<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 31, 1997
REGISTRATION NO. 333-38405
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
VIRTUAL MORTGAGE NETWORK, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7374 88-0334342
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
4590 MACARTHUR BOULEVARD, SUITE 175, NEWPORT BEACH, CALIFORNIA 92660
(714) 252-0700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MICHAEL A. BARRON
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
VIRTUAL MORTGAGE NETWORK, INC.
4590 MACARTHUR BOULEVARD, SUITE 175, NEWPORT BEACH, CALIFORNIA 92660
(714) 252-0700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
DAVID A. KRINSKY, ESQ. BRUCE A. RICH, ESQ.
KEVIN BAKER, ESQ. JAMES T. SEERY, ESQ.
O'MELVENY & MYERS LLP REID & PRIEST LLP
610 NEWPORT CENTER DRIVE, SUITE 1700 40 WEST 57TH STREET
NEWPORT BEACH, CALIFORNIA 92660 NEW YORK, NEW YORK 10019
(714) 760-9600 --------------- (212) 603-2000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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,
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 statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration 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>
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------
Common Stock, $.005 par value(2).............................. $31,912,500 $6,383(5)
- ---------------------------------------------------------------------------------------------------
Common Stock, $.005 par value(3).............................. $7,815,720 $1,563
- ---------------------------------------------------------------------------------------------------
Common Stock, $.005 par value, underlying Representatives'
Warrants(4).................................................. $3,191,250 $638
- ---------------------------------------------------------------------------------------------------
Total......................................................... $42,919,470 $8,584
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457 under the Securities Act of 1933, as amended.
(2) Includes 3,700,000 shares sold by the Company hereby and 555,000 shares
included in the Underwriters' over-allotment option.
(3) Includes 1,042,096 shares to be offered by certain stockholders.
(4) Pursuant to Rule 416, includes such indeterminate number of additional
shares of Common Stock as may be required for issuance on exercise of the
Representatives' Warrants as a result of any adjustment in the number of
shares of Common Stock issuable on such exercise by reason of the formula
contained in the Representatives' Warrants.
(5) The Company initially paid a filing fee of $11,849.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
The form of Prospectus filed as part of this Registration Statement has two
cover pages, the first of which relates to an underwritten public offering of
3,700,000 shares of Common Stock by Virtual Mortgage Network, Inc. and the
second of which relates to an offering to be made exclusively by certain
stockholders. All Prospectuses distributed in the underwritten public offering
will bear the first form of cover page, appropriately completed after the
Registration Statement becomes effective. The form of Prospectus in the exact
form in which it is to be used after the effective date will be filed with the
Securities and Exchange Commission pursuant to Rule 424(b) of the General
Rules and Regulations under the Securities Act of 1933, as amended.
The second cover page pertains to the registration of resales of 1,042,096
shares of Common Stock to be sold at some point in the future by certain
stockholders (the "Registered Stockholders") independent of the underwritten
offering. It is anticipated that the Prospectus used by the Registered
Stockholders will bear the second form of cover page, appropriately completed
after the Registration Statement becomes effective. This form of Prospectus
will also include the additional information concerning the Registered
Stockholders and the plan of distribution disclosed under the captions
"Registered Stockholders" and "Plan of Distribution" included in this
Registration Statement, will include the section entitled "Principal
Stockholders," and will omit sections not applicable to such sales, including
"Underwriting" and "Legal Matters." The Registered Stockholders and Plan of
Distribution sections will not be included in the form of Prospectus
distributed in connection with the underwritten public offering.
<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, JANUARY , 1998
PROSPECTUS
3,700,000 SHARES
[LOGO OF VIRTUAL MORTGAGE NETWORK(TM)]
COMMON STOCK
-----------
Virtual Mortgage Network, Inc. (the "Company" or "Virtual Mortgage") hereby
offers 3,700,000 shares (the "Shares") of common stock, par value $.005 per
share (the "Common Stock"), of the Company (the "Offering"). Prior to the
Offering, there has been no public market for the Common Stock, and there can
be no assurance such a market will develop or be sustained after the Offering.
It is currently estimated that the initial public offering price will be at
$7.50 per share. For information regarding the factors considered in
determining the initial public offering price of the Common Stock, see
"Underwriting." Application is being made to quote the Common Stock on the
Nasdaq National Market under the symbol "VMNI," subject to official notice of
issuance. A portion of the proceeds of the Offering will be used to repay
indebtedness to certain Registered Stockholders (as defined below). See "Use of
Proceeds."
The Company also has registered on the registration statement of which this
Prospectus constitutes a part the offering and resale by certain stockholders
(the "Registered Stockholders") from time to time of up to 1,042,096 shares of
Common Stock, all of which are subject to a 24-Month Provisional Lock-up. See
"Shares Eligible for Future Sale." Subject to such lock-up arrangements, the
Registered Stockholders may offer and sell such shares of Common Stock on the
Nasdaq National Market, in negotiated transactions or otherwise. No
underwriting arrangements have been entered into by the Registered
Stockholders. The Company will not receive any proceeds from the sale of Common
Stock by the Registered Stockholders. See "Shares Eligible for Future Sale."
THE SHARES INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 AND "DILUTION."
-----------
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>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNDERWRITING PROCEEDS
PRICE TO COMMISSIONS TO THE
PUBLIC AND DISCOUNTS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................. $ $ $
- --------------------------------------------------------------------------------
Total(3).................................. $ $ $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) Excludes a non-accountable expense allowance payable to Barington Capital
Group, L.P. and Value Investing Partners, Inc., the representatives of the
Underwriters (the "Representatives"), in an amount equal to 3% of the gross
proceeds of the Offering (the "Representatives' Expense Allowance"), and
the value of warrants to purchase 370,000 shares of Common Stock at an
exercise price equal to 165% of the initial public offering price being
issued to the Representatives (the "Representatives' Warrants"). The
Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2) Before deducting expenses payable by the Company, estimated at $750,000,
and the Representatives' Expense Allowance.
(3) The Company has granted to the Underwriters a 45-day option to purchase up
to an aggregate of 555,000 additional shares of Common Stock at the Price
to Public, less the Underwriting Commissions and Discounts, solely to cover
over-allotments, if any. If the Underwriters exercise the option in full,
the total Price to Public, Underwriting Commissions and Discounts and
Proceeds to the Company will be $ , $ and $ , respectively. See
"Underwriting."
-----------
The Shares are offered by the several Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters and subject to
the right to reject any order in whole or in part, and subject to certain other
conditions as set forth in the Underwriting Agreement between the Company and
the Underwriters. It is expected that the delivery of certificates representing
the Shares will be made against payment therefor at the offices of Barington
Capital Group, L.P., 888 Seventh Avenue, New York, New York 10019 or through
the facilities of The Depository Trust Company, on or about January , 1998.
-----------
BARINGTON CAPITAL GROUP VALUE INVESTING PARTNERS, INC.
THE DATE OF THIS PROSPECTUS IS , 1998
<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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUBJECT TO COMPLETION, JANUARY , 1998
1,042,096 SHARES
[LOGO OF VIRTUAL MORTGAGE NETWORK(TM)]
COMMON STOCK
------------
This Prospectus relates to 1,042,096 shares of Common Stock being sold by
certain Registered Stockholders. Subject to a 24-Month Provisional Lock-up, the
Registered Stockholders may offer and sell the shares of Common Stock owned by
them on the Nasdaq National Market, in negotiated transactions or otherwise.
This Prospectus, which forms a part of the registration statement filed by the
Company, must be current at any time during which a Registered Stockholder
sells shares of Common Stock. See "Registered Stockholders," "Description of
Capital Stock" and "Shares Eligible for Future Sale."
This Prospectus (without certain information concerning the Registered
Stockholders) was also used in connection with an underwritten public offering
by the Company of 3,700,000 shares of Common Stock which became effective on
, 1998. In connection with the underwritten offering, the Company issued to
the managing underwriters (the "Representatives") warrants to purchase up to
370,000 shares of Common Stock (the "Representatives' Warrants") for $ per
share, and granted to the Representatives an option, exercisable at any time
prior to , 1998, to purchase up to 555,000 shares of Common Stock solely to
cover over-allotments (the "over-allotment option"). See "Prospectus Summary"
and "Capitalization." References in this Prospectus to the Offering, unless
otherwise noted, are to the underwritten offering. The Representatives will not
be involved in, nor will they receive any compensation in connection with, the
sale of securities by the Registered Stockholders.
------------
THE SHARES INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 AND "DILUTION."
------------
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.
------------
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
[THE FOLD-OUT OF THE INSIDE COVER CONTAINS A MAP OF THE UNITED STATES OF
AMERICA DISPLAYING LOCATIONS OF VIRTUAL MORTGAGE NETWORK, INC. OFFICES AND
SIMULATED CONNECTIONS BETWEEN THOSE OFFICES TO THE COMPANY'S LOAN
COUNSELLING CENTER. THE FOLLOWING CAPTIONS APPEAR AT VARIOUS LOCATIONS ON
THE MAP: "LOCAL ACCOUNT EXECUTIVES," "CENTRALIZED LOAN COUNSELORS,"
"CENTRALIZED PROCESSING TEAMS," "MULTI-LENDER NETWORK WITH HUNDREDS OF LOAN
PRODUCTS," "POINT OF SALE HOME LOAN APPLICATION AND APPROVAL RIGHT IN THE
REAL ESTATE OFFICE," "CUSTOM MORTGAGE SOLUTIONS FOR LARGE MULTI-OFFICE REAL
ESTATE FIRMS" AND "THE CONSUMERS CHOICE FOR MORTGAGE SERVICES THROUGH
ADVANCED TECHNOLOGY."]
[IMMEDIATE INSIDE COVER CONTAINS PICTURE OF THE
LOANMAKER SYSTEM; PICTURE APPEARS WITH THE
FOLLOWING CAPTION:
"THE LOANMAKER SYSTEM."]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE OR MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. SEE "UNDERWRITING." IN
CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ALSO ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION
M. SEE "UNDERWRITING."
This document has been approved by Value Investing Partners (U.K.) Ltd,
regulated by the SFA. The securities described in this document are not
available to persons other than market counterparties or non-private customers
as those terms are defined in the rules of the SFA.
Virtual Mortgage Network(TM) and The LoanMaker System(TM) are registered
trademarks of the Company. ProShare(TM) and Pentium(TM) are registered
trademarks of Intel Corporation. Trademarks of other companies are also used
in this Prospectus.
<PAGE>
Unless otherwise indicated, the information in this Prospectus (i) assumes an
initial public offering price of $7.50 per share of Common Stock, (ii) does not
give effect to the exercise of the over-allotment option granted to the
Underwriters as described in "Underwriting" and (iii) gives effect to the 1 for
4.89 reverse stock split and reincorporation in the State of Delaware to be
effected by the Company in January 1998, both of which have been approved by
the Company's stockholders. This Prospectus contains forward-looking statements
which involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause a difference include, but are not limited to, those
discussed in "Risk Factors."
PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by the more
detailed information, including "Risk Factors" and Consolidated Financial
Statements and Notes thereto, appearing elsewhere in this Prospectus.
THE COMPANY
General
The Company's objective is to become the leading low-cost discount provider
of mortgage products to consumers in the $785 billion residential mortgage
industry. To achieve this goal, the Company has developed and begun deployment
of a video-conferencing mortgage transaction processing system, The LoanMaker
System(TM) (the "LoanMaker System"), which allows home buyers seeking mortgages
to receive a mortgage loan approval quickly at a cost to the home buyer that is
typically less than through the traditional mortgage broker and lender network.
LoanMaker Systems are strategically located in real-estate offices and provide
home buyers with the ability to select from over 1,000 loan products offered by
multiple selected national, regional and local lenders as well as the ability,
via video-conferencing, to communicate face-to-face with the Company's loan
counselors. The Company operates both as an independent mortgage broker,
through the use of its LoanMaker System, and as a mortgage bank offering its
own loan products and the loan products of lenders for which the Company is a
delegated or correspondent underwriter which enables the Company to quickly
make an underwriting decision with respect to loans originated using the
LoanMaker System. Through the LoanMaker System, lenders are able to deliver
conventional and non-conforming loan products to borrowers with a large range
of credit profiles without the costs of establishing and maintaining their own
retail brokerage forces. The Company believes it is a leading provider of
multi-lender video-conferencing mortgage loan origination services. As of
December 1, 1997, approximately 73 LoanMaker Systems had been installed and
approximately 96 were on order to be installed in the first half of 1998 in
selected real estate offices. The Company had 67 LoanMaker Systems available as
of December 1, 1997, which are sufficient to meet installations scheduled
through February 1998. In addition, the Company is negotiating for up to an
additional 268 installations.
The Company believes the LoanMaker System's efficiencies benefit each of the
key parties to a mortgage loan transaction. Consumers may comparison shop from
over 1,000 loan products from multiple lenders and receive their loan approvals
quickly. Consumers are assisted by a qualified loan counselor, who is
compensated the same regardless of the loan or lender chosen. Lenders can gain
access to a more efficient distribution system than traditional mortgage
origination at no incremental cost. Real estate broker-owners can significantly
increase their mortgage related revenues while providing a value-added service
to their customers and, to the extent the system leads to more rapid closings,
increasing their office productivity. Real estate agents may increase the speed
of closing each transaction and enhance client satisfaction.
3
<PAGE>
In order to control more of the underwriting decisions made with respect to
loans originated using the LoanMaker System and therefore expedite and enhance
the speed and capabilities of the LoanMaker System, the Company agreed to
acquire (the "Acquisition") Sutter Mortgage Corporation ("Sutter Mortgage"), a
residential mortgage bank based in Walnut Creek, California in June 1997, and
closed the Acquisition in December 1997. As a mortgage bank and delegated
underwriter for 17 of the 29 lenders represented on the LoanMaker System as of
December 1997, Sutter Mortgage makes many of the Company's underwriting
decisions, which enables the Company to increase the speed of the loan approval
process and to increase the percentage of loans that can be approved on-line
within one to two hours.
The Company has a very limited operating history upon which an evaluation of
the Company and its prospects can be based. The Company has only experienced
losses to date. Although the Company has experienced revenue growth in recent
periods, this revenue growth should not be viewed as indicative of future
revenue growth, if any, and there can be no assurance that the revenues of the
Company will continue to increase. The Company believes, however, that it will
receive sufficient proceeds from the Offering to finance its operations for the
next 12 months. See "Risk Factors--Risks Related to the Company."
Industry Overview
Funding sources for residential mortgage loans include banks, savings and
loans institutions, mortgage banks and a number of specialized financial
institutions. The principal sources of revenue for mortgage brokers and bankers
include loan origination fees, net interest earned on mortgage loans prior to
sale, proceeds from the sale of mortgage loans, mortgage loan servicing fees
and proceeds from the sale of mortgage servicing rights. Traditionally,
mortgage bankers have used three channels of distribution: (i) Retail:
principally through their branch networks and telemarketing; (ii) Wholesale:
principally through mortgage brokers; and (iii) Correspondent: principally
through pre-qualified financial institutions, some of which may be granted
delegated underwriting authority. While the industry is attempting to
incorporate technology to provide better service to borrowers and maximize
internal efficiency through methods of credit scoring, automated underwriting
systems and automated appraisal, the Company believes that the loan application
and approval process continues to frustrate home buyers. This process has
traditionally been a time-consuming and paperwork-intensive process involving a
long and costly search process, unclear pricing, a scarcity of objective,
professional advice and agents who are principally motivated by the commissions
they will generate. The Company believes its LoanMaker System simplifies,
hastens and improves the process by providing one-stop access to multiple
lenders and loan products presented on an objective basis.
The LoanMaker System
The LoanMaker System is a proprietary, wide-area network that utilizes PC-
based video-conferencing technology, and allows a prospective home buyer
sitting in a real-estate office to (i) easily and quickly select from over
1,000 loan products based on the home buyers credit profile, loan payment
preferences and geographic location; (ii) compare loan fees, calculate payment
schedules, review historical and current interest rates, and run any customized
scenario; and (iii) complete and submit a mortgage loan application, all on a
real-time basis with the assistance of a loan counselor. Approval can be
obtained in as little as one to two hours or, as in most cases, within 72 hours
depending on the borrower's credit profile. The Company's latest generation
technology, known as "LoanMaker System with Paris Technology" ("Paris"), is an
upgraded and enhanced version of the LoanMaker System that allows immediate,
on-line underwriting, does not require a proprietary network and ISDN lines
(i.e., allows the use of standard modems, telephone lines, and/or Internet
connections), and enables users to access the system using laptop PCs or via
the Internet. The Company began the desk-top roll-out of the "Paris" technology
in December 1997 and intends to begin the roll-out of the laptop PC and
Internet version by March 1998. There can be no assurance, however, that this
schedule will be met.
Marketing Strategy
The Company's marketing strategy is to deploy the LoanMaker System in the 200
largest real estate brokerage companies in the United States. This marketing
approach is expected to enable the Company to
4
<PAGE>
leverage the real estate company's established local brand name identity while
also gaining access to a large pool of borrowers at the point of real estate
sale. The Company believes its marketing efforts toward these real estate firms
are vital to its success, given that the Company relies on the firms' consents
to install the LoanMaker System in their offices and on real estate agents to
introduce their customers to the LoanMaker System. The Company presently has
LoanMaker Systems installed, at its expense, in certain offices of three of the
200 largest real estate brokerage companies in the U.S., has signed a contract
with a fourth such company and is negotiating with two additional such
companies. In exchange for their marketing efforts with respect to the
LoanMaker System, real estate brokerage companies receive compensation from the
Company.
As of December 1, 1997, the Company had installed the LoanMaker System in 73
real estate offices serving 11 metropolitan areas in Arizona, California,
Florida, Louisiana, New Jersey, Oregon and Texas, with 96 systems on order that
the Company has not yet installed. Several of the largest real estate firms in
the U.S. have installed the LoanMaker System in their offices, including:
Realty Executives of Phoenix (Arizona); Latter & Blum Realtors (Louisiana);
Re/Max South County (Orange County, California); Murphy Realty (New Jersey);
and Preferred Better Homes & Gardens (Portland, Oregon). Smythe/Cramer Realtors
(Cleveland) has signed a contract for installations scheduled in the first
quarter of 1998. In addition, the Company is negotiating to install up to 268
additional LoanMaker Systems, including the LoanMaker Systems in the offices of
two other prominent real estate companies: Fox/Roach Realtors (Philadelphia)
and AmerUs Home Services (Des Moines).
Growth Strategy
The Company generates revenue from two sources. First, as a mortgage
transaction processor, the Company earns loan origination fees received upon
completion of loans, generally 1.0% to 1.5% of the face value of the loan. And
second, as a mortgage bank, the Company generates revenues from the gain on
sales of loans, processing fees, loan origination fees and interest on loans
held pending sale. The Company anticipates that a significant amount of its
mortgage banking operations' future growth will come from originating loans
using the LoanMaker System.
The Company's strategy is to exploit its proprietary LoanMaker System to
establish itself as a leading loan origination transaction processor serving
the $785 billion one-to-four family residential mortgage industry in the United
States. The Company's principal short-term focus is to expand its installed
base of LoanMaker Systems by focusing on high volume local real estate offices
and to work with real estate firms to increase the volume of mortgages
completed using the LoanMaker System.
In addition to the residential mortgage origination market, the Company has
identified three other potential growth opportunities: (i) adding complementary
services to the mortgage lending process such as title search, property
appraisals, relocation services and cash management; (ii) extending the
Company's LoanMaker System to other geographic areas such as Europe; and (iii)
eventually exploiting other markets such as home equity loans, life insurance
sales and personal financial planning. Although the Company currently has no
specific plans in these three areas, the Company intends to explore these
additional growth opportunities as part of its long-term strategic growth plan.
Company History
The Company was incorporated in Nevada in December 1992 and was inactive
until March 1995. The Company reincorporated in the State of Delaware in
January 1998. Unless otherwise noted, references herein to "Virtual Mortgage"
or the "Company" refer to Virtual Mortgage Network, Inc. and its wholly-owned
subsidiaries, including Sutter Mortgage. The Company's principal executive
offices are located at 4590 MacArthur Boulevard, Suite 175, Newport Beach,
California 92660, and its telephone number at that location is (714) 252-0700.
5
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock Offered by the Company................... 3,700,000 shares
Common Stock to be outstanding after the Offering(1).. 6,171,086 shares
Use of proceeds....................................... For computer purchases
and upgrades, repayment
of outstanding debt,
including debt relating
to outstanding lease
payments due and
relating to the
Acquisition, new product
development and general
corporate purposes,
including working
capital and capital
expenditures.
Proposed Nasdaq National Market symbol................ "VMNI"
Risk Factors.......................................... The shares of Common
Stock offered hereby
involve a high degree of
risk. Before investing
in the Common Stock
offered hereby,
prospective investors
should carefully
consider the risks
relating to the
Company's limited
operating history and
anticipated losses and
the other risks
described in "Risk
Factors." See "Risk
Factors" for a
discussion of certain
material factors that
should be considered in
connection with an
investment in the Shares
offered hereby.
</TABLE>
- --------
(1) Includes (i) 383,242 shares of Common Stock issued in private placements
subsequent to September 30, 1997; (ii) the exercise of 368,136 warrants to
purchase Common Stock at an exercise price of $.005 per share and (iii) the
conversion of 207,000 shares of Series A Preferred Stock into 51,633 shares
of Common Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Excludes (i) 2,043,000 shares of Series A Preferred Stock which are
presently convertible into 509,501 shares of Common Stock; (ii) 441,053
shares of Series B Preferred Stock (convertible into 441,053 shares of
Common Stock) to be issued upon exchange of certain debt upon the closing
of the Offering (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources--
Bridge Financings"); (iii) 105,616 shares of Common Stock to be issued upon
the exchange of interest outstanding on certain debt to be exchanged for
Series B Preferred Stock upon the closing of the Offering; (iv) 125,476
shares of Common Stock reserved for issuance pursuant to warrants with an
exercise price of $4.89 per share; (v) 266,114 shares of Common Stock
reserved for issuance pursuant to warrants with an exercise price of $7.34
per share; (vi) 7,588 shares of Common Stock reserved for issuance pursuant
to warrants with an exercise price of $7.78 per share; (vii) 100,000 shares
of Common Stock reserved for issuance pursuant to a warrant with an
exercise price of $7.88; (viii) 10,581 shares of Common Stock reserved for
issuance pursuant to warrants with an exercise price of $5.63 per share;
(ix) an aggregate of 1,409,000 shares reserved for issuance under the
Company's stock option plans, of which 373,236 shares are subject to
outstanding options and 552,800 shares are subject to options that will be
granted concurrently with the closing of the Offering; (x) an aggregate of
10,226 shares reserved for issuance to certain of the Company's founders
pursuant to options granted under their respective employment agreements,
of which 5,113 options are currently exercisable; and (xi) 370,000 shares
reserved for issuance pursuant to the Representatives' Warrants.
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables set forth historical summary consolidated financial
information for Virtual Mortgage (prior to the Acquisition) and unaudited pro
forma combined information which represents the Consolidated Statement of
Operations data as if the Acquisition were completed on January 1, 1996 and
Combined Balance Sheet data as if the Acquisition were completed as of
September 30, 1997. The summary financial information in the table is derived
from the financial statements of the Company, Sutter Mortgage and the unaudited
pro forma financial statements included elsewhere in this Prospectus. The data
should be read in conjunction with the financial statements, related notes and
other financial information included herein. The pro forma financial statements
may not be indicative of the results that may be obtained by the Company in any
future period.
<TABLE>
<CAPTION>
INCEPTION
(MARCH 2, NINE MONTHS
1995) TO ENDING NINE MONTHS
DECEMBER 31, YEAR ENDED SEPTEMBER 30, ENDING
1995 DECEMBER 31, 1996 1996 SEPTEMBER 30, 1997
------------ ------------------- ------------- -------------------
VIRTUAL VIRTUAL PRO FORMA VIRTUAL VIRTUAL PRO FORMA
MORTGAGE MORTGAGE COMBINED MORTGAGE MORTGAGE COMBINED
------------ -------- --------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $ 2 $ 123 $ 7,602 $ 61 $ 689 $ 7,851
Operating expenses...... 1,550 6,453 14,968 4,105 6,711 15,840
------- ------- ------- ------- ------- -------
Loss from operations.... (1,548) (6,330) (7,366) (4,044) (6,022) (7,989)
Net loss................ (1,544) (6,981) (8,019) (4,206) (7,950) (9,917)
Pro forma net loss per
common share (1)....... $ (6.81) $ (7.82) $ (4.44) $ (5.43) $ (6.77)
Pro forma weighted
average common shares
outstanding (1)........ 1,025 1,025 947 1,464 1,464
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ----------------- ---------------------------------
PRO FORMA
VIRTUAL VIRTUAL VIRTUAL PRO FORMA COMBINED AS
MORTGAGE MORTGAGE MORTGAGE COMBINED(2) ADJUSTED(3)
----------------- ----------------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents.... $ 22 $ 40 $ 97 $ 266 $21,687
Mortgage loans held for
sale, current.......... -- -- -- 44,665 44,665
Property and equipment,
net.................... 279 456 421 1,162 1,162
Total assets............ 324 780 1,830 50,014 70,974
Lines of credit and
financing
arrangements........... -- -- -- 44,798 44,798
Notes payable........... 250 3,742 6,023 8,707 --
Redeemable Series A
Preferred Stock........ 1,133 2,017 2,017 1,693 1,693
Total stockholders'
equity (deficit)....... (1,341) (6,560) (9,024) (6,887) 21,301
</TABLE>
- --------
(1) Pro forma net loss per common share at December 31, 1996 uses pro forma
shares outstanding as of December 31, 1996. Pro forma net loss per common
share at September 30, 1997 uses pro forma shares outstanding as of
September 30, 1997. Excludes (i) 509,759 shares of the Company's Common
Stock reserved for issuance pursuant to warrants; (ii) 2,043,000 shares of
Series A Preferred Stock which are presently convertible into 509,501
shares of Common Stock; (iii) an aggregate of 1,409,000 shares reserved for
issuance under the Company's stock option plans, of which 373,236 shares
are subject to outstanding options at November 30, 1997 and 552,800 are
subject to options that will be granted concurrently with the closing of
the Offering; and (iv) an aggregate of 10,226 shares reserved for issuance
to certain of the Company's founders pursuant to employment agreements, of
which 5,113 are currently exercisable. See Notes 2 and 4 of Notes to
Consolidated Financial Statements of Virtual Mortgage Network, Inc. and
Subsidiaries.
(2) Reflects adjustments related to the Acquisition, including amounts due in
connection with the Acquisition. See "Sutter Mortgage Acquisition." Also
reflects (i) equity adjustments related to the sale of 751,378 shares of
Common Stock issued subsequent to September 30, 1997 for net proceeds of
$2,137,000, which includes the exercise of 368,136 warrants at a price of
$.005 per share; (ii) adjustments related to conversion of 207,000 shares
of Series A Preferred Stock into 51,633 shares of Common Stock, as well as
repayment of $100,000 of a subscription for Series A Preferred Stock into
notes payable; (iii) adjustments for a note payable in the aggregate
principal amount of $1,300,000 issued at a discount of $350,000, payable at
the closing of the Offering. See "Use of Proceeds".
(3) Adjusted to give effect to the sale of shares offered hereby by the Company
at an assumed initial public offering price of $7.50 per share and the
receipt and application of the estimated net proceeds therefrom including
the payment of $4.8 million of debt, which includes amounts due in
connection with the Acquisition, and the exchange of $4.2 million in debt
for Series B Preferred Stock.
7
<PAGE>
RISK FACTORS
This Prospectus contains certain forward-looking statements. Actual results
could differ materially from those projected in the forward-looking statements
as a result of certain of the risk factors set forth below and elsewhere in
this Prospectus. In addition to the other information contained in this
Prospectus, investors should carefully consider the following risk factors.
RISKS RELATED TO THE COMPANY
EXTREMELY LIMITED OPERATING HISTORY
The Company has a very limited operating history upon which an evaluation of
the Company and its prospects can be based. The Company was incorporated in
1992 and commenced operations in 1995, but did not generate revenues until
February 1996. In December 1997, the Company acquired Sutter Mortgage, a
residential mortgage bank. The Company and its prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by
companies in the business of providing mortgage products and services. To
address these risks, the Company must, among other things: (i) continue to
respond to competitive developments; (ii) attract, retain and motivate
qualified personnel; (iii) successfully execute its marketing strategy; (iv)
expand and diversify its lender base and loan products; and (v) upgrade its
technologies and market products and services incorporating these
technologies. There can be no assurance that the Company will be successful in
addressing these risks.
HISTORY OF LOSSES; ANTICIPATED FUTURE LOSSES; EQUITY AND WORKING CAPITAL
DEFICITS
The Company has only experienced operating losses to date and as of
September 30, 1997 had an accumulated deficit of $16,475,000. Prior to the
Company's acquisition of Sutter Mortgage, Sutter Mortgage had an accumulated
deficit of $4,904,000 as of September 30, 1997. The Company currently expects
that for at least 12 months it will significantly increase its operating
expenses to expand its sales and marketing operations and to fund greater
levels of new product development. As a result of the foregoing factors, the
Company expects to continue to incur significant losses at least through the
second quarter of 1998, and there can be no assurance that losses will not
continue in subsequent periods. In addition, the Company has a working capital
deficit, net stockholders' deficit and has experienced significant losses to
date. These and certain other factors raise substantial doubt about the
ability of the Company to continue as a going concern. As a result of these
factors, the report of the Company's independent public accountants on the
Company's audited financial statements includes an explanatory paragraph that
states substantial doubt about the Company's ability to continue as a going
concern as described in Note 1 to the Company's consolidated financial
statements. In addition, Sutter Mortgage's recurring losses from operations
and its net capital deficiency raise substantial doubt about Sutter Mortgage's
ability to continue as a going concern, and the report of its independent
public accountants also includes an explanatory paragraph that states
substantial doubt about Sutter Mortgage's ability to continue as a going
concern, as described in Note 1 to Sutter Mortgage's financial statements. See
"Selected Financial Information," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," Note 1 of Notes to
Consolidated Financial Statements of Virtual Mortgage Network, Inc. and
Subsidiaries and Note 1 of Notes to Financial Statements of Sutter Mortgage
Corporation.
LIMITED REVENUES GENERATED FROM LOANMAKER SYSTEM
The Company installed the first LoanMaker System in May 1996 and currently
has installed 73 LoanMaker Systems. Revenues from the LoanMaker Systems were
$123,000 and $689,000 for fiscal 1996 and the nine-months ended September 30,
1997, respectively. Revenue growth is dependent on the number of LoanMaker
Systems and the number of loans made using them. Various factors affect the
Company's ability to increase the number of LoanMaker Systems and their use.
As the Company attempts to place the systems in real estate brokerage offices,
the Company must convince the broker-owner to accept the systems and replace,
at least in part, established relationships with mortgage brokers or mortgage
lenders. Further, the Company must convince
8
<PAGE>
real estate agents to recommend and sell the use of the system to their
clients. These activities require increasing the Company's marketing force at
significant additional expense. The Company must pay for the acquisition,
installation and operations, currently done through lease arrangements costing
approximately $550 per month, of an increasing number of LoanMaker Systems,
which will increase the Company's costs significantly. In addition, the
Company must provide an increasing number of qualified loan counselors, which
will increase the Company's payroll significantly. While the Company believes
that the proceeds of the offering will provide sufficient funds for its
planned growth for at least the next 12 months, other factors are outside the
Company's control. There can be no assurance that the Company will be
successful in its efforts to increase the number and use of LoanMaker Systems
to the extent necessary for the Company to have a viable business.
HISTORICAL REVENUE GROWTH NOT INDICATIVE OF FUTURE PERFORMANCE
Although the Company has experienced revenue growth in recent periods, there
can be no assurance that the revenues of the Company will continue to
increase. The extremely limited operating history of the Company makes the
prediction of future results of operations difficult and, therefore, the
recent revenue growth experienced by the Company should not be taken as
indicative of the rate of revenue growth, if any, that can be expected in the
future. The Company believes that historical period-to-period comparisons of
its operating results are not meaningful and that the results for any period
should not be relied upon as an indication of future performance.
UNDEVELOPED MARKET
The market for video-conference loan origination is relatively new,
undeveloped and uncertain. As is typical in the case of a new and evolving
industry, demand and market acceptance for recently introduced products and
services are subject to a high level of uncertainty and risk. Because the
market for the Company's LoanMaker System is new and evolving, it is difficult
to predict the future growth rate, if any, and size of this market. Marketing
and sales techniques in this area are not well established nor are the bases
for competition. The Company believes competition will be based principally on
quality of service, speed, price and convenience. There can be no assurance
that a significant market for video-conference loan origination will develop
or that the Company's system and loan products will be accepted in any
expanded market. If the market fails to develop or develops more slowly than
expected, or if the Company's products and services do not achieve significant
market acceptance, the Company's business, operating results and financial
condition would be materially adversely affected.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
As a result of the Company's extremely limited operating history, the
Company does not have historical financial data for a significant number of
periods on which to base planned operating expenses. A substantial portion of
the Company's operating expenses are related to personnel, facilities and
marketing programs. The level of spending for these expenses is based, in
significant part, on the Company's expectations of future revenues. If actual
revenue levels are below management's expectations, the Company's business,
operating results and financial condition are likely to be adversely affected.
