee in a
written agreement, to the extent the Company maintains an insurance policy or
policies providing directors' and officers' liability insurance, Indemnitee
shall be covered by that policy or those policies, in accordance with its or
their terms, to the maximum extent of the coverage available for any Company
director or officer.
13. PERIOD OF LIMITATIONS
No legal action shall be brought and no cause of action shall be
asserted by or on behalf of the Company or any affiliate of the Company against
Indemnitee or Indemnitee's
8
<PAGE>
spouse, heirs, executors, or personal or legal representatives after the
expiration of three years from the date of accrual of that cause of action, and
any claim or cause of action of the Company or its affiliate shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within that three-year period; provided, however, that, if any shorter
period of limitations is otherwise applicable to any such cause of action, the
shorter period shall govern.
14. AMENDMENTS
No supplement, modification, or amendment of this Agreement shall be
binding unless executed in writing by both of the parties hereto. No waiver of
any of the provisions of this Agreement shall be deemed or shall constitute a
waiver of any other provisions hereof (whether or not similar) nor shall that
waiver constitute a continuing waiver.
15. SUBROGATION
In the event of payment under this Agreement, the Company shall be
subrogated to the extent of that payment to all of the rights of recovery of
Indemnitee, who shall execute all papers required and shall do everything that
may be necessary to secure those rights, including the execution of the
documents necessary to enable the Company effectively to bring suit to enforce
those rights.
16. NO DUPLICATION OF PAYMENTS
The Company shall not be liable under this Agreement to make any
payment in connection with any claim made against Indemnitee to the extent
Indemnitee has otherwise actually received payment (under any insurance policy,
provision of the Company's charter or Bylaws or otherwise) of the amounts
otherwise indemnifiable hereunder.
17. BINDING EFFECT; MERGER
This Agreement shall be binding upon and inure to the benefit of and
be enforceable by the parties hereto and their respective successors, assigns
(including any direct or indirect successor by purchase, merger, consolidation,
or otherwise to all or substantially all of the business or assets of the
Company), spouses, heirs, and personal and legal representatives. The Company
shall require and cause any successor (whether direct or indirect by purchase,
merger, consolidation or otherwise) to all, substantially all, or by written
agreement in form and substance satisfactory to Indemnitee, expressly to assume
and agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform if no such succession had taken
place. This Agreement shall continue in effect regardless of whether Indemnitee
continues to serve as an officer or director of the Company or another
enterprise at the Company's request.
18. SEVERABILITY
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If any provision of this Agreement is held to be illegal, invalid, or
unenforceable under present or future laws effective during the term hereof,
that provision shall be fully severable; this Agreement shall be construed and
enforced as if that illegal, invalid, or unenforceable provision had never
comprised a part hereof; and the remaining provisions shall remain in full force
and effect and shall not be affected by the illegal, invalid, or unenforceable
provision or by its severance from this Agreement. Furthermore, in lieu of that
illegal, invalid, or unenforceable provision, there shall be added automatically
as a part of this Agreement a provision as similar in terms to the illegal,
invalid, or unenforceable provision as may be possible and be legal, valid, and
enforceable.
19. GOVERNING LAW
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Delaware applicable to contracts made
and to be performed in that state without giving effect to the principles of
conflicts of laws or choice of laws.
20. CONSTRUCTION
The headings contained in this Agreement are for reference purposes only
and shall not affect in any way the meaning or interpretation of this Agreement.
Pronouns shall be construed to include the masculine, feminine, neuter, singular
and plural as the context requires.
21. NOTICES
Whenever this Agreement requires or permits notice to be given by one party
to the other, such notice must be in writing to be effective and shall be deemed
delivered and received by the party to whom it is sent upon actual receipt (by
any means) of such notice. Receipt of a notice by any officer of the Company
shall be deemed receipt of such notice by the Company.
22. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original, but in making proof hereof it shall not be
necessary to produce or account for more than one such counterpart.
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IN WITNESS WHEREOF, the undersigned has executed this agreement
as of the date first written above.
BNC MORTGAGE, INC.
a Delaware corporation
By: __________________________________
Evan R. Buckley
Chief Executive Officer
INDEMNITEE:
By: __________________________________
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EXHIBIT 10.4
EMPLOYMENT AND NON-COMPETITION AGREEMENT
----------------------------------------
THIS EMPLOYMENT AND NON-COMPETITION AGREEMENT (the "Agreement") is
made and entered into as of January 29, 1998, to be effective as of January 1,
1998, by and between BNC Mortgage, Inc. (the "Corporation"), a Delaware
corporation, and Evan R. Buckley, an individual (the "Executive").
WITNESSETH:
WHEREAS, the Corporation desires to employ the Executive as its Chief
Executive Officer; and
WHEREAS, the Executive has agreed not to compete with Corporation or
use any confidential and proprietary business information regarding the business
of Corporation to the detriment of Corporation during the term of this Agreement
(and thereafter as applicable) in order to induce Corporation to enter into this
Agreement and to perform its obligations hereunder; and
WHEREAS, the Executive desires to accept such employment under the
terms and conditions herein stated.
NOW, THEREFORE, the Corporation and the Executive, each intending to
be legally bound, hereby mutually covenant and agree as follows:
1. Employment and Term.
-------------------
(a) Employment - The Corporation hereby offers to employ the
Executive as the Chief Executive Officer of the Corporation on the terms and
conditions set forth herein, and the Executive hereby accepts such employment,
for the term set forth in Section l(b).
(b) Term - The employment hereunder shall be for a term of two
years (the "Term") commencing on January 1, 1998 and terminating on December 31,
1999 (the "Expiration Date"), provided that such term may be extended if
authorized by the Board of Directors and evidenced by a written agreement signed
by a Director of the Corporation and the Executive.
2. Duties.
------
During his Term, the Executive shall serve as Chief Executive Officer
of the Corporation and shall have all powers and duties consistent with such
position subject to the direction of the Board of Directors of the Corporation,
to whom the Executive shall report. Any directions of the Board of Directors to
the Executive shall be consistent with the Executive's position as Chief
Executive Officer, but Executive understands that this title and the duties
attendant thereto may change (but may not be diminished without the prior
written consent of the Executive) over the term hereof. The Executive shall
devote his full time and attention and best efforts to fulfill faithfully,
responsibly and to the best of his ability his duties hereunder.
<PAGE>
3. Compensation.
------------
(a) Base Salary - For services performed by the Executive for the
Corporation pursuant to this Agreement during his Term, the Corporation shall
pay the Executive a base salary ("Base Salary") at the rate of $250,000 per
year, payable twice each month in the amount of $10,417 on the 15th day and the
last day of each month, or in accordance with the Corporation's regular payroll
practices. Such Base Salary may be adjusted annually to reflect increases in the
consumer price index. Any compensation which may be paid to the Executive under
any additional compensation plan of the Corporation, or which may be otherwise
authorized from time to time by the Board, shall be in addition to the Base
Salary to which the Executive shall be entitled under this Agreement.