Loan fee revenues in any quarter are substantially dependent on loans booked
and closed in that quarter, and revenues for any future quarter are not
predictable with any significant degree of accuracy. For these reasons, the
Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance.
The Company expects to experience significant fluctuations in future
quarterly operating results, which may be caused by many factors, including
the following: inability to achieve growth objectives due to the delay in
installation of ISDN telephone lines; seasonal fluctuations in the mortgage
origination business; business interruptions caused by software bugs or other
product quality problems; competition in the mortgage loan origination
business; loan product pricing competition; and general economic conditions.
Due to the foregoing factors, it is likely that in some future quarter the
Company's operating results will be below the expectations of
9
<PAGE>
public market analysts and investors. In that event, the price of the
Company's Common Stock would likely be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON PRINCIPAL PRODUCT AND MORTGAGE LENDING INDUSTRY
The Company's growth is dependent on the success of the LoanMaker System. As
a result, any factors adversely affecting residential real estate sales in any
geographic area where the Company has placed, or plans to place, equipment, a
downturn in the economy as a whole, a sharp rise in interest rates or other
developments in the mortgage industry could have a material adverse effect on
the Company's business, operating results and financial condition. In
addition, members of Congress and other government officials from time to time
have suggested the elimination of the mortgage interest deduction for federal
income tax purposes, either entirely or in part, based on the borrower's
income, type of loan or principal amount. Any legislation reducing the benefit
of the mortgage interest deduction could have a material adverse effect on the
Company's business, operating results and financial condition. The Company's
future financial performance will depend in significant part on its ability to
develop and introduce its loan origination system into point-of-sale locations
such as real estate offices, as well as its ability to enhance and accelerate
borrower acceptance of its products and services. There can be no assurance
that the Company's video-conferencing method will achieve wide acceptance from
borrowers or real estate professionals. See "Business--Products" and "--
Competition."
RELIANCE ON THIRD PARTIES
The success of the Company and its business are dependent on, among other
things, its agreements and relationships with third parties. In particular,
the Company relies on the participation of real estate broker-owners and the
lenders on the LoanMaker System, which may terminate their relationship with
the Company at any time without penalty or any charge. The withdrawal of all
or substantially all of the real estate broker-owners or the lenders on the
LoanMaker System would have a material adverse effect on the Company's
business, operating results and financial condition. The Company is also
dependent on the marketing efforts of Interealty Corp. ("Interealty") and the
technical services of Data General Corporation ("Data General"). The failure
of either company to fully perform its contractual obligations, or the
inability of the Company to replace such companies, may delay the Company's
expansion plans. While the Company believes that Data General and Interealty
can be replaced, there can be no assurance that the Company will be able to
enter into agreements with other parties to replace these agreements. See
"Business--Strategic Relationships." As of November 30, 1997, the Company was
past due on lease payments to Data General of approximately $1,469,000. The
Company and Data General have agreed to a repayment plan, pursuant to which
Data General will continue to provide support services but will not lease
additional LoanMaker Systems to the Company until the repayment is made. The
Company had 67 LoanMaker Systems available for new installations as of
December 1, 1997. There can be no assurance, however, that the number of
LoanMaker Systems available to the Company will be sufficient to meet the
Company's installation needs. See "Business--Strategic Relationships."
Additionally, 20% and 17% of the Company's revenues from the LoanMaker Systems
during the nine-months ended September 30, 1997 were contributed by Latter &
Blum and Re/Max South County, respectively. The withdrawal of either real
estate broker-owner could have a material adverse effect on the revenues
derived from the LoanMaker Systems.
INTEGRATION OF THE BUSINESSES
The Company agreed to acquire Sutter Mortgage in June 1997, began
integrating operations in September 1997 and closed the acquisition of Sutter
Mortgage in December 1997. While the integration has already been underway,
there can be no assurance that difficulties will not be encountered in the
integration of Sutter Mortgage's business with that of the Company. Any delays
or unexpected costs in connection with such integration could have a material
adverse effect on the Company's business, operating results and financial
condition. The transition to a combined company involving Virtual Mortgage and
Sutter Mortgage will require integration of the companies' management and
coordination of the companies' new product development and sales and marketing
efforts. The difficulties of such assimilation may be increased by the
necessity of coordinating geographically separated organizations,
10
<PAGE>
integrating personnel with disparate business backgrounds and combining
different corporate cultures. In addition, the process of integrating Virtual
Mortgage and Sutter Mortgage will require substantial attention from management
and could cause an interruption in the business activities of Virtual Mortgage
and Sutter Mortgage, which could have an adverse effect on their combined
operations. See "Sutter Mortgage Acquisition" and "Pro Forma Combined Financial
Information."
CONCENTRATION OF MORTGAGE BANKING OPERATIONS IN CALIFORNIA
All of the loans originated by Sutter Mortgage during the nine-months ended
September 30, 1997 were secured by properties located in California. Although
Sutter Mortgage is expanding its loan origination services outside of
California, Sutter Mortgage is likely to continue to have a significant amount
of its loan originations in California for the foreseeable future.
Consequently, Sutter Mortgage's business, operating results and financial
condition are dependent on general trends in the California economy and its
residential real estate market. Residential real estate market declines may
adversely affect the value of the properties securing loans. Reduced collateral
value will adversely affect the volume of Sutter Mortgage's loans as well as
the pricing of Sutter Mortgage's loans and Sutter Mortgage's ability to sell
its loans.
RISKS RELATED TO LOAN SALES AND MORTGAGE BANKING PRODUCTS
The Company, through Sutter Mortgage, engages in 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. In some cases, the remedies available to a purchaser of loans
from the Company may be broader than those available to the Company against the
originators of such loans, and, even where this is not the case, should a
purchaser enforce its remedies against the Company, the Company may not always
be able to enforce its remedies against the related originators. Any claims
asserted against the Company in the future by one of its loan purchasers may
result in liabilities or legal expenses that could have a material adverse
effect on the Company's business, operating results and financial condition.
Although the Company, through Sutter Mortgage, sells substantially all of the
mortgage loans it originates or purchases, the Company retains some degree of
credit risk on substantially all of the loans it sells. During the period of
time that the loans are held for sale, the Company is subject to the various
business risks associated with the lending business, including borrower
default, foreclosure and the risk that a rapid increase in interest rates would
result in a decline of the value of loans held for sale to potential
purchasers.
RISKS RELATED TO DEPENDENCE ON KEY PERSONNEL
The Company's performance is substantially dependent on the performance of
its senior management and key technical personnel, including Michael Barron,
Chairman of the Board and Chief Executive Officer, John Murray, President,
Chief Financial Officer and Chief Operating Officer, Robert Gottesman, Vice
President, Information Technology and Ronald Morck, Vice President--Mortgage
Operations and President of Sutter Mortgage. In particular, the Company's
success depends substantially on the continued efforts of its senior management
team, which currently is composed of a small number of individuals. The Company
does not carry key person life insurance on any of its senior management
personnel. The Company has entered into three-year employment agreements with
Messrs. Barron and Murray. The loss of the services of any of these persons
could have a material adverse effect on the business, operating results and
financial condition of the Company.
The Company's future success also depends on its continuing ability to
attract and retain highly qualified technical and managerial personnel.
Competition for personnel is intense and there can be no assurance that the
Company will be able to retain its key managerial and technical employees or
that it will be able to attract and retain additional highly qualified
technical and managerial personnel in the future. The inability to attract and
retain the necessary technical and managerial personnel could have a material
and adverse effect upon the Company's business, operating results and financial
condition. See "Management."
11
<PAGE>
Michael Barron was the Chairman and Chief Executive Officer of Sold
Corporation ("Sold"), a private software company, from November 1982 to August
1988 and again from March 1989 to September 1989. Sold experienced substantial
financial difficulties and ceased doing business in September 1989. During the
period when Mr. Barron was not Chief Executive Officer, Sold failed to meet a
portion of its federal payroll tax obligations, and in 1989 Mr. Barron, among
others, was personally assessed, pursuant to Internal Revenue Code Section
6672, a Trust Fund Recovery Penalty by the Internal Revenue Service ("IRS"),
for these taxes in the aggregate amount of approximately $500,000. In
addition, Mr. Barron was the subject of a number of judgment liens of Sold's
creditors in connection with personal guarantees from Mr. Barron. These liens
totaled in the aggregate approximately $215,000. A settlement was reached
between Mr. Barron and the lienholders, and all of the liens have been removed
as of October 1997. Mr. Barron reached a settlement with the IRS in November
1997 with respect to the tax assessment against him. To finance the
settlement, Mr. Barron borrowed against certain of his shares of Common Stock
of the Company, which were pledged as collateral to secure the loans.
Following the repayment of the loans, all of Mr. Barron's shares of Common
Stock will be pledged to secure certain indemnification obligations to the
Company relating to a threatened lawsuit involving the Company. See
"Business--Legal Proceedings."
ACCESS TO FUNDING SOURCES
Sutter Mortgage requires access to warehouse credit facilities in order to
fund loan originations pending the sale of such loans. Sutter Mortgage
currently has the following warehouse lines of credit: (i) a $30,000,000
warehouse line of credit with Paine Webber Real Estate Securities, Inc.
secured by mortgage loans that has no stated maturity date with a balance of
$30,995,781 at September 30, 1997; (ii) a $10,000,000 warehouse line of credit
with Imperial Bank maturing on March 6, 1998 with a balance of $8,432,297 at
September 30, 1997; (iii) a $5,000,000 warehouse line of credit with First
Collateral Services, Inc. maturing on March 31, 1998 with a balance of
$3,646,289 at September 30, 1997; and (iv) a $5,000,000 warehouse line of
credit with Prudential Securities Realty Funding Corporation that has no
stated maturity date with a balance of $1,590,395 at September 30, 1997. All
warehouse lines of credit are paid down upon sale of the loans. The Company
also maintains a $150,000 line of credit with Imperial Bank that matures on
March 6, 1998 and had a balance of $150,000 at September 30, 1997. The Company
will need to add new credit facilities, as well as renew and expand its
existing credit facilities in order to finance its growing level of loan
production.
Although the Company expects to be able to maintain and expand Sutter
Mortgage's existing warehouse lines of credit, or to obtain replacement or
additional financing as the current arrangements expire or become fully
utilized, there can be no assurance that such financing will be available on
favorable terms, if at all. In addition, there can be no assurance that Sutter
Mortgage will be able to continue to sell its loans on favorable terms, if at
all. To the extent that the Company is unable to access adequate capital to
fund Sutter Mortgage's loan production, Sutter Mortgage may have to curtail
its loan origination activities, which could have a material adverse effect on
the Company's ability to execute its growth and operating strategies and could
have a material adverse effect on the Company's business, operating results
and financial condition. See "Management's Discussion and Analysis of Results
of Operations and Financial Condition--Liquidity and Capital Resources."
FUTURE CAPITAL REQUIREMENTS
The Company's business plan will require significant amounts of working
capital. The Company's mortgage banking business requires substantial cash to
support its operating activities and growth plans. In order to support its
loan originations, the Company is required to make a significant cash
investment that includes the funding of: (i) fees paid to brokers in
connection with generating loans through wholesale and net branch lending
activities, (ii) commissions paid to sales employees to originate loans, and
(iii) the difference between the amount funded per loan and the amount
advanced under warehouse facilities. The Company's mortgage banking business
also requires cash to fund ongoing operating and administrative expenses,
including capital expenditures and debt service. The Company has principally
funded its growth historically through equity and debt financing, and through
revenues from operations, to a lesser extent. There can be no assurance that
the proceeds of the Offering,
12
<PAGE>
together with available cash, bank lines of credit and cash from operations,
will be sufficient to satisfy the Company's business plan. If additional funds
are not available, the Company's plans could be significantly curtailed, or
the Company could be forced to obtain financing on terms that cause the
Company's operating results to be adversely affected. The Company cannot issue
additional shares of Common Stock without the consent of a majority in
interest of the holders of the Series B Preferred Stock.
The Company may expand its product line through the acquisition of
complementary businesses, products and technologies. However, the Company has
no present plans, agreements or commitments to make any acquisitions.
Acquisitions involve numerous risks, including difficulties in the
assimilation of operations and products, the ability to manage geographically
remote units, the diversion of management's attention from other business
concerns, the risks of entering markets in which the Company has little or no
experience or expertise and the potential loss of key employees of any
acquired companies. In addition, acquisitions may involve the expenditure of
significant funds. There can be no assurance that an acquisition would result
in long-term benefits to the Company or that management would be able to
manage effectively the resulting business. See "Use of Proceeds,"
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
MANAGEMENT OF GROWTH
The Company is experiencing an increase in the demand for the LoanMaker
System and in the number of its customers and employees. This growth has
placed, and will continue to place, strains on the Company's management,
operations and systems. The Company's ability to compete effectively will
depend, in part, upon its ability to expand, improve and effectively use its
operational, management, marketing, sales and financial systems as
necessitated by changes in the Company's business. Any failure by the
Company's management to effectively anticipate, implement and manage the
changes required to sustain the Company's growth could have a material adverse
effect on the Company's business, operating results and financial condition.
There can be no assurance that the Company will be able to manage effectively
this change.
RISKS RELATED TO CERTAIN POTENTIAL LITIGATION
In 1995 and 1996, the Company received threats of a lawsuit with respect to,
among other things, the Company's refusal to issue shares of Common Stock to
three individuals. These individuals had entered into an agreement with the
Company in March 1995 in connection with the initial capitalization of the
Company to purchase shares of Common Stock in exchange for certain assets to
be delivered to the Company by the individuals. The Company believed the
individuals failed to deliver the consideration required by the agreement, and
the Company refused to issue the Common Stock. The three individuals have made
a variety of allegations against the Company and Michael A. Barron, the
Company's Chairman and Chief Executive Officer, relating to the disputed
issuance of Common Stock and the formation of the Company, however, no legal
proceedings have ever been commenced by these individuals. The Company
believes that the allegations are without merit, and the Company intends to
vigorously defend any legal action that may be commenced in the future. There
can be no assurance, however, that the Company would be successful in
defending such a lawsuit, or that the Company, even if successful, would not
expend significant resources in its defense. See "Business--Legal
Proceedings."
ECONOMIC SLOWDOWN
The risks associated with the Company's business are more acute during
periods of economic slowdown or recession because these periods may be
accompanied by decreased demand for consumer credit and declining real estate
values. Declining real estate values reduce the ability of borrowers to use
home equity to support borrowings by negatively affecting loan-to-value ratios
of the home equity collateral. To the extent that the loan-to-value ratios of
prospective borrowers' home equity collateral do not meet lenders'
underwriting criteria, the volume of loans originated by the Company and third
party lenders using the LoanMaker System could decline. A decline in loan
origination volumes could have a material adverse effect on the Company's
business, operating results and financial condition.
13
<PAGE>
CHANGES IN INTEREST RATES
The Company's profitability may be directly affected by changes in interest
rates, which affect the Company's ability to earn a spread between the
interest received on its loans and its funding costs. The revenues of the
Company may be adversely affected during any period of unexpected or rapid
change in interest rates. For example, a substantial and sustained increase in
interest rates could adversely affect the demand for mortgages nationwide. A
significant decrease in interest rates could increase the rate at which loans
are prepaid, which would also reduce the amount of cash the Company receives
over the life of its residual interests. Either of these events could require
the Company to reduce the fair market value of its residual interests, which
would have a material adverse effect on the Company's business, operating
results and financial condition.
RISKS RELATED TO THE INDUSTRY
COMPETITION
The Company's primary competition comes from traditional mortgage brokers,
mortgage banks, savings and loan institutions and commercial banks. Since the
Company's primary marketing strategy is to distribute its LoanMaker System
through major real estate brokers' offices, the Company's most intense direct
competition is from the local independent mortgage brokers in each community
in which the Company operates.
The market for on-line, video-conferencing transaction processing in the
mortgage lending market is new and at present there are relatively few
competitors. Competitors in the video-conferencing mortgage loan origination
market include FlagStar Bank, Shelter Mortgage and EMB Financial Corp., all
mortgage banks that presently use video-conferencing technology to deliver
only their own mortgage lending products and do not provide a multi-lender
system offering the products of other lenders. AmeriNet Financial Systems,
Inc. currently represents the only provider of a multi-lender video-
conferencing service similar in some respects to the Company's service. In
addition, Alltel Corporation, a telecommunications and information services
company which provides mortgage payment processing and communications services
for a number of major mortgage lenders, has indicated that it may in the
future offer a video-conferencing capability.
The Company also faces competition from mortgage lenders using the Internet.
Most mortgage lenders have websites on the Internet which enable Internet
users to complete a mortgage loan application and search among the particular
lender's products. The Company believes the website serves primarily as a lead
generation tool and each loan application is later followed up by a call from
a loan officer who proceeds to approve and process the mortgage loan in the
traditional manner. In addition, certain information providers such as HSH
Associates quote on the Internet lending rates and other information from a
multitude of lenders. As a result, borrowers currently can use the Internet
either to obtain information about mortgage loans broadly or to gain access to
a single lender's products.
Most of the Company's current and potential competitors are substantially
larger, have greater name recognition, and have more capital and resources
than the Company. The Company expects more competition in the future from
existing and new competitors producing video-conference loan origination
systems and other alternatives to traditional mortgage lending methods, such
as the sale of mortgages over the Internet or at retail shopping
establishments. The ability of the LoanMaker System to compete effectively
will be dependent in part on consumer acceptance of video-conference loan
origination in general and industry acceptance of the Company's products and
services in particular. There can be no assurance that the Company's current
and potential competitors will not develop software or other business
practices that are more effective or achieve greater market acceptance than
the Company's current or future products or that the Company's technologies
and products would not be rendered obsolete by these developments or that
competitive pressures resulting from these competitors will not otherwise have
a material adverse effect on the Company's business, operating results and
financial condition. An increase in competition could reduce the fees the
Company is able to collect for its services, thereby lowering the Company's
revenues and margins, which could have a material adverse effect on the
Company's business, operating results and financial condition. See "Business--
Competition."
14
<PAGE>
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS; LIMITED PROTECTION OF TECHNOLOGY
The Company's success and ability to compete depends in part upon its
proprietary technology. The Company regards certain of its technology as
critical to its business and attempts to protect this technology under
trademark, copyright and trade secret laws and through the use of employee,
consultant and vendor confidentiality agreements. The source code for the
Company's proprietary software is protected both as a trade secret and as a
copyrighted work. These measures, however, afford only limited protection, and
the Company may not be able to maintain the confidentiality of its technology.
There can be no assurance that others will not develop technologies that are
similar or superior to the Company's technology. It may be possible for a
third party to copy or otherwise obtain and use the Company's technology
without authorization, or to develop similar technology independently. In
addition, effective copyright and trade secret protection may be unavailable
or limited in certain foreign countries. Policing unauthorized use of the
Company's technology is difficult. While the Company seeks to protect its
technology, there can be no assurance that the steps taken by the Company will
prevent misappropriation of its technology or that these confidentiality
agreements will be enforceable. In addition, litigation may be necessary in
the future to enforce the Company's intellectual property rights, to protect
the Company's trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. The computer software market is characterized by frequent and
substantial intellectual property litigation. Litigation of that sort could
result in substantial costs and diversion of resources and could have a
material adverse effect on the Company's business, operating results and
financial condition.
The Company also relies on certain technology that it licenses from third
parties, including software that is integrated with internally developed
software and used with the Company's technology to perform key functions.
There can be no assurance that these third party technology licenses will
continue to be available to the Company on commercially reasonable terms. The
loss of or inability to maintain any of these technology licenses could result
in delays or reductions in installations of LoanMaker Systems until equivalent
technology could be identified, licensed and integrated. Any delays or
reductions in installations of LoanMaker Systems could have a material adverse
effect on the Company's business, operating results and financial condition.
See "Business--Technology."
RISK OF PRODUCT DEFECTS AND SYSTEM FAILURES; RESPONSES TO TECHNOLOGICAL
CHANGES
Although the Company has not experienced material adverse effects resulting
from undetected software errors or hardware failures in the past, there can be
no assurance that these failures will not happen in the future. Any system
failures could harm the Company's reputation for providing high-quality
service and timely closure of loans, making it more difficult for the Company
to deploy the system at new locations in the future, which could have a
material adverse effect upon the Company's business, operating results and
financial condition.
The Company's operations are dependent in part upon its ability to protect
its operating systems against physical damage from fire, floods, earthquakes,
power loss, telecommunications failures, break-ins and similar events. The
Company does not presently have redundant, multiple-site capacity. Despite the
implementation of network security measures by the Company, its servers are
also vulnerable to computer viruses, break-ins and similar disruptions from
unauthorized tampering with the Company's computer systems. The occurrence of
any of these events could result in interruptions, delays or cessations in
service to users of the LoanMaker System, which could have a material adverse
effect on the Company's business, operating results and financial condition.
See "Business--Facilities."
To remain competitive, the Company must continue to enhance and improve its
existing proprietary software system and integrate it with updated versions of
new video-conferencing hardware and software products. The Company must be
able to expand rapidly its network of video-conferencing customers and provide
high-quality customer service to a wide, divergent geographical customer base.
If the Company is unable to maintain the integrity of its computer network
because of telephone lines or computer failures or is unable to introduce new
software or hardware changes and respond to industry changes on a timely
basis, its business,
15
<PAGE>
operating results and financial condition could be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business--The LoanMaker System Solution," "Business--
Technology" and "Business--Competition."
GOVERNMENT REGULATION AND UNCERTAINTIES OF FUTURE REGULATION
The mortgage banking and mortgage brokerage industries are highly regulated
industries. The mortgage banking operations of the Company are subject to the
rules and regulations of, and examinations by, the Federal National Mortgage
Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC"),
the Department of Housing and Urban Development ("HUD"), the Veterans
Administration ("VA"), the Rural Housing Service and state regulatory
authorities with respect to originating, underwriting, making, selling,
securitizing and servicing residential mortgage loans. In addition, there are
other federal and state statutes and regulations affecting such activities.
These rules and regulations, among other things, impose licensing obligations
on the Company, establish eligibility criteria for mortgage loans, prohibit
discrimination, provide for inspection and appraisals of properties, require
credit reports on prospective borrowers, regulate payment features, establish
collection, foreclosure and claims handling procedures and, in some cases, fix
maximum interest rates, fees and loan amounts. HUD lenders such as Sutter
Mortgage are required annually to submit to the Federal Housing Commissioner
audited financial statements. Sutter Mortgage's affairs are also subject to
examination by the Federal Housing Commissioner at all times to assure
compliance with HUD regulations, policies and procedures.
Mortgage origination and processing activities are subject to the Equal
Credit Opportunity Act, the Federal Truth in Lending Act, the Real Estate
Settlement Procedures Act, the Fair Housing Act, the Fair Credit Reporting
Act, the Home Mortgage Disclosure Act, among other laws, and the regulations
promulgated thereunder, which prohibit discrimination, require the disclosure
of certain information to borrowers concerning credit and settlement costs and
certain servicing related information, regulate the extent of payments that
can be made for the marketing and brokering of mortgage loans, regulate the
access to and use of credit records maintained by credit bureaus, require the
disclosure of loan origination information to public officials and citizens of
the United States and protect the borrower's privacy of financial information,
among other duties and obligations. Failure to comply with regulatory
requirements can lead to loss of approved status, termination of servicing
contracts without compensation to the servicer, demands for indemnification or
loan repurchases, class action lawsuits, administrative enforcement actions
and criminal prosecution.
Virtual Mortgage is currently licensed as a mortgage broker in California,
Connecticut, Louisiana, Maryland, Oregon, Utah and Washington and is in the
process of applying for a broker license in Florida. The Company believes
Virtual Mortgage is exempt from the broker license requirements in Alaska,
Colorado, New Mexico, Texas and Wyoming. Sutter Mortgage is currently licensed
as a lender in Arizona, California, Florida, Idaho, New Jersey and Utah and
has applied for a lender's license in Illinois and Virginia. The Company
believes that Sutter Mortgage is exempt from the lender license requirements
in Alaska, Oregon, Colorado, Minnesota, Nevada, New Mexico and Texas.
Any person who acquires more than 10% of the Company's voting stock may
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 states in which the Company is currently licensed that
require such compliance are Connecticut, Florida, Washington, Arizona, Oregon,
New Jersey and Virginia. The loss of required licenses could have a material
adverse effect on the Company's business, operating results and financial
condition.
16
<PAGE>
RISKS RELATED TO THE OFFERING
NO PRIOR MARKET FOR THE COMMON STOCK; POTENTIAL LIMITED TRADING MARKET;
VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock.
Application is being made to have the Common Stock approved for quotation on
The Nasdaq National Market. However, there can be no assurance that an active
trading market for the Common Stock will develop or be sustained or that the
market price of the Common Stock will not decline below the initial public
offering price. The initial public offering price will be determined through
negotiations between the Company and the Representatives of the Underwriters
and may not be indicative of prices that will prevail in the trading market.
See "Underwriting" for information relating to the factors to be considered in
determining the initial public offering price. The trading price of the
Company's Common Stock could be subject to wide fluctuations in response to
quarterly variations in operating results, announcements of technological
innovations or new products by the Company or its competitors, changes in
financial estimates by securities analysts, the operating and stock price
performance of other companies that investors may deem comparable to the
Company and other events or factors. In addition, the stock market in general
has experienced extreme volatility that often has been unrelated to the
operating performance of these companies. These broad market and industry
fluctuations may adversely affect the trading price of the Company's Common
Stock, regardless of the Company's operating performance.
SHARES ELIGIBLE FOR FUTURE SALE; NO PRIOR TRADING MARKET; REGISTRATION RIGHTS
Sales of a substantial number of shares of the Company's Common Stock could
have the effect of depressing the prevailing market price of its Common Stock.
Upon completion of the Offering, the Company will have outstanding 6,171,086
shares of Common Stock (assuming no exercise of outstanding options or
warrants after November 30, 1997) and 2,043,000 shares of Series A Preferred
Stock (which are convertible into 509,501 shares of Common Stock as of
November 30, 1997), 441,053 shares of Series B Preferred Stock (which are
convertible into 441,053 shares of Common Stock) and 105,616 shares of Common
Stock to be issued upon the exchange of interest outstanding on certain debt
for Series B Preferred Stock upon the closing of the Offering. Of these
shares, the 3,700,000 shares of Common Stock sold in the Offering (4,255,000
if the Underwriters' over-allotment option is exercised in full) will be
freely transferable without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"). Officers, directors
and stockholders of the Company holding all of the remaining 2,471,086
outstanding shares of Common Stock prior to the Offering and all holders of
the Company's Series A Preferred Stock, Series B Preferred Stock and of
warrants and options to acquire Common Stock have agreed (the "24-Month
Provisional Lock-up Agreement") not to sell such Common Stock and such related
securities for 24 months following the effective date of the Offering, without
the consent of Barington, subject to certain exceptions. The Company has been
advised by Barington that it has no general policy with respect to granting
releases from such lock-up agreements. Barington may, in its discretion and
without notice to the public, waive the lock-up and permit sales prior to the
expiration of the lock-up period. See "Shares Eligible for Future Sale" and
"Underwriting."
Concurrent with the Offering and under the registration statement of which
this Prospectus forms a part, the Company has also registered for resale
1,042,096 shares held by certain stockholders of the Company who participated
in certain debt and equity financings of the Company, which would under
certain circumstances permit the holders to resell shares without complying
with Rule 144. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and
"Shares Eligible for Future Sale." The holders of all 1,042,096 of such
registered shares have agreed to the 24-Month Provisional Lock-up Agreement.
Prior to the Offering, there has been no public market for the Common Stock
of the Company, and no predictions can be made of the effect, if any, that the
sale or availability for sale of shares of additional Common Stock will have
on the trading price of the Common Stock. Nevertheless, sales of substantial
amounts of these shares of Common Stock in the public market, or the
perception that these sales could occur, could adversely affect the trading
price of the Common Stock and could impair the Company's future ability to
raise capital
17
<PAGE>
through an offering of its equity securities. Sales of substantial amounts of
Common Stock under Rule 144, Regulation S or otherwise, or even the potential
for such sales, could depress the market price of the Common Stock, and could
impair the Company's ability to raise capital through the sale of its equity
securities. See "Shares Eligible for Future Sale," "Underwriting" and
"Description of Capital Stock."
BROAD MANAGEMENT DISCRETION IN ALLOCATION OF PROCEEDS
Of the $24,225,000 estimated net proceeds of the Offering, the Company
expects to devote approximately $13,770,000 to purposes specifically
identified by the Company. See "Use of Proceeds." The remaining $10,455,000 of
the net proceeds the Company intends to devote to new product development and
general corporate purposes, including working capital and capital
expenditures, but has not yet identified specific uses for this portion of the
proceeds. The Company's management will retain broad discretion as to the
allocation of the proceeds of the Offering. The failure of management to apply
the funds effectively could have a material adverse effect on the Company's
business, operating results and financial condition. See "Use of Proceeds."
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price is expected to be substantially higher
than the deficit net tangible book value per share of the currently
outstanding Common Stock. Investors purchasing shares of Common Stock in the
Offering will therefore suffer immediate and substantial dilution in the
amount of $5.23 per share, assuming an Offering price of $7.50 per share.
Additional dilution will occur upon exercise of outstanding options and
warrants granted by the Company and upon the conversion of the Company's
outstanding Preferred Stock to Common Stock. See "Dilution" and "Description
of Capital Stock--Preferred Stock."
CERTAIN ANTI-TAKEOVER AND INDEMNIFICATION PROVISIONS
The Company's Certificate of Incorporation enables the Company's Board of
Directors to issue up to 10,000,000 shares of Preferred Stock and to determine
the rights, preferences, privileges and restrictions, including voting rights
of those shares, without any further vote or action by the stockholders. The
rights of the holders of Common Stock will be subject to and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be
issued in the future. While the Company has no present intention to issue
additional shares of Preferred Stock, other than the Series B Preferred Stock,
the issuance, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. In addition, the Preferred Stock may
have other rights, including economic rights senior to the Common Stock, and,
as a result, the issuance thereof could have a material adverse effect on the
market value of the Common Stock. See "Description of Capital Stock--Preferred
Stock."
The Certificate of Incorporation provides that the liability of the
directors of the Company for monetary damages to the Company or its
stockholders are eliminated to the fullest extent permissible under Delaware
law. The Certificate of Incorporation contains provisions authorizing the
Company to indemnify its directors and officers to the fullest extent
permitted by the laws of Delaware. While the Company believes that these
provisions will assist the Company in attracting and retaining qualified
individuals to serve as directors, they could also serve to insulate directors
of the Company against liability for actions that damage the Company or its
stockholders. See "Description of Capital Stock--Limitation of Liability of
Directors."
The Company's Certificate of Incorporation also provides for a classified
board of directors with staggered three year terms. The classification of
directors and provisions in the Certificate of Incorporation and Bylaws that
limit the ability of stockholders to increase the size of the Board of
Directors, together with provisions in the Bylaws that limit the ability of
stockholders to remove directors and provisions in the Certificate of
Incorporation that permit the remaining directors to fill any vacancies on the
Board, will have the effect of making it more difficult for stockholders to
change the composition of the Board of Directors. As a result, two
18
<PAGE>
annual meetings of stockholders may be required for the stockholders to change
a majority of the directors, whether or not a change in the Board of Directors
would be beneficial to the Company and its stockholders and whether or not a
majority of the Company's stockholders believes that such a change would be
desirable. The Company's Bylaws provide for (i) advance notice requirements
for stockholder proposals and director nominations, (ii) a prohibition on
stockholder action by written consent and (iii) limitations on calling
stockholder meetings. Stockholders are not permitted to call a special meeting
or to require that the Board of Directors call a special meeting of
stockholders. Such provision may have the effect of delaying consideration of
a stockholder proposal until the next annual meeting unless a special meeting
is called by the Board of Directors, the Chairman of the Board or the Chief
Executive Officer of the Company. These provisions, along with certain
provisions of the Delaware General Corporation Law applicable to the Company
that prohibit certain business combinations, could have the effect of
discouraging certain attempts to acquire the Company which could deprive the
Company's stockholders of the opportunity to sell their shares of Common Stock
at prices higher than prevailing market prices.