(b) Unconditional Semi-Annual Bonus - Executive shall be paid on
each of June 30 and December 31 of each year during the term of this Agreement
an unconditional bonus in an amount of $62,500 ("Unconditional Semi-Annual
Bonus"). The Unconditional Semi-Annual bonus payable for any calendar year shall
be paid to the Executive no later than the 15th day following June 30 and
December 31. Nothing herein shall preclude the Executive from participating in
any equity or equity-based compensation program of the Corporation, and the
bonus program set forth in this subsection (b) herein may be replaced with a
different program approved by the Board's Compensation Committee and agreed with
by the Executive.
(c) Performance-Based Annual Bonus - For each full year during his
Term, commencing on January 1, 1998, the Executive shall be eligible to receive
a cash bonus based on the Corporation's achievement of certain financial goals
("Performance-Based Annual Bonus"). For calendar year 1998, and until changed by
the Board's Compensation Committee, the annual cash bonus award shall be
determined on the basis of the Corporation's return on equity ("ROE"). The
Executive's cash bonus will range from $25,000 to $125,000 as follows:
(i) if ROE for the calendar year is less than 15.0% and the
Corporation's net income is negative, the cash bonus
shall be $25,000;
(ii) if ROE for the calendar year is less than 15.0% and the
Corporation's net income is positive, the cash bonus
shall be $50,000;
(iii) if ROE for the calendar year is between 15.1% and 19.9%
and the Corporation's net income is positive, the cash
bonus shall be $75,000;
(iv) if ROE for the calendar year is between 20.0% and 24.9%
and the Corporation's net income is positive, the cash
bonus shall be $100,000;
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(v) if ROE for the calendar year is at least 25.0% and the
Corporation's net income is positive, the cash bonus shall
be $125,000;
(vi) The Performance-Based Annual Bonus payable for any calendar
year shall be paid to the Executive no later than the 15th
day of April of the following year. Nothing herein shall
preclude the Executive from participating in any equity or
equity-based compensation program of the Corporation, and
the bonus program set forth in this subsection (c) herein
may be replaced with a different program approved by the
Board's Compensation Committee and agreed with by the
Executive.
(d) Tax Withholding - The Corporation shall provide for the
withholding of any taxes required to be withheld by Federal, state and local law
with respect to any payment in cash, shares of capital stock or other property
made by or on behalf of the Corporation to or for the benefit of the Executive
under this Agreement or otherwise. The Corporation may, at its option: (i)
withhold such taxes from any cash payments owing from the Corporation to the
Executive, including any payments owing under any other provision of the
Agreement, (ii) require the Executive to pay to the Corporation in cash such
amount as may be required to satisfy such withholding or (iii) make other
satisfactory arrangements with the Executive to satisfy such withholding
obligations.
4. Benefits.
--------
In addition to the Base Salary to be paid to the Executive pursuant to
Section 3(a) hereof and any semi-annual and annual bonuses earned by the
Executive pursuant to Sections 3(b) and 3(c), the Executive shall also be
entitled to the following:
(a) Participation in Insurance and Healthcare Benefit Plans - Except
as otherwise expressly provided herein, the Executive and his dependents shall
be enrolled in the Corporation's insurance and healthcare benefit group plans,
including disability insurance, in accordance with established Corporation
policies.
(b) Participation in the Corporation's 401(k) Plan - The Executive
shall be entitled to participate in the Corporation's 401(k) Plan in accordance
with established Corporation policies.
(c) Expense Reimbursement - The Corporation shall reimburse the
Executive, upon proper accounting, for reasonable business expenses incurred by
him in the course of the performance of his duties under this Agreement.
(d) Vacations, Holidays, Absences and Leaves - The Executive shall be
entitled to the benefit of the vacation, holiday, absence and leave policies
applicable to all employees of comparable title or status in the Corporation.
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(e) Other Benefits - The Corporation shall provide Executive with such
other benefits as are generally made available from time to time to its
employees.
(f) Proration of Benefits - Any payments or benefits pursuant to this
Section 4, in any year during which the Executive is employed by the Corporation
for less than the entire year, shall, unless otherwise provided herein or in the
applicable plan or arrangement, be prorated in accordance with the number of
days in such year during which the Executive is employed by the Corporation.
5. Indemnification.
---------------
The Executive shall be entitled to the maximum indemnification
provided by the Bylaws and the Certificate of Incorporation of the Corporation
for officers, directors and employees of the Corporation. The Executive's rights
under this paragraph shall continue without time limit so long as he may be
subject to any such liability, whether or not the Executive's term of employment
by the Corporation may have ended.
Such indemnification provided by the Bylaws and Articles of
Incorporation as of the date of this Agreement shall be deemed contract rights
and no amendment, repeal or modification of any of the provisions of the
Certificate of Incorporation or Bylaws relating to indemnification shall have
the effect of limiting or denying any such rights of indemnification.
6. Representations and Warranties of the Executive.
-----------------------------------------------
The Executive hereby represents and warrants to the Corporation that
(a) the Executive's execution and delivery of this Agreement and his performance
of his duties and obligations hereunder will not conflict with, or cause a
default under, or give any party a right to damages under, or to terminate, any
other agreement to which the Executive is a party or by which he is bound, and
(b) there are no agreements or understandings that would make unlawful the
Executive's execution or delivery of this Agreement or his employment hereunder.
7. Representations and Warranties of the Corporation.
-------------------------------------------------
The Corporation hereby represents and warrants to the Executive as
follows:
(a) The Corporation is duly organized and established as a
corporation under the laws of the State of Delaware and has all requisite power
and authority to enter into this Agreement and to perform its obligations
hereunder. The consummation of the transactions contemplated by this Agreement
will neither violate nor be in conflict with any agreement or instrument to
which the Corporation is a party or by which it is bound.
(b) The execution, delivery and performance of this Agreement and
the transactions contemplated hereby have been duly and validly authorized by
all requisite corporate action on the part of the Corporation and are valid,
legal and binding obligations of the Corporation, enforceable in accordance with
their terms except as may be limited by laws of general application
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<PAGE>
relating to bankruptcy, insolvency, moratorium or other similar laws relating to
or affecting the enforcement of creditors' rights generally, and rules of law
governing specific performance, injunctive relief or other equitable remedies.
8. Termination.
-----------
Executive's employment shall terminate prior to the Expiration Date
upon the happening of any of the following events:
A. For Cause.
---------
The Executive may be terminated for Cause immediately upon receipt
of notice pursuant to a good faith determination to terminate for Cause made by
a majority of the Board. For purposes of this Agreement, "Cause" means:
(1) the Executive engages in any act of theft, embezzlement,
falsification of records, misappropriation of funds or property, or fraud
against, or with respect to the business of, the Corporation or any affiliate;
(2) the Executive commits a breach of any material term of
this Agreement and, if such breach is capable of being cured, fails to cure such
breach within 30 days of written notice of such breach from the Corporation;
(3) the Executive is convicted of, or pleads guilty or nolo
contendere to a felony or a crime involving moral turpitude, breach of trust or
dishonesty; or
(4) the Executive commits any act that causes, or knowingly
fails to take reasonable and appropriate action to prevent, any material injury
to the financial condition or business reputation of the Corporation or any of
its affiliates; however, this shall not apply to (i) any act of the Corporation
or its affiliates by any other employee thereof except to the extent that such
act is committed at the direction, or with the knowledge, of the Executive or
(ii) any action in which the Executive acted in good faith and in a manner
reasonably to be in or not opposed to the best interests of the Corporation, as
determined by the Corporation's Board of Directors.
B. Good Reason (by the Executive).
------------------------------
The Executive's employment may be terminated by the Executive at
any time for any of the following reasons (each of which is referred to herein
as "Good Reason") by giving the Corporation notice of the effective date of such
termination (which effective date may be the date of such notice):
(1) the Corporation commits a breach of any material term of
this Agreement and, if such breach is capable of being cured, fails to cure such
breach within 30 days of receipt of written notice of such breach; or
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(2) the Corporation removes the Executive from the position of
Chief Executive Officer of the Corporation, other than for Cause, or the
Corporation effects any diminution of the powers, duties or authority of the
Executive, in each case, without the prior written consent of the Executive.
C. Executive's Rights to Terminate.
-------------------------------
The Executive may, at his option, terminate his employment hereunder
for any reason upon 60 days' prior written notice to the Corporation.
D. Death.
-----
This Agreement shall terminate automatically upon the Executive's
death.
E. Disability.
----------
The Corporation may terminate the Executive's employment upon a good
faith determination by the Board that Executive has become so physically or
mentally disabled as to be incapable of satisfactorily performing his duties
hereunder for a period of 180 consecutive days, such determination to be based
upon a certificate as to such physical or mental disability issued by a licensed
physician or psychiatrist employed by the Corporation.
F. Without Cause.
-------------
The Corporation may, at its option, terminate the Executive's
employment without Cause at any time upon written notice to the Executive.
G. Date of Termination.
-------------------
For purposes of this Agreement, the term "Date of Termination" shall
mean the later of the date that any party gives written notice that it intends
to terminate this Agreement pursuant to the terms hereof or the date, if any,
specified by the terminating party in such notice as the effective date of
termination.
9. Obligations of the Corporation Upon Termination.
-----------------------------------------------
(a) Cause or Voluntary - If the Executive's employment shall be
terminated for Cause or if the Executive terminates his employment for other
than Good Reason (a "Voluntary Termination"), the Corporation's obligations to
the Executive shall terminate, other than the obligation (i) to pay to the
Executive his Base Salary through the Date of Termination at the rate in effect
on the day preceding the Date of Termination, (ii) to pay (A) the pro rata
portion through the Date of Termination of the Unconditional Semi-Annual Bonus
pursuant to section 3(b) at the rate in effect on the day preceding the Date of
Termination and (B) an amount which together with the pro rata portion of the
Unconditional Semi-Annual Bonus paid to the Executive by the Corporation would
equal an aggregate of $75,000, and (iii) to continue to provide the Executive
with benefits of
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<PAGE>
the type described in Section 4 through the Date of Termination. Executive
acknowledges that the amount to be paid to the Executive by the Corporation
pursuant to section 9(a)(ii) above shall be deemed consideration for the
agreements of the Executive set forth in section 10 below; provided, however,
that if the Executive challenges the enforceability of Section 10 below and it
is found unenforceable by a court having jurisdiction over the matter, then the
Executive shall remit to the Corporation the $75,000.
(b) Without Cause or for Good Reason - If the Corporation shall
terminate the Executive's employment without Cause, or if the Executive shall
terminate his employment for Good Reason, the Corporation shall (i) continue, in
accordance with the Corporation's normal payroll procedures, to pay the
Executive his Base Salary through the Expiration Date of this Agreement, (ii)
continue to pay the Executive his Unconditional Semi-Annual Bonus pursuant to
section 3(b) through the Expiration Date of this Agreement at the rate in effect
on the day preceding the Date of Termination, (iii) continue to provide the
Executive with benefits of the type described in Section 4 through the
Expiration Date, and (iv) pay $70,000 annually on a pro rata basis through the
Expiration Date of this Agreement on a date that is no later than the 15th of
April of the following year, except in the case of the year of termination or
resignation in which case the pro rata portion of the $70,000 shall be paid no
later than 60 days after the Date of Termination; provided, however, that this
payment shall be suspended during any period in which the Executive is an
employee or independent contractor of a company that in the Board's opinion
competes with the Corporation.
10. Non-Competition.
---------------
The Executive acknowledges and recognizes the highly competitive
nature of the business of the Corporation and its affiliates as well as his
extensive participation in the ownership of the common stock of the Corporation.
If the Executive is terminated by the Corporation for Cause or resigns based
upon a Voluntary Termination, the Executive accordingly agrees, until the first
anniversary of the Executive's termination or resignation of employment (such
date being hereafter referred to as the "Restricted Date"), as follows:
(a) The Executive will not directly or indirectly engage (as
owner, stockholder, partner or otherwise, except as a holder of fewer than 10%
of the outstanding shares or other equity interests of a company whose shares or
other equity interests are publicly traded) in any business which directly or
indirectly competes with the business of the Corporation or any of its
affiliates within the same jurisdictions in which the Corporation or any of its
affiliates engages in business at the time of the Executive's termination or
resignation, as the case may be.
(b) The Executive will not directly or indirectly induce any
employee of the Corporation or any of its affiliates to engage in any activity
in which the Executive is prohibited from engaging by paragraph (a) above or to
terminate his employment with the Corporation or any of its affiliates, and will
not directly or indirectly employ or offer employment to any person who was
employed by the Corporation or any of its affiliates unless such person shall
have been terminated without cause or ceased to be employed by any such entity
for a period of at least 12 months.
-7-
<PAGE>
(c) The Executive will not make any statement or take any action
intended to impair the goodwill or the business reputation of the Corporation or
any of its affiliates, or to be otherwise detrimental to the interests of the
Corporation or any of its affiliates, including any action or statement
intended, directly or indirectly, to benefit a competitor of the Corporation or
any of its affiliates.
(d) It is expressly understood and agreed that although the
Executive and the Corporation consider the restrictions contained in this
Section 10 to be reasonable, if a final judicial determination is made by a
court of competent jurisdiction that the time or territory or any other
restriction contained in this Agreement is an unenforceable restriction against
the Executive, the provisions of this Agreement shall not be rendered void but
shall be deemed amended to apply as to such maximum time and territory and to
such maximum extent as such court may judicially determine or indicate to be
enforceable. Alternatively, if any court of competent jurisdiction finds that
any restriction contained in this Agreement is unenforceable, and such
restriction cannot be amended so as to make it enforceable, such finding shall
not affect the enforceability of any of the other restrictions contained herein.