ABSENCE OF DIVIDENDS
The Company has never declared or paid dividends on its Common Stock or
Preferred Stock and does not anticipate declaring or paying any cash dividends
on its Common Stock in the foreseeable future. The Company will begin accruing
dividends of 10% and 9.9% annually on the Series A Preferred Stock and Series
B Preferred Stock, respectively, commencing with the completion of the
Offering. In addition, the Company's Certificate of Incorporation preclude the
payment of dividends to holders of Common Stock until quarterly non-cumulative
dividends have been paid to the holders of the Company's Series A Preferred
Stock at the minimum rate of 10% per annum and the holders of the Company's
Series B Preferred Stock at a rate of 9.9% per annum, when and if declared by
the Company's Board of Directors. See "Dividend Policy" and "Description of
Capital Stock--Preferred Stock."
19
<PAGE>
SUTTER MORTGAGE ACQUISITION
The Company agreed to acquire Sutter Mortgage Corporation, a residential
mortgage bank and now wholly-owned subsidiary of the Company, in June 1997,
and closed the Acquisition in December 1997. During the pendency of the
Acquisition, Sutter Mortgage began (i) making its products available through
the LoanMaker System, (ii) improving its approval times used with the
LoanMaker System, (iii) increasing the number and types of loan products
available, and (iv) obtaining licenses in additional states where the
LoanMaker Systems are installed. Sutter Mortgage originates and sells
residential home mortgage loans and is a full service mortgage banking
company. Sutter Mortgage primarily originates loans indirectly through
licensed real estate loan brokers ("wholesale") and directly through loan
offices under its "net branch" agreements. The adjusted purchase price for
Sutter Mortgage was approximately $2,484,000, subject to adjustment for the
reconciliation of the final acquisition balance sheet at November 30, 1997.
The adjustment is anticipated to be less than $100,000. A total of $950,000
was paid through the closing of the Acquisition. Concurrent with the closing
of the Offering, an additional $1,534,000 will be paid to the former
shareholder of Sutter Mortgage, which was evidenced by a promissory note. Also
concurrent with the closing of the Offering, Sutter Mortgage will repay a
$100,000 loan made by Sutter Mortgage's former shareholder. See "Use of
Proceeds," "Selected Financial Information," "Pro Forma Combined Financial
Information," "Management's Discussion and Analysis of Financial Conditions
and Results of Operations," and "Business--Mortgage Banking Operations."
20
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 3,700,000 shares of Common
Stock offered by the Company hereby at an assumed initial public offering
price of $7.50 per share, after deducting underwriting discounts and
commissions and estimated offering expenses, are estimated to be $24,225,000
($27,971,000 if the Underwriters' over-allotment option is exercised in full).
The Company believes that the remaining proceeds from the Offering, after
repayment of its notes and the payments relating to the Acquisition, together
with funds available under Sutter Mortgage's credit facilities, will be
sufficient to finance operations for at least the next 12 months.
The Company intends to use approximately $3,150,000 to purchase capital
assets, primarily new LoanMaker Systems as current leases expire (at a cost of
approximately $2,700,000), facility improvements required to expand the
Company's video-conferencing centers (at a cost of approximately $250,000) and
an upgraded communication system to enhance the operation of the Company's
video-conferencing centers (at a cost of approximately $200,000). The Company
also expects to utilize approximately $3,600,000 to increase staffing
primarily in sales and video-conferencing center personnel and to use
approximately $475,000 for advertising and marketing expenses.
In addition, the Company intends to use approximately $3,311,000 of the
proceeds to repay outstanding principal, interest and loan fees under (i) a
$200,000 note that presently bears interest at 15% per annum and will be due
upon the closing of the Offering; (ii) a $50,000 note that bears interest at
5% and matured in March 1995; (iii) a $1,300,000 note that presently bears
interest at 15% per annum and matures on the earlier of the consummation of
the Offering or February 15, 1998; (iv) $1,495,000 Phase I and Phase II Bridge
Notes certain of which are held by Registered Stockholders (as defined and
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources"); and (v) a $100,000
note to the former shareholder of Sutter Mortgage that presently bears
interest at 8% per annum and matures at the closing of the Offering. The Phase
I and Phase II Bridge Notes mature on the earlier of the consummation of the
Offering or February 15, 1998, and presently accrue interest at the rate of
15% per annum. The proceeds of the Phase I and Phase II Bridge Notes and the
$1,300,000 note were used to fund the Company's operations and working capital
requirements.
The Company plans to use approximately $1,700,000 to reduce outstanding
lease payments due Data General Corporation ("Data General"). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Business--Strategic
Relationships--Data General Corporation."
The Company plans to use $1,534,000 of the proceeds to pay the note
evidencing a deferred portion of the purchase price of the Acquisition. See
"Sutter Mortgage Acquisition."
The foregoing represents the Company's best estimate of its allocation of
the estimated net proceeds of the Offering. Pending such uses, the Company
intends to invest the Offering proceeds in short-term investment grade
interest-bearing obligations. Approximately $10,455,000 of anticipated
proceeds will be used for new product development and general corporate
purposes, including working capital and capital expenditures. Such amounts are
subject to reapportionment among the other categories listed above or among
additional categories in response to, among other things, changes in the
Company's plans, regulations and economic and industry conditions.
If the Underwriters' over-allotment option is exercised in full, the Company
will receive additional net proceeds of $3,746,000. Although not obligated to
do so, the Company may use a portion of the proceeds to redeem outstanding
shares of Series B Preferred Stock. To the extent the Company elects not to
redeem shares of Series B Preferred Stock, such additional proceeds will be
used for new product development and general corporate purposes as described
below.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain any earnings for use in its business
and does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. In addition, the Company's Certificate of Incorporation
and the Certificate of Designation precludes the payment of dividends to
holders of Common Stock until dividends have been paid to the holders of the
Company's Series A Preferred Stock at the minimum rate of 10% per annum and to
the holders of the Company's Series B Preferred Stock at a rate of 9.9% per
annum, when and if declared by the Company's Board of Directors. The Series A
Preferred Stock is presently convertible into Common Stock at the option of
the holder and the Series B Preferred Stock is convertible at the option of
the holder after completion of the Offering. See "Description of Capital
Stock--Preferred Stock."
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<PAGE>
DILUTION
As of September 30, 1997, after giving effect to the Acquisition and the net
proceeds of $2,137,000 from the sale of 751,378 shares of Common Stock
subsequent to September 30, 1997, which includes the exercise of 368,136
warrants at a price of .005 per share, the Company had a pro forma net
tangible book value of $(10,006,000), or $(4.05) per share of the number of
pro forma shares of Common Stock outstanding. Pro forma net tangible book
value per share is determined by dividing the pro forma net tangible book
value of the Company (total tangible assets less total liabilities less Series
A Preferred Stock) by the number of pro forma shares of Common Stock
outstanding as of September 30, 1997. Pro forma shares of Common Stock
outstanding at September 30, 1997 were 2,471,086 (including 751,378 common
shares issued subsequent to September 30, 1997 and 51,633 common shares issued
upon conversion to holders of Series A Preferred Stock). The pro forma shares
do not include 2,043,000 shares of Series A Preferred Stock which are
convertible into 509,501 shares of Common Stock at the discretion of the
Series A Preferred Stockholders or 441,053 shares of Series B Preferred Stock
that will be issued concurrently with the close of the Offering and which are
convertible into 441,053 shares of Common Stock at the discretion of the
Series B Preferred Stockholders. After giving effect to the sale by the
Company of the 3,700,000 Shares of Common Stock offered by the Company hereby
at an assumed initial public offering price per share of $7.50, the Company's
pro forma net tangible book value (after deduction of underwriting discounts
and commissions and estimated offering expenses payable by the Company and
excluding $4,190,000 related to conversion of notes payable to Series B
Preferred Stock) would have been $13,992,000 or $2.27 per share of pro forma
Common Stock. This represents an immediate increase in net tangible book value
of $6.32 per share to existing stockholders and an immediate dilution of $5.23
per share to new investors purchasing shares in the Offering. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $7.50
-----
Pro forma net tangible book value per share before the
Offering................................................... $(4.05)
Increase per share attributable to new investors............ $ 6.32
------
Pro forma net tangible book value per share after the
Offering..................................................... $2.27
-----
Dilution per share to new investors........................... $5.23
=====
</TABLE>
The following table sets forth the relative investments of all existing
stockholders and new investors purchasing shares of Common Stock from the
Company in the Offering. The calculations are based on an assumed initial
public offering price of $7.50 per share (before deducting underwriting
discounts and offering expenses).
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 2,471,086 40.0% $ 8,245,447 22.9% $3.34
New investors............... 3,700,000 60.0% 27,750,000 77.1% $7.50
--------- ----- ----------- -----
Total..................... 6,171,086 100.0% $35,995,447 100.0%
========= ===== =========== =====
</TABLE>
As of the date hereof, there were 882,995 shares of Common Stock issuable
upon the exercise of options and warrants outstanding at a weighted average
exercise price of $6.65 per share. The issuance of shares upon exercise of
these options and warrants is not reflected in the preceding tables. If all of
the outstanding options and warrants were exercised in full, the dilution per
share to new investors would be $4.65. These exercises would increase the
number of shares held by existing stockholders to 3,354,081 shares, or 47.5%
of the total number of shares of Common Stock to be outstanding after the
Offering, and would (i) decrease the number of shares held by the new
investors to 52.5% of the total number of shares of Common Stock to be
outstanding after the Offering, (ii) increase the total consideration paid to
the Company by existing stockholders to $14,118,552, or 33.7% of the total
consideration paid to the Company, and (iii) increase the average price per
share paid by existing stockholders to $4.21. See "Management--Director
Compensation" and "Stock Option Plans."
22
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of September 30, 1997; (ii) the capitalization of the Company after giving
effect to the Acquisition, including the issuance of notes payable of $1.6
million which reflects the balance of the purchase price for the Acquisition
and a $100,000 loan from the seller of Sutter Mortgage; net proceeds totaling
$2,137,000 from the sale of 751,378 shares of Common Stock issued subsequent
to September 30, 1997, which includes the exercise of 368,136 warrants at a
price of $.005 per share, and the issuance of $1,300,000 aggregate principal
amount of an additional note subsequent to September 30, 1997 with a discount
of $350,000; and (iii) the capitalization of the combined companies as
adjusted for the net proceeds from the sale of 3,700,000 Shares of Common
Stock offered hereby by the Company at an assumed offering price of $7.50 per
share, and the application of the net proceeds therefrom. See "Use of
Proceeds." This table should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------------------
PRO FORMA PRO FORMA AS
ACTUAL COMBINED(1) ADJUSTED(2)(3)
-------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Notes payable-current................ $ 6,023 $ 8,707 $ -- (3)
Lines of credit and financing
arrangements........................ -- 44,798 44,798
======== ======== ========
Redeemable Series A Preferred Stock,
$.001 par value; 2,250,000 shares
issued and outstanding, actual;
2,043,000 shares issued and
outstanding, as adjusted(1) ........ $ 2,017 $ 1,693 $ 1,693
Common stock, $.005 par value;
25,000,000 shares authorized,
1,668,074 shares issued and
outstanding, actual; 6,171,086
shares issued and outstanding, as
adjusted(4)......................... 7 7 30
Series B Preferred Stock, $.001 par
value, 0 shares issued and
outstanding, actual; 441,053 shares
issued and outstanding, as
adjusted(3) -- -- 4,190
Additional paid-in capital........... 5,935 8,072 32,397
Warrants............................. 1,567 1,567 1,567
Deferred compensation................ (58) (58) (58)
Accumulated deficit.................. (16,475) (16,475) (16,825)
-------- -------- --------
Total stockholders' (deficit)
equity.............................. (9,024) (6,887) 21,301
-------- -------- --------
Total capitalization................. $ (7,007) $ (5,194) $ 22,994
======== ======== ========
</TABLE>
- -------
(1) Reflects adjustments related to the Acquisition, including $400,000 due
upon closing of the Acquisition which is reflected as having been paid but
which is being funded from the sale of stock by the Company as noted
below, $1,534,000 due in the form of a note payable and a $100,000 loan
from the seller of Sutter Mortgage to be paid upon the closing of the
Offering. See "Sutter Mortgage Acquisition." Also reflects (i) adjustments
related to the sale of 751,378 shares of Common Stock issued subsequent to
September 30, 1997 for net proceeds of $2,137,000, which includes the
exercise of 368,136 warrants at a price of $.005 per share; (ii)
adjustments related to conversion of 207,000 shares of Series A Preferred
Stock into 51,633 shares of Common Stock, as well as conversion of a
subscription for $100,000 of Series A Preferred Stock into notes payable;
(iii) adjustments for a note payable in the aggregate principal amount of
$1,300,000 issued at a discount of $350,000, payable at the closing of the
Offering.
(2) Includes $24,225,000 to give effect to the net proceeds from the sale of
3,700,000 shares of Common Stock offered hereby as well as conversion of
$584,000 accrued interest on Bridge Notes to Common Stock (interest
accrual is through September 30, 1997), effective at the closing of the
Offering.
(3) Reflects conversion of $4,190,000 of Bridge Notes to Series B Preferred
Stock and expense of a $350,000 discount on Bridge Notes upon the closing
of the Offering. Also reflects repayment of Bridge Notes totaling
$3,233,000 and reflects payments of $1,634,000 of remaining amounts due
with respect to the Acquisition, as noted above.
(4) Excludes 882,995 shares of Common Stock issuable upon exercise of stock
options and warrants at a weighted average price of $6.65 per share,
509,501 shares issuable upon the conversion of the Series A Preferred
Stock, and 441,053 shares issuable upon the conversion of the Series B
Preferred Stock.
23
<PAGE>
SELECTED FINANCIAL INFORMATION
The selected financial information is derived from the consolidated
financial statements of Virtual Mortgage and the financial statements of
Sutter Mortgage, which financial statements have been audited for the period
ending December 31, 1995 and for the year ended December 31, 1996 by Arthur
Andersen LLP, independent public accountants. Reference is made to the
respective Reports of Independent Public Accountants, which includes
explanatory paragraphs that state substantial doubt about each entity's
respective ability to continue as a going concern, as described in Note 1 to
the respective entity's financial statements. The information set forth below
should be read in conjunction with the consolidated financial statements of
Virtual Mortgage, and the financial statements of Sutter Mortgage including
the notes thereto, and Management's Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere herein. The
consolidated financial information for Virtual Mortgage for the nine-months
ended September 30, 1996 and September 30, 1997 are derived from the unaudited
consolidated financial statements of Virtual Mortgage. The financial
information for Sutter Mortgage for the nine-months ended September 30, 1996
and September 30, 1997 are derived from the unaudited financial statements of
Sutter Mortgage. All of the unaudited financial statement information referred
to above has been prepared on the same basis as the audited financial
statements of Virtual Mortgage and Sutter Mortgage included elsewhere herein,
and in the opinion of Virtual Mortgage's management, include adjustments
consisting only of normal recurring adjustments, necessary for a fair
presentation of financial position and the results of operations. The
operating results for the nine-months ended September 30, 1996 and 1997 are
not necessarily indicative of the operating results for a full year.
VIRTUAL MORTGAGE
<TABLE>
<CAPTION>
NINE-MONTHS
ENDED
PERIOD ENDED YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, ----------------
1995 1996 1996 1997
------------ ------------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues......................... $ 3 $ 123 $ 61 $ 689
Loan production costs............ -- 909 557 1,418
Technology development........... 169 532 393 677
Sales and marketing.............. 387 1,667 930 1,605
General and administrative....... 994 3,345 2,225 3,011
------- ------- ------- -------
Total operating expenses......... 1,550 6,453 4,105 6,711
------- ------- ------- -------
Loss from operations............. (1,547) (6,330) (4,044) (6,022)
Interest expense (income)........ (5) 696 166 1,882
Other expense (income)........... 2 (45) (4) 46
------- ------- ------- -------
Net loss......................... $(1,544) $(6,981) $(4,206) $(7,950)
Pro forma net loss per share..... (6.81) (4.44) (5.43)
Pro forma weighted average number
of shares outstanding........... 1,025 947 1,464
======= ======= =======
BALANCE SHEET DATA (END OF PERIOD):
Working capital deficit.......... $ (499) $(5,015) $(7,127)
Total assets..................... 324 780 1,830
Notes payable.................... 250 3,742 6,023
Redeemable Series A Preferred
Stock........................... 1,133 2,017 2,017
Stockholders' deficit............ (1,341) (6,560) (9,024)
SUTTER MORTGAGE
<CAPTION>
NINE-MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ----------------
1995 1996 1996 1997
------------ ------------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $ 4,898 $ 7,479 $ 5,473 $ 7,162
Personnel expense................ 2,547 3,925 2,786 5,128
General and administrative....... 1,735 2,492 1,719 2,461
Interest expense................. 1,005 1,583 1,258 1,154
------- ------- ------- -------
Total operating expenses......... 5,287 8,000 5,763 8,743
------- ------- ------- -------
Income (loss) from operations.... (389) (521) (290) (1,581)
Income tax expense............... 3 2 3 --
------- ------- ------- -------
Net income (loss)................ $ (392) $ (523) $ (293) $(1,581)
======= ======= ======= =======
BALANCE SHEET DATA (END OF PERIOD):
Cash............................. $ 379 $ 266 $ 169
Mortgage loans held for sale..... 34,321 23,642 44,665
Total assets..................... 35,600 24,568 45,565
Lines of credit and financing
arrangements.................... 34,396 23,945 44,798
Stockholder's deficit............ 751 (266) (685)
</TABLE>
24
<PAGE>
PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial information reflects
the Acquisition by the Company as if the Acquisition occurred on January 1,
1996. The pro forma statement of operations for the nine-months ended
September 30, 1997 and the year-ended December 31, 1996 assumes that the
Acquisition occurred on January 1, 1996.
The historical financial information of the Company for the nine-months
ended September 30, 1997 (unaudited) and the year-ended December 31, 1996 has
been derived from the consolidated financial statements included elsewhere in
this Prospectus. The financial information of Sutter Mortgage for the nine-
months ended September 30, 1997 and for the year ended December 31, 1996 has
been derived from the financial statements included elsewhere in this
Prospectus. The pro forma financial information should be read in conjunction
with the accompanying notes thereto and with the financial statements of the
Company and Sutter Mortgage. The pro forma combined financial information does
not purport to be indicative of operating results which would have been
achieved had the Acquisition occurred as of the dates indicated and should not
be construed as representative of future operating results. In the opinion of
the Company's management, all adjustments have been made to reflect the
effects of the Acquisition.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
HISTORICAL PRO FORMA NINE-MONTHS NINE-MONTHS
YEAR-ENDED YEAR-ENDED ENDED ENDED
DECEMBER 31, SUTTER PRO FORMA DECEMBER 31, SEPTEMBER 30, SUTTER PRO FORMA SEPTEMBER 30,
1996 MORTGAGE ADJUSTMENTS 1996 1997 MORTGAGE ADJUSTMENTS 1997
------------ -------- ----------- ------------ ------------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............... $ 123 $7,479 $ -- $ 7,602 $ 689 $ 7,162 $ -- $ 7,851
Operating expenses..... 6,453 8,000 515 (1) 14,968 6,711 8,743 386 (1) 15,840
------- ------ ----- ------- ------- ------- ----- -------
Loss from operations... (6,330) (521) (515) (7,366) (6,022) (1,581) (386) (7,989)
Interest expense....... 696 -- -- 696 1,882 -- -- 1,882
Other expense (in-
come)................. (45) -- -- (45) 46 -- -- 46
------- ------ ----- ------- ------- ------- ----- -------
Loss before taxes..... (6,981) (521) (515) (8,017) (7,950) (1,581) (386) (9,917)
Provision for tax-
es(2)................. -- 2 -- 2 -- -- -- --
------- ------ ----- ------- ------- ------- ----- -------
Net loss.............. $(6,981) $ (523) $(515) $(8,019) $(7,950) $(1,581) $(386) $(9,917)
======= ====== ===== ======= ======= ======= ===== =======
Pro forma net loss per
share(3).............. $ (6.81) $ (7.82) $ (5.43) $ (6.77)
======= ======= ======= =======
Pro forma weighted
average shares
outstanding........... 1,025 (3) 1,025 1,464 (3) 1,464
======= ======= ======= =======
</TABLE>
- --------
(1) Reflects amortization of goodwill and a covenant not to compete resulting
from the Acquisition over an eight year and a four year life,
respectively, as if the Acquisition had been completed as of the first day
of the periods presented.
(2) No income tax benefit has been provided for the results of the operations
of the Company and Sutter Mortgage as a full valuation allowance has been
placed on all deferred tax assets.
(3) Loss per share for the periods presented above has been computed on a pro
forma basis giving effect to the automatic exercise of 368,136 warrants
issued to certain note holders upon the closing of the Offering.
Historical earnings per share is not presented as such amounts are not
meaningful in light of the exercise of the warrants. See Notes 2 and 9 to
the Company's Consolidated Financial Statements.
25
<PAGE>
PRO FORMA COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
VIRTUAL SUTTER PRO FORMA SEPTEMBER 30,
MORTGAGE MORTGAGE ADJUSTMENTS 1997
Current assets: -------- -------- ----------- -------------
<S> <C> <C> <C> <C>
Cash........................ $ 97 $ 169 $ -- $ 266
Prepaid expenses and other
current assets............. 60 190 -- 250
Mortgage loans held for
sale....................... -- 44,665 -- 44,665
Deferred offering costs..... 461 -- -- 461
Note receivable............. 500 -- (500)(2) --
Deferred acquisition costs.. 265 -- (265)(1) --
-------- ------- ------ -------
Total current assets...... 1,383 45,024 (765) 45,642
Property and equipment, net... 421 476 265 (1) 1,162
Goodwill...................... -- -- 2,119 (1) 2,119
Covenant not to compete....... -- -- 1,000 (1) 1,000
Other assets.................. 26 65 -- 91
-------- ------- ------ -------
Total assets.............. $ 1,830 $45,565 $2,619 $50,014
======== ======= ====== =======
Current Liabilities:
Notes payable............... $ 6,023 $ -- $1,934 (2) $ 7,957
Funding line payable........ -- 44,798 -- 44,798
Accounts payable............ 1,475 297 -- 1,772
Accrued liabilities......... 1,308 1,155 -- 2,463
Capital lease obligation.... 31 -- -- 31
-------- ------- ------ -------
Total liabilities......... 8,837 46,250 1,934 57,021
-------- ------- ------ -------
Redeemable Series A Preferred
Stock........................ 2,017 -- -- 2,017
Stockholders' Deficit
Common stock................ 7 295 (295)(3) 7
Additional paid in capital.. 5,935 4,407 (4,407)(3) 5,935
Additional paid in capital,
warrants................... 1,567 -- -- 1,567
Deferred compensation....... (58) -- -- (58)
Intercompany receivables.... -- (483) 483 (3) --
Accumulated deficit......... (16,475) (4,904) 4,904 (3) (16,475)
-------- ------- ------ -------
Total stockholders'
deficit.................. (9,024) (685) 685 (9,024)
-------- ------- ------ -------
Total liabilities and
stockholders' deficit........ $ 1,830 $45,565 $2,619 $50,014
======== ======= ====== =======
</TABLE>
- --------
(1) To record goodwill and covenant not to compete arising from the
Acquisition, as well as to record property and equipment acquired at
estimated fair value. The purchase price of $2,484,000 was allocated to
the assets and liabilities assumed in the acquisition. The resulting
difference was recorded as goodwill and a covenant not to compete. The
goodwill is being amortized over an 8 year life and the covenant not to
compete over the covenant life of 4 years.
(2) To record amounts due to the shareholder of Sutter Mortgage, including
$400,000 due upon the closing of the Acquisition and $500,000 paid prior
to September 30, 1997 (which is being paid from the proceeds of the sale
of stock by the Company subsequent to September 30, 1997) and a note
payable for $1,534,000, due in full upon the closing of the Offering.
(3) To eliminate shareholder's equity accounts of Sutter Mortgage.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
a difference include, but are not limited to, those discussed in "Risk
Factors."
OVERVIEW
The Company has developed and begun deployment of its core technology, The
LoanMaker System, a proprietary, wide-area network that utilizes PC-based
video-teleconferencing technology to allow the Company's loan counselors to
communicate face-to-face with home buyers seeking a mortgage. The Company
deploys the LoanMaker System in third party real estate offices at the point-
of-sale for real estate. By utilizing the technological advantages and
efficiencies of an electronic network, the Company believes that it will be
able to generate loan origination fees at a cost that is typically lower than
through traditional loan origination methods.
The Company began field testing a Beta test version of the LoanMaker System
in November 1995 and in May 1996 began its marketing test phase deployment of
the LoanMaker System. The Beta test phase deployed 30 systems at real estate
office, lender and Company locations and during the marketing phase, the
Company installed over 160 systems at real estate offices. The Company
concluded its marketing tests in late 1996 and, during the period from
November 1996 to August 1997, removed approximately 130 marketing sites and
began moving installations to larger real estate firms. The first major
customer, Latter & Blum of Louisiana, was signed in November 1996 and
installations in 15 of Latter & Blum's offices were completed during the
period from December 1996 to February 1997. The Company had 73 LoanMaker
System installations as of December 1, 1997 and has signed contracts to
install an additional 96 locations. In addition, the Company is negotiating
for up to an additional 268 installations. Limited revenues from the LoanMaker
System were recorded in 1996 amounting to $123,000 and during the nine months
ended September 30, 1997, the Company recorded revenues of $689,000 of which
approximately 20% were contributed by Latter & Blum and 17% were contributed
by Re/Max South County. The Company had an accumulated deficit during the
development stage of approximately $16,475,000 as of September 30, 1997.
In December 1997, the Company acquired Sutter Mortgage for approximately
$2,484,000 in cash and promissory notes. Sutter Mortgage is a delegated
underwriter for 17 of the 29 lenders presently on the LoanMaker System, which
enables Sutter Mortgage's underwriters, via video-conferencing, to increase
the speed of many of the underwriting decisions during the loan approval
process and to increase the percentage of loans that can be approved on-line
within one or two hours. Sutter Mortgage was established in 1985, and during
its fiscal year ended December 31, 1996, Sutter Mortgage reported aggregate
revenues from loan origination and related fees, interest earned on mortgage
loans held pending their sale and net gains on the sale of mortgage loans of
approximately $7,479,000 and reported a loss from operations of $523,000.
During the nine months ended September 30, 1997, Sutter Mortgage recorded
aggregate revenue of $7,162,000 with a loss from operations of $1,581,000.
Sutter Mortgage had an accumulated deficit of $4,904,000 at September 30,
1997.
The Company began integrating a portion of its Southern California
operations with those of Sutter Mortgage in September 1997 and expects to
complete the integration during the next two or three months. In order to
complete the integration, Virtual Mortgage will reduce its office space
requirements in Southern California (a portion of its current lease expired in
December 1997) and Sutter Mortgage will expand its office space in Walnut
Creek to facilitate the integration. The functions to be integrated include
establishing and coordinating a second video-conferencing center at Sutter
Mortgage to accommodate expected increases in transaction volume and to
provide a redundant location of the Company's Newport Beach location. Certain
personnel from Newport Beach will relocate to Walnut Creek. In addition, the
Company will be upgrading its internal phone systems and expanding its
Information Technology Department with the addition of personnel at Walnut
Creek.
27
<PAGE>
The Company generates loan origination revenues equal to 1.0% to 1.5% of the
face value of the loans closed from its LoanMaker System network and pays the
real estate broker approximately .25% of the face value of each closed loan
for marketing services provided that the broker is a licensed mortgage broker
in the state in which the broker does business. The Company's mortgage bank
generates revenues from mortgage loan originations and related fees, interest
earned on mortgage loans that are held by the Company pending their sale and
net gains on the sale of mortgage loans. Factors that impact LoanMaker System
revenue expectations are the number of installations, the number of loans per
month per installation, the percentage of loan applications that close and the
average loan size achieved. For the mortgage banking operation, revenue
factors are centered around competitive pricing, number of net branch
operations and, to a lesser degree, number of retail sales personnel.
The Company's deployment plan for new installations in 1998 is to slightly
exceed the total installations and backlog it has achieved as of December 1,
1997. In connection with pursuing these installation objectives, the Company
plans to add field sales personnel at the rate of approximately one person per
every three to six real estate offices using the LoanMaker System, depending
on office sizes. In addition, the Company expects to expand its loan
counselors in its video-conferencing centers at a rate of three counselors for
every eight real estate offices using the LoanMaker System. There can be no
assurance, however, that the Company can achieve these objectives or that
additional personnel will not need to be added.
During the course of the next 12 months, the Company expects to add
approximately 40 people overall, with approximately 25 in production and the
remainder primarily in sales. Also, the Company is leasing computer equipment
for its LoanMaker Systems deployed in the field from Data General Corporation.
The Company cannot lease additional equipment from Data General until the
Company pays past due lease payments, which it will do by using a portion of
the proceeds of the Offering. See "Use of Proceeds." While the Company has the
capability to lease LoanMaker Systems for new installations, the Company's
plan is to buy LoanMaker Systems for new installations. The Company
anticipates buying LoanMaker Systems currently leased as its leases expire.
The Company believes it can lower the effective costs of deploying the
LoanMaker Systems by purchasing rather than leasing.
The Company and its prospects must be considered in light of the Company's
extremely limited operating history and the risks, expenses and difficulties
frequently encountered by companies in new and rapidly evolving markets. To
address these risks, the Company must, among other things, continue to respond
to competitive developments, attract, retain and motivate qualified personnel,
implement and successfully execute its sales strategy and upgrade its
technologies. There can be no assurance that the Company will be successful in
addressing these risks. The extremely limited operating history of the Company
makes the prediction of future results of operations difficult and, therefore,
revenue growth experienced by the Company in any particular period should not
be taken as indicative of the amount of revenue, if any, that can be expected
in the future. To date the Company has not generated substantial revenues from
the use of its LoanMaker System. The Company's ability to increase these
revenues is dependent on several factors, including developing relationships
with real estate firms, consumer acceptance of the LoanMaker System and the
volume of its use. As a result, there can be no assurance that the Company
will sustain revenue growth, become profitable on a quarterly basis or achieve
profitability on an annual basis.
RESULTS OF OPERATIONS--VIRTUAL MORTGAGE NETWORK, INC.
Nine-Month Period Ended September 30, 1997 Compared To Nine-Month Period Ended
September 30, 1996
Revenues. Revenues consist primarily of loan origination fees and processing
fees earned on closed loans. Revenue increased to $689,000 for the nine-month
period ended September 30, 1997, from $61,000 for the comparable period in
1996. The Company engaged in market testing of the LoanMaker System throughout
1996 and initiated commercial installations at the end of that year, resulting
in the higher 1997 period revenues.
28
<PAGE>
Loan Production Costs. Loan production costs consist primarily of wages,
benefits, leased computer costs and telephone expenses for ISDN lines. Loan
production costs increased to $1,418,000 for the nine-month period ended
September 30, 1997, from $557,000 for the comparable period in 1996. The
increase of $861,000 resulted primarily from increases in wages and benefits
of $369,000 to expand the Company's loan center, increased leased computer
costs of $230,000 and increased telephone expenses of $157,000.
Technology Development. Technology development costs increased $284,000 or
72.3% from $393,000 for the nine-month period ended September 30, 1996 to
$677,000 for the comparable period ended September 30, 1997. The increase was
primarily attributable to additional personnel resulting in an increase in
salary and benefits costs of $258,000.
Sales and Marketing. Sales and marketing expenses increased to $1,605,000
for the nine-month period ended September 30, 1997 from $930,000 for the
comparable period ended September 30, 1996, an increase of $675,000 or 72.6%.
The increase was primarily attributable to installations of LoanMaker Systems
and the addition of personnel to expand production on the installed systems.
Salaries and related taxes and benefits increased by $563,000 and leased
LoanMaker Systems expenses increased by $99,000.
General and Administrative. General and administrative expenses consist
principally of employment-related costs for administrative personnel,
professional fees, consulting fees, system support costs and other general
corporate purposes. General and administrative expenses increased to
$3,011,000 for the nine-month period ended September 30, 1997 from $2,225,000
for the comparable period ended September 30, 1996. The increase was primarily
due to increased leased computer costs of $298,000, termination of a
consulting arrangement of $149,000, salary and benefits costs of $201,000,
increased rent expenses of $92,000 and telephone expenses of $91,000.
Interest Expense Net. Interest expense increased to $1,882,000 for the nine-
month period ended September 30, 1997 from $166,000 for the comparable period
ended September 30, 1996. During 1996,the Company incurred $4,703,000 in debt
to finance the Company's growth and increased its borrowings by $1,270,000
through September 30, 1997.
Net Loss. During the nine months ended September 30, 1997, the Company
incurred a net loss of $7,950,000 as compared to a net loss of $4,206,000 for
the comparable period in 1996.
The increase of $3,744,000 was primarily due to a $1,716,000 increase in
interest expense for debts incurred to finance operations and increased
operating expenses of $2,606,000 which were partially offset by an increase in
revenues of $563,000.
During 1996, the Company moved from the marketing test phase of its
LoanMaker Systems to the production phase. Although revenues for 1997 are
minimal, they continue to grow on a quarter-to-quarter basis as more LoanMaker
Systems production sites are installed. At December 1, 1997, 73 production
sites were installed and 96 production sites were in backlog awaiting
installation, primarily over the next four months.
The Company's operating expenses for the nine months ended September 30,
1997 were primarily attributable to establishing and maintaining the
infrastructure necessary to support current and future installations. These
expenses were primarily incurred as follows: Salaries and related payroll
costs of $3,337,000, leased computer systems costs of $1,016,000, telephone
expenses of $422,000, rent expense of $198,000, travel and travel related
expenses of $254,000 and depreciation expense of $194,000.
Salaries and related payroll costs were incurred as follows: Loan Production
of $942,000, Sales and Marketing of $1,048,000, Information Technology of
$715,000 and General and Administrative of $627,000.
29
<PAGE>
The Company has on lease from Data General Corporation 288 computers for
LoanMaker Systems deployment and support. At December 1, 1997, these systems
were utilized as follows: 73 systems at customer production sites, 34 sales
and marketing support systems, 88 systems designated for loan production and
internal uses and 26 systems installed at Sutter Mortgage. The Company has 67
systems available to meet scheduled installations during December 1997 through
February 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" for
discussion on leased computers.
The Company believes that its current infrastructure, augmented by
additional field account executives and loan counselors, can originate and
process a significant increase in loans from the Company's installed base and
backlog during 1998.
Twelve Month Period Ended December 31, 1996 Compared to Ten-Month Period From
Inception, March 2, 1995 Through December 31, 1995
Revenues. Revenue increased to $123,000 for the twelve-month period ended
December 31, 1996 from $2,000 in 1995, an increase of $121,000. The Company
began generating revenue from operations subsequent to the conclusion of the
beta test period on March 31, 1996. Revenues consist primarily of loan
origination fees and processing fees earned on closed loans.
Loan Production Costs. Loan production costs of $909,000 were incurred as
the Company installed its LoanMaker Systems and began operations of its loan
center.
Technology Development. Technology development costs increased to $532,000
for the year ended December 31, 1996 from $169,000 for the ten-month period
ended December 31, 1995, an increase of $363,000 or 215%. The increase was
primarily attributable to additional personnel resulting in an increase in
salary and benefits costs of $357,000.
Sales and Marketing. Sales and Marketing expenses increased to $1,667,000
for the twelve-month period ended December 31, 1996 from $387,000 for the ten-
month period ended December 31, 1995, an increase of $1,280,000. The increase
is primarily attributable to salary and wages of $388,000, advertising of
$239,000, $117,000 in travel expenses, $67,000 in promotional expenses,
$381,000 in leased computers and $233,000 in telephone expenses. These
increases were incurred primarily to launch the Company's LoanMaker System.
General and Administrative. General and administrative expenses increased to
$3,345,000 for the twelve-month period ended December 31, 1996 from $994,000
for the ten-month period ended December 31, 1995, an increase of $2,351,000.
The increases in the general and administrative expenses were primarily
attributable to increases in salaries expense of $487,000 due to expanding the
Company's administrative staff. In addition, leased computer systems cost
increased $129,000. Other major expense categories that increased in 1996
versus 1995 were communication expenses of approximately $108,000, legal and
accounting expenses of approximately $662,000 associated primarily with the
Company's financing activities, depreciation expense of approximately
$140,000, facility rents of approximately $92,000 and other accrued expenses
of approximately $255,000.
Interest Expense (Income) Net. Interest expense increased to $696,000 for
the twelve months ended December 31, 1996 from $(5,000) in 1995. During 1996,
the Company incurred $4,703,000 in debt to finance the Company's growth.
Interest and expenses related to this debt were partially offset by interest
income of $45,000 generated from the investment of excess funds in money
market accounts.
RESULTS OF OPERATIONS--SUTTER MORTGAGE
Nine-Month Period Ended September 30, 1997 Compared to Nine-Month Period Ended
September 30, 1996
Revenues. Revenues consist primarily of revenues from the gain on sale of
mortgage loans, processing fees, underwriting fees, document preparation fees,
loan origination fees and interest earned on loans held pending
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sale in warehouse lines of credit. Revenues increased to $7,162,000 for the
nine-month period ended September 30, 1997 from $5,473,000 for the comparable
period in 1996, an increase of $1,689,000 or 30.9%. The increase resulted from
an increase in revenue of $1,795,000 from the origination and sale of mortgage
and revenue collected on behalf of net branches (see "Business--Mortgage
Banking Operations"), a decrease of $128,000 of interest income on loans held
for sale in warehouse lines of credit, and an increase of $21,000 in
miscellaneous income. Closed loans increased to 1,831 for the nine-month
period ended September 30, 1997, from 1,604 for the comparable period in 1996,
an increase of 227 loans or 14.2%. The average loan size remained unchanged at
$171,000.
Personnel Expenses. Personnel expenses consist principally of office
salaries, commissions, and related payroll expenses. For the nine-month
periods ended September 30, 1997 and 1996, such expenses amounted to
$5,128,000 and $2,786,000 respectively. The increase of $2,200,000 was caused
by an increase of $844,000 in salaries, an increase of $1,126,000 in
commissions, and an increase of $230,000 in related payroll expense. Of these
increases in personnel expenses, $1,287,000 was paid on behalf of net
branches.
General and Administrative. General and administrative expenses consist
principally of professional fees, underwriting costs, advertising, rents,
office supplies, telephone and fax, depreciation, secondary marketing
expenses, and other general and administrative expenses. For the nine-month
period ended September 30, 1997, general and administrative expenses amounted
to $2,461,000 compared to $1,719,000 for the comparable period in 1996 for an
increase of $742,000. The increase was caused primarily by an increase of
$314,000 in general and administrative expenses paid on behalf of net
branches, an increase of $168,000 in professional fees, an increase of
$185,000 in secondary marketing expenses, and an increase of $163,000 in other
corporate general and administrative expenses.
Interest Expense. Interest expense decreased to $1,154,000 for the nine-
month period ended September 30, 1997 from $1,258,000 for the comparable
period in 1996, a decrease of $104,000 or 8.3%, resulting from more favorable
warehouse interest rates and a reduction in time between funding loans and the
subsequent sale of the loans to investors.
Net Loss. Net loss increased to $1,581,000 for the nine-month period ended
September 30, 1997 from $293,000 for the comparable period in the prior year.
The increase of $1,288,000 was primarily attributable to the expansion of the
"net branch" portion of the business.
Twelve Months Ended December 31, 1996 Compared to Twelve Months Ended December
31, 1995.
Revenues. Revenue increased to $7,479,000 for the twelve months ended
December 31, 1996 from $4,898,000 in 1995, an increase of $2,581,000 or 52.7%.
The increase in revenue resulted from increased loan volume resulting in an
increase of $906,000 on the gain on sale of mortgage loans and origination
fees on $85 million of increased loan volume, an increase of $639,000 in
interest income on loans held for sale, and $348,000 of loan fees collected on
behalf of net branches.
Personnel Expense. Personnel expenses increased from $2,547,000 for the year
ended December 31, 1995 to $3,925,000 for the year ended December 31, 1996, an
increase of $1,378,000 or 54.1%. The increase was attributable primarily to an
increase in funded loans of $84,842,000 resulting in an increase in commission
payments of $637,000 and an increase of $407,000 of expenses collected and
paid on behalf of net branches.
General and Administrative. General and administrative expenses increased
from $1,735,000 for the year ended December 31, 1995 to $2,492,000 for the
year ended December 31, 1996, an increase of $757,000 or 43.6%. The increase
was caused primarily by increased salaries and payroll taxes of approximately
$536,000, an increase of $295,000 in the provision for loan losses and a
decrease in depreciation and amortization expense of $53,000.
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Interest Expense. Interest expense increased to $1,583,000 for the twelve
months ended December 31, 1996 resulting from an increase in lending volume.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
private sales of debt and equity. The total proceeds, since inception, from
sales of preferred stock, warrants, promissory notes and Common Stock through
September 30, 1997 were approximately $13,525,000.
Since inception to September 30, 1997, the Company has accumulated a deficit
of approximately $16,475,000 which it has financed with the aforementioned
$13,525,000 and through increases in trade payables of approximately
$1,475,000 and accrued liabilities of approximately $1,308,000. In addition,
the Company has acquired approximately $773,000 of property and equipment.
Lines of Credit
Sutter Mortgage, the Company's wholly-owned subsidiary, requires access to
warehouse credit facilities in order to fund loan originations pending the
sale of such loans. Sutter Mortgage currently has the following warehouse
lines of credit: (i) a $30,000,000 warehouse line of credit with Paine Webber
Real Estate Securities, Inc. secured by mortgage loans that has no stated
maturity date with a balance of $30,995,781 at September 30, 1997 and an
interest rate of 1.15% over the 30 day LIBOR; (ii) a $10,000,000 warehouse
line of credit with Imperial Bank with a maturity date of March 6, 1998, with
a balance of $8,432,297 at September 30, 1997 and an interest rate of prime
plus 0.75%; (iii) a $5,000,000 warehouse line of credit with First Collateral
Services, Inc. maturing on March 31, 1998 with a balance of $3,646,289 at
September 30, 1997, and an interest rate of 2.5% over the 30 day LIBOR; and
(iv) a $5,000,000 warehouse line of credit with Prudential Securities Realty
Funding Corporation that has no stated maturity date with a balance of
$1,590,395 at September 30, 1997 and an interest rate of 1.0% over the 30 day
LIBOR. All warehouse lines of credit are paid down upon sale of the loans.
Sutter Mortgage also maintains a $150,000 line of credit with Imperial Bank
that matures on March 6, 1998 with a balance as of September 30, 1997 of
$150,000 and an interest rate of prime plus 1.50%. Sutter Mortgage will need
to add new credit facilities, as well as renew and expand its existing credit
facilities in order to finance any growth in loan production.
Sutter Mortgage's mortgage banking business requires substantial cash to
support its operating activities and growth plans. In order to support its
loan originations, Sutter Mortgage is required to make a significant cash
investment that includes the funding of: (i) fees paid to brokers in
connection with generating loans through wholesale and net branch lending
activities, (ii) commissions paid to sales employees to originate loans, and
(iii) the difference between the amount funded per loan and the amount
advanced under warehouse facilities. Sutter Mortgage's mortgage banking
business also requires cash to fund ongoing operating and administrative
expenses, including capital expenditures and debt service.
The availability of funds under certain of Sutter Mortgage's credit
facilities is subject to Sutter Mortgage's continued compliance with certain
operating and financial covenants, including (i) leverage covenants based on
the ratio of outstanding borrowings to net worth, (ii) restrictions on changes
in Sutter Mortgage's business, (iii) restrictions on selling assets other than
in the ordinary course of business and (iv) restrictions on guaranteeing the
debt obligation of any other entity without prior approval. Sutter Mortgage is
in compliance with its covenants as of September 30, 1997. The Company
anticipates that Sutter Mortgage will continue to be in compliance with the
covenants following the Acquisition.
Certain Lease Obligations
The Company currently leases from Data General all of the hardware required
in each of the real estate offices served by the Company under a master
operating lease agreement, and Data General provides all of the installation,
moves and changes, upgrades, maintenance and other support services requested
for the LoanMaker
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Systems deployed in the field. As of November 30, 1997, the Company was past
due on lease payments to Data General of approximately $1,469,000. The Company
and Data General have agreed to a repayment plan, pursuant to which Data
General will continue to provide support services but will not lease additional
LoanMaker Systems to the Company until the repayment is made. Pursuant to that
repayment plan, the Company intends to use an estimated $1,700,000 of the
proceeds of the Offering to reduce outstanding lease payments due Data General
as of the closing of the Offering. See "Use of Proceeds."
Bridge Financings
Between May 31, 1996 and July 1997, the Company entered into Bridge Loan and
Security Agreements with 17 accredited investors (the "Phase I Investors"),
pursuant to which the Company executed promissory notes (the "Phase I Bridge
Notes") in the aggregate principal amount of $5,005,000 and issued 255,892
Common Stock Purchase Warrants, exercisable at $.005 per share (the "Phase I
Bridge Warrants"), for shares of the Company's Common Stock. The Phase I Bridge
Notes are secured by substantially all the assets of the Company. The Phase I
Bridge Notes accrued interest at the rate of 12% per annum from the date of
execution until March 6, 1997, at which time the interest rate increased to 15%
per annum. The aggregate amount of accrued interest on the Phase I Bridge Notes
was $719,000 at September 30, 1997. The Phase I Investors extended the maturity
date of the Phase I Bridge Notes to February 15, 1998 for an additional 76,785
Common Stock Purchase Warrants, in the aggregate, exercisable at $.005 per
share.
In September 1997, the Company entered into Bridge Loan and Security
Agreements with 20 accredited investors (the "Phase II Investors") to fund
operations pursuant to which the Company executed promissory notes (the "Phase
II Bridge Notes") in the aggregate principal amount of $895,000 and issued
61,022 Common Stock Purchase Warrants, exercisable at $.005 per share (the
"Phase II Bridge Warrants"), for shares of the Company's Common Stock. The
aggregate principal amount of Phase II Bridge Notes outstanding as of November
30, 1997 was $895,000. The Phase II Bridge Notes are secured by substantially
all the assets of the Company and rank pari passu with the Phase I Bridge Notes
and accrue interest at 15% per annum. The maturity date of the Phase II Bridge
Notes has been extended to February 15, 1998. The proceeds of the Phase I and
Phase II Bridge Notes were used to fund the Company's operations and working
capital requirements.
In July 1997, one Phase I Investor holding $500,000 in principal amount of
debt agreed to the Company's repayment of that debt and the cancellation of the
related Phase I Bridge Warrant. The Company has repaid $150,000 of the
principal amount. The Company intends to repay the balance of this debt from
proceeds of the Offering. See "Use of Proceeds."
In December 1997, certain Phase I and Phase II Investors holding $4,190,000
in aggregate principal amount of Phase I and Phase II Bridge Notes,
respectively, agreed to exchange their respective Phase I and Phase II Bridge
Notes for the Company's Series B Preferred Stock and Common Stock upon the
closing of the Offering. The principal on those Phase I and Phase II Bridge
Notes will be exchanged for 441,053 shares of Series B Preferred Stock and the
accrued interest on such notes will be exchanged for shares of the Company's
Common Stock at $7.50 per share. Each of the Series B Preferred Shares is
exchangeable into one share of the Company's Common Stock. On January 31, 1998,
the accrued interest on those Phase I and Phase II Bridge Notes will be
$792,000, exchangeable for 105,616 shares of the Company's Common Stock. The
actual number of shares of the Company's Common Stock for which the interest
will be exchanged will depend on when the closing of the Offering takes place.
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The Company plans to negotiate with the remaining Phase I and Phase II
Investors to exchange their Phase I Bridge Notes and Phase II Bridge Notes,
respectively, on the same terms; however, the disclosure in this Prospectus
assumes that the remaining Phase I and Phase II Investors have not exchanged
their notes.
In December 1997, the Company borrowed $1,300,000 from a lender pursuant to
a secured promissory note with a discount of $350,000. The note matures on the
earlier to occur of February 14, 1998 or the consummation of this Offering and
accrues interest on $1,000,000 at 15% per annum. The Company used the proceeds
of the note to pay a $50,000 loan commitment fee to the lender and to fund
operations. If the Company fails to repay the note on the maturity date, the
Company must pay a late fee penalty of $600,000. In connection with the
borrowing, the Company issued 100,000 Common Stock Purchase Warrants,
exercisable at 105% of the initial price to public for shares of the Company's
Common Stock in the Offering. The warrant agreement provides that the warrants
cannot be exercised until at least six months after the effectiveness of the
registration statement relating to the Offering. The proceeds of this note
were used to fund the Company's operations and working capital requirements.
Private Placements of Equity
Between February and June 1997, pursuant to agreements, dated as of February
24, 1997, the Company sold 486,950 shares (the "Purchased Shares") of Common
Stock to ten accredited investors (the "February Purchasers") for an aggregate
purchase price of $3,790,000 or $7.88 per share. Each agreement required the
Company to issue warrants, with an exercise price of $7.34 per share, if an
initial public offering was not completed by August 15, 1997. On August 15,
1997, the Company issued 266,101 warrants to the February Purchasers in
compliance with the terms of the agreements. The Company also provided price
protection to the Purchasers by agreeing to issue additional shares of Common
Stock if shares were later sold by the Company at a lower price. Pursuant to a
subsequent private placement which was subject to this price protection
provision, the Company issued 187,010 shares of Common Stock to the February
Purchasers. The agreements also require the Company to register the Purchased
Shares for resale under the registration statement of which this Prospectus
forms a part. The Purchased Shares are subject to a 24-Month Provisional Lock-
up Agreement entered into between the Purchasers and the Representatives. See
"Shares Eligible for Future Sale."
From June 1997 to October 1997, the Company raised $3,428,000 by selling
609,407 shares of its Common Stock to 23 accredited investors (the "June
Purchasers") at a price of $5.625 per share. These sales triggered the
Company's price protection obligations to the February Purchasers. There were
no registration rights or other rights granted to the June Purchasers in
connection with the private placement. The private placement was completed to
enable the Company to close the Acquisition and commence the integration of
the operations of Sutter Mortgage and the Company prior to the completion of
the Offering. The proceeds of the private placement were also used to fund the
completion and testing of the Company's Paris technology, to pay certain
outstanding debt to Data General, the Company's equipment supplier, and to
fund the Company's working capital needs prior to the completion of the
Offering.
The Company intends to use approximately $3,311,000 of the proceeds of the
Offering to repay outstanding principal and interest on its notes payable,
including the Phase I and Phase II Bridge Notes.
Sutter Mortgage Acquisition
The Company agreed to acquire Sutter Mortgage in June 1997, and closed the
Acquisition in December 1997. The adjusted purchase price for Sutter Mortgage
was approximately $2,484,000, subject to adjustment for the reconciliation of
the final acquisition balance sheet at November 30, 1997. A total of $950,000
was paid through the closing of the Acquisition. Concurrent with the closing
of the Offering, $1,534,000 of the proceeds of the Offering will be paid to
the former shareholder of Sutter Mortgage as evidenced by a promissory note.
Also concurrent with the closing of the Offering, Sutter Mortgage will repay a
$100,000 loan to the former shareholder of Sutter Mortgage.
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Other Uses of Proceeds
The Company intends to use approximately $3,150,000 of the Offering proceeds
to purchase capital assets, primarily new LoanMaker Systems as current leases
expire (at a cost of approximately $2,700,000), facility improvements required
to expand the Company's video-conferencing centers (at a cost of approximately
$250,000) and an upgraded communication system to enhance the operation of the
Company's video- conferencing centers (at a cost of approximately $200,000).
The Company also expects to utilize approximately $3,600,000 to increase
staffing primarily in sales and video-conferencing center personnel and to use
approximately $475,000 for advertising and marketing expenses. The foregoing
represents an estimate of the Company's allocation of the estimated net
proceeds of this Offering. Pending such uses, the Company intends to invest
the Offering proceeds in short-term investment grade interest-bearing
obligations. Approximately $10,455,000 of anticipated proceeds will be used
for new product development and general corporate purposes, including working
capital and capital expenditures (including the payment of past due lease
payments to Data General Corporation).
The Company believes that the remaining proceeds from the Offering, after
repayment of its notes and the payments relating to the Acquisition, together
with funds available under Sutter Mortgage's credit facilities, will be
sufficient to finance operations for at least the next 12 months. The Company
anticipates purchasing computer systems to achieve its anticipated annual
LoanMaker Systems installation objectives between $2,000,000 and $3,500,000
per year. Thereafter, the Company's ability to fund operations without issuing
additional equity or debt will depend on the Company's cash from operations
and there can be no assurances that such funds will be sufficient. In the
event the Company is unable to fund its operations from cash from operations,
the Company will have to seek additional sources of capital to finance the
Company's operations and growth plans. The Company cannot issue additional
shares of Common Stock without the consent of a majority in interest of the
holders of the Series B Preferred Stock. There can be no assurance that
additional sources of capital, if needed, will be available.
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BUSINESS
OVERVIEW
The Company's objective is to become the leading low-cost discount provider
of mortgage products to consumers in the $785 billion residential mortgage
industry. To achieve this goal, the Company has developed and begun deployment
of a video-conferencing mortgage transaction processing system, The LoanMaker
System, which allows home buyers seeking mortgages to receive a mortgage loan
approval quickly at a cost to the home buyer that is typically less than the
cost through the traditional mortgage broker and lender network. LoanMaker
Systems are strategically located in real-estate offices and provide home
buyers with the ability to select from over 1,000 loan products offered by
selected national, regional and local lenders as well as the ability, via
video-conferencing, to communicate face-to-face with the Company's loan
counselors. The Company operates both as an independent mortgage broker,
through the use of its LoanMaker System, and as a mortgage bank offering its
own loan products and the loan products of lenders for which the Company is a
delegated or correspondent underwriter which enables the Company to quickly
make an underwriting decision with respect to loans originated using the
LoanMaker System. Through the LoanMaker System, lenders are able to deliver
conventional and non-conforming loan products to borrowers with a large range
of credit profiles without the costs of establishing and maintaining their own
retail brokerage forces. The Company believes it is a leading provider of
multi-lender video-conferencing mortgage loan origination services, and as of
December 1, 1997, 73 LoanMaker Systems have been installed and 96 are on order
to be installed in the first half of 1998 in selected real estate offices,
including in certain offices of four of the 200 largest real estate brokerage
companies in the United States. The Company had 67 LoanMaker Systems available
for new installations as of December 1, 1997. Additionally, the Company is
negotiating contracts for an additional 268 systems. See "Use of Proceeds."
The Company believes the LoanMaker System's efficiencies benefit each of the
key parties to a mortgage loan transaction. Consumers may comparison shop from
over 1,000 loan products and receive their loan approvals quickly. They are
assisted by a qualified loan counselor, who is compensated the same regardless
of the loan or lender chosen. Lenders can gain access to a more efficient
distribution system than traditional mortgage origination at no incremental
cost. Real estate broker-owners provide a value-added service to their
customers and, to the extent the system leads to more rapid closings, increase
their office productivity while being compensated for their marketing efforts
related to the LoanMaker System. Real estate agents may increase the speed of
closing each transaction and enhance client satisfaction.
In order to control more of the underwriting decisions made with respect to
loans originated using the LoanMaker System and therefore expedite and enhance
the speed and capabilities of the LoanMaker System, The Company agreed to
acquire Sutter Mortgage in June 1997, began integrating operations in
September 1997 and closed the acquisition of Sutter Mortgage, a residential
mortgage bank based in Walnut Creek, California, in December 1997. As a
mortgage bank and delegated underwriter for 17 of the 29 lenders represented
on the LoanMaker System as of December 1997, Sutter Mortgage makes many of the
underwriting decisions on loans placed through the LoanMaker System, which
enables the Company to increase the speed of the loan approval process and to
increase the percentage of loans that can be approved on-line within one to
two hours. See "Sutter Mortgage Acquisition," "Selected Financial
Information," "Pro Forma Combined Information," "Management's Discussion and
Analysis of Financial Conditions and Results of Operations--Sutter Mortgage"
and "--Mortgage Banking Operations."
The Company's marketing strategy is to deploy the LoanMaker System in the
200 largest real estate brokerage companies in the United States. This
marketing approach is expected to enable the Company to leverage the real
estate company's established local brand name identity while also gaining
access to a large pool of borrowers at the point of real estate sale. The
Company believes its marketing efforts toward these real estate firms are
vital to its success, given that the Company relies on the firms' consents to
install the LoanMaker System in their offices and on real estate agents to
introduce their customers to the LoanMaker System. The Company presently has
LoanMaker Systems installed, at the Company's expense, in certain offices of
four of the 200 largest real estate brokerage companies in the U.S. and is
negotiating with two additional such companies. In exchange for their
marketing efforts with respect to the LoanMaker System, real estate brokerage
companies receive compensation from the Company.
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As of December 1, 1997, the Company had installed the LoanMaker System in 73
real estate offices serving eleven metropolitan areas in Arizona, California,
Florida, Louisiana, New Jersey, Oregon and Texas, with 96 systems on order
that the Company has not yet installed, and is negotiating contracts for an
additional 268 systems. Several of the largest real estate firms in the U.S.
have installed the LoanMaker System in their offices, including: Realty
Executives of Phoenix (Arizona); Latter & Blum Realtors (Louisiana); Re/Max
South County (Orange County, California); Murphy Realty (New Jersey); and
Preferred Better Homes & Gardens (Portland, Oregon). Smythe/Cramer Realtors
(Cleveland) has signed a contract for installation commencing in the first
quarter of 1998. In addition, the Company is in negotiations to install
LoanMaker Systems in the offices of two other prominent real estate companies,
Fox/Roach Realtors (Philadelphia) and AmerUs Home Services (Des Moines). The
Company derived approximately 20% and 17% of its revenues from the LoanMaker
Systems installed by Latter & Blum and Re/Max South County, respectively.
GROWTH STRATEGY
The Company generates revenue from two sources. First, as a mortgage
transaction processor, the Company earns loan origination fees received upon
completion of loans, generally 1.0% to 1.5% of the face value of the loan.
Second, as a mortgage bank, the Company generates revenues from the gain on
sales of loans, processing fees, loan origination fees, and interest on loans
held pending sale. The Company anticipates that a significant amount of its
mortgage banking operations' future growth will come from originating loans
using the LoanMaker System.
The Company's objective is to exploit its proprietary LoanMaker System to
establish itself as a leading loan origination transaction processor serving
the $785 billion residential mortgage industry in the United States. The
Company's principal short-term focus is to expand its installed base of
LoanMaker Systems by focusing on high volume local real estate offices and to
work with real estate firms to increase the volume of mortgages completed
using the LoanMaker System.
The Company believes that the key benefits of the LoanMaker System for
borrowers (i.e., greater access to information, automated processing, and one-
stop shopping) and mortgage lenders (i.e., additional distribution at little
or no incremental cost) can be extended to other traditional services utilized
during the mortgage lending process such as title search, property appraisals,
and cash management. The Company also believes that the LoanMaker System
technology may be able to be applied to other geographic areas such as Europe
and to other markets such as home equity loans, life insurance sales and
personal financial planning. Although the Company currently has no specific
plans in these three areas, the Company intends to explore these additional
growth opportunities as part of its long-term strategic growth plan.
INDUSTRY OVERVIEW
Mortgage lending is a large, highly fragmented industry that presents
attractive opportunities for the Company. Funding sources for residential
mortgage loans include banks, savings and loans institutions, mortgage banks
and a number of specialized financial institutions. The principal sources of
revenue for mortgage brokers and bankers include loan origination fees, net
interest earned on mortgage loans prior to sale, proceeds from the sale of
mortgage loans, mortgage loan servicing fees, and proceeds from the sale of
mortgage servicing rights. Traditionally, mortgage bankers have used three
channels of distribution: (i) Retail: principally through their branch
networks and telemarketing; (ii) Wholesale: principally through mortgage
brokers; and (iii) Correspondent: principally through pre-qualified financial
institutions, some of which may be granted delegated underwriting authority.
The industry is attempting to incorporate technology to provide better
service to borrowers and maximize internal efficiency through methods of
credit scoring, automated underwriting systems and automated appraisal.
Several mortgage banks use computerized loan systems on an internal basis, and
other lenders offer a centralized processing service to brokers, which service
typically includes only the products offered by that bank. These advances in
computer assisted loan origination and processing systems have made in-house
lending operations more efficient for many lenders and have validated the
basic capabilities of these systems and the advantage of point-of-sale
strategies. The Company believes that the loan application and approval
process, however,
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continues to frustrate home buyers since it is a time-consuming and paperwork-
intensive process involving a long and costly search process, unclear pricing,
a scarcity of objective, professional advice and agents who are principally
motivated by the commissions they will generate.
THE LOANMAKER SYSTEM SOLUTION
The LoanMaker System is a proprietary, wide-area network that utilizes PC-
based video-conferencing technology, and allows a prospective home buyer
sitting in a real-estate office to easily and quickly select from over 1,000
loan products based on the home buyers credit profile, loan payment
preferences and geographic location; compare loan fees, calculate payment
schedules, review historical and current interest rates, and run any
customized scenario; and complete and submit a mortgage loan application, all
on a real-time basis with the assistance of a loan counselor. Approval can be
obtained in as little as one to two hours or, as in most cases, within 72
hours depending on the borrower's credit profile. The Company's mortgage
banking operations are key in obtaining approval quickly because they enable
the Company's mortgage banking subsidiary to make the loan underwriting
decisions with respect to loans originated using the LoanMaker System.
The Company's latest generation technology, known as "The LoanMaker System
with Paris Technology" ("Paris"), is an upgraded and enhanced version of the
LoanMaker System that allows immediate, on-line underwriting, does not require
a proprietary network and ISDN lines (i.e., allows the use of standard modems,
telephone lines, and/or Internet connections), and enables users to access the
system using laptop PCs or via the Internet. The Company began the roll-out of
the "Paris" technology in December 1997 and intends to begin the roll-out of
the laptop PC and Internet version by March 1998. There can be no assurance
however that this schedule will be met.
How the LoanMaker System Works
The LoanMaker System is located in a real estate broker's office with a
computer monitor and video-conferencing camera. The real estate agent
activates the system for the new or prospective home buyer simply by touching
an electronic pen to the signature pad, moving the on-screen arrow to the area
displaying "Connect to the Virtual Mortgage Network." The LoanMaker System
automatically connects to the Company's Conference Manager and, within
seconds, connects to the first available loan counselor at the Company's
central facility in California. The loan counselor appears on the top of the
screen alongside the Company's logo and a live picture of the borrower and the
agent in the agent's office. At this point, the real estate agent is free to
leave the room, if he or she chooses, and complete other work.
The loan counselor briefly introduces the borrower to the LoanMaker System
and the loan application process. By questioning the borrower, the loan
counselor collects credit information and mortgage structure preferences,
highlights loan programs that appear to satisfy the home buyer's needs, fills
out the loan application by typing while they speak, and electronically
retrieves the home buyer's credit history from credit reporting agencies. The
loan application and all other information is simultaneously displayed on the
bottom three-quarters of the screen. Historical interest rate data, the
variety of available loans, comparisons among loans, amortization schedules,
and any alternative scenarios, as well as other data, are also displayed real-
time on the computer screen. In a single call, the Company's loan counselor
reviews the borrower's credit profile and a Company underwriter can approve a
loan, either for the Company itself through its mortgage bank, Sutter
Mortgage, or as a delegated underwriter for the lenders it represents. As a
mortgage bank and delegated lender for 17 of the 29 lenders represented on the
LoanMaker System as of December 1997, Sutter Mortgage makes the Company's own
underwriting decisions which enables the Company to increase significantly the
speed of the loan approval process and to increase the percentage of loans
that can be approved on-line within one to two hours. See "Sutter Mortgage
Acquisition," "Selected Financial Information," "Pro Forma Combined Financial
Information," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "--Mortgage Banking Operations."
If the Company submits a loan to a lender for which the Company is not a
delegated underwriter, and the lender denies the application, the LoanMaker
System enables the Company to transfer the loan package to
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<PAGE>
another lender for approval on an expedited basis. The length of time required
to obtain lender approval of a loan varies depending upon the borrower's
credit profile and the lender. All loan transactions are subject to
verification of the borrower's financial information and appraisal of the
subject property. If the application is not approved, the loan counselor
assists the borrower in selecting alternative loan programs or lenders, and
quickly submits the borrower's application to this new lender.
The LoanMaker System was designed so that the real estate agent and borrower
need no prior computer experience. Borrowers only need to be able to talk,
listen, and see the display screen, and their only interaction with the
technology is an occasional need to sign their name on a pad using an
electronic pen. The loan counselor manages all video display and data entry
throughout the session. The process of choosing a loan and fully completing an
application may be completed in one to two hours.
After the loan has been approved, the Company orders a property appraisal
and initiates the other mechanics and paperwork of closing the loan. In this
regard, the Company has established relationships with Stewart Title and
Chicago Title for the electronic ordering of appraisal, title, flood and
credit information. The Company's operations support staff as well as account
executives in the field assist and expedite the completion of the paperwork
required to close the loan.
Greater Efficiency
By effectively applying technology through its LoanMaker System, the Company
has reengineered and streamlined the loan approval process to make it more
efficient. The key to the gains in efficiency is the specialization of tasks
underlying the loan approval and processing, essentially replacing the current
"Independent Contractor" model of commission-based loan officers and mortgage
brokers with a more efficient "Operations Flow" model. Under the Company's
"Operations Flow" paradigm, the loan approval process is broken into four
components, with the Company assigning one group of professionals (Account
Executives, Loan Counselors, Underwriters or Processing Teams) to specialize
in one of the four areas. Account Executives focus upon serving the real
estate brokers and their customers and processing transactions in the field
supported by the Company's central support staff. Loan Counselors focus
exclusively on providing the best, most objective advice possible and
assisting borrowers in choosing the loan best suited to their particular
needs. Underwriters make credit decisions over a network fed by clean
electronic data, and Processing Teams execute paperwork and close and fund
loans.