11. Proprietary Information.
-----------------------
Through the Restricted Date, the Executive shall not use for his
personal benefit, or disclose, communicate or divulge to, or use for the direct
or indirect benefit on any person, firm, association or company other than the
Corporation, any Proprietary Information. "Proprietary Information" means
information relating to the properties, prospects, products, services or
operations of the Corporation or any direct or indirect affiliate thereof that
is not generally known, is proprietary to the Corporation or such affiliate and
is made known to the Executive or learned or acquired by the Executive while in
the employ of the Corporation, including, without limitation, information
concerning trade secrets of the Corporation, or any of the Corporation's
affiliates and any improvements relating to the products of the Corporation in
accounting, marketing, selling, leasing, financing and other business methods
and techniques. However, Proprietary Information shall not include (A) at the
time of disclosure to the Executive such information that was in the public
domain or later entered the public domain other than as a result of a breach of
an obligation herein; or (B) subsequent to disclosure to the Executive,
Executive received such information from a third party under no obligation to
maintain such information in confidence, and the third party came into
possession of such information other than as a result of a breach of an
obligation herein. All materials or articles of information of any kind
furnished to the Executive by the Corporation or developed by the Executive in
the course of his employment hereunder are and shall remain the sole property of
the Corporation; and if the Corporation requests the return of such information
at any time during, upon or after the termination of the Executive's employment
hereunder, the Executive shall immediately deliver the same to the Corporation.
12. Ownership of Proprietary Information.
------------------------------------
The Executive agrees that all Proprietary Information shall be the
sole property of the Corporation and its assigns, and the Corporation and its
assigns shall be the sole owner of all licenses and other rights in connection
with such Proprietary Information. At all times, until the Restricted
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<PAGE>
Date, the Executive will keep in the strictest confidence and trust all
Proprietary Information and will not use or disclose such Proprietary
Information, or anything relating to such information, without the prior written
consent of the Corporation, except as may be necessary in the ordinary course of
performing his duties under this Agreement.
13. Documents and Other Property.
----------------------------
All materials and articles of information of any kind furnished to the
Executive in the course of his employment hereunder are and shall remain the
sole property of the Corporation; and if the Corporation requests the return of
such information at any time during, upon or after the termination of the
Executive's employment hereunder, the Executive shall immediately deliver the
same to the Corporation. The Executive will not, without the prior written
consent of the Corporation, retain any documents, data or property, or any
reproduction thereof of any description, belonging to the Corporation or
pertaining to any Proprietary Information.
14. Intellectual Property.
---------------------
Any and all products, including but not limited to marketing and
financing materials and methods made, developed or created by the Executive for
use in the Corporation's then current markets (whether at the request or
suggestion of the Corporation or otherwise, whether alone or in conjunction with
others, and whether during regular hours of work or otherwise) (i) during the
period of this Agreement, or (ii) within a period of one year after the date of
termination or resignation of employment hereunder, which may be directly or
indirectly useful in, or relate to, the business of or tests being carried out
by any member of the Corporation, shall be promptly and fully disclosed by the
Executive to the members of the Board and, if such intellectual property was
made, developed or created other than pursuant to the Executive's employment
hereunder, the Executive shall grant the Corporation a perpetual, royalty free
license to such intellectual property, and if such intellectual property was
made, developed or created pursuant to the Executive's employment hereunder,
such intellectual property shall be the Corporation's exclusive property as
against the Executive.
15. Customer Lists.
--------------
The Executive will not during, or for a period of two years after the
termination of, his employment (i) disclose the Corporation's (including its
subsidiaries') customer lists or any part thereof to any person, firm,
corporation, association or other entity for any reason or purpose whatsoever,
(ii) assist in obtaining any of the Corporation's (including its subsidiaries')
existing customers for any competing business, or (iii) encourage any customer
to terminate its relationship with the Corporation or any of its subsidiaries.
16. Equitable Relief.
----------------
The Executive acknowledges that, in view of the nature of the business
in which the Corporation is engaged, the restrictions contained in Sections 10
through 15 inclusive (the "Restrictions") are reasonable and necessary in order
to protect the legitimate interests of the Corporation, and that any violation
thereof would result in irreparable injuries to the Corporation,
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<PAGE>
and the Executive therefore further acknowledges that, if the Executive
violates, or threatens to violate, any of the Restrictions, the Corporation
shall be entitled to obtain from any court of competent jurisdiction, without
the posting of any bond or other security, preliminary and permanent injunctive
relief as well as damages and an equitable accounting of all earnings, profits
and other benefits arising from such violation, which rights shall be cumulative
and in addition to any other rights or remedies in law or equity to which the
Corporation may be entitled.
17. Binding Effect.
--------------
This Agreement shall be binding upon and inure to the benefit of the
heirs and representatives of the Executive and the successors and assigns of the
Corporation. The Corporation shall require any successor (whether direct or
indirect, by purchase, merger, reorganization, consolidation, acquisition of
property or stock, liquidation or otherwise) to all or a significant portion of
its assets, by agreement in form and substance satisfactory to the Executive,
expressly to assume and agree to perform this Agreement in the same manner and
to the same extent that the Corporation would be required to perform this
Agreement if no such succession had taken place. Regardless of whether such
agreement is executed, this Agreement shall be binding upon any successor of the
Corporation in accordance with the operation of law and such successor shall be
deemed the "Corporation" for purposes of this Agreement.
18. Notices.
-------
All notices, requests, demands and other communications hereunder
shall be in writing and shall be deemed to have been duly given if delivered by
hand or sent by facsimile transmission with telephonic confirmation of receipt,
or one business day after being sent for next business day delivery by a
reputable overnight courier service providing delivery confirmation, addressed
as follows:
(a) if to the Board or the Corporation, to:
BNC Mortgage, Inc.
1063 McGaw Avenue
Irvine, CA 92614-5532
(b) if to the Executive, to:
Evan R. Buckley
c/o BNC Mortgage, Inc.
1063 McGaw Avenue
Irvine, CA 92614-5532
Such addresses may be changed by written notice sent to the other party at the
last recorded address of that party.
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<PAGE>
19. Arbitration of All Disputes.
---------------------------
(a) Any controversy or claim arising out of or relating to this
Agreement or the breach thereof (including the arbitrability of any controversy
or claim), shall be settled by arbitration in Orange County in accordance with
the laws of the State of California by one arbitrator. If the parties cannot
agree on the appointment of an arbitrator, then the arbitrator shall be
appointed by the American Arbitration Association. The arbitration shall be
conducted in accordance with the rules of the American Arbitration Association,
except with respect to the selection of an arbitrator which shall be as provided
in this Section 19 . The cost of any arbitration proceeding hereunder shall be
borne equally by the Corporation and the Executive. The award of the arbitrator
shall be binding upon the parties. Judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof.
(b) If it shall be necessary or desirable for the Executive to retain
legal counsel and incur other costs and expenses in connection with the
enforcement of any or all of his rights under this Agreement, and provided that
the Executive substantially prevails in the enforcement of such rights, the
Corporation shall pay (or the Executive shall be entitled to recover from the
Corporation, as the case may be) the Executive's reasonable attorneys' fees and
costs and expenses in connection with the enforcement of his rights including
the enforcement of any arbitration award and any costs of any arbitration which
the Executive would otherwise be required to pay in accordance with Section
19(a).
20. No Assignment.
-------------
Except as otherwise expressly provided herein, this Agreement is not
assignable by any party and no payment to be made hereunder shall be subject to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or
other charge.