Each of the contributors to the Company's "Operations Flow" approach is a
salaried employee with any bonuses being based upon transaction volume and
throughput rather than obtaining the highest possible loan brokerage
commission from the customer. As a result, the "Operations Flow" paradigm is
able to provide more benefits to the borrower at less cost and puts the entire
operation in the service of the borrowers, lenders and real estate brokers
rather than creating potential conflicts between the loan originators and the
borrowers. In addition, the Company believes this approach simplifies the
training of its new employees and enables the Company to scale its operations
up or down more easily and at less cost.
As a result of the Company's "Operations Flow" approach, the Company also
believes its account executives and loan counselors can close a higher number
of loans each month than a typical loan officer or mortgage broker can
complete. The Company's management estimates that at peak operating capacity,
a typical account executive can manage six locations completing 24 to 36 loans
per month and that loan counselors can process four to eight loans per day.
LoanMaker System Benefits
The Company believes the LoanMaker System, through the application of
technology and the streamlining of the loan approval process, benefits the key
participants in the loan transaction: (i) borrowers, (ii) lenders, (iii) real
estate broker-owners and (iv) real estate agents.
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Borrowers can obtain the following benefits:
. ability to comparison shop efficiently from over 1,000 mortgage loan
products;
. quick loan approvals, typically ranging from one to 72 hours;
. convenience and accessibility;
. objective loan advice;
. clear understanding of pricing and easier comparisons among products; and
. standardized, relatively low loan origination fees (i.e., 1.0% to 1.5% of
the face value of the loan).
In addition, and equally important, the LoanMaker System can reduce the
anxiety that can arise from the loan application and approval process.
Borrowers using the LoanMaker System have reported high levels of
satisfaction.
Lenders can obtain the following benefits:
. more efficient distribution system than traditional mortgage operations at
little or no incremental cost;
. cleaner, more error-free electronic submissions;
. access to a large population of borrowers;
. portfolio diversification by geography, credit risk and type of product;
and
. ability to customize and update lending terms on a real-time basis.
Real estate broker-owners can obtain the following benefits:
. opportunity to significantly increase the revenues generated by real
estate transactions;
. in-house mortgage lending capability at little or no incremental cost;
. the ability to offer other value-added services over time; and
. greater control over agents' customers.
Real estate agents can obtain the following benefits:
. more rapid customer loan approvals (e.g., no need to wait for the loan
officer to return a phone call);
. an additional value-added service for the customer;
. greater control over the loan transaction process;
. ability to obtain a pre-approval prior to, during, or after the search
for a home; and
. due to more rapid loan approvals and a more efficient process requiring
very little of the real estate agent's time, an opportunity to improve
significantly the agent's own productivity.
Support Services
The Company believes that providing high-quality support services is
critical to ensure success and satisfaction and, accordingly, supports the
LoanMaker System with training, consulting and technical support services. The
Company's field sales staff and loan counselors play important roles in the
success of the LoanMaker System, including providing market information to the
Company and developing relationships with real estate agents and their clients
in order to encourage use of the LoanMaker System. Most of the Company's
support systems are devoted to assisting the broker-owner in increasing the
volume of transactions in each office.
Training Programs. The Company offers in-office training programs to real
estate brokers, agents and their employees. The aim of these programs is not
only to instruct users on the mechanics of the system, but also to convey its
benefits and promote the use of its service. In addition, the Company offers
extensive training programs to its lender network and receives training from
the lenders regarding new product options.
Support Services. The Company believes that it must keep the LoanMaker
System available to achieve borrower satisfaction and loan production.
Accordingly, the Company provides a toll-free customer service telephone
number for immediate problem resolution, and this number is displayed on each
LoanMaker System. Support services include maintenance of the Company's
LoanMaker System and direct access to technical support representatives. The
Company's technical support services are managed and performed by the internal
support group and the field sales group of the Company, with the availability
of the extended services and field expertise of Data General.
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The Company's support services also reflect its commitment to providing up-
to-date product information to the end users of the LoanMaker System. The
participating lenders have agreed to provide timely data, and as information
is received from the lenders, it is updated on the LoanMaker network and is
independently cross-checked. All loan product information is tested to verify
accuracy. Following the completion of this quality control process, the new
rate information is downloaded to the loan counselor network. The Company also
works with the lenders to select a mix of loan products that accommodates the
needs of most borrowers within the different marketplaces served by the real
estate offices utilizing the LoanMaker System.
STRATEGIC RELATIONSHIPS
The Company has the benefit of several strategic relationships, including
major real estate firms, Interealty Corporation, Intel Corporation and Data
General Corporation.
Major Real Estate Firms
The real estate firms the Company serves represent its most critical
strategic alliances. In addition to being the Company's principal source of
access to borrowers, the Company leverages the local brand name identity of
the real estate firms to establish its presence in the marketplace. While the
real estate firms are not the end users of the LoanMaker System, the Company
believes the cooperation of real estate firms is vital to the Company's
success because the Company must obtain consent to install its LoanMaker
Systems in their offices at the Company's expense, and the Company relies on
real estate agents to introduce their customers to the LoanMaker System. The
consent of the real estate firms to place the LoanMaker System in their
offices can be withdrawn at any time without any charge or penalty to the real
estate firm. As of December 1, 1997, the Company had installed the LoanMaker
System in 73 real estate offices serving eleven metropolitan areas in Arizona,
California, Florida, Louisiana, New Jersey, Oregon and Texas, with 96 systems
on order that the Company has not yet installed, and is negotiating contracts
for an additional 268 systems.
Several of the largest real estate firms in the U.S. have installed the
LoanMaker System in their offices, or have contracted for installation
including:
<TABLE>
<CAPTION>
1996 SALES NATIONAL NO. OF
REAL ESTATE FIRM VOLUME RANK* OFFICES
---------------- -------------- -------- -------
<S> <C> <C> <C>
Realty Executives of Arizona.................. $2,757,617,000 14th 20
Latter & Blum Companies, LA................... 1,025,743,000 54th 20
Re/Max South County, CA....................... 975,123,000 61st 8
Smythe/Cramer Realtors (contracted--not
installed)................................... 1,853,463,000 23rd 32
</TABLE>
- --------
(*Source: 1997 Edition--Real Facts--Real Trends, Dallas, Texas)
In addition, the Company is negotiating to install LoanMaker Systems in
certain offices of the following two prominent real estate firms:
<TABLE>
<CAPTION>
1996 SALES NATIONAL NO. OF
REAL ESTATE FIRM VOLUME RANK* OFFICES
---------------- -------------- -------- -------
<S> <C> <C> <C>
Fox/Roach Realtors-Trident Mortgage............. $2,802,395,000 12th 48
AmerUs Home Services............................ 3,000,000,000 N/A 220
</TABLE>
- --------
(*Source: 1997 Edition--Real Facts--Real Trends, Dallas, Texas)
Interealty Corporation
The Company has entered into a four year marketing agreement, which expires
on December 31, 2000 with Interealty Corporation, a wholly-owned subsidiary of
News Holding Corporation jointly owned by Tribune Company, Cox Communications,
Knight Ridder and Advanced Publications. Interealty is the largest supplier of
on-line and printed multiple listing services in the United States, with
approximately 45,000 real estate offices
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on line and subscribing to services. Under the terms of the agreement with the
Company, Interealty acts as the exclusive third-party marketer of the
LoanMaker System in the United States. The Company and Interealty have
identified the largest, most profitable real estate offices in the states in
which the Company currently operates. Interealty's role is to establish
contacts with those offices, using a sales team dedicated solely to the
Company, and to introduce the Company to appropriate persons in those offices
so that the Company may capitalize on the contacts and ultimately obtain
permission to install the LoanMaker System. Compensation for Interealty's
services under the agreement is for marketing, promotional and sales services.
Interealty receives the greater of either (i) $150,000 for 1997 and $300,000
per year thereafter per year or (ii) 2% of the Company's total gross revenues
for each year. Payments under this category are made on a quarterly basis.
Intel Corporation
In 1995, Intel selected the Company to assist it in introducing and
promoting Intel's ProShare video-conferencing technology. As a result of this
initiative, Intel also provided the Company with seed capital and remains a
current stockholder. The Company also participates as an early test location
for Intel's new generation video-conferencing and other related technologies
related to the Company's business.
The Company has granted certain rights to Intel which expire at the close of
the Offering. These rights include board visitation rights, rights of first
refusal on sales of certain securities (excluding sales pursuant to the
Offering) and a right to require the Company to repurchase the stock owned by
Intel if the Company uses a video-conferencing solution other than Intel's
ProShareTM. A restriction on Company stock option vesting would also cease at
that time.
Data General Corporation
The Company provides each real estate office with a Pentium-based computer,
monitor, video-conferencing unit, full duplex speaker system and electronic
signature pad and pen at no cost to the real estate broker-owner, with the
assistance of another key strategic partner Data General. The Company
currently leases from Data General all of the hardware required in each of the
real estate offices served by the Company under a master operating lease
agreement, and Data General provides all of the installation, moves and
changes, upgrades, maintenance and other support services required for the
LoanMaker Systems deployed in the field. Data General's services provide
critical logistical support in an efficient manner enabling the Company to
roll out its LoanMaker Systems throughout the country. In addition, Data
General helps to reduce the Company's capital expenditures and support staff
requirements. As of November 30, 1997, the Company was past due on lease
payments to Data General of approximately $1,469,000. The Company and Data
General have agreed to a repayment plan pursuant to which Data General
continues to provide support services but will not lease additional LoanMaker
Systems to the Company until the repayment is made. The Company had 67
LoanMaker Systems available for new installations as of December 1, 1997.
There can be no assurance, however, that the number of LoanMaker Systems in
the Company's inventory will be sufficient to meet the Company's installation
needs.
MARKETING STRATEGY
The LoanMaker System can be used for a variety of transactions, principally
(i) mortgages for the purchase of a home; (ii) mortgages that refinance
existing mortgages to improve rates or terms; and (iii) home equity loans. The
Company's plan is to deploy systems to serve primarily the first of these
three types of mortgages. For that reason, the Company has primarily targeted
its LoanMaker System to the point-of-sale for home purchases, which is
typically the real estate office. Within the real estate brokerage community,
the Company's primary target market is the 200 largest real estate brokers
with a large number of real estate offices executing a high volume of home
purchasing transactions. The Company believes this will provide an attractive
pool of potential mortgage loan originations. The Company believes its
marketing efforts toward these real estate firms are vital to its success,
given that the Company relies on the firms' consents to install the LoanMaker
System in their offices and on real estate agents to introduce their customers
to the LoanMaker System.
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<PAGE>
The Company began to deploy the system free of charge in the real estate
offices of smaller real estate brokers in mid-1996, to begin to generate word-
of-mouth awareness and demand among borrowers and as demonstration sites for
larger real estate brokers. In addition, due to the reputations and contacts
of the Company's senior management and with the assistance of Interealty, the
Company was able to generate real estate industry press coverage and has
access to the owners of most of the top 200 real estate brokers in the U.S.
This combination of "grass roots" awareness and top-level industry visibility
has enabled the Company to deploy systems in several of the largest real
estate brokerage offices in the country. See "--Strategic Relationships." As
new, large brokers have signed installation agreements with the Company, the
Company has redeployed some of its LoanMaker Systems from initial, smaller
marketing sites to larger offices. Marketing sites are granted the right to
demonstrate that they can generate sufficient loan volume (i.e., approximately
six loan closings per month) in order to retain the LoanMaker System installed
at that site.
After the Company has installed one or more LoanMaker Systems on behalf of a
real estate company (and often during the installation phase), the Company
assigns local account executives to encourage and maximize the use of the
system by the real estate agents of the real estate company. The account
executive is compensated with a base salary and a fixed fee per loan closed.
By using the LoanMaker System and support staff, the account executive spends
less time dealing with paperwork, can work with a wider range of automated
loan products, and can spend more time generating mortgage loan business.
While the account executive's commission per loan is substantially less than
that of an independent loan officer, the Company's account executive has the
potential to generate a significantly higher volume of loans because, unlike
traditional loan officers, the Company's account executives do not complete
loan applications and are not primarily responsible for processing individual
loans. And unlike the "feast or famine" cycles of a mortgage broker or loan
officer, a Company account executive enjoys the greater predictability and
security of a base salary.
For real estate companies which already have their own mortgage brokerage
operations, the Company intends to offer its loan origination system as an
opportunity to outsource the loan application and selection process. Under
this scenario, the Company would tailor the LoanMaker System to the needs of
the particular firm, providing the capability, for example, to select only
among the loan programs of lenders chosen by the real estate firm. The
Company's loan counselor would work with the borrower to select a loan product
only among products chosen by the real estate firm and pass the loan
application to the real estate firm's mortgage bank for further processing.
The Company would charge the real estate firm for its services based upon the
type and extent of the services provided.
LENDER RELATIONS
Today's mortgage lenders are seeking bigger shares of the market at less
cost to them. The objective of the Company is to become the low-cost discount
provider of mortgage products to the consumer on behalf of its lenders. As of
December 1997, the following lenders were represented on the LoanMaker System
(lenders for which Sutter Mortgage acts as a delegated underwriter are denoted
with an asterisk):
<TABLE>
<S> <C>
BankAmerica Mortgage National Mortgage Corporation*
Chase Manhattan Mortgage Corporation* NationsBanc Mortgage Corporation*
Countrywide Funding Corporation* Norwest Funding*
First Nationwide Mortgage Corporation Peoples Heritage Savings Bank*
First Plus Financial PHH Mortgage Services*
Flagstar Bank* PNC Mortgage Corporation of America*
Fremont Investment and Loan Preferred Credit Corporation
General Electric Capital Mortgage
Services* Principal Residential Mortgage, Inc.*
GreenPoint Mortgage Residential Funding Corporation*
Homeside Lending, Inc.* Resources Bancshares Mortgage Group, Inc.
ICI Funding Corporation* Saxon Mortgage, Inc.
Independent National Mortgage
Corporation Temple Inland Mortgage Corporation*
Marine Midland Mortgage Corporation* Tucker Federal Mortgage
Mego Mortgage Wilshire Financial Services Group
Mellon Mortgage*
</TABLE>
43
<PAGE>
Through the LoanMaker System, these lenders are able to deliver conventional
and non-conforming loan products to borrowers with a large range of credit
profiles without the costs and capital investment associated with traditional
loan origination operations. The Company currently operates both as an
independent mortgage broker and a mortgage bank, offering its own loan
products, the loan products of lenders for whom the Company is a delegated or
correspondent underwriter, and loan products of other third-party lenders.
Presently, the bulk of the Company's loans are with the lenders for whom the
Company serves as a delegated or correspondent underwriter. A lender may elect
to terminate its participation in the LoanMaker System, or the Company's
status as its delegated or correspondent underwriter, at any time, without any
penalty or charge to the lender.
With respect to each lender for whom the Company is not a delegated or
correspondent underwriter, the Company has an agreement in place, but the
Company may remove a lender from the system at any time, and a lender may
withdraw its products at any time. The Company works with the lenders on its
network to provide a diverse mix of loan products to loan consumers. Loan
consumers may assess products from a cross-section of the loans available,
which is generally varied and competitive. The Company does not attempt to
provide on its system all loan products of each lender or all loans that are
available nationally.
The lenders on the LoanMaker System update the information on their various
loan programs as the market changes on a real-time basis. Lenders may also
customize their product offerings to particular markets or types of borrowers.
The LoanMaker System also allows borrowers to receive on-line information
about loan products that are available from its national database. Finally,
the LoanMaker System differs from traditional mortgage broker methods in that
the Company can provide information on a diverse mix of loans and introduce
the lender into the equation at the beginning of the process of selecting a
loan, rather than as the last step in the transaction.
COMPETITION
The market for on-line, video-conferencing transaction processing in the
mortgage lending market is new and at present there are relatively few
competitors. The Company believes it is currently the leading provider of
multi-lender video-conferencing mortgage loan origination services located in
real estate offices. Competitors in the video-conferencing mortgage loan
origination market include FlagStar Bank, Shelter Mortgage and EMB Financial
Corp., all mortgage banks that presently use video-conferencing technology to
deliver only their own mortgage lending products and do not provide a multi-
lender system offering the products of other lenders. The Company believes
that FlagStar has targeted mortgage brokers' offices, that Shelter Mortgage
has primarily targeted real estate brokers' offices and that EMB has primarily
targeted credit unions.
AmeriNet Financial Systems, Inc. currently represents the only provider of a
multi-lender video-conferencing service similar in some respects to the
Company's service. The Company believes, however, that AmeriNet acts only as a
mortgage broker, not a mortgage banker, and therefore cannot provide on-line
loan approvals as quickly as the Company can provide them. The Company also
believes that AmeriNet is seeking primarily to lower its customers' real
estate brokerage costs. As a result, AmeriNet's primary marketing strategy
appears to the Company to be to identify affinity groups, such as customers of
CostCo Companies Inc. in Washington State, and to market its real estate
brokerage services to such groups, thereby developing new distribution
channels for residential real estate sales and seeking to fundamentally change
the traditional relationship between the real estate broker and the homebuyer.
In addition, Alltel Corporation, a telecommunications and information services
company which provides mortgage payment processing and communications services
for a number of major mortgage lenders, has indicated that it may in the
future offer a video-conferencing capability. The Company is unaware of
Alltel's current plans.
The Company also faces competition from mortgage lenders using the Internet.
Most mortgage lenders, such as Citibank and Countrywide, have websites on the
Internet which enable Internet users to complete a mortgage loan application
and search among the particular lender's products. The Company believes the
website serves primarily as a lead generation tool and each loan application
is later followed up by a call from a loan officer who proceeds to approve and
process the mortgage loan in the traditional manner. In addition, certain
information providers such as HSH Associates quote on the Internet lending
rates and other information from a
44
<PAGE>
multitude of lenders. As a result, borrowers currently can use the Internet
either to obtain information about mortgage loans broadly or to gain access to
a single lender's products. However, the Company does not believe that any of
these services provides the borrower with the ability to conduct a thorough
search of multiple lenders and then obtain a loan approval on-line for the
particular loan chosen. In addition, the Company believes that none of the
Internet offerings has the personal touch and objective advice offered by the
Company's video-conferencing technology and its loan counselors.
The Company's primary competition comes from traditional mortgage brokers,
mortgage banks, savings and loan institutions and commercial banks, especially
those with existing relationships with the real estate broker. The Company
believes that many of its leading competitors have focused increasingly upon
aggregating and securitizing loans, and, in connection with that focus, have
also increasingly outsourced the distribution and brokerage of mortgage loans.
The Company believes that this has led to an increasing share of the market
being taken by independent mortgage brokers.
Since the Company's primary marketing strategy is to distribute its
LoanMaker System through major real estate brokers' offices, the Company's
most intense direct competition is from the local independent mortgage brokers
in each community in which the Company operates, especially those with
existing relationships with the real estate broker. In many cases, real estate
brokers have either acquired a mortgage broker or established a joint venture
relationship with a local mortgage broker. The Company believes, however, that
many of these mortgage brokerage operations of real estate companies have no
competitive advantage over other local mortgage brokers and are in many
instances too small to be price competitive with local mortgage banks. The
Company believes that the LoanMaker System provides the advantage of a multi-
lender platform and the ability to comparison shop from over 1,000 loan
products and obtain a loan approval in as little as one to two hours or, as in
most cases, within 72 hours depending on the borrower's credit profile. In
addition, it provides the real estate brokerage company with a full mortgage
banking capability at relatively little cost.
Most of the Company's current and potential competitors are substantially
larger, have greater name recognition, and have more capital and resources
than the Company. The Company expects more competition in the future from
existing and new competitors producing video-conference loan origination
systems and other alternatives to traditional mortgage lending methods, such
as the sale of mortgages over the Internet or at retail shopping
establishments. The ability of the LoanMaker System to compete effectively
will be dependent in part on consumer acceptance of video-conference loan
origination in general and industry acceptance of the Company's products and
services in particular. There can be no assurance that the Company's current
and potential competitors will not develop software or other business
practices that are more effective or achieve greater market acceptance than
the Company's current or future products or that the Company's technologies
and products would not be rendered obsolete by these developments or that
competitive pressures resulting from these competitors will not otherwise have
a material adverse effect on the Company's business, operating results and
financial condition. An increase in competition could reduce the fees the
Company is able to collect for its services, thereby lowering the Company's
revenues and margins, which could have a material adverse effect on the
Company's business, operating results and financial condition. See "Risk
Factors--Competition."
TECHNOLOGY
The LoanMaker System uses a combination of proprietary and off-the-shelf
software and Pentium-based computers. For instance, the Conference Manager was
developed by and is the proprietary technology of the Company. The Conference
Manager enables the system simultaneously to capture and route multiple voice,
video and data transmissions to a centralized team of loan counselors. The
Conference Manager is software driven and scalable and not bound by the
limitations of currently available hardware solutions. The Conference Manager
is a registered copyright of the Company. The Company licenses the remaining
software used by the LoanMaker System, including the loan and lender
applications. The underwriting filter, which matches borrower profiles with
applicable loans from multiple lenders, has been customized by the Company.
The LoanMaker System includes Intel's ProShare video-conferencing hardware and
software that are available on the market. The Company has, however, augmented
the ProShare technology with its own software to add scalability.
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<PAGE>
The Company has recently completed the development of a multi-platform
communications interface, the "Paris" technology, which is an upgraded and
enhanced version of the LoanMaker System that accepts user calls into the
Company's network from, not only ISDN telephone lines, but also a variety of
other sources, such as standard telephone lines. The technology is more user-
friendly than the present LoanMaker System and allows users to get loan
information and, for those who choose, complete loan applications prior to
connecting with a Company loan counselor. If the Company is able to deploy
this technology commercially, users could access the LoanMaker System from
laptop computers, the Internet, home personal computers or network computers.
This development would enable the Company to deploy the LoanMaker System
without the necessity and cost of installing hardware and special ISDN
communications telephone lines in the field. The Company has begun beta
testing of the "Paris" technology and began the desk-top roll-out of the
"Paris" technology in December 1997 and intends to begin the roll-out of the
laptop PC and Internet version by March 1998. There can be no assurance
however that this schedule will be met.
The Company has made substantial investments in real estate and mortgage
industry marketing research, technical development, beta testing and quality
assurance. The Company's product development is conducted by employees and in-
house consultants in the Company's Information Technology Department. As
communications delivery technology techniques are rapidly changing, the
Information Technology Department's technological development concentration
has been and continues to be in voice, video and data communications including
Internet and intranet platforms, and application development, specific to
financial information delivery. The Information Technology Department is
invited regularly to participate in Intel's and Microsoft's software/platform
beta testing programs. The Company intends to devote substantial resources to
the tracking of these and other advances and to modifications of the LoanMaker
System to use and benefit from these developments. See "Risk Factors--Risk of
Product Defects and System Failures; Responses to Technological Changes."
The Company's success and ability to compete depends in part upon its
proprietary technology. The Company regards certain of its technology as
critical to its business and attempts to protect this technology under
trademark, copyright and trade secret laws and through the use of employee,
consultant and vendor confidentiality agreements. The source code for the
Company's proprietary software is protected both as a trade secret and as a
copyrighted work. These measures, however, afford only limited protection, and
the Company may not be able to maintain the confidentiality of its technology.
There can be no assurance that others will not develop technologies that are
similar or superior to the Company's technology. It may be possible for a
third party to copy or otherwise obtain and use the Company's technology
without authorization, or to develop similar technology independently. In
addition, effective copyright and trade secret protection may be unavailable
or limited in certain foreign countries. Policing unauthorized use of the
Company's technology is difficult. While the Company seeks to protect its
technology, there can be no assurance that the steps taken by the Company will
prevent misappropriation of its technology or that these confidentiality
agreements will be enforceable. In addition, litigation may be necessary in
the future to enforce the Company's intellectual property rights, to protect
the Company's trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. The computer software market is characterized by frequent and
substantial intellectual property litigation. Litigation of that sort could
result in substantial costs and diversion of resources and could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company also relies on certain technology that it
licenses from third parties, including software that is integrated with
internally developed software and used with the Company's technology to
perform key functions.There can be no assurance that these third party
technology licenses will continue to be available to the Company on
commercially reasonable terms. The loss of or inability to maintain any of
these technology licenses could result in delays or reductions in
installations of LoanMaker Systems until equivalent technology could be
identified, licensed and integrated. Any delays or reductions in installations
of LoanMaker Systems could materially adversely effect the Company's business,
operating results and financial condition. See "Risk Factors--Intellectual
Property and Proprietary Rights; Limited Protection of Technology."
46
<PAGE>
MORTGAGE BANKING OPERATIONS
General
The Company's mortgage banking operations are conducted through Sutter
Mortgage, which was established in 1985 and was acquired by the Company in
December 1997. Sutter Mortgage is a full service mortgage banking company
engaged in the origination and sale of first mortgage loans, second mortgage
loans and home equity lines of credit. The Company's revenues from its
mortgage loan origination activities result from mortgage loan origination and
related fees, interest earned on mortgage loans that are held by the Company
pending their sale, and net gains on the sale of mortgage loans. Sutter
Mortgage currently originates mortgage loans via wholesale, net branch and
retail distribution systems. See "Sutter Mortgage Acquisition," "Selected
Financial Information," "Pro Forma Combined Financial Information" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The mortgage loans originated by the Company are comprised of: (i)
conforming conventional loans which qualify for inclusion in purchase and
guarantee programs sponsored by Federal Home Loan Mortgage Corporation
("FHLMC") and Federal National Mortgage Association ("FNMA") and must meet
credit and property standards established by FHLMC and FNMA; (ii) non-
conforming conventional loans which are not eligible for sale to FHLMC and
FNMA, primarily due to size limitations, credit criteria or property type and
must meet the Company's own underwriting criteria, as well as satisfy the
criteria of those secondary market conduits to whom such loans are sold; and
(iii) loans insured by Department of Housing and Urban Development ("HUD") and
guaranteed by the Veterans Administration ("VA"), which must meet the
guidelines of the Federal Housing Authority ("FHA") or VA.
The Company maintains all underwriting, document preparation and loan
funding functions in its Walnut Creek office to control overhead, maintain
consistency in service and meet loan quality control standards. The Company
has invested in the technology necessary to provide on-line access and
information to all wholesale, net branch and retail remote locations. In
addition to being a mortgage bank itself, Sutter Mortgage acts as a delegated
underwriter for 17 of the 29 lenders represented on the LoanMaker System as of
December 1997. The lenders represented on the LoanMaker system vary from time
to time, as do the products that are made available. As a delegated
underwriter, Sutter Mortgage is able to make many of the Company's
underwriting decisions which enables the Company to increase the speed of the
loan approval process and to increase the percentage of loans that can be
approved on-line within one to two hours.
Mortgage Loan Origination
The Company currently originates mortgage loans through three primary
distribution systems: wholesale, net branches, and retail. The wholesale
operation includes the solicitation of loans and a regional office from which
mortgage loans are received from approximately 600 approved independent
mortgage brokers. The net branch distribution system is composed of eight loan
brokerage companies that have formed an affiliation with the Company. The
Company's retail distribution system serves the San Francisco metropolitan
area.
Wholesale Distribution System. Historically, Sutter Mortgage's primary
source of mortgage loan originations has been its wholesale distribution
system, which operates through the Company's Walnut Creek, California office
and a regional office in Newport Beach, California. Mortgage loans are
solicited from approximately 600 approved independent mortgage brokers. Sutter
Mortgage's wholesale operation has enabled it to achieve a high volume of
mortgage loan originations at a lower cost than retail mortgage loan
originations because the mortgage loan broker performs most of the labor
intensive functions of the mortgage loan origination process, such as taking
the mortgage loan application and processing the mortgage loan.
A total of five account executives operate from the Walnut Creek office and
three operate from the Newport Beach regional office. The account executives
are responsible for developing and maintaining relationships with the mortgage
brokers in their territories. A mortgage broker must be approved by the
Company before mortgage loans are accepted for underwriting. The approval
process generally includes verification of proper licenses, a quality control
review and receipt of satisfactory references.
47
<PAGE>
The Company's account executives typically have underwriting expertise that
enable them to assist the mortgage broker in understanding the Company's
underwriting criteria and in selecting which of the Company's loan products is
most suitable for the mortgage broker's customers. Mortgage brokers submit
processed mortgage loan packages to the Company for underwriting and approval.
All mortgage loans originated by the wholesale distribution system are
underwritten by the Company in accordance with its credit and underwriting
standards.
Net Branch Distribution System. Sutter Mortgage initiated a net branch
distribution system in late 1996 and currently operates eight net branches
from the Walnut Creek office. Five net branches operate in Contra Costa
County, one in San Mateo County, one in Marin County, and one in Sacramento
County, California. Select independent mortgage brokers enter into a
contractual relationship with the Company and operate as a branch of the
Company while maintaining the identity the mortgage broker has established in
its own marketplace. The net branch is responsible for its own operating
expenses, but enjoys the reputation and benefits of operating as a mortgage
banker. The majority of loan origination volume of the net branch is obligated
to be delivered to the Company. A net branch must be approved by the Company
before a net branch contract is signed. The approval process generally
includes verification of proper licenses, a quality control review, a review
of the mortgage broker's financial statements and receipt of satisfactory
references.
Net branches submit processed mortgage loan packages to the Company for
underwriting and approval. All mortgage loans originated by the net branch
distribution system are underwritten by the Company in accordance with its
credit and underwriting standards. The Company realizes the same cost savings
on net branch operations as they do with wholesale operations because the net
branch performs most of the labor intensive functions of the mortgage loan
origination process.
Retail Distribution System. The Company conducts its retail operations
through one retail office located in Walnut Creek, California that has
approximately 15 loan officers operating from it with loan processors and
clerical support. The Company underwrites its retail loans in its Walnut Creek
headquarters. Retail loan officers are responsible for establishing referral
relationships with local real estate brokers and agents and home builders. The
retail distribution system is a small source of business for the Company.
Sale of Mortgage Loans
The Company's mortgage banking operations derive the majority of their
income from the sale of mortgage loans. The Company is approved to sell
approximately 300 different mortgage loan products to 27 secondary market
conduits. The Company includes a spread, a percentage of the loan amount, to
the price on all loans before they are distributed by the Company's various
distribution systems. This spread is realized upon the sale of the loan. The
Company also realizes related fee income resulting from charges the Company
imposes for underwriting and closing documentation preparation.
The Company endeavors to minimize any interest rate risk by committing the
loan for sale to one of the secondary market conduits at the time the interest
rate is established for the borrower. In this way, the Company bears no
interest rate risk between the time the mortgage loan is funded and the time
it is sold to the conduit.
Quality Control
All mortgage loan originations, regardless of the source, must be
underwritten in accordance with the Company's underwriting criteria, including
loan-to-value ratios, borrowers income qualifications, debt ratios and credit
history, investor requirements, necessary insurance and property appraisal
requirements. The Company's underwriting standards also comply with relevant
guidelines set forth by HUD, VA, FNMA, FHLMC and secondary market conduits.
All Company underwriting personnel are located in the Company's Walnut Creek
office, make underwriting decisions independent of the Company's mortgage loan
personnel and report to the Company's Vice President--Mortgage Operations.
Under the Company's quality control plan, the Company's internal quality
control underwriter re-verifies at least 10% of the mortgage loans funded each
month to ensure that the Company's underwriting standards have been satisfied.
The report of the quality control underwriter is forwarded directly to the
Company's Vice
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<PAGE>
President--Mortgage Operations. Mortgage loans submitted by mortgage brokers
recently approved by the Company are automatically re-verified at the time of
submission, until such time as the quality of the mortgage loans submitted by
the mortgage broker is consistently acceptable.
Interest Income
The Company derives net interest income from interest earned on warehouse
loans originated by the Company, less interest expense incurred to fund such
loans. The Company presently maintains $50 million dollars in warehouse credit
line facilities to fund mortgage loan originations. Loans remain in the
warehouse lines an average of less than 30 days from the time of mortgage loan
funding until being purchased by one of the secondary market conduits. The
Company believes that it currently has adequate warehouse lines to provide for
an increase in its loan originations.
GOVERNMENT REGULATION
The mortgage banking and mortgage brokerage industries are highly regulated
industries. The mortgage banking operations of the Company are subject to the
rules and regulations of, and examinations by, FNMA, FHLMC, HUD, VA, the Rural
Housing Service and state regulatory authorities with respect to originating,
underwriting, making, selling, securitizing and servicing residential mortgage
loans. In addition, there are other federal and state statutes and regulations
affecting such activities. These rules and regulations, among other things,
impose licensing obligations on the Company, establish eligibility criteria
for mortgage loans, prohibit discrimination, provide for inspection and
appraisals of properties, require credit reports on prospective borrowers,
regulate payment features, establish collection, foreclosure and claims
handling procedures and, in some cases, fix maximum interest rates, fees and
loan amounts. HUD lenders such as Sutter Mortgage are required annually to
submit to the Federal Housing Commissioner audited financial statements.