21. Execution in Counterparts.
-------------------------
This Agreement may be executed by the parties hereto in two counterparts,
each of which shall be deemed to be an original, but all such counterparts shall
constitute one and the same instrument, and all signatures need not appear on
any one counterpart.
22. Jurisdiction and Governing Law.
------------------------------
This Agreement shall be construed and interpreted in accordance with
and governed by the laws of the State of Delaware, without reference to its
conflict of laws provisions.
23. Severability.
------------
If any provision of this Agreement shall be adjudged by any court of
competent jurisdiction to be invalid or unenforceable for any reason, such
judgment shall not affect, impair or invalidate the remainder of this Agreement.
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24. Entire Agreement.
----------------
This Agreement embodies the entire agreement of the parties hereof,
and supersedes all other oral or written agreements or understandings between
them regarding the subject matter hereof. No change, alteration or modification
hereof may be made except in a writing, signed by each of the parties hereto.
25. Headings Descriptive.
--------------------
The headings of the several paragraphs of this Agreement are inserted
for convenience only and shall not in any way affect the meaning or construction
of any of this Agreement.
[Signatures begin on next page]
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If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return this Agreement, whereupon it will become a
binding agreement between the Company and you in accordance with its terms.
Very truly yours,
BNC Mortgage, Inc.
Dated: January 29, 1998 By: /s/ KELLY W. MONAHAN
-----------------------
Name: KELLY W. MONAHAN
Title: PRESIDENT
The Agreement is hereby confirmed and accepted as of the date first above
written.
Evan R. Buckley
Dated: January 29, 1998 /s/ EVAN R. BUCKLEY
----------------------------
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EXHIBIT 10.5
EMPLOYMENT AND NON-COMPETITION AGREEMENT
----------------------------------------
THIS EMPLOYMENT AND NON-COMPETITION AGREEMENT (the "Agreement") is
made and entered into as of January 29, 1998, to be effective as of January 1,
1998, by and between BNC Mortgage, Inc., a Delaware corporation (the
"Corporation"), and Kelly W. Monahan, an individual (the "Executive").
WITNESSETH:
WHEREAS, the Corporation desires to employ the Executive as its
President and Chief Financial Officer; and
WHEREAS, the Executive has agreed not to compete with Corporation or
use any confidential and proprietary business information regarding the business
of Corporation to the detriment of Corporation during the term of this Agreement
(and thereafter as applicable) in order to induce Corporation to enter into this
Agreement and to perform its obligations hereunder; and
WHEREAS, the Executive desires to accept such employment under the
terms and conditions herein stated.
NOW, THEREFORE, the Corporation and the Executive, each intending to
be legally bound, hereby mutually covenant and agree as follows:
1. Employment and Term.
-------------------
(a) Employment - The Corporation hereby offers to employ the Executive
as the President and Chief Financial Officer of the Corporation on the terms and
conditions set forth herein, and the Executive hereby accepts such employment,
for the term set forth in Section l(b).
(b) Term - The employment hereunder shall be for a term of three years
(the "Term") commencing on January 1, 1998 and terminating on December 31, 2001
(the "Expiration Date"), provided that such term may be extended if authorized
by the Board of Directors and evidenced by a written agreement signed by the
Chairman of the Corporation and the Executive.
2. Duties.
------
During his Term, the Executive shall serve as the President and Chief
Financial Officer of the Corporation and shall have all powers and duties
consistent with such position subject to the direction of the Board of Directors
of the Corporation, to whom the Executive shall report. Any directions of the
Board of Directors to the Executive shall be consistent with the Executive's
position as President and Chief Financial Officer, but Executive understands
that this title and the duties attendant thereto may change (but may not be
diminished without the prior written consent of the Executive) over the term
hereof. The Executive shall devote his full time and attention and best efforts
to fulfill faithfully, responsibly and to the best of his ability his duties
hereunder.
<PAGE>
3. Compensation.
------------
(a) Base Salary - For services performed by the Executive for the
Corporation pursuant to this Agreement during his Term, the Corporation shall
pay the Executive a base salary ("Base Salary") at the rate of $200,000 per
year, payable twice each month in the amount of $8,334 on the 15th day and the
last day of each month, or in accordance with the Corporation's regular payroll
practices. Such Base Salary may be adjusted annually to reflect increases in
the consumer price index. Any compensation which may be paid to the Executive
under any additional compensation plan of the Corporation, or which may be
otherwise authorized from time to time by the Board, shall be in addition to the
Base Salary to which the Executive shall be entitled under this Agreement.
(b) Unconditional Semi-Annual Bonus - Executive shall be paid on each
of June 30 and December 31 of each year during the term of this Agreement an
unconditional bonus in an amount of $50,000 ("Unconditional Semi-Annual Bonus").
The Unconditional Semi-Annual bonus payable for any calendar year shall be paid
to the Executive no later than the 15th day following June 30 and December 31.
Nothing herein shall preclude the Executive from participating in any equity or
equity-based compensation program of the Corporation, and the bonus program set
forth in this subsection (b) herein may be replaced with a different program
approved by the Board's Compensation Committee and agreed with by the Executive.
(c) Performance-Based Annual Bonus - For each full year during his
Term, commencing on January 1, 1998, the Executive shall be eligible to receive
a cash bonus based on the Corporation's achievement of certain financial goals
("Performance-Based Annual Bonus"). For calendar year 1998, and until changed by
the Board's Compensation Committee, the annual cash bonus award shall be
determined on the basis of the Corporation's return on equity ("ROE"). The
Executive's cash bonus will range from $10,000 to $100,000 as follows:
(i) if ROE for the calendar year is less than 15.0% and the
Corporation's net income is negative, the cash bonus shall
be $10,000;
(ii) if ROE for the calendar year is less than 15.0% and the
Corporation's net income is positive, the cash bonus shall
be $25,000;
(iii) if ROE for the calendar year is between 15.1% and 19.9%
and the Corporation's net income is positive, the cash
bonus shall be $50,000;
(iv) if ROE for the calendar year is between 20.0% and 24.9%
and the Corporation's net income is positive, the cash
bonus shall be $75,000;
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(v) if ROE for the calendar year is at least 25.0% and the
Corporation's net income is positive, the cash bonus shall
be $100,000;
(vi) The Performance-Based Bonus payable for any calendar year
shall be paid to the Executive no later than the 15th
day of April of the following year. Nothing herein shall
preclude the Executive from participating in any equity or
equity-based compensation program of the Corporation, and
the bonus program set forth in this subsection (c) herein
may be replaced with a different program approved by the
Board's Compensation Committee and agreed with by the
Executive.
(d) Tax Withholding - The Corporation shall provide for the
withholding of any taxes required to be withheld by Federal, state and local law
with respect to any payment in cash, shares of capital stock or other property
made by or on behalf of the Corporation to or for the benefit of the Executive
under this Agreement or otherwise. The Corporation may, at its option: (i)
withhold such taxes from any cash payments owing from the Corporation to the
Executive, including any payments owing under any other provision of the
Agreement, (ii) require the Executive to pay to the Corporation in cash such
amount as may be required to satisfy such withholding or (iii) make other
satisfactory arrangements with the Executive to satisfy such withholding
obligations.