Sutter Mortgage's affairs are also subject to examination by the Federal
Housing Commissioner at all times to assure compliance with HUD regulations,
policies and procedures.
Mortgage origination and processing activities are subject to the Equal
Credit Opportunity Act, the Federal Truth in Lending Act, the Real Estate
Settlement Procedures Act, the Fair Housing Act, the Fair Credit Reporting
Act, the Home Mortgage Disclosure Act, among other laws, and the regulations
promulgated thereunder. Failure to comply with regulatory requirements can
lead to loss of approved status, termination of servicing contracts without
compensation to the servicer, demands for indemnification or loan repurchases,
class action lawsuits, administrative enforcement actions and criminal
prosecution.
The Real Estate Settlement Procedures Act ("RESPA") imposes disclosure
requirements and substantive limitations on entities, such as the Company,
that engage in the making and brokering of residential real estate settlement
services. RESPA prohibits the Company from favoring loans offered through
Sutter Home Mortgage over loans offered by other participants in the Company's
LoanMaker System and requires the Company to provide an affiliated business
disclosure to consumers that are referred to Sutter Home Mortgage through the
LoanMaker System. RESPA also limits the form and amount of compensation that
the Company can pay to real estate brokers-owners to promote and market the
LoanMaker System; the form and amount of compensation that lenders can pay the
Company; and the form and amount of compensation Sutter Home Mortgage may pay
the Company for loans originated through the LoanMaker System. RESPA may also
limit or otherwise restrict the revenue the Company can expect to receive from
its planned expanded operations, such as arranging for title search and
property appraisals through the LoanMaker System. See "Growth Strategies."
The Equal Credit Opportunity Act prohibits discrimination against applicants
with respect to any aspect of a credit transaction on the basis of sex,
marital status, race, color, religion, national origin, age, derivation of
income from public assistance programs, or the good faith exercise of a right
under the Federal Consumer Credit Protection Act. The Federal Truth in Lending
Act requires a written statement showing an annual percentage
49
<PAGE>
rate of finance charges and requires that other information be presented to
debtors when mortgage loans are executed. The Fair Housing Act prohibits
discrimination in mortgage lending on the basis of race, color, religion, sex,
handicap, familial status or national origin. The Fair Credit Reporting Act
requires certain disclosures to applicants concerning information that is used
as a basis for denial of credit. The Home Mortgage Disclosure Act requires
collection and reporting of statistical data concerning the loan transaction.
Virtual Mortgage Network, Inc. is currently licensed as a mortgage broker in
California, Connecticut, Louisiana, Maryland, Oregon, Utah and Washington and
is in the process of applying for a broker license in Florida. The Company
believes Virtual Mortgage Network, Inc. is exempt from the broker license
requirements in Alaska, Colorado, New Mexico, Texas and Wyoming. Sutter
Mortgage is currently licensed as a lender in Arizona, California, Florida,
Idaho, New Jersey and Utah and has applied for a lender's license in Illinois
and Virginia. The Company believes that Sutter Mortgage is exempt from the
lender license requirements in Alaska, Oregon, Colorado, Minnesota, Nevada,
New Mexico and Texas.
Any person who acquires more than 10% of the Company's stock may 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 business, operating results and financial condition.
EMPLOYEES
As of November 30, 1997, the Company, including Sutter Mortgage, had 162
full-time employees, all of whom were based in the United States. These
employees include 10 in the Information Technology Department, 27 in Sales and
Marketing, 18 in Operations, 14 in Finance and Administration and 114 persons
employed by the Company's mortgage banking operations. The Company's employees
are not represented by any collective bargaining organizations, and the
Company has never experienced any work stoppages. The Company considers its
relations with its employees to be good.
FACILITIES
As of January 1998, the Company leases approximately 8,600 square feet of
office space in Newport Beach, California. The lease expires in September
1998. The Company also leases approximately 14,000 square feet in Walnut
Creek, California for its mortgage banking operations. The Walnut Creek lease
expires in January 2003. The Company also leases approximately 2,500 square
feet in Walnut Creek, California for a retail mortgage office, which lease
expires in February 2003, and 1,600 square feet in Newport Beach, California
for a wholesale mortgage office, which lease expires in May 1998. The Company
believes that it will have to relocate loan counselors and loan processors to
a larger facility in Newport Beach within the next year because the Company
expects to be adding new employees as the number of installed LoanMaker
Systems increases. The Company presently leases approximately 1,283 square
feet of office space in Lake Oswego, Oregon under a lease expiring in January
2003 and approximately 848 square feet in Tampa, Florida under a lease
expiring in November 1999.
LEGAL PROCEEDINGS
In 1995 and 1996, the Company received threats of a lawsuit with respect to,
among other things, the Company's refusal to issue shares of Common Stock to
three individuals. These individuals had entered into an agreement with the
Company in March 1995 in connection with the initial capitalization of the
Company to purchase shares of Common Stock in exchange for certain assets to
be delivered to the Company by the individuals. The Company believed the
individuals failed to deliver the consideration required by the agreement, and
the Company refused to issue the Common Stock. The three individuals have made
a variety of allegations against the Company and Michael A. Barron, the
Company's Chairman and Chief Executive Officer, relating to the disputed
issuance of Common Stock and the formation of the Company, however, no legal
proceedings have
50
<PAGE>
ever been commenced by these individuals. These allegations include the
following: (i) the assertion that in October 1994 Mr. Barron was hired as a
consultant to Software Today, a company owned by the individuals, to develop
the business opportunity that has now turned into the Company, (ii) the
assertion that in exchange for Software Today's and the individuals' agreement
to pursue the opportunity through the Company, two of the individuals ("Meader
and Garde") would receive 25% of the initial equity of the Company and the
third individual ("Edwards") would also receive 25% of the initial equity
(with Mr. Barron also receiving 25% and two others (Dianne David and Sandra
Sawyer) collectively receiving the remaining 25%), (iii) the assertion that
Mr. Barron breached his consulting agreement with Software Today and converted
an opportunity made available to him while he was serving as a consultant to
Software Today in breach of his fiduciary duties to Software Today, and (iv)
the assertion that the Company has breached its agreement to deliver the
Common Stock. Although no legal proceedings have ever been initiated by
Meader, Garde or Edwards, Mr. Barron brought a defamation lawsuit against
Edwards and obtained, on his behalf and on behalf of the Company, a
settlement, an assignment of claims and a release from the trustee in
bankruptcy of Edwards with respect to half of the shares in dispute in
connection with the settlement of a defamation lawsuit brought by Mr. Barron
against Edwards. No legal action has been commenced by or against the
remaining claimants. The Company believes that the claims are without merit,
and the Company intends to vigorously defend any legal action that may be
commenced in the future. There can be no assurance, however, that the Company
would be successful in defending such a lawsuit, or that the Company, even if
successful, would not expend significant resources in its defense. Mr. Barron
and Ms. David, founding stockholders of the Company, have agreed to indemnify
and hold the Company harmless from any and all losses (including reasonable
attorneys' fees and expenses) the Company might incur with respect to the
foregoing claims. The shares of Common Stock owned by the founding
stockholders of the Company have been pledged, subject to certain pledge
arrangements of Mr. Barron (see "Risk Factors--Risks Related to Dependence on
Key Personnel"), to secure the founding stockholders' indemnification
obligations to the Company. There can be no assurance, however, that the
indemnification provided by the founding stockholders will be sufficient to
fully indemnify the Company with respect to any losses the Company might incur
with respect to the foregoing claims.
In May 1997, Independent National Mortgage ("INM") brought suit against
Sutter Mortgage in Los Angeles County Superior Court to recover damages it
claims it has incurred or will incur as a result of Sutter Mortgage's refusal
and/or failure to repurchase three loans INM purchased from Sutter Mortgage
between December 1994 and November 1995. One such loan has been paid in full
and INM has dismissed that portion of its suit with respect to such loan. INM
foreclosed on property related to another one of the three loans and resold
such property; the sale price resulted in a loss to INM of approximately
$650,000.
Prior to inception of Virtual Mortgage's business, in March 1994, Sandra
Sawyer pleaded guilty to the federal misdemeanor of accessory after the fact
in connection with false statements made to a federally insured bank in 1987
by an unrelated private company that Ms. Sawyer owned and operated. Ms. Sawyer
was sentenced to three years of probation and 300 hours of community service
and was required to pay $50,000 in restitution. Ms. Sawyer was a founder and
had been a director, vice president and secretary of the Company until May
1995. In addition, Ms. Sawyer was placed on interim suspension with the State
Bar of California until December 1997 in connection with the above
misdemeanor. Companies controlled by Ms. Sawyer own approximately 5.3% of the
Common Stock of the Company prior to the Offering (2.1% of the Common Stock of
the Company after the Offering). From August 1995 to September 1996, Ms.
Sawyer rendered certain consulting services (including legal services) to the
Company. Since September 1996, Ms. Sawyer has not provided any services to the
Company. See "Certain Transactions."
The Company occasionally becomes involved in litigation arising in the
normal course of business. Management believes that any liability with respect
to such legal actions, individually or in the aggregate, will not have a
material adverse effect on the Company's financial position or results of
operations.
51
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers, directors and key employees of the Company as of
November 30, 1997 were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Michael A. Barron.. 47 Chairman of the Board and Chief Executive Officer
John D. Murray..... 56 President, Chief Financial Officer, Chief Operating
Officer and Director
Robert Gottesman... 49 Vice President, Information Technology
Ronald Morck....... 49 Vice President--Mortgage Operations and President,
Sutter Mortgage Corporation
Michael Balter..... 45 Vice President, Sales and Marketing
Dianne D. David.... 42 Vice President, National Account Sales
Larry Wells........ 54 Director
Randall C. Fowler.. 58 Director
John Wells......... 56 Director
</TABLE>
The directors of the Company are divided into three classes, as nearly equal
in number as possible, designated as Class I, Class II and Class III. Mr.
Larry Wells and Mr. John Wells are the Class I directors, and there is no
family relationship between them. This class will stand for election at the
1998 annual stockholders meeting. Mr. Murray is the sole Class II director and
will stand for election at the 1999 annual stockholders meeting. Messrs.
Barron and Fowler are the Class III directors and will stand for election at
the 2000 annual meeting of stockholders. At each annual meeting of
stockholders, successors of the class of directors whose term expires at that
annual meeting are elected for a three-year term. There are no family
relationships between any of the executive officers and directors of the
Company.
Michael A. Barron has served as Chairman of the Board and a director of the
Company since March 1995. From October 1995 to July 1996, and since December
1996 Mr. Barron has served as Chief Executive Officer of the Company, and from
March 1995 to October 1995 Mr. Barron served as President of the Company. From
March 1994 to March 1995, Mr. Barron served as a consultant to Eclipse Holding
Company, Ltd. in the area of business planning. From April 1992 to March 1994,
Mr. Barron engaged in business consulting for companies such as TRW, Pacific
Bell and Century 21. From November 1989 to April 1992, Mr. Barron served as
President and founder of Finet Mortgage, a mortgage broker and banking
business. Mr. Barron was the Chairman and Chief Executive Officer of Sold
Corporation, a private software company, from November 1982 to August 1988 and
again from March 1989 to September 1989. Mr. Barron was a founder of Citidata,
the first electronic provider of multiple listing services which was sold to
Moore Corporation in 1979. See "Risk Factors--Risks Related to Dependence on
Key Personnel." Mr. Barron and Ms. David are domestic partners.
John D. Murray has served as director of the Company since July 1996,
President of the Company since December 1996, Chief Financial Officer of the
Company since May 1996 and Chief Operating Officer since December 1996. From
July 1996 to December 1996, Mr. Murray served as Chief Executive Officer of
the Company. From April 1995 to May 1996, Mr. Murray served as Executive Vice
President and Chief Financial Officer of Matthews Studio Equipment Group, a
designer, manufacturer and supplier of equipment to the entertainment
industry. From August 1992 to February 1995, Mr. Murray served as Chief
Operating Officer and Chief Financial Officer for Alpha Microsystems Inc, a
software, hardware and services provider to the internet and intranet markets.
From March 1988 to August 1992, Mr. Murray served as co-founder of South Coast
Communications Group (currently known as Allen & Caron, Inc.), which is a
full-service corporate, investor and marketing communications agency.
Robert Gottesman has served as Vice President, Information Technology since
July 1995. He was a consultant from July 1995 to October 1996 and thereafter
has been an employee. From May 1984 to December 1995, Mr. Gottesman served as
a software development consultant for both the San Fernando Valley Realtors
52
<PAGE>
Association, a non-profit organization governing the multiple listing services
for realtors in Northern Los Angeles and Southern Ventura counties, and TRW-
REDI (currently known as Experian Information Solutions), a real estate
information company specializing in tax, title and property data. For TRW, Mr.
Gottesman automated a county tax information system and on-line title
information system. Mr. Gottesman was a co-founder of Citidata and served as
its Vice President Technology from June 1976 to November 1981.
Ronald Morck has served as Vice President--Mortgage Operations since
December 1997 and as President of Sutter Mortgage since 1985. From June 1981
to January 1984, Mr. Morck served as Senior Vice President and Chief Loan
Officer at First Nationwide Bank in San Francisco, California.
Michael Balter has served as Vice President, Sales and Marketing since July
1997. Prior to coming to the Company, Mr. Balter worked for Intel Corporation
for 17 years. Mr. Balter served as the Vertical Marketing Manager for the
Personal Conferencing Division at Intel, where he was responsible for working
with several key start-up companies in the video loan origination application,
including the Company.
Dianne D. David has served as Vice President of Sales since September 1996,
and from July to December 1996, as the Chief Operating Officer of the Company.
From October 1995 to December 1996, Ms. David served as President of the
Company, and from October 1995 to December 1997, she served as a director of
the Company. From August 1993 to December 1994, Ms. David served as an
independent financial services consultant and assisted residential mortgage
lending and financial service companies in expanding their businesses. From
July 1990 to February 1993, Ms. David served as Vice-President of Lender
Services of Finet Mortgage. From June 1987 to June 1990, Ms. David was
President of First Realty Financial Services, a computerized loan origination
based mortgage broker, and from June 1985 to May 1987, Ms. David was President
of Gulf West Mortgage, a residential mortgage broker. Ms. David and Mr. Barron
are domestic partners.
Larry Wells has been a director of the Company since May 1997. Mr. Wells has
been a partner at Anderson & Wells, an investment management company, since
February 1989. Mr. Wells is a director of Identix, Inc., Cellegy
Pharmaceuticals, Gateway Data Sciences Corp. and Tellegen Corp. Larry Wells is
not related to John Wells.
Randall C. Fowler has been a director of the Company since September 1996.
Mr. Fowler is the founder of Identix, Inc., which is a leader in designing,
developing, manufacturing and marketing products for the capture and/or
comparison of fingerprints for security, anti-fraud, law enforcement and other
applications. Mr. Fowler has served as the President and Chief Executive
Officer of Identix, Inc. since 1982. Mr. Fowler is a director of Fingerscan,
Inc. and ANADAC, Inc., both of which are subsidiaries of Identix, Inc.
John Wells has been a director of the Company since May 1997. Mr. Wells is a
retired partner of Gibson, Dunn & Crutcher LLP where he was a partner for 21
years. John Wells is not related to Larry Wells.
BOARD COMMITTEES
The Board of Directors formed a Compensation Committee and an Audit
Committee in July 1996. As of May 1997, John Wells, Larry Wells and Randall
Fowler have been the members of each committee, with John Wells being the
Chairman of the Compensation Committee and Randall Fowler being the Chairman
of the Audit Committee. Prior to that date, there were no committees of the
Board of Directors. The Compensation Committee makes recommendations to the
Board concerning salaries and incentive compensation for the Company's
officers and employees and administers the Company's stock option plans. The
Audit Committee reviews the results and scope of the audit and other
accounting related services and evaluates the Company's internal audit and
control functions.
DIRECTOR COMPENSATION
All non-employee directors are reimbursed for travel and other related
expenses incurred in attending meetings of the Board of Directors. All non-
employee directors are eligible to receive automatic annual grants
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<PAGE>
under the Company's 1997 Performance Award Plan. See "--Stock Option Plans--
1997 Plan." In addition, at the time of John Wells' election to the Board of
Directors, he was granted a stock option to acquire 10,225 shares of Common
Stock at an exercise price of $7.78 per share. Except as set forth above, none
of the directors is presently compensated for serving as a director.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors consists of John Wells,
Larry Wells and Randall Fowler. No member of the Compensation Committee or
executive officer of the Company has a relationship that constitutes an
interlocking relationship with executive officers or directors of another
entity.
LIMITATION OF LIABILITY OF DIRECTORS
The Certificate of Incorporation provides that the liability of the
directors of the Company for monetary damages to the Company or its
stockholders are eliminated to the fullest extent permissible under Delaware
law. While the Certificate of Incorporation provides directors with protection
from awards for monetary damages for breaches of their duty of care, it does
not eliminate such duty. Accordingly, the Certificate of Incorporation will
have no effect on the availability of equitable remedies, such as an
injunction or rescission, based on a director's breach of such director's duty
of care. See "Description of Capital Stock--Limitation of Liability of
Directors."
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company has entered into indemnity agreements with its directors and
officers that require the Company to indemnify the directors and officers to
the fullest extent permitted by applicable provisions of the Delaware General
Corporation Law. The Company believes the foregoing provisions are necessary
to attract and retain qualified persons as directors and officers. See
"Description of Capital Stock--Indemnification of Directors and Officers."
EXECUTIVE COMPENSATION
The following table shows the compensation paid by Virtual Mortgage Network,
Inc. during fiscal 1996 to the Company's Chief Executive Officer and its three
most highly compensated officers whose salary and bonus exceeded $100,000
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
---------------- ------------
SECURITIES
NAME AND PRINCIPAL UNDERLYING ALL OTHER
POSITION SALARY BONUSES OPTIONS COMPENSATION
------------------ -------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Michael A. Barron(1)............... $120,000 -- -- $ 1,900
Chairman of the Board and Chief
Executive Officer
John D. Murray(2).................. 70,500 50,000 61,350 3,400
President, Chief Financial Officer
and Chief Operating Officer
Dianne D. David(3)................. 138,000 -- -- 1,900
Vice President, National Sales
Accounts
Robert Gottesman(4) ............... 164,941 -- -- 14,000
Vice President, Information
Technology
</TABLE>
- --------
(1) Paid to a consulting firm, Eclipse Holdings, Inc. Other compensation is
the estimated value of perquisites and other personal benefits including
health insurance ($1,600) and life insurance ($300).
(2) Other compensation is the estimated value of perquisites and other
personal benefits including health insurance ($3,100) and life insurance
($300).
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<PAGE>
(3) Other compensation is the estimated value of perquisites and other
personal benefits including health insurance ($1,600) and life insurance
($300).
(4) Of the $164,941 salary amount, $36,040 was paid directly to Mr. Gottesman
and $128,901 was paid to Mr. Gottesman's consulting firm, Voyager
Information Services. As of October 1996, Mr. Gottesman became an employee
of the Company. Other compensation is the estimated value of perquisites
and other personal benefits including health insurance ($1,000), life
insurance ($200) and housing expenses ($12,800).
OPTION GRANTS
The following table sets forth for each of the Named Executive Officers
certain information concerning stock options granted during the period of
January 1, 1996 to December 31, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED ANNUAL
RATES OF STOCK
PRICE
% OF APPRECIATION
TOTAL OPTIONS FOR OPTION
STOCK GRANTED ALL EXERCISE TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------
NAMED EXECUTIVE OFFICER GRANTED 1996 PER SHARE(2) DATE 5% ($) 10% ($)
----------------------- ------- ------------- ------------ ---------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Michael A. Barron....... -- -- -- -- -- --
John D. Murray(1)....... 61,350 57.14% $4.89 4/30/01 $319,070 $384,327
Diane D. David.......... -- -- -- -- -- --
Robert Gottesman........ -- -- -- -- -- --
</TABLE>
- --------
(1) Of these options, 25% vested immediately and the remainder vest ratably on
a monthly basis over a three year period. Options are subject to the
employee's continued employment. The options terminate ten years after the
grant date, subject to earlier termination in accordance with the 1995
Plan and the applicable option agreement. See "Management--Stock Option
Plans."
(2) The exercise price is equal to the market value on the date of the grant.
The amounts shown as potential realizable value illustrate what might be
realized upon exercise immediately prior to expiration of the option term
using the 5% and 10% appreciation rates established in regulations of the
Securities and Exchange Commission, compounded annually. The potential
realizable value is not intended to predict future appreciation of the
price of the Company's Common Stock. The values shown do not consider
nontransferability, vesting or termination of the options upon termination
of employment.
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
The Company has entered into Employment Agreements with Michael Barron and
John Murray which require each of Messrs. Barron and Murray to devote his full
business time, energy and ability to the business, affairs and interests of
the Company and his best efforts and abilities to promote the Company's
interests. The agreements provide for annual base salaries of $180,000 with
discretionary annual performance increases and/or performance bonuses to be
established by the Independent directors of the Company's Board of Directors
based on the Company's attainment of certain net income projections. The
agreements have three-year terms ending on September 30, 2000 and may be
terminated by the Company with or without cause as defined in the agreements.
The agreements also provide for severance payments upon termination of
employment without cause or resignation by the executive for good reason in
the amount of approximately $180,000 to each, with partial vesting of stock
options. The agreements further contain noncompetition, confidentiality,
indemnity and dispute resolution provisions.
Each of the Named Executive Officers has entered into a non-competition,
non-solicitation, non-disclosure and assignment of inventions agreement with
the Company (the "Non-Competition Agreement"), which restricts the officer
from competing with the Company and from soliciting, diverting or attempting
to solicit or divert any customers or employees of the Company during the term
of the officer's employment and for one year after termination of employment.
The Non-Competition Agreement also obliges the Named Executive Officer not to
reveal any trade secrets or confidential information of the Company during the
term of the officer's employment and for five years after termination of
employment. The Non-Competition Agreement requires the Named
55
<PAGE>
Executive Officers to assign to the Company all right and interest in any
intellectual property related to the business of the Company and developed by
the officer during the term of the officer's employment with the Company.
The Compensation Committee, as the administrator of the Company's stock
option plans, has the authority to accelerate vesting of the shares of Common
Stock held by any of the Named Executive Officers in connection with certain
changes of control of the Company. See "--Stock Option Plans."
STOCK OPTION PLANS
1995 Plan. In November 1995, the Company adopted the Company's 1995 Stock
Option Plan (the "1995 Plan"). The 1995 Plan authorized the issuance of
409,000 shares of Common Stock, of which 373,236 shares have been issued in
the form of stock options. The Company's Board of Directors determined the
terms and conditions of each award under the 1995 Plan made to directors,
officers, employees and consultants of the Company. The exercise prices of
options range from $4.89 to $6.75, with options vesting 25% after one year and
thereafter ratably on a monthly basis over a three or four year period and
terminating ten years from the date of grant.
Options that have not yet become exercisable will lapse upon the date a
participant is no longer employed by the Company for any reason. Options that
have become exercisable must be exercised within 30 days after that date if
the termination of employment was for any reason other than retirement, total
disability, death or discharge for cause. If a participant is discharged for
cause, all options shall lapse immediately upon termination of employment. If
the termination of employment was due to retirement, total disability or
death, the options that are exercisable on the date of the termination must be
exercised within three months of the date of termination or a shorter period
provided in the award agreement. If the stockholders of the Company approve
the dissolution or liquidation of the Company, certain mergers or
consolidations, or the sale of substantially all of the business assets of the
Company, unless prior to that event the Board of Directors determines that
there shall be either no acceleration or limited acceleration of awards, each
option shall become immediately exercisable.
1997 Plan. In October 1997, the Company adopted the Company's 1997
Performance Award Plan (the "1997 Plan"), which was approved by the
stockholders in November 1997. The 1997 Plan provides a means to attract,
motivate, retain and reward key employees (including officers and directors)
of the Company and its subsidiaries and certain other eligible persons and
promote the success of the Company.
Awards under the 1997 Plan may be in the form of nonqualified stock options,
incentive stock options, stock appreciation rights ("SARs"), restricted stock,
performance shares, stock bonuses or cash bonuses based on performance. Awards
may be granted singly or in combination with other awards. Any cash bonuses
would be paid based upon the extent to which performance goals set by the
Compensation Committee are met during the performance period. Awards under the
1997 Plan generally will be nontransferable by a holder (other than by will or
the laws of descent and distribution) and rights thereunder generally will be
exercisable, during the holder's lifetime, only by the holder, subject to such
exceptions as may be authorized by the Compensation Committee.
Administration; Change in Control. The 1997 Plan provides that it will be
administered by the Board of Directors or a committee appointed by the
Company's Board of Directors. The Board of Directors has appointed the
Company's Compensation Committee to serve as the committee under the 1997
Plan. The Compensation Committee will have the authority to (i) designate
recipients of awards, (ii) determine or modify the provisions of awards,
including vesting provisions, the number of shares or amount of cash subject
to awards, the terms of exercise of an award and expiration dates, (iii)
approve the form of award agreements, and (iv) construe and interpret the 1997
Plan; consistent with the terms and limits of the Plan. The Compensation
Committee will have the discretion to accelerate and extend the exercisability
or term and establish the events of termination or reversion of outstanding
awards.
56
<PAGE>
Upon a Change in Control Event each option and SAR will become immediately
exercisable, restricted stock will immediately vest free of restrictions and
the number of shares, cash or other property covered by each performance share
award will be issued to the grantee of such award, unless the Compensation
Committee determines to the contrary. A "Change in Control Event" is defined
generally to include the acquisition of 50% or more of the outstanding voting
securities of the Company by any person, a transfer of substantially all of
the Company's assets, the dissolution or liquidation of the Company, or a
merger, consolidation or reorganization whereby stockholders immediately prior
to such event own less than 50% of the outstanding voting securities of the
surviving entity after such event.
Plan Amendment; Termination and Term. The Company's Board of Directors will
have the authority to amend, suspend or discontinue the 1997 Plan at any time,
but no such action will affect any outstanding award in any manner adverse to
the participant without the consent of the participant. The 1997 Plan may be
amended by the Board of Directors without stockholder approval unless such
approval is required by applicable law.
The 1997 Plan will remain in existence as to all outstanding awards until
such awards are exercised or terminated. The maximum term of unvested or
unexercised options, SARs and other rights to acquire Common Stock under the
1997 Plan is 10 years after the initial date of award. No award can be made
after the tenth anniversary of the date on which the Board of Directors
approved the 1997 Plan.
Authorized Shares and Other Provisions. The maximum number of shares of
Common Stock that may be issued in respect of awards under the 1997 Plan is
1,000,000 shares. The number and kind of shares available for grant and the
shares subject to outstanding awards will be adjusted to reflect the effect of
a stock dividend, stock split, recapitalization, merger, consolidation,
reorganization, combination or exchange of shares, extraordinary dividend or
other distribution or other similar transaction. If any award expires or is
cancelled or terminated without having been exercised or paid in full, or if
any Common Stock subject to a restricted stock award does not vest or is not
delivered, the unpurchased, unvested or undelivered shares will again be
available for award under the 1997 Plan. No incentive stock option may be
granted at a price that is less than fair market value of the Common Stock
(less than 110% of fair market value of the Common Stock on the date of grant
for certain participants) on the date of grant.
Automatic Annual Grants to Non-Employee Directors. Under the 1997 Plan, each
director who is not an employee (each, a "Non-Employee Director") and who is
in office at the time the stockholders of the Company approve the 1997 Plan
will be automatically granted stock options to purchase 20,000 shares of
Common Stock on the date of such approval at an exercise price equal to the
market price on the date of the approval. Each new Non-Employee Director after
the date of such approval will be granted stock options to purchase 20,000
shares of Common Stock upon becoming a director at an exercise price equal to
the market price on that date. In addition, at the close of trading on the day
of the annual stockholders meeting in each calendar year beginning in 1998 and
continuing for each subsequent year during the term of the 1997 Plan, each
person who is a Non-Employee Director as of such date will be granted stock
options to purchase 10,000 shares of Common Stock at an exercise price equal
to the market price of the Common Stock on that date. If a Non-Employee
Director's services are terminated for any reason other than the director's
death, disability or retirement, any portion of stock options held by such
director that are exercisable will remain exercisable for six months after
such termination of services or until the expiration of the term of such
option, whichever occurs first. If the Non-Employee Director dies, becomes
disabled or retires, stock options held by such director will become
exercisable for two years after the date of such termination of services or
until the expiration of the term of such option, whichever occurs first.
Federal Tax Consequences. The current federal income tax consequences of
awards authorized under the 1997 Plan follow certain basic patterns.
Generally, awards under the 1997 Plan that are includable in the income of the
recipient at the time of award or exercise (such as nonqualified stock
options, SARs, restricted stock and performance awards) are deductible by the
Company, and awards that are not required to be included in the income of the
recipient at such times (such as incentive stock options) are not deductible
by the Company.
57
<PAGE>
Grant of Options. The Board of Directors of the Company has authorized the
grant of options relating to approximately 552,800 shares of Common Stock to
Eligible Persons, including Michael Barron and John Murray who were granted
options to acquire 334,150 and 218,650 shares of Common Stock, respectively,
which shall be effective upon the closing of this Offering. The exercise price
of each option granted is the initial public offering price per share of the
Common Stock offered hereby. Such options vest in equal installments of 1/48th
per month over a period of four years.
COMPENSATION PLAN
The Company's Board of Directors approved the Company's 1995 Consultant and
Employee Stock Compensation Plan (the "Compensation Plan") in March 1995. The
purpose of the Compensation Plan was to compensate officers, directors,
consultants, lawyers and accountants for services rendered to the Company,
other than services in connection with the offer or sale of securities,
through awards of Common Stock. The maximum number of shares authorized under
the Compensation Plan was 102,250, 20,450 of which were issued in the form of
restricted stock (818 shares of which the Company has repurchased at par value
upon the departures of three employees) and 81,800 of which have been granted
and are not restricted. The Board of Directors of the Company, however,
administers the Compensation Plan and may increase the maximum number of
shares under the plan at such times as it deems advisable.
The Company's Board of Directors has the authority to interpret the
Compensation Plan and to prescribe rules and regulations for the plan. The
Board of Directors has complete discretion in determining when, to whom and in
what amount awards are to be granted. The maximum number of allowable
participants, however, is set at 35.
CERTAIN TRANSACTIONS
Between March 1995 and June 1996, the Company issued certain promissory
notes and warrants to purchase Common Stock ("Warrants") to American Growth
Fund I, L.P., a California limited partnership (the "Fund"), in exchange for
consulting services. The general partner of the Fund is American Growth
Capital Corporation, a Nevada corporation ("AGCC"). Donna Snyder, a director
of the Company from March 1996 to September 1996, was an executive officer and
stockholder of AGCC. The Company paid approximately $154,700 from March 1995
to September 1996 in aggregate consulting fees to AGCC directly. In August
1997, a temporary receiver was appointed by a federal court to oversee the
affairs of the Fund and AGCC. The receiver was appointed at the request of the
Securities and Exchange Commission.
In July 1996, the Company consolidated all outstanding promissory note
indebtedness in favor of the Fund by issuing two promissory notes in the
principal amounts of $200,000 and $300,000 in exchange for the cancellation of
all prior promissory notes. The $200,000 note matured in March 1997 and
presently accrues interest at 15% interest per annum. The $300,000 note is a
Phase I Bridge Note. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
The Fund purchased 51,125 shares of Common Stock as well as 35,788 Warrants
on March 22, 1995 for $200,000. On June 14, 1995, the Fund purchased 250,000
shares of Series A Preferred Stock for $250,000, and an additional 100,000
shares of Series A Preferred Stock on March 15, 1996 for $100,000. On March
29, 1996, the Company issued 1,534 Warrants, with an exercise price of $4.89
per share, to the Fund for services rendered.
Donna Snyder was also an executive officer and stockholder of American
Growth Capital Investments, Inc., a Nevada corporation ("AGCI"). AGCI has
rendered consulting services to the Company in consideration for an aggregate
of 35,788 Warrants, each with an exercise price of approximately $3.42 per
share. As consideration for increasing the exercise price of these warrants to
the Fund to $4.89 per share, the Company issued 1,245 Warrants, with an
exercise price of $4.89 per share, to AGCI on September 9, 1996.
American Growth Capital Fund I, LP, holding $300,000 in principal amount of
debt, is entitled to repayment of such debt or may exchange the principal on
such debt for shares of Series B Preferred Stock and the interest on such debt
for shares of Common Stock, at the option of the holder.
58
<PAGE>
On March 31, 1996, the Company issued 20,450 Warrants to Randall C. Fowler,
a director of the Company, in exchange for consulting services rendered. These
Warrants had an exercise price of $4.89 per share and Mr. Fowler exercised the
Warrants on January 22, 1997. In addition, Mr. Fowler had subscribed to
acquire 35,000 shares of Series A Preferred Stock in connection with the
Company's private placement which occurred from September 1995 through March
1996. His subscription was in excess of the amount of the Series A Preferred
Stock authorized by the Board of Directors. Consequently, the Company and Mr.
Fowler agreed to convert his subscription into a $35,000 Phase II Bridge Note
and 2,386 Phase II Bridge Warrants effective as of September 30, 1997.
In December 1997, Mr. Fowler, holding $85,000 in principal amount of debt,
agreed to exchange the principal on such debt for 8,947 shares of Series B
Preferred Stock and the interest on such debt for 2,683 shares of Common
Stock.
On July 5, 1996, the Company issued 20,450 Warrants to Larry Wells, a
director of the Company, in exchange for consulting services rendered. These
Warrants have an exercise price of $7.78 per share. On February 5, 1997, Mr.
Wells exercised 12,863 Warrants. In addition, Mr. Wells had subscribed to
acquire 42,500 shares of Series A Preferred Stock in connection with the
Company's private placement which occurred from September 1995 through March
1996. His subscription was in excess of the amount of the Series A Preferred
Stock authorized by the Board of Directors. Consequently, the Company and Mr.
Wells agreed to convert his subscription into a $42,500 Phase II Bridge Note
and 2,898 Phase II Bridge Warrants effective as of September 30, 1997.
In December 1997, Mr. Wells, holding $897,500 in principal amount of debt
(which includes (i) $50,000 in principal amount of debt held by Anacapa
Ventures Partners, (ii) $205,000 in principal amount of debt held by Daystar
Partners LP and (iii) $600,000 in principal amount of debt held by Sundance
Venture Partners L.P.), agreed to exchange the principal on such debt for
94,474 shares of Series B Preferred Stock and the interest on such debt for
25,974 shares of Common Stock.
John Wells, a director of the Company, had subscribed to acquired 15,000
shares of the Series A Preferred Stock in connection with the Company's
private placement which occurred from September 1995 through March 1996. His
subscription was in excess of the amount of the Series A Preferred Stock
authorized by the Board of Directors. Consequently, the Company and Mr. Wells
agreed to convert his subscription into a $15,000 Phase II Bridge Note and
1,023 Phase II Bridge Warrants effective as of September 30, 1997. Also, in
May 1997 the Company granted an option to acquire 10,255 shares of Common
Stock to Mr. Wells at an exercise price of $7.50 per share.
On October 1, 1996, the Company entered into an agreement with Sandra
Sawyer, a former officer and director of the Company, and Villa Nova
Management Co., Inc. ("Villa Nova"), a consulting firm controlled by Ms.
Sawyer, whereby the consulting services of both were terminated. As
consideration, the Company (i) agreed to pay up to $149,300 as a severance
package to Villa Nova, of which $142,800 has been paid, (ii) allowed Villa
Nova 90 days in which to exercise stock options to purchase 5,113 shares of
Common Stock which had vested, which Villa Nova exercised, and (iii) issued to
Villa Nova a warrant to purchase 5,113 shares of Common Stock at an exercise
price of $4.89 per share. Sandra Sawyer is the President of Villa Nova. See
"Business--Legal Proceedings."
On October 21, 1997, the Company made a short-term personal loan to Michael
A. Barron, Chairman and Chief Executive Officer of the Company, in the amount
of $112,500 which Mr. Barron repaid in November 1997. The loan accrued
interest at ten percent per annum. The loan was made to Mr. Barron as an
accommodation to bridge a short-term financial need pending his receipt of
funds from a third-party source. The loan was approved by all of the non-
employee directors of the Company.
Compensation paid by the Company for Mr. Barron's services were paid to
Eclipse Holdings, Inc., a consulting firm owned by Mr. Barron's domestic
partner, Dianne David, until November 1, 1997 when
59
<PAGE>
Mr. Barron became an employee of the Company. Amounts paid to Eclipse equalled
$113,000 in 1995, $120,000 in 1996 and $153,000 as of September 30, 1997.
Compensation paid for the services of Robert Gottesman, the Company's Vice
President, Information Technology, totalling $128,901 in fiscal 1996 was paid
to Voyager Information Services, a consulting company owned by Mr. Gottesman.
Since October 1996, the Company has paid Mr. Gottesman directly as an
employee.
In December 1997, Remy Trafelet, Orin Kramer and Kramer Spellman, each
holding $1,000,000 in principal amount of debt (which includes for each of
them (i) $885,000 in principal amount of debt held by Boston Provident, (ii)
$40,000 in principal amount of debt held by BP Institutional Partners, and
(iii) $75,000 in principal amount of debt held by Maritime Global Subsidiary
I, Ltd.), agreed to exchange the principal on such debt for 105,264 shares of
Series B Preferred Stock and the interest on such debt for 20,944 shares of
Common Stock.
The Company has entered into indemnity agreements with each of its directors
and executive officers. These agreements require the Company to indemnify such
individuals for certain liabilities to which they may be subject as a result
of their affiliation with the Company, to the fullest extent allowed by law.
The Company has adopted a policy that transactions, other than compensation
matters, between the Company and its executive officers, directors and
affiliates, will be submitted to the Company's non-employee directors for
approval.
60
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock and Series A Preferred Stock as of
November 30, 1997 by (i) each person who is known to the Company to
beneficially own 5% or more of the outstanding shares of Common Stock and
Series A Preferred Stock, (ii) each of the Company's directors, (iii) each of
the Named Executive Officers and (iv) all directors and executive officers as
a group.
<TABLE>
<CAPTION>
SERIES A PREFERRED STOCK
-------------------------
PERCENT OF SHARES
NUMBER OF BENEFICIALLY OWNED NUMBER OF PERCENT OF
SHARES ----------------------- SHARES SHARES
BENEFICIALLY BEFORE AFTER BENEFICIALLY BENEFICIALLY
NAME OWNED(1) OFFERING(2) OFFERING(3) OWNED OWNED(4)
- ---- ------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Remy Trafelet(5)........ 993,730 40.2% 16.1% -- 0%
Orin Kramer(5).......... 981,146 39.7% 15.9% -- 0%
Kramer Spellman(5)...... 955,713 38.7% 15.5% -- 0%
Michael A. Barron(6).... 263,294 10.7% 4.3% -- 0%
Dianne D. David(6)...... 215,578 8.7% 3.5% -- 0%
Larry Wells(7).......... 202,083 8.2% 3.3% -- 0%
Sandra S. Sawyer(8)..... 139,743 5.7% 2.3% -- 0%
John D. Murray(9)....... 43,306 1.8% 0.7% -- 0%
Robert Gottesman(10).... 42,556 1.7% 0.7% -- 0%
Randall C. Fowler(11)... 37,295 1.5% 0.6% -- 0%
Michael Balter.......... 5,325 0.2% * -- 0%
John Wells(12).......... 1,023 * * -- 0%
Ronald Morck............ -- * * -- 0%
All directors and
executive officers as a
group (9 persons)...... 800,188 32.4% 13.0% -- 0%
Intel Corporation....... 124,695 * * 500,000 22.2%
American Growth Capital
Fund I, L.P.(13)....... 194,276 7.9% 3.1% 350,000 15.6%
James M. Glockner....... 53,619 * * 215,000 9.5%
</TABLE>
- -------
* Less than one percent.
(1) Includes the number of shares and percentage ownership represented by
such shares determined to be beneficially owned by a person in accordance
with the rules of the Securities and Exchange Commission plus all
additional options and warrants to purchase Common Stock exercisable at
any time after 60 days from November 30, 1997. Also includes the number
of shares of Common Stock into which the Series A Preferred Stock is
convertible. Such shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of any other person. Such
exercisable options are shown in the footnotes to this table for each
such person. Also assumes the exchange of outstanding principal and
accrued interest on outstanding debt for Series B Preferred Stock and
Common Stock, respectively, and assumes that the respective investor
participating in the exchange converts his Series B Preferred Stock into
Common Stock. Each share of Series B Preferred Stock is convertible, at
the option of the holder, into one share of Common Stock. The shares
derived from the debt exchange are not deemed outstanding for purposes of
computing the percentage ownership of any other person. All such shares
derived from the debt exchange are shown in the footnotes to this table
for each applicable investor. To the Company's knowledge, the persons
named in this table have sole voting and investment power with respect to
all shares of Common Stock shown as owned by them, subject to community
property laws where applicable and except as indicated in the other
footnotes to this table.
(2) Percentage calculation is based upon 2,471,086 shares including 259,091
shares of Common Stock issued in private placements subsequent to
September 30, 1997.
(3) Percentage calculation is based upon 6,171,086 shares consisting of (i)
the shares considered outstanding as set forth in note 2 above and
(ii) 3,700,000 shares of Common Stock to be issued in connection with the
Offering.
(4) Percentage calculation is based upon 2,003,665 shares of Series A
Preferred Stock.
(5) Includes: (i) 229,403 shares of Common Stock, 52,632 shares of Series B
Preferred Stock and 5,833 shares of Common Stock issued (assuming the
exchange of outstanding principal and interest on debt) and 195,903
warrants to acquire Common Stock owned by Boston Provident Partners,
L.P.; (ii) 24,967 shares of Common Stock and 14,811 warrants to acquire
Common Stock owned by Pine Boston Partners, L.P.; (iii) 25,952 shares of
Common Stock and 15,267 warrants to acquire Common Stock owned by
International Charitable Interests II, L.P.; (iv) 28,688 shares of Common
Stock and 19,816 warrants to acquire Common Stock owned by BP
Institutional Partners, L.P.; (v) 46,256 shares of Common Stock and
33,085 warrants to acquire Common Stock owned by BP Overseas Partners,
L.P.; and (vi) 30,120 shares of Common Stock and 22,887 warrants to
acquire Common Stock owned by Maritime Global Subsidiary I, Ltd. and
(vii) 52,632 shares of Series B Preferred Stock and 15,111 shares of
Common Stock issued assuming the exchange of outstanding principal and
interest on debt. Mr. Trafelet and Mr. Kramer each have voting and
dispositive power over the above shares and warrants. The address for
each of the above holders is 2050 Center St., Suite 300, Fort Lee, NJ
07024.
(6) Includes 2,557 shares of Common Stock subject to options exercisable
within 60 days. The address for this individual is 4590 MacArthur Blvd.,
Suite 175, Newport Beach, CA 92660.
(7) Includes: (i) 12,368 shares of Series B Preferred Stock and 3,692 shares
of Common Stock issued (assuming the exchange of the outstanding
principal and interest on debt) and 13,977 warrants to acquire Common
Stock owned by Daystar Partners, L.P.; (ii) 5,263 shares of Series B
Preferred Stock and 1,522 shares of Common Stock issued (assuming the
exchange of the outstanding principal and interest on debt) and 3,410
warrants to acquire Common Stock owned by Anacapa Ventures Partners; and
(iii) 63,158 shares of Series B Preferred Stock and 17,333 shares of
Common Stock issued (assuming the exchange of the outstanding principal
and interest on debt) and 40,900 warrants to acquire Common Stock owned
by Sundance Venture Partners, L.P. Mr. Wells has voting and dispositive
power over the above warrants and stock.
(8) Includes: (i) 5,113 shares of Common Stock and 5,113 warrants to acquire
Common Stock exercisable within 60 days which are owned by Villa Nova
Management Co., Inc.; and (ii) 129,517 shares of Common Stock owned by
Tradenet Development Co., Ltd. S.A. de C.V.; with respect to which Ms.
Sawyer has voting and dispositive power. The address for Ms. Sawyer is
4590 MacArthur Blvd., Suite 503, Newport Beach, CA 92660.
(9) Consists of 43,306 shares of Common Stock subject to options exercisable
within 60 days of September 30, 1997.
(10) Consists of 42,556 shares of Common Stock subject to options exercisable
within 60 days of September 30, 1997.
(11) Includes 8,947 shares of Series B Preferred Stock and 2,683 shares of
Common Stock issued (assuming the exchange of the outstanding principal
and interest on debt) and 5,796 warrants to acquire Common Stock.
(12) Includes 1,023 warrants to acquire Common Stock.
(13) Includes 350,000 shares of Series B Preferred Stock which is convertible
into 87,287 shares of Common Stock (assuming the exchange of the
outstanding principal and interest on debt) and 202,951 warrants to
acquire Common Stock.
61
<PAGE>
REGISTERED STOCKHOLDERS
Subject to certain lock-up arrangements, the Registered Stockholders may
offer and sell the 1,042,096 shares of Common Stock owned by them on the
Nasdaq National Market in negotiated transactions or otherwise. The Company
will not receive any proceeds from the sale of shares by the Registered
Stockholders. See "Shares Eligible for Future Sale."
Except as indicated below and for their ownership of Common Stock of the
Company, the Registered Stockholders have no material relationship with the
Company. The following table sets forth certain information regarding the
Registered Stockholders.
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK
REGISTERED STOCKHOLDER OWNED(1) TO BE REGISTERED
---------------------- ------------ ----------------
<S> <C> <C>
Remy Trafelet (2)................................ 993,730 628,323
Orin Kramer (2).................................. 981,146 619,432
Kramer Spellman, L.P. (2)........................ 955,713 601,649
American Growth Fund I, L.P. .................... 194,276 20,451
Moore Global Investments Ltd. (3)................ 299,035 102,251
Robert Merrick................................... 105,268 88,913
Larry Wells (4).................................. 202,083 61,185
Jeffrey Gendell (5).............................. 98,383 34,084
Randall Fowler (6)............................... 37,876 5,796
James Scibelli (7)............................... 19,628 6,818
Sunshine Charitable Trust........................ 6,817 6,817
Ronald Ruben..................................... 10,016 7,114
James Scullion (8)............................... 11,668 3,922
Vance Driscoll................................... 3,410 3,410
Robert Weiss..................................... 3,410 3,410
KSH Investment Group, Inc. ...................... 3,409 3,409
Ronald Krinick................................... 3,409 3,409
Mid-Lakes P/S Trust.............................. 3,409 3,409
Alfred Abiouness................................. 3,409 3,409
Windy City, Inc. ................................ 3,409 3,409
Judy Shapiro..................................... 3,409 3,409
Allenstown Investment Ltd. Corp. ................ 3,409 3,409
Paul and Judy Berkman JTWROS..................... 3,409 3,409
KAM Group, Inc. ................................. 3,409 3,409
Linda Bassin..................................... 3,409 3,409
Edward S. Raskin Trust........................... 3,409 3,409
Harvey Greenfield................................ 3,409 3,409
M. D. Funding.................................... 3,409 3,409
Andrew Malik (9)................................. 5,099 1,706
Steven Nimirov (10).............................. 5,060 1,706
Joseph Bianco.................................... 1,705 1,705
Stanley Goldberg Revocable Trust................. 1,364 1,364
John Wells (11).................................. 1,023 1,023
</TABLE>
- --------
(1) Assumes the exchange of outstanding principal and accrued interest on
outstanding debt for Series B Preferred Stock and Common Stock,
respectively, and assumes that the respective investor participating in
the exchange converts his Series B Preferred Stock into Common Stock.
Each share of Series B Preferred Stock is convertible, at the option of
the holder, into one share of Common Stock. All such shares derived from
the debt exchange are shown in the footnotes to this table for each
applicable investor.
(2) Includes: (i) 229,403 shares of Common Stock, 195,903 warrants to acquire
Common Stock and 110,626 shares of Common Stock (resulting from the
exchange of certain debt and accrued interest for Series B Preferred
Stock and Common Stock) owned by Boston Provident Partners, L.P.; (ii)
24,967 shares of Common Stock and 14,811 warrants to acquire Common Stock
owned by Pine Boston Partners, L.P.; (iii) 25,952 shares of Common Stock
and 15,267 warrants to acquire Common Stock owned by International
Charitable Interests II, L.P.; (iv) 28,688 shares of Common Stock, 19,816
warrants to acquire Common Stock and 5,420 shares of Common Stock
(resulting from the exchange of certain debt and accrued interest for
Series B Preferred Stock and Common Stock) owned by BP Institutional
Partners, L.P.; (v) 46,256 shares of Common Stock and 33,085 warrants to
acquire Common Stock owned by BP Overseas Partners, L.P.; and (vi) 30,120
shares of Common Stock, 22,887 warrants to acquire Common Stock and
10,162 shares
61-1
<PAGE>
of Common Stock (resulting from the exchange of certain debt and accrued
interest for Series B Preferred Stock and Common Stock) owned by Maritime
Global Subsidiary I, Ltd. Mr. Trafelet and Mr. Kramer each have voting and
dispositive power over the above shares and warrants.
(3) Includes 196,784 shares of Common stock (resulting from the exchange of
certain debt and accrued interest for Series B Preferred Stock and Common
Stock).
(4) Includes: (i) 13,977 warrants to acquire Common Stock and 27,309 shares
of Common Stock (resulting from the exchange of certain debt and accrued
interest for Series B Preferred Common Stock and Common Stock) owned by
Daystar Partners, L.P.; (ii) 3,410 warrants to acquire Common Stock and
6,785 shares of Common Stock (resulting from the exchange of certain debt
and accrued interest for Series B Preferred Stock and Common Stock) owned
by Anacapa Ventures Partners; (iii) 40,900 warrants to acquire Common
Stock and 80,491 shares of Common Stock (resulting from the exchange of
certain debt and accrued interest for Series B Preferred Stock and Common
Stock) owned by Sundance Venture Partners, L.P.; and (iv) 5,862 shares of
Common Stock (resulting from the exchange of certain debt and accrued
interest for Series B Preferred Stock and Common Stock) owned by Mr.
Wells. Mr. Wells has voting and dispositive power over the above warrants
and is a director of the Company.
(5) Includes 64,299 shares of Common Stock (resulting from the exchange of
certain debt and accrued interest for Series B Preferred Stock and Common
Stock).
(6) Includes 11,630 shares of Common Stock (resulting from the exchange of
certain debt and accrued interest for Series B Preferred Stock and Common
Stock). Mr. Fowler is a director of the Company.
(7) Includes 12,810 shares of Common Stock (resulting from the exchange of
certain debt and accrued interest for Series B Preferred Stock and Common
Stock).
(8) Includes 7,746 shares of Common Stock (resulting from the exchange of
certain debt and accrued interest for Series B Preferred Stock and Common
Stock).
(9) Includes 3,393 shares of Common Stock (resulting from the exchange of
certain debt and accrued interest for Series B Preferred Stock and Common
Stock).
(10) Includes 3,354 shares of Common Stock (resulting from the exchange of
certain debt and accrued interest for Series B Preferred Stock and
Common Stock).
(11) Mr. Wells is a director of the Company.
PLAN OF DISTRIBUTION
The 1,042,096 shares of Common Stock are being registered to permit public
secondary sales of the registered Common Stock (the "Registered Shares") by
the Registered Stockholders from time to time after the date of this
Prospectus, all of which are subject to the terms of the 24-Month Provisional
Lock-Up Agreement. See "Shares Eligible for Future Sale." The Company has
agreed to bear all expenses (other than any underwriting discounts, selling
commissions and fees and expenses of counsel and other advisors to the
Registered Stockholders) in connection with the registration and sale of the
Registered Shares.
The Company anticipates that the Registered Stockholders may sell all or a
portion of the Registered Shares from time to time through a broker or brokers
on the Nasdaq National Market or in other over-the-counter market transactions
at the then prevailing market price. The Registered Stockholders may also sell
the Registered Shares in privately negotiated transactions, directly or
through a broker or brokers, at a price and pursuant to other terms negotiated
between the parties. In connection with all of these transactions, all of such
shares are subject to the 24-Month Provisional Lock-Up Agreement. See "Shares
Eligible for Future Sale."
Brokers effecting sales of the Registered Shares may receive customary
brokerage commissions from the Registered Stockholders. Brokers or dealers
engaged by the Registered Stockholders may arrange for other brokers or
dealers to participate. In connection with such sales, the Registered
Stockholders and brokers participating in such sales may be deemed to be
"underwriters" within the meaning of the Securities Act and may be deemed by
the National Association of Securities Dealers to have received underwriting
compensation for purposes of the Association's Rules of Fair Practice.
Each of the Registered Stockholders has agreed not to sell its Registered
Shares except as permitted by the terms of the 24-Month Provisional Lock-up
Agreement. See "Shares Eligible for Future Sale."
61-2
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DESCRIPTION OF CAPITAL STOCK
REINCORPORATION
The Company's predecessor was incorporated in the State of Nevada on
December 31, 1992. In January 1998, the Company's predecessor reincorporated
as a Delaware corporation named Virtual Mortgage Network, Inc., pursuant to a
merger with and into a newly-formed and wholly owned Delaware subsidiary, with
the Delaware subsidiary as the surviving corporation. As part of the
reincorporation, the Company effectuated a 4.89-for-1 reverse stock split.
OUTSTANDING CAPITAL
The authorized capital stock of the Company consists of 25,000,000 shares of
Common Stock, $.005 par value, 10,000,000 shares of Preferred Stock, $.001 par
value, 2,250,000 shares of which have been designated as Series A Preferred
Stock and 625,000 shares of which have been designated as Series B Preferred
Stock.
COMMON STOCK
Holders of Common Stock are entitled to receive such dividends as the Board
may declare out of funds legally available for that purpose. Holders of Common
Stock are entitled to one vote per share on all matters on which they are
entitled to vote. Holders of Common Stock have no preemptive, conversion,
redemption or sinking funds rights. In the event of a liquidation, dissolution
or winding-up of the Company, holders of Common Stock are entitled to share
equally and ratably in the assets of the Company, if any, remaining after the
payment of all debts and liabilities of the Company and the liquidation
preference of any outstanding Preferred Stock. The outstanding shares of
Common Stock are, and the shares of Common Stock offered by the Company hereby
when issued will be, fully paid and nonassessable. The rights, preferences and
privileges of holders of Common Stock are subject to the outstanding Series A
Preferred Stock and Series B Preferred Stock of the Company and any other
series of Preferred Stock that the Company may issue in the future.
PREFERRED STOCK
The Board is authorized to provide for the issuance of additional Preferred
Stock in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including the dividend rate, conversion rights, voting
rights, redemption price and liquidation preference, and to fix the number of
shares to be included in any series. Any Preferred Stock so issued may rank
senior to the Common Stock with respect to the payment of dividends or amounts
upon liquidation, dissolution or winding-up, or both. In addition, any shares
of Preferred Stock may have class or series voting rights. Issuances of
Preferred Stock, while providing the Company with flexibility in connection
with general corporate purposes, may, among other things, have an adverse
effect on the rights of holders of Common Stock, may have the effect of
delaying, deterring or preventing a change in control of the Company without
further action by the stockholders, may discourage bids for the Company's
Common Stock at a premium over the market price of the Common Stock, and may
adversely affect the market price and the voting and other rights of the
holders of Common Stock. At present, the Company has no plans to issue any
additional shares of Preferred Stock.
Series A Preferred Stock
The Company currently has 2,043,000 shares of Series A Preferred Stock
outstanding. Each share of Series A Preferred Stock, as of the closing of the
Offering, is convertible at the option of the holder into .249 shares of
Common Stock, which number is subject to upward adjustment if the Company
issues certain equity securities in the future for less than $4.01 per share.
Holders of Series A Preferred Stock are entitled to receive dividends before
any dividends are paid on the Company's Common Stock (which accrue at the rate
of 10% per year and are not cumulative), hold a liquidation preference in the
amount of $1.00 for each share of Series A Preferred Stock and hold the right
to vote with the Common Stock on all matters submitted to the stockholders,
with each holder having, as of the closing of the Offering, .249 votes per
share of Series A Preferred Stock.
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After June 1, 1998, holders of a majority of the Series A Preferred Stock may
require the Company to redeem the Series A Preferred Stock, if lawfully
permitted to do so, at $1.10 per share. Holders of a majority of the
outstanding Series A Preferred Stock also have the right to approve certain
Company actions, including the sale or merger of the Company, certain
amendments to the Company's Certificate of Incorporation and the declaration
of dividends on the Company's Common Stock. Such voting and approval rights
could have the effect of making a third party less willing to acquire a
majority of the outstanding voting stock of the Company. In addition, the
conversion of the Series A Preferred Stock into Common Stock, and the sale of
such Common Stock into the market, could have a material adverse effect on the
market value of the Common Stock although all such shares are subject to the
24-Month Provisional Lock-Up Agreement. See "Shares Eligible for Future Sale."
At December 31, 1996, the Company had received oversubscriptions with respect
to 150,000 shares of Series A Preferred Stock. Subsequent to December 31,
1996, the oversubscriptions were converted into an aggregate of $100,000 in
Phase II Bridge Notes (with 6,817 associated Phase II Bridge Warrants, in the
aggregate) and 12,470 shares of Common Stock with the consents of the
applicable investors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Series B Preferred Stock
Description. Concurrent with the closing of the Offering, the Company will
issue 441,053 shares of Series B Preferred Stock. Each share of Series B
Preferred Stock, as of the closing of the Offering, is convertible at the
option of the holder into one share of Common Stock, which number is subject
to upward adjustment in the event of any stock splits or stock dividends on
the Common Stock. Holders of Series B Preferred Stock are entitled to receive
dividends prior to the payment of dividends on the Company's Common Stock
(which accrue on a noncumulative basis at the rate of 9.9% per year). Holders
of Series B Preferred Stock have a liquidation preference, after all amounts
payable to holders of Series A Preferred Stock have been paid, in the amount
of $9.50 for each share of Series B Preferred Stock. The Company may at any
time, subject to the rights of the holders of Series A Preferred Stock, upon
30 days notice, require redemption of any outstanding shares of Series B
Preferred Stock of the Company. The redemption price of shares of Series B
Preferred Stock increases periodically from $9.975 per share at the closing of
the Offering to $19.00 per share after February 1, 2005 and includes the
payment of all accrued but unpaid dividends on the shares of Series B
Preferred Stock subject to redemption. The Company may not redeem any shares
of Series B Preferred Stock until the Company has offered to redeem the shares
of Series A Preferred Stock. The holders of Series B Preferred Stock are not
entitled to vote their shares on any matters submitted to a vote of Common
Stockholders, except those matters required by law to be submitted to a class
vote.
Agreement. In December 1997, the Company and the persons to be the holders
of $4,190,000 of Phase I and Phase II Bridge Notes (the "Bridge Noteholders")
entered into an agreement (the "Preferred Noteholders' Agreement"). The
Company agreed not to issue any additional equity securities (other than
Common Stock upon the exercise of outstanding warrants and options and upon
the exercise of options granted hereafter under employee option plans) without
the consent of a majority of the outstanding Series B Preferred Stock, which
consent may not be unreasonably withheld. The Company also agreed to accrue
dividends to the Series A Preferred Stock and Series B Preferred Stockholders
and to pay those dividends to the extent legally able to do so.
REGISTRATION RIGHTS
Pursuant to the Virtual Mortgage Network, Inc. Master Registration Rights
Agreement (the "Registration Rights Agreement"), holders of 51,125 shares of
Common Stock, 35,788 warrants to purchase Common Stock and 2,043,000 shares of
Series A Preferred Stock that are presently convertible into 509,501 shares of
Common Stock (the "Registrable Shares") or their transferees (the "Rights
Holders") will have registration rights that entitle the holders to request
that the Company include some or all of the shares owned by these holders,
subject to certain conditions, in a Company registration of its securities
under the Securities Act. Under the terms of the Registration Rights
Agreement, if the Company proposes to register any of its securities under the
Securities Act
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<PAGE>
for its own account, the holders of Registrable Shares are entitled to receive
written notice of the registration and are entitled to include, at the
Company's expense, Registrable Shares therein. Holders of 60% of the
Registrable Shares, excluding certain shares from the calculation, have demand
rights for two registrations following the consummation of the Offering. The
underwriters of any offering have the right, under specified conditions, to
limit the number of Registrable Shares included in these registrations. All
fees, costs and expenses for these registrations will be borne by the Company,
with certain exceptions, provided that these holders will be required to bear
their pro rata share of the underwriting discounts and commissions. All of the
Rights Holders have agreed under the 24-Month Provisional Lock-up Agreement
not to sell shares of Common Stock or request registration with respect
thereto, except as permitted by the 24-Month Provisional Lock-up Agreement.
See "Shares Eligible for Future Sale."
CERTAIN ANTI-TAKEOVER EFFECTS
The provisions of the Certificate of Incorporation and the Bylaws of the
Company summarized in the succeeding paragraphs may be deemed to have anti-
takeover effects and may delay, deter or prevent a tender offer or takeover
attempt that a stockholder might consider to be in such stockholder's best
interest, including those attempts that might result in a premium over the
market price for the shares held by stockholders. However, certain of the
following provisions may be limited or prohibited by the application of
Section 2115 of the California General Corporation Law described below.
Classified Board of Directors. The Certificate of Incorporation divides the
Board of Directors into three classes of directors serving staggered three-
year terms. As a result, approximately one-third of the Board of Directors
will be elected at each annual meeting of stockholders.
The classification of directors and provisions in the Certificate of
Incorporation and Bylaws that limit the ability of stockholders to increase
the size of the Board of Directors, together with provisions in the Bylaws
that limit the ability of stockholders to remove directors and provisions in
the Certificate of Incorporation that permit the remaining directors to fill
any vacancies on the Board, will have the effect of making it more difficult
for stockholders to change the composition of the Board of Directors. As a
result, two annual meetings of stockholders may be required for the
stockholders to change a majority of the directors, whether or not a change in
the Board of Directors would be beneficial to the Company and its stockholders
and whether or not a majority of the Company's stockholders believes that such
a change would be desirable.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The Bylaws establish advance notice procedures with regard to
stockholder proposals and the nomination, other than by or at the direction of
the Board of Directors or a committee thereof, of candidates for election as
directors. The Company may reject a stockholder proposal or nomination that is
not made in accordance with such procedures.
Prohibition on Stockholder Action by Written Consent and Limitations on
Calling Stockholder Meetings. The Bylaws prohibit stockholder action by
written consent in lieu of a meeting, and provide that stockholder action can
be taken only at an annual or special meeting of stockholders. The Bylaws
provide that, subject to the rights of holders of any series of Preferred
Stock to elect additional directors under specified circumstances, special
meetings of stockholders can be called only by the Board of Directors, the
Chairman of the Board of Directors or the Chief Executive Officer of the
Company. Stockholders are not permitted to call a special meeting or to
require that the Board of Directors call a special meeting of stockholders.
Such provision may have the effect of delaying consideration of a stockholder
proposal until the next annual meeting unless a special meeting is called by
the Board of Directors, the Chairman of the Board or the Chief Executive
Officer of the Company.
Section 203 of the Delaware General Corporation Law. Subject to certain
exclusions summarized below, Section 203 of the Delaware General Corporation
Law ("Section 203") prohibits any interested stockholder (an "Interested
Stockholder") from engaging in a "business combination" with a Delaware
corporation for three years following the date such person became an
Interested Stockholder. Interested Stockholder generally includes (i) any
person who is the beneficial owner of 15% or more of the outstanding voting
stock of the corporation and (ii) any person who is an affiliate or associate
of the corporation and who held 15% or more of the outstanding voting stock of
the corporation at any time within three years before the date on which such
person's status as an Interested Stockholder is determined. Subject to certain
exceptions a "business combination"
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includes, among other things: (i) any merger or consolidation involving the
corporation; (ii) the sale, lease, exchange, mortgage, pledge, transfer or
other disposition of assets having an aggregate market value equal to 10% or
more of either the aggregate market value of all assets of the corporation
determined on a consolidated basis or the aggregate market value of all the
outstanding stock of the corporation; (iii) any transaction that results in
the issuance or transfer by the corporation of any stock of the corporation to
the Interested Stockholder, except pursuant to a transaction that effects a
pro rata distribution to all stockholders of the corporation; (iv) any
transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series, or securities
convertible into the stock of any class or series, of the corporation that is
owned directly or indirectly by the Interested Stockholder; and (v) any
receipt by the Interested Stockholder of the benefit (except proportionately
as a stockholder) of any loans, advances, guarantees, pledges or other
financial benefits provided by or through the corporation.
Section 203 does not apply to a business combination if (i) before a person
became an Interested Stockholder, the board of directors of the corporation
approved the transaction in which the Interested Stockholder became an
Interested Stockholder or the business combination, (ii) upon consummation of
the transaction that resulted in the person becoming an Interested
Stockholder, the Interested Stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commences (other
than certain excluded shares), (iii) at the time of or following a transaction
in which the person became an Interested Stockholder, the business combination
was (a) approved by the board of directors of the corporation and
(b) authorized at an annual or special meeting of stockholders (and not by
written consent) by the affirmative vote of the holders of at least two-thirds
of the outstanding voting stock of the corporation not owned by the Interested
Stockholder, or (iv) if the corporation elects not to be governed by Section
203.