4. Benefits.
--------
In addition to the Base Salary to be paid to the Executive pursuant to
Section 3(a) hereof and any semi-annual and annual bonuses earned by the
Executive pursuant to Sections 3(b) and 3(c), the Executive shall also be
entitled to the following:
(a) Participation in Insurance and Healthcare Benefit Plans - Except
as otherwise expressly provided herein, the Executive and his dependents shall
be enrolled in the Corporation's insurance and healthcare benefit group plans,
including disability insurance, in accordance with established Corporation
policies.
(b) Participation in the Corporation's 401(k) Plan - The Executive
shall be entitled to participate in the Corporation's 401(k) Plan in accordance
with established Corporation policies.
(c) Expense Reimbursement - The Corporation shall reimburse the
Executive, upon proper accounting, for reasonable business expenses incurred by
him in the course of the performance of his duties under this Agreement.
(d) Vacations, Holidays, Absences and Leaves - The Executive shall be
entitled to the benefit of the vacation, holiday, absence and leave policies
applicable to all employees of comparable title or status in the Corporation.
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(e) Other Benefits - The Corporation shall provide Executive with such
other benefits as are generally made available from time to time to its
employees.
(f) Proration of Benefits - Any payments or benefits pursuant to this
Section 4, in any year during which the Executive is employed by the Corporation
for less than the entire year, shall, unless otherwise provided herein or in the
applicable plan or arrangement, be prorated in accordance with the number of
days in such year during which the Executive is employed by the Corporation.
5. Indemnification.
---------------
The Executive shall be entitled to the maximum indemnification
provided by the Bylaws and the Certificate of Incorporation of the Corporation
for officers, directors and employees of the Corporation. The Executive's
rights under this paragraph shall continue without time limit so long as he may
be subject to any such liability, whether or not the Executive's term of
employment by the Corporation may have ended.
Such indemnification provided by the Bylaws and Certificate of
Incorporation as of the date of this Agreement shall be deemed contract rights
and no amendment, repeal or modification of any of the provisions of the
Certificate of Incorporation or Bylaws relating to indemnification shall have
the effect of limiting or denying any such rights of indemnification.
6. Representations and Warranties of the Executive.
-----------------------------------------------
The Executive hereby represents and warrants to the Corporation that
(a) the Executive's execution and delivery of this Agreement and his performance
of his duties and obligations hereunder will not conflict with, or cause a
default under, or give any party a right to damages under, or to terminate, any
other agreement to which the Executive is a party or by which he is bound, and
(b) there are no agreements or understandings that would make unlawful the
Executive's execution or delivery of this Agreement or his employment hereunder.
7. Representations and Warranties of the Corporation.
-------------------------------------------------
The Corporation hereby represents and warrants to the Executive as
follows:
(a) The Corporation is duly organized and established as a corporation
under the laws of the State of Delaware and has all requisite power and
authority to enter into this Agreement and to perform its obligations hereunder.
The consummation of the transactions contemplated by this Agreement will neither
violate nor be in conflict with any agreement or instrument to which the
Corporation is a party or by which it is bound.
(b) The execution, delivery and performance of this Agreement and the
transactions contemplated hereby have been duly and validly authorized by all
requisite corporate action on the part of the Corporation and are valid, legal
and binding obligations of the Corporation, enforceable in accordance with their
terms except as may be limited by laws of general application
-4-
<PAGE>
relating to bankruptcy, insolvency, moratorium or other similar laws relating to
or affecting the enforcement of creditors' rights generally, and rules of law
governing specific performance, injunctive relief or other equitable remedies.
8. Termination.
-----------
Executive's employment shall terminate prior to the Expiration Date
upon the happening of any of the following events:
A. For Cause.
---------
The Executive may be terminated for Cause immediately upon receipt of
notice pursuant to a good faith determination to terminate for Cause made by a
majority of the Board. For purposes of this Agreement, "Cause" means:
(1) the Executive engages in any act of theft, embezzlement,
falsification of records, misappropriation of funds or property, or fraud
against, or with respect to the business of, the Corporation or any affiliate;
(2) the Executive commits a breach of any material term of this
Agreement and, if such breach is capable of being cured, fails to cure such
breach within 30 days of written notice of such breach from the Corporation;
(3) the Executive is convicted of, or pleads guilty or nolo
contenders to a felony or a crime involving moral turpitude, breach of trust or
dishonesty; or
(4) the Executive commits any act that causes, or knowingly
fails to take reasonable and appropriate action to prevent, any material injury
to the financial condition or business reputation of the Corporation or any of
its affiliates; however, this shall not apply to (i) any act of the Corporation
or its affiliates by any other employee thereof except to the extent that such
act is committed at the direction, or with the knowledge, of the Executive or
(ii) any action in which the Executive acted in good faith and in a manner
reasonably to be in or not opposed to the best interests of the Corporation, as
determined by the Corporation's Board of Directors.
B. Good Reason (by the Executive).
------------------------------
The Executive's employment may be terminated by the Executive at any
time for any of the following reasons (each of which is referred to herein as
"Good Reason") by giving the Corporation notice of the effective date of such
termination (which effective date may be the date of such notice):
(1) the Corporation commits a breach of any material term of
this Agreement and, if such breach is capable of being cured, fails to cure such
breach within 30 days of receipt of written notice of such breach; or
-5-
<PAGE>
(2) the Corporation removes the Executive from the position of
President or Chief Financial Officer of the Corporation, other than for Cause,
or the Corporation effects any diminution of the powers, duties or authority of
the Executive, in each case, without the prior written consent of the Executive.
C. Executive's Rights to Terminate.
-------------------------------
The Executive may, at his option, terminate his employment
hereunder for any reason upon 60 days' prior written notice to the Corporation.
D. Death.
-----
This Agreement shall terminate automatically upon the Executive's
death.
E. Disability.
----------
The Corporation may terminate the Executive's employment upon a
good faith determination by the Board that Executive has become so physically or
mentally disabled as to be incapable of satisfactorily performing his duties
hereunder for a period of 180 consecutive days, such determination to be based
upon a certificate as to such physical or mental disability issued by a licensed
physician or psychiatrist employed by the Corporation.
F. Without Cause.
-------------
The Corporation may, at its option, terminate the Executive's
employment without Cause at any time upon written notice to the Executive.
G. Date of Termination.
-------------------
For purposes of this Agreement, the term "Date of Termination"
shall mean the later of the date that any party gives written notice that it
intends to terminate this Agreement pursuant to the terms hereof or the date, if
any, specified by the terminating party in such notice as the effective date of
termination.
9. Obligations of the Corporation Upon Termination.
-----------------------------------------------
(a) Cause or Voluntary - If the Executive's employment shall be
terminated for Cause or if the Executive terminates his employment for other
than Good Reason (a"Voluntary Termination"), the Corporation's obligations to
the Executive shall terminate, other than the obligation (i) to pay to the
Executive his Base Salary through the Date of Termination at the rate in effect
on the day preceding the Date of Termination, (ii) to pay (A) the pro rata
portion through the Date of Termination of the Unconditional Semi-Annual Bonus
pursuant to section 3(b) at the rate in effect on the day preceding the Date of
Termination and (B) an amount which together with the pro rata portion of the
Unconditional Semi-Annual Bonus paid to the Executive by the Corporation would
equal an aggregate of $75,000, and (iii) to continue to provide the Executive
with
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<PAGE>
benefits of the type described in Section 4 through the Date of Termination.
Executive acknowledges that the amount to be paid to the Executive by the
Corporation pursuant to section 9(a)(ii) above shall be deemed consideration for
the agreements of the Executive set forth in section 10 below; provided,
however, that if the Executive challenges the enforceability of Section 10 below
and it is found unenforceable by a court having jurisdiction over the matter,
then the Executive shall remit to the Corporation the $75,000.
(b) Without Cause or for Good Reason - If the Corporation shall
terminate the Executive's employment without Cause, or if the Executive shall
terminate his employment for Good Reason, the Corporation shall (i) continue, in
accordance with the Corporation's normal payroll procedures, to pay the
Executive his Base Salary through the Expiration Date of this Agreement, (ii)
continue to pay the Executive his Unconditional Semi-Annual Bonus pursuant to
section 3(b) through the Expiration Date of this Agreement at the rate in effect
on the day preceding the Date of Termination, (iii) continue to provide the
Executive with benefits of the type described in Section 4 through the
Expiration Date, and (iv) pay $70,000 annually on a pro rata basis through the
Expiration Date of this Agreement on a date that is no later than the 15th of
April of the following year, except in the case of the year of termination or
resignation in which case the pro rata portion of the $70,000 shall be paid no
later than 60 days after the Date of Termination; provided, however, that this
payment shall be suspended during any period in which the Executive is an
employee or independent contractor of a company that in the Board's opinion
competes with the Corporation.
10. Non-Competition.
---------------
The Executive acknowledges and recognizes the highly competitive
nature of the business of the Corporation and its affiliates as well as his
extensive participation in the ownership of the common stock of the Corporation.
If the Executive is terminated by the Corporation for Cause or resigns based
upon a Voluntary Termination, the Executive accordingly agrees, until the first
anniversary of the Executive's termination or resignation of employment (such
date being hereafter referred to as the "Restricted Date"), as follows:
(a) The Executive will not directly or indirectly engage (as owner,
stockholder, partner or otherwise, except as a holder of fewer than 10% of the
outstanding shares or other equity interests of a company whose shares or other
equity interests are publicly traded) in any business which directly or
indirectly competes with the business of the Corporation or any of its
affiliates within the same jurisdictions in which the Corporation or any of its
affiliates engages in business at the time of the Executive's termination or
resignation, as the case may be.
(b) The Executive will not directly or indirectly induce any
employee of the Corporation or any of its affiliates to engage in any activity
in which the Executive is prohibited from engaging by paragraph (a) above or to
terminate his employment with the Corporation or any of its affiliates, and will
not directly or indirectly employ or offer employment to any person who was
employed by the Corporation or any of its affiliates unless such person shall
have been terminated without cause or ceased to be employed by any such entity
for a period of at least 12 months.
-7-
<PAGE>
(c) The Executive will not make any statement or take any action
intended to impair the goodwill or the business reputation of the Corporation or
any of its affiliates, or to be otherwise detrimental to the interests of the
Corporation or any of its affiliates, including any action or statement
intended, directly or indirectly, to benefit a competitor of the Corporation or
any of its affiliates.
(d) It is expressly understood and agreed that although the
Executive and the Corporation consider the restrictions contained in this
Section 10 to be reasonable, if a final judicial determination is made by a
court of competent jurisdiction that the time or territory or any other
restriction contained in this Agreement is an unenforceable restriction against
the Executive, the provisions of this Agreement shall not be rendered void but
shall be deemed amended to apply as to such maximum time and territory and to
such maximum extent as such court may judicially determine or indicate to be
enforceable. Alternatively, if any court of competent jurisdiction finds that
any restriction contained in this Agreement is unenforceable, and such
restriction cannot be amended so as to make it enforceable, such finding shall
not affect the enforceability of any of the other restrictions contained herein.
11. Proprietary Information.
-----------------------
Through the Restricted Date, the Executive shall not use for his
personal benefit, or disclose, communicate or divulge to, or use for the direct
or indirect benefit on any person, firm, association or company other than the
Corporation, any Proprietary Information. "Proprietary Information" means
information relating to the properties, prospects, products, services or
operations of the Corporation or any direct or indirect affiliate thereof that
is not generally known, is proprietary to the Corporation or such affiliate and
is made known to the Executive or learned or acquired by the Executive while in
the employ of the Corporation, including, without limitation, information
concerning trade secrets of the Corporation, or any of the Corporation's
affiliates and any improvements relating to the products of the Corporation in
accounting, marketing, selling, leasing, financing and other business methods
and techniques. However, Proprietary Information shall not include (A) at the
time of disclosure to the Executive such information that was in the public
domain or later entered the public domain other than as a result of a breach of
an obligation herein; or (B) subsequent to disclosure to the Executive,
Executive received such information from a third party under no obligation to
maintain such information in confidence, and the third party came into
possession of such information other than as a result of a breach of an
obligation herein. All materials or articles of information of any kind
furnished to the Executive by the Corporation or developed by the Executive in
the course of his employment hereunder are and shall remain the sole property of
the Corporation; and if the Corporation requests the return of such information
at any time during, upon or after the termination of the Executive's employment
hereunder, the Executive shall immediately deliver the same to the Corporation.
12. Ownership of Proprietary Information.
------------------------------------
The Executive agrees that all Proprietary Information shall be the
sole property of the Corporation and its assigns, and the Corporation and its
assigns shall be the sole owner of all licenses and other rights in connection
with such Proprietary Information. At all times, until the Restricted
-8-
<PAGE>
Date, the Executive will keep in the strictest confidence and trust all
Proprietary Information and will not use or disclose such Proprietary
Information, or anything relating to such information, without the prior written
consent of the Corporation, except as may be necessary in the ordinary course of
performing his duties under this Agreement.
13. Documents and Other Property.
----------------------------
All materials and articles of information of any kind furnished to the
Executive in the course of his employment hereunder are and shall remain the
sole property of the Corporation; and if the Corporation requests the return of
such information at any time during, upon or after the termination of the
Executive's employment hereunder, the Executive shall immediately deliver the
same to the Corporation. The Executive will not, without the prior written
consent of the Corporation, retain any documents, data or property, or any
reproduction thereof of any description, belonging to the Corporation or
pertaining to any Proprietary Information.
14. Intellectual Property.
---------------------
Any and all products, including but not limited to marketing and
financing materials and methods made, developed or created by the Executive for
use in the Corporation's then current markets (whether at the request or
suggestion of the Corporation or otherwise, whether alone or in conjunction with
others, and whether during regular hours of work or otherwise) (i) during the
period of this Agreement, or (ii) within a period of one year after the date of
termination or resignation of employment hereunder, which may be directly or
indirectly useful in, or relate to, the business of or tests being carried out
by any member of the Corporation, shall be promptly and fully disclosed by the
Executive to the members of the Board and, if such intellectual property was
made, developed or created other than pursuant to the Executive's employment
hereunder, the Executive shall grant the Corporation a perpetual, royalty free
license to such intellectual property, and if such intellectual property was
made, developed or created pursuant to the Executive's employment hereunder,
such intellectual property shall be the Corporation's exclusive property as
against the Executive.
15. Customer Lists.
--------------
The Executive will not during, or for a period of two years after the
termination of, his employment (i) disclose the Corporation's (including its
subsidiaries') customer lists or any part thereof to any person, firm,
corporation, association or other entity for any reason or purpose whatsoever,
(ii) assist in obtaining any of the Corporation's (including its subsidiaries')
existing customers for any competing business, or (iii) encourage any customer
to terminate its relationship with the Corporation or any of its subsidiaries.
16. Equitable Relief.
----------------
The Executive acknowledges that, in view of the nature of the business
in which the Corporation is engaged, the restrictions contained in Sections 10
through 15 inclusive (the "Restrictions") are reasonable and necessary in order
to protect the legitimate interests of the Corporation, and that any violation
thereof would result in irreparable injuries to the Corporation,
-9-
<PAGE>
and the Executive therefore further acknowledges that, if the Executive
violates, or threatens to violate, any of the Restrictions, the Corporation
shall be entitled to obtain from any court of competent jurisdiction, without
the posting of any bond or other security, preliminary and permanent injunctive
relief as well as damages and an equitable accounting of all earnings, profits
and other benefits arising from such violation, which rights shall be cumulative
and in addition to any other rights or remedies in law or equity to which the
Corporation may be entitled.
17. Binding Effect.
--------------
This Agreement shall be binding upon and inure to the benefit of the
heirs and representatives of the Executive and the successors and assigns of the
Corporation. The Corporation shall require any successor (whether direct or
indirect, by purchase, merger, reorganization, consolidation, acquisition of
property or stock, liquidation or otherwise) to all or a significant portion of
its assets, by agreement in form and substance satisfactory to the Executive,
expressly to assume and agree to perform this Agreement in the same manner and
to the same extent that the Corporation would be required to perform this
Agreement if no such succession had taken place. Regardless of whether such
agreement is executed, this Agreement shall be binding upon any successor of the
Corporation in accordance with the operation of law and such successor shall be
deemed the "Corporation" for purposes of this Agreement.
18. Notices.
-------
All notices, requests, demands and other communications hereunder
shall be in writing and shall be deemed to have been duly given if delivered by
hand or sent by facsimile transmission with telephonic confirmation of receipt,
or one business day after being sent for next business day delivery by a
reputable overnight courier service providing delivery confirmation, addressed
as follows:
(a) if to the Board or the Corporation, to:
BNC Mortgage, Inc.
1063 McGaw Avenue
Irvine, CA 92614-5532
(b) if to the Executive, to:
Kelly W. Monahan
c/o BNC Mortgage, Inc.
1063 McGaw Avenue
Irvine, CA 92614-5532
Such addresses may be changed by written notice sent to the other party at the
last recorded address of that party.
-10-
<PAGE>
19. Arbitration of All Disputes.
---------------------------
(a) Any controversy or claim arising out of or relating to this
Agreement or the breach thereof (including the arbitrability of any controversy
or claim), shall be settled by arbitration in Orange County in accordance with
the laws of the State of California by one arbitrator. If the parties cannot
agree on the appointment of an arbitrator, then the arbitrator shall be
appointed by the American Arbitration Association. The arbitration shall be
conducted in accordance with the rules of the American Arbitration Association,
except with respect to the selection of an arbitrator which shall be as provided
in this Section 19. The cost of any arbitration proceeding hereunder shall be
borne equally by the Corporation and the Executive. The award of the arbitrator
shall be binding upon the parties. Judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof.
(b) If it shall be necessary or desirable for the Executive to
retain legal counsel and incur other costs and expenses in connection with the
enforcement of any or all of his rights under this Agreement, and provided that
the Executive substantially prevails in the enforcement of such rights, the
Corporation shall pay (or the Executive shall be entitled to recover from the
Corporation, as the case may be) the Executive's reasonable attorneys' fees and
costs and expenses in connection with the enforcement of his rights including
the enforcement of any arbitration award and any costs of any arbitration which
the Executive would otherwise be required to pay in accordance with Section
19(a).
20. No Assignment.
-------------
Except as otherwise expressly provided herein, this Agreement is not
assignable by any party and no payment to be made hereunder shall be subject to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or
other charge.
21. Execution in Counterparts.
-------------------------
This Agreement may be executed by the parties hereto in two
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall constitute one and the same instrument, and all signatures
need not appear on any one counterpart.
22. Jurisdiction and Governing Law.
------------------------------
This Agreement shall be construed and interpreted in accordance with
and governed by the laws of the State of Delaware, without reference to its
conflict of laws provisions.
23. Severability.
------------
If any provision of this Agreement shall be adjudged by any court of
competent jurisdiction to be invalid or unenforceable for any reason, such
judgment shall not affect, impair or invalidate the remainder of this Agreement.
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<PAGE>
24. Entire Agreement.
----------------
This Agreement embodies the entire agreement of the parties hereof,
and supersedes all other oral or written agreements or understandings between
them regarding the subject matter hereof. No change, alteration or modification
hereof may be made except in a writing, signed by each of the parties hereto.
25. Headings Descriptive.
--------------------
The headings of the several paragraphs of this Agreement are inserted
for convenience only and shall not in any way affect the meaning or construction
of any of this Agreement.
[Signatures begin on next page]
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<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return this Agreement, whereupon it will become a binding
agreement between the Company and you in accordance with its terms.
Very truly yours,
BNC Mortgage, Inc.
Dated: January 29, 1998 By: /s/ EVAN R. BUCKLEY
---------------------
Name: Evan R. Buckley
Title: Chairman
The Agreement is hereby confirmed and accepted as of the date first above
written.
Kelly W. Monahan
Dated: January 29, 1998 /s/ KELLY W. MONAHAN
--------------------
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EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
-------------------- ---------------------
1996 1997 1996 1997
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average shares outstanding. 2,833,133 4,128,231 4,127,633 4,044,375
Net effect of dilutive stock options
based on the treasury stock method
using the IPO price................ 72,727 72,727 72,727 72,727
--------- ---------- ---------- ----------
Total............................... 2,905,860 4,200,958 4,200,360 4,117,102
--------- ---------- ---------- ----------
Pro forma net income................ $ 417,000 $7,542,000 $2,990,000 $3,531,000
--------- ---------- ---------- ----------
Pro forma net income per share
amount............................. $ 0.14 $ 1.80 $ 0.71 $ 0.86
========= ========== ========== ==========
</TABLE>
<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 August 2, 1997, except for Note 10, as to which
the date is November 26, 1997 in the Registration Statement (Form S-1 No. 333-
38651) and related Prospectus of BNC Mortgage, Inc., for the registration of
3,173,196 shares of its common stock.
/s/ Ernst & Young LLP
Orange County, California
February 2, 1998