The provisions described above, together with the ability of the Board of
Directors to issue Preferred Stock as described under "--Preferred Stock," may
have the effect of delaying or deterring a change in the control or management
of the Company.
APPLICATION OF THE CALIFORNIA GENERAL CORPORATION LAW TO THE COMPANY
If the Company's equity securities are held by less than 800 stockholders, a
majority of its outstanding shares are held by persons with California
addresses and the Company has operational characteristics that indicate that
it has significant contacts to California, the Company may be subject to
Section 2115 of the California Corporations Code. In such event, the Company
would be subject to certain key provisions of the California General
Corporation Law, including, without limitation, those provisions relating to
the number of directors to be elected each year (all directors would be
required to be elected each year under California law applicable to companies
with less than 800 beneficial holders of their equity securities), the
stockholders' right to cumulate votes at elections of directors (cumulative
voting would be mandatory under California law applicable to companies with
less than 800 beneficial holders of their equity securities), the
stockholders' right to remove directors without cause (which under California
law is subject to the stockholders' right to cumulative voting), the Company's
ability to indemnify its officers, directors and employees (which generally is
more limited in certain situations in California than in Delaware), the
Company's ability to make distributions, dividends or repurchases (which
generally is more restrictive in California than in Delaware), inspection of
corporate records (which is generally more available in California than in
Delaware), approval of certain corporate transactions, and dissenters' rights.
After consultation with the Underwriters of the Offering, the Company
anticipates that it will have more than 800 stockholders following the
completion of the Offering. If this is the case, the Company would not be
subject to Section 2115 of the California Corporations Code as of the record
date of its next annual meeting of stockholders (even if such section
otherwise applied) if it continued to have 800 or more stockholders as of such
date.
LIMITATION OF LIABILITY OF DIRECTORS
The Certificate of Incorporation provides that the liability of the
directors of the Company for monetary damages to the Company or its
stockholders are eliminated to the fullest extent permissible under Delaware
law.
65
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While the Certificate of Incorporation provides directors with protection
from awards for monetary damages for breaches of their duty of care, it does
not eliminate such duty. Accordingly, the Certificate of Incorporation will
have no effect on the availability of equitable remedies, such as an
injunction or rescission based on a director's breach of such director's duty
of care.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation contains provisions authorizing the Company
to indemnify its directors and officers to the fullest extent permitted by the
laws of Delaware. In addition, the Company has entered into indemnity
agreements with its directors and officers that require the Company to
indemnify the directors and officers to the fullest extent permitted by
applicable provisions of the Delaware General Corporation Law. The Company
intends to explore alternatives for obtaining directors' and officers'
insurance to cover certain liabilities, including liabilities under the
Securities Act.
The Company believes the foregoing provisions are necessary to attract and
retain qualified persons as directors and officers.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is U.S. Stock Transfer
Corporation.
LISTING
Application is being made to have the Company's Common Stock approved for
quotation on the Nasdaq National Market under the trading symbol "VMNI."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of the Company's Common Stock could
have the effect of depressing the prevailing market price of its Common Stock.
Upon completion of the Offering, the Company will have outstanding 6,171,086
shares of Common Stock (assuming no exercise of outstanding options or
warrants after September 30, 1997, 2,043,000 shares of Series A Preferred
Stock (which are convertible into 509,501 shares of Common Stock as of
November 30, 1997), 441,053 shares of Series B Preferred Stock (which are
initially convertible into 441,053 shares of Common Stock) and 105,616 shares
of Common Stock to be issued upon the exchange of interest outstanding on
certain debt exchanged for Series B Preferred Stock upon the closing of the
Offering. Of these shares, the 3,700,000 shares of Common Stock sold in the
Offering (4,255,000 if the Underwriters' over-allotment option is exercised in
full) will be freely transferable without restriction or further registration
under the Securities Act, unless purchased by Affiliates of the Company, as
that term is defined in Rule 144 of the Securities Act, which shares will be
subject to the resale limitations of Rule 144 adopted under the Securities
Act. Officers, directors and stockholders of the Company holding all of the
remaining 2,471,086 outstanding shares of Common Stock prior to the Offering
and all holders of the Company's Series A Preferred Stock and Series B Common
Stock and of warrants and options to acquire Common Stock have agreed under
the terms of the 24-Month Provisional Lock-up Agreement not to sell such
Common Stock and such related securities for 24 months following the effective
date of the Offering, without the consent of Barington, except that (i) such
24-month period shall be reduced to 12 months, if the closing sale price of
the Common Stock on Nasdaq National Market has been at least 200% of the
initial public offering price per share of Common Stock for a period of 20
consecutive trading days ending within five days of the date of such sale, and
such sale is completed at a price in excess of 200% of the initial public
offering price per share of Common Stock (the "Stock Price Out") and (ii) each
such holder may sell up to 50% of such holder's shares of Common Stock
commencing 18 months following the effective date of the Offering, without
regard to the market price of the Common Stock. In addition, the Company has
agreed, subject to limitations, not to sell any shares of Common Stock for 24
months following the effective date of the Offering, without the consent of
Barington,
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except as permitted under the Stock Price Out to the 24-Month Provisional
Lock-up Agreement. See "Underwriting." The Company has also agreed not to
issue any shares of Common Stock without the consent, not to be unreasonably
withheld, of a majority-in-interest of holders of the Series B Preferred
Stock. The Company has been advised by Barington that it has no general policy
with respect to granting releases from such lock-up agreements. Barington may
in its discretion and without notice to the public, waive the lock-up and
permit sales prior to the expiration of the lock-up period.
Concurrent with the Offering, the Company has also registered 1,042,096
shares held by certain stockholders of the Company who participated in certain
debt and equity financings of the Company, which would under certain
circumstances permit the holders to resell shares without complying with Rule
144. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources." The holders of all
1,042,096 of such registered shares have agreed to the 24-Month Provisional
Lock-up Agreement.
Following the completion of the Offering, 2,471,086 shares of Common Stock,
the Series A Preferred Stock and the Series B Preferred Stock, and the 950,554
shares of Common Stock into which they may be converted held by existing
stockholders will be "Restricted Securities" as that term is defined under
Rule 144 (the "Restricted Shares"). Restricted Shares may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rules 144, 144(k) or 701 promulgated under the Securities
Act.
Pursuant to the Registration Rights Agreement, holders of 51,125 shares of
Common Stock, 35,788 warrants to purchase Common Stock and 2,043,000 shares of
Series A Preferred Stock that are presently convertible into 509,501 shares of
Common Stock or their transferees will have registration rights that entitle
the holders to request that the Company include some or all of the shares
owned by these holders, subject to certain conditions, in a Company
registration of its securities under the Securities Act. Under the terms of
the Registration Rights Agreement, if the Company proposes to register any of
its securities under the Securities Act for its own account, the holders of
such shares are entitled to receive written notice of the registration and are
entitled to include, at the Company's expense, such shares therein. Holders of
60% of such shares, excluding certain shares from the calculation, have demand
rights for two registrations following the consummation of the Offering. The
underwriters of any offering have the right, under specified conditions, to
limit the number of such shares included in these registrations. All fees,
costs and expenses for these registrations will be borne by the Company, with
certain exceptions, provided that these holders will be required to bear their
pro rata share of the underwriting discounts and commissions. All of the
Rights Holders have agreed under the 24-Month Provisional Lock-up Agreement
not to sell shares of Common Stock or request registration with respect
thereto, except as permitted by the 24-Month Provisional Lock-up Agreement.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for
at least one year, will be entitled to sell in any three-month period a number
of shares that does not exceed the greater of: (i) 1% of the number of shares
of Common Stock then outstanding (approximately 61,711 shares immediately
after the Offering) or (ii) the average weekly trading volume of the Company's
Common Stock in the Nasdaq National Market during the four calendar weeks
immediately preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission. Sales pursuant to Rule 144 are subject to
certain requirements relating to manner of sale, notice and availability of
current public information about the Company. A person (or persons whose
shares are aggregated) who is not deemed to have been an affiliate of the
Company at any time during the 90 days immediately preceding the sale and who
has beneficially owned Restricted Shares for at least two years is entitled to
sell those shares pursuant to Rule 144(k) without regard to the limitations
and requirements described above.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period
requirement, of Rule 144. Any employee, officer or director of or consultant
to the Company who purchased his or her shares pursuant to a written
compensatory plan or contract may be entitled to rely on the resale provisions
of Rule 701. Rule 701 permits Affiliates to sell their Rule 701
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shares under Rule 144 without complying with the holding period requirements of
Rule 144. Rule 701 further provides that non-Affiliates may sell the shares in
reliance on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. All holders of
Rule 701 shares are required to wait until 90 days after the date of this
Prospectus before selling their shares.
As of September 30, 1997, options to purchase a total of 373,236 shares of
Common Stock were outstanding (of which options to purchase 103,105 shares were
then exercisable), and all of the total shares issuable pursuant to these
exercisable options are subject to 24-Month Provisional Lock-up Agreements with
the Representatives. An additional 1,000,000 shares of Common Stock are
available for future grants under the Company's 1997 Performance Award Plan.
See "Management--Stock Option Plans." As of September 30, 1997, warrants to
purchase 409,759 shares of Common Stock were outstanding.
The Company intends to file one or more registration statements on Form S-8
under the Securities Act to register all shares of Common Stock subject to
outstanding stock options and Common Stock issuable pursuant to the Company's
stock option plans that do not qualify for an exemption under Rule 701 from the
registration requirements of the Securities Act. The Company expects to file
these registration statements approximately 90 days following the date of this
Prospectus, and the registration statements are expected to become effective
upon filing. Shares covered by these registration statements will thereupon be
eligible for sale in the public markets, subject to Rule 144 limitations
applicable to Affiliates and the lock-up agreements, to the extent applicable.
Prior to the Offering, there has been no public market for the Common Stock
of the Company, and no predictions can be made of the effect, if any, that the
sale or availability for sale of shares of additional Common Stock will have on
the trading price of the Common Stock. Nevertheless, sales of substantial
amounts of Common Stock in the public market, or the perception that these
sales could occur, could adversely affect the trading price of the Common Stock
and could impair the Company's future ability to raise capital through an
offering of its equity securities. Sales of substantial amounts of Common Stock
under Rule 144, Regulation S or otherwise, or even the potential for such
sales, could depress the market price of the Common Stock, and could impair the
Company's ability to raise capital through the sale of its equity securities.
See "Underwriting" and "Description of Capital Stock."
68
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Company and each of the Underwriters, for whom Barington Capital Group,
L.P. and Value Investing Partners, Inc. are acting as representatives (the
"Representatives"), have severally agreed to purchase from the Company the
aggregate number of shares of Common Stock set forth opposite their names
below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
- ------------ ---------
<S> <C>
Barington Capital Group, L.P..........................................
Value Investing Partners, Inc.........................................
---------
TOTAL............................................................... 3,700,000
=========
</TABLE>
The Common Stock is being sold on a firm commitment basis. The Underwriting
Agreement provides, however, that the obligations of the several Underwriters
are subject to certain conditions precedent. The Underwriters are committed to
purchase all the Common Stock offered hereby if any is purchased. The
Representatives have informed the Company that they do not expect to sell any
Common Stock to any account over which they have discretionary authority.
The Representatives have advised the Company that the Underwriters propose
to offer the Common Stock directly to the public at the initial public
offering price set forth on the cover page of this Prospectus, and to selected
dealers at that price, less a concession of not more than $. per share. The
Underwriters may allow, and such dealers may re-allow, a discount of not more
than $. per share on sales to certain other dealers. After the initial
public offering, the price to the public of the Common Stock and the other
terms may be changed.
The Company has granted the Underwriters an option, exercisable during the
45-day period following the date of this Prospectus, to purchase up to 555,000
additional shares of Common Stock at the initial public offering price, less
the underwriting discount (the "Over-Allotment Option"). The Underwriters may
exercise such option only for the purpose of covering any over-allotments in
the sale of shares of Common Stock offered by this Prospectus.
The Company has agreed to indemnify the Underwriters against certain
liabilities, losses and expenses, including liabilities under the Securities
Act, or to contribute to payments that the Underwriters may be required to
make in respect thereof.
The Company has agreed to pay the Representatives a non-accountable expense
allowance of 3% of the gross proceeds from the sale of the Common Stock
(including the proceeds of the sale of any shares of Common Stock to cover
over-allotments), of which $50,000 has been paid to date.
Except in connection with acquisitions, the exercise of options to purchase
up to 1,409,000 shares of Common Stock that may be granted or issued under the
Company's stock option plans or certain underwritten public offerings effected
six months after the effective date of the Offering, the Company has agreed
for a period of 24 months from the effective date of the Offering, that it
will not offer, issue, sell, contract to sell, grant any option for the sale
of or otherwise dispose of, or purchase any shares of Common Stock or other
equity securities of the Company without the prior written consent of
Barington, except as permitted under the Stock Price Out to the 24-Month
Provisional Lock-up Agreement. In addition, the officers, directors and
stockholders of the Company have agreed, under the terms of the 24-Month
Provisional Lock-up Agreement, that they will not offer, sell or otherwise
dispose of any shares of Common Stock or other equity securities of the
Company owned by them to the public for a period of at least 24 months from
the effective date of the Offering, without the prior written consent of
Barington. Under the terms of the 24-Month Provisional Lock-up Agreement, any
stockholder may (i) sell shares of Common Stock commencing 12 months after the
effective date of the Offering in the event that the closing sale price of the
Common Stock on the Nasdaq National Market has been at least 200% of the
initial public offering price per share of Common Stock for a period of 20
consecutive trading days ending
69
<PAGE>
within five days of the date of such sale, and such sale is completed at a
price in excess of 200% of the initial public offering price per share of
Common Stock and (ii) sell up to 50% of such stockholder's shares of Common
Stock commencing 18 months following the effective date of the Offering,
without regard to the market price of the Common Stock. Barington may, in its
discretion and without notice to the public, waive these lock-up agreements
and permit holders otherwise agreeing to lock up their shares to sell any or
all of their shares. See "Shares Eligible for Future Sale."
The Company has granted Value Investing Partners, Inc. ("VIP") a right of
first refusal on terms no more favorable than can be obtained elsewhere, for a
period of 24 months from the date of this Prospectus with respect to acting as
a broker, dealer, underwriter or advisor of any sale of securities for cash to
be made by the Company or any of its present or future subsidiaries.
VIP is entitled to appoint one member of the Company's Board of Directors,
which member may be a director, officer, employee or affiliate of VIP, and is
also entitled to observer status at any Board meeting held during the 24
months immediately following the date of this Prospectus. VIP does not
presently intend to appoint a member of the Company's Board of Directors.
In connection with the Offering, the Company shall issue to the
Representatives, for nominal consideration, warrants (the "Representative
Warrants") to purchase from the Company 10,000 shares of Common Stock for
every 100,000 shares of Common Stock sold in the Offering. The Representative
Warrants are initially exercisable at a per share price equal to 165% of the
public offering price for a period of five years commencing one year from the
date of this Prospectus and are restricted from sale, transfer, assignment or
hypothecation for a period of 24 months from the date hereof, except to
officers and/or employees of the Representatives or to other Underwriters and
their respective officers and/or employees. The demand registration rights
granted to the Representatives pursuant to the Representative Warrants will
expire five years from the date of this Prospectus.
VIP received cash compensation in connection with certain private placements
of Common Stock prior to the Offering.
Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurance that a market will develop or be sustained
following the Offering. The initial public offering price of the Common Stock
was determined by negotiations among the Representatives and the Company. The
factors considered in determining the initial public offering price were an
assessment of the prospects for the Company, an assessment of the industry in
which the Company operates, an assessment of management, the number of shares
of Common Stock offered and the price that purchasers of such shares might be
expected to pay, given the nature of the Company and the general condition of
the securities markets at the time of the Offering. Accordingly, the offering
price set forth on the cover page of this Prospectus should not necessarily be
considered an indication of the actual value of the Company or the Common
Stock.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by O'Melveny & Myers LLP, Newport Beach, California.
Certain legal matters will be passed upon for the Underwriters by Reid &
Priest LLP, New York, New York.
EXPERTS
The consolidated financial statements of Virtual Mortgage Network, Inc. (a
development stage Company) included in this Prospectus have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
report. Reference is made to said report which includes an explanatory
paragraph that states substantial doubt about Virtual Mortgage Network, Inc.'s
ability to continue as a going concern, as described in Note 1 to its
consolidated financial statements.
70
<PAGE>
The financial statements of Sutter Mortgage Corporation included in this
Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said report. Reference is made to said
report which includes an explanatory paragraph that states substantial doubt
about Sutter Mortgage Corporation's ability to continue as a going concern, as
described in Note 1 to its financial statements.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, exhibits, schedules and supplements thereto, the "Registration
Statement"), of which this Prospectus forms a part, covering the Common Stock
to be sold pursuant to the Offering. As permitted by the rules and regulations
of the Commission, this Prospectus omits certain information, exhibits and
undertakings contained in the Registration Statement. Additional information,
exhibits and undertakings can be inspected at and obtained from the Commission
at the public reference facilities maintained by the Commission at Room 1024,
450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and at certain
regional offices of the Commission located at Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and 13th Floor, 7
World Trade Center, New York, New York, 10048. Copies of the material can be
obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549 at prescribed rates.
Electronic filings made through the Electronic Data Gathering Analysis and
Retrieval System are publicly available through the Commission's Web Site
(http://www.sec.gov). For additional information with respect to the Company,
the Common Stock and related matters and documents, reference is made to the
Registration Statement and the exhibits thereto. Statements contained herein
as to the contents of any contract or any other document referred to are not
necessarily complete and, in each instance, if such contract or document is
filed as an exhibit, reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statement. Each statement is
qualified in its entirety by such reference.
The Company intends to furnish to its stockholders annual reports containing
consolidated financial statements audited by an independent public accounting
firm and will make available to its stockholders quarterly reports containing
unaudited consolidated financial statements for the first three quarters of
each fiscal year.
71
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
VIRTUAL MORTGAGE NETWORK, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Deficit........................... F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
SUTTER MORTGAGE CORPORATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................... F-17
Balance Sheets............................................................. F-18
Statements of Operations and Accumulated Deficit........................... F-19
Statements of Cash Flows................................................... F-20
Notes to Financial Statements.............................................. F-21
</TABLE>
F-1
<PAGE>
The accompanying consolidated financial statements retroactively reflect a
one for 4.89 reverse stock split of the Company's common stock approved by the
Company's Board of Directors in October 1997 and by the shareholders of the
Company, but which has not yet been consummated. The opinion below is in the
form which will be signed by Arthur Andersen LLP upon consummation of the
reverse stock split, which is described in Note 9 of the Notes to the
Consolidated Financial Statements, and assumes that from April 18, 1997 to the
date of such reverse stock split, no other events shall have occurred that
would affect the accompanying financial statements and notes thereto.
ARTHUR ANDERSEN LLP
Orange County, California
December 30, 1997
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of VIRTUAL MORTGAGE NETWORK, INC.:
We have audited the accompanying consolidated balance sheets of VIRTUAL
MORTGAGE NETWORK, INC. (a Nevada corporation in the development stage) and
subsidiaries as of December 31, 1995 and 1996 and the related consolidated
statements of operations, stockholders' deficit and cash flows for the period
from inception (March 2, 1995) to December 31, 1995, the year ended December
31, 1996 and for the period from inception (March 2, 1995) to December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Virtual Mortgage Network,
Inc. and subsidiaries as of December 31, 1995 and 1996, and the results of
their operations and their cash flows for the period from inception (March 2,
1995) to December 31, 1995, the year ended December 31, 1996 and for the
period from inception (March 2, 1995) to December 31, 1996, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, as of December 31, 1996, the Company has a working
capital deficit and stockholders' deficit and has incurred a cumulative net
loss of $8,524,998. The Company's losses are expected to continue for the
foreseeable future until such time as the Company is able to successfully
establish, operate and sufficiently expand its video-conferencing system.
Should its proposed public offering not be completed, the Company would be
required to seek alternative sources of financing to develop its video-
conferencing system and support its operations. Such sources of financing
could include equity financing or debt offerings. There can be no assurance
that such additional funding will be available on acceptable terms, if at all,
or that such funds, if raised, would enable the Company to achieve sufficient
revenue levels and maintain profitable operations. These matters raise
substantial doubt about the ability of the Company to continue as a going
concern. The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
that might result from the outcome of these uncertainties.
ARTHUR ANDERSEN LLP
Orange County, California
April 18, 1997
F-2
<PAGE>
VIRTUAL MORTGAGE NETWORK, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER
DECEMBER 31, 30,
------------------------ ------------
1995 1996 1997
----------- ----------- ------------
(UNAUDITED)
ASSETS
------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash................................. $ 22,222 $ 39,638 $ 97,210
Prepaid expenses and other current
assets.............................. 11,034 90,081 60,439
Note receivable...................... -- -- 500,000
Deferred offering costs.............. -- 179,254 460,857
Deferred acquisition costs........... -- -- 264,565
----------- ----------- ------------
Total current assets............... 33,256 308,973 1,383,071
----------- ----------- ------------
PROPERTY AND EQUIPMENT................. 309,907 612,394 773,038
Less-accumulated depreciation and
amortization........................ 31,278 156,152 352,246
----------- ----------- ------------
278,629 456,242 420,792
----------- ----------- ------------
OTHER ASSETS........................... 12,082 15,229 25,971
----------- ----------- ------------
$323,967 $ 780,444 $ 1,829,834
=========== =========== ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Notes payable........................ $ 250,000 $ 3,742,333 $ 6,023,000
Accounts payable..................... 137,006 1,121,479 1,474,997
Accrued liabilities.................. 145,006 460,066 1,307,832
Capital lease obligation, short
term................................ -- -- 10,759
----------- ----------- ------------
Total current liabilities.......... 532,012 5,323,878 8,816,588
----------- ----------- ------------
Capital lease obligation, long term.. -- -- 19,725
----------- ----------- ------------
Total liabilities.................. 532,012 5,323,878 8,836,313
----------- ----------- ------------
REDEEMABLE SERIES A PREFERRED STOCK,
$.001 par value; 2,250,000 shares
authorized; 1,426,500 shares issued
and outstanding at December 31, 1995;
2,250,000 shares issued and
outstanding at December 31, 1996 and
at September 30, 1997................. 1,133,272 2,017,064 2,017,064
----------- ----------- ------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' DEFICIT:
Common stock, $.005 par value;
25,000,000 shares authorized;
664,623 shares issued and
outstanding at December 31, 1995;
707,568 shares issued and
outstanding at December 31, 1996 and
1,668,074 shares issued and
outstanding at September 30, 1997... 3,250 3,460 7,151
Additional paid-in capital........... 227,800 600,760 5,935,310
Warrants............................. -- 1,422,750 1,566,500
Deferred compensation................ (28,117) (62,470) (57,837)
Deficit accumulated during
development stage................... (1,544,250) (8,524,998) (16,474,667)
----------- ----------- ------------
Total stockholders' deficit........ (1,341,317) (6,560,498) (9,023,543)
----------- ----------- ------------
$ 323,967 $ 780,444 $ 1,829,834
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
VIRTUAL MORTGAGE NETWORK, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
INCEPTION
(MARCH 2, INCEPTION NINE-MONTH PERIODS
1995) TO YEAR ENDED (MARCH 2, ENDED INCEPTION
DECEMBER DECEMBER 1995) TO SEPTEMBER 30, (MARCH 2, 1995)
31, 31, DECEMBER ------------------------ TO SEPTEMBER 30,
1995 1996 31, 1996 1996 1997 1997
----------- ----------- ----------- ----------- ----------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES................ $ 2,416 $ 123,119 $ 125,535 $ 61,199 $ 689,324 $ 814,859
OPERATING EXPENSES:
Loan production
costs................ -- 909,010 909,010 557,287 1,418,171 2,327,181
Technology
development.......... 169,100 532,050 701,150 393,095 677,031 1,378,181
Sales and marketing... 387,001 1,667,005 2,054,006 930,083 1,604,745 3,658,751
General and
administrative....... 993,743 3,344,576 4,338,319 2,224,968 3,011,167 7,349,486
----------- ----------- ----------- ----------- ----------- ------------
1,549,844 6,452,641 8,002,485 4,105,433 6,711,114 14,713,599
----------- ----------- ----------- ----------- ----------- ------------
Loss from
operations......... (1,547,428) (6,329,522) (7,876,950) (4,044,234) (6,021,790) (13,898,740)
INTEREST INCOME
(EXPENSE).............. 5,363 (695,904) (690,541) (165,749) (1,882,245) (2,572,786)
OTHER INCOME (EXPENSE).. (2,185) 44,678 42,493 4,422 (45,634) (3,141)
----------- ----------- ----------- ----------- ----------- ------------
Net loss.............. $(1,544,250) $(6,980,748) $(8,524,998) $(4,205,561) $(7,949,669) $(16,474,667)
=========== =========== =========== =========== =========== ============
Pro forma net loss per
share.................. $ (6.81) $ (4.44) $ (5.43)
=========== =========== ===========
Pro forma weighted
average number of
shares outstanding..... 1,025,254 947,332 1,463,989
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
VIRTUAL MORTGAGE NETWORK, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
DEFICIT
COMMON STOCK ACCUMULATED
----------------- ADDITIONAL DURING TOTAL
NUMBER OF PAID-IN DEFERRED DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT WARRANTS CAPITAL COMPENSATION STAGE DEFICIT
--------- ------ ---------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, March 2, 1995
(inception)............ -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common
stock at $0.005 to
founders in March
1995................. 511,248 2,500 -- (2,000) -- -- 500
Issuance of common
stock at $1.23 for
services related to
sale of Series A
Preferred Stock in
March 1995........... 51,125 250 -- 62,250 -- -- 62,500
Issuance of common
stock options at
$1.23 to employees in
March 1995........... -- -- -- 37,470 (37,470) -- --
Amortization of
deferred
compensation......... -- -- -- -- 9,353 -- 9,353
Issuance of common
stock at $1.23 to
employees for
services in December
1995................. 102,250 500 -- 130,080 -- -- 130,580
Net loss.............. -- -- -- -- -- (1,544,250) (1,544,250)
--------- ------ ---------- ---------- --------- ------------ -----------
BALANCE, December 31,
1995................... 664,623 3,250 -- 227,800 (28,117) (1,544,250) (1,341,317)
--------- ------ ---------- ---------- --------- ------------ -----------
Issuance of common
stock for cash at
$4.89 in April 1996.. 2,045 10 -- 9,990 -- -- 10,000
Common stock issued at
$6.12 for services
rendered in December
1996................. 40,900 200 -- 244,220 -- -- 244,420
Fair value of warrants
issued ($6.12) in
connection with notes
payable from June
through December
1996................. -- -- 1,408,000 -- -- -- 1,408,000
Issuance of warrants
at $6.12 pursuant to
settlement agreement
in October 1996...... -- -- 14,750 -- -- -- 14,750
Deferred compensation
on options issued to
employees............ -- -- -- 118,750 (118,750) -- --
Amortization of
deferred
compensation......... -- -- -- -- 84,397 -- 84,397
Net loss.............. -- -- -- -- -- (6,980,748) (6,980,748)
--------- ------ ---------- ---------- --------- ------------ -----------
BALANCE, December 31,
1996................... 707,568 3,460 1,422,750 600,760 (62,470) (8,524,998) (6,560,498)
========= ====== ========== ========== ========= ============ ===========
Exercise of employee
stock options at
$0.005 in January
1997................. 15,337 75 -- -- -- -- 75
Exercise of warrants
at $4.89 in January
1997................. 20,450 100 -- 99,900 -- -- 100,000
Exercise of warrants
at $7.78 in February
1997................. 12,863 62 -- 99,938 -- -- 100,000
Issuance of common
stock in February
1997 at $5.63........ 533,476 1,885 -- 2,998,115 -- -- 3,000,000
Issuance of common
stock in June 1997
at $5.63............. 172,774 611 -- 967,633 -- -- 968,244
Repurchase of
restricted stock at
initial grant price
of $0.005 in June
1997................. (410) (2) -- -- -- -- (2)
Fair value of warrants
issued ($5.63) in
conjunction with
notes payable from
July to September
1997................. -- -- 143,750 -- -- -- 143,750
Issuance of common
stock July through
September 1997 at a
price of $5.63....... 206,016 960 -- 1,168,964 -- -- 1,169,924
Amortization of
deferred
compensation......... -- -- -- -- 4,633 -- 4,633
Net loss.............. -- -- -- -- (7,949,669) (7,949,669)
--------- ------ ---------- ---------- --------- ------------ -----------
BALANCE, September 30,
1997................... 1,668,074 $7,151 $1,566,500 $5,935,310 $ (57,837) $(16,474,667) $(9,023,543)
========= ====== ========== ========== ========= ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
VIRTUAL MORTGAGE NETWORK, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCEPTION INCEPTION
(MARCH 2, (MARCH 2, NINE-MONTH PERIODS INCEPTION
1995) TO YEAR ENDED 1995) TO ENDED (MARCH 2,
DECEMBER DECEMBER DECEMBER SEPTEMBER 30, 1995) TO
31, 31, 31, ------------------------ SEPTEMBER 30,
1995 1996 1996 1996 1997 1997
----------- ----------- ----------- ----------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss............... $(1,544,250) $(6,980,748) $(8,524,998) $(4,205,561) $(7,949,669) $(16,474,667)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization......... 31,278 168,147 199,425 126,852 196,094 395,519
Compensation expense
on common stock,
options and warrants
issued............... 193,580 259,170 452,750 167,511 143,750 596,500
Amortization of
deferred
compensation......... 9,353 84,397 93,750 25,508 4,633 98,383
Amortization of
discount on notes
payable.............. -- 397,393 397,393 22,528 1,010,667 1,408,060
Changes in operating
assets and
liabilities:
(Increase) decrease in
prepaid expenses and
other current
assets............... (11,034) 7,620 (3,414) (106,614) 29,642 26,228
Increase in deferred
offering costs....... -- (179,254) (179,254) (134,756) (281,603) (460,857)
Increase in deferred
acquisition costs.... -- -- -- -- (264,565) (264,565)
Increase in other
assets............... (12,082) (3,147) (15,229) -- (10,742) (25,971)
Increase in accounts
payable.............. 137,006 984,473 1,121,479 198,337 353,518 1,474,997
Increase in accrued
liabilities.......... 145,006 315,060 460,066 235,390 847,766 1,307,832
----------- ----------- ----------- ----------- ----------- ------------
Net cash used in
operating
activities......... (1,051,143) (4,946,889) (5,998,032) (3,670,805) (5,920,509) (11,918,541)
CASH FLOWS FROM
INVESTING ACTIVITIES:
Increase in note
receivable............ -- -- -- -- (500,000) (500,000)
Purchase of property
and equipment......... (309,907) (302,487) (612,394) (240,683) (160,644) (773,038)
----------- ----------- ----------- ----------- ----------- ------------
Net cash used in
investing
activities......... (309,907) (302,487) (612,394) (240,683) (660,644) (1,273,038)
----------- ----------- ----------- ----------- ----------- ------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net proceeds from
issuance of preferred
stock................. 1,133,272 883,792 2,017,064 742,742 -- 2,017,064
Net proceeds from
issuance of notes
payable............... 250,000 4,373,000 4,623,000 3,403,000 1,270,000 5,893,000
Net proceeds from
issuance of common
stock................. -- 10,000 10,000 10,000 5,338,241 5,348,241
Obligations under
capital lease......... -- -- -- -- 30,484 30,484
----------- ----------- ----------- ----------- ----------- ------------
Net cash provided by
financing
activities......... 1,383,272 5,266,792 6,650,064 4,155,742 6,638,725 13,288,789
----------- ----------- ----------- ----------- ----------- ------------
NET INCREASE IN CASH.... 22,222 17,416 39,638 244,254 57,572 97,210
CASH, at beginning of
period................. -- 22,222 -- 22,222 39,638 --
----------- ----------- ----------- ----------- ----------- ------------
CASH, at end of period.. $ 22,222 $ 39,638 $ 39,638 $ 266,476 $ 97,210 $ 97,210
=========== =========== =========== =========== =========== ============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
During March 1995, 10,225 shares of common stock were issued to three
stockholders in exchange for $500 in notes receivable.
During March 1995, 51,125 shares of common stock valued at $62,500 were
issued for services related to the issuance of preferred stock and were
recorded as a reduction of the proceeds.
During May and June 1996, warrants were granted in connection with bridge
financings with an estimated fair market value of $1,408,000, which is
included as a discount to the related notes payable.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
VIRTUAL MORTGAGE NETWORK, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
1. COMPANY BACKGROUND AND SIGNIFICANT RISK FACTORS
Virtual Mortgage Network, Inc. (the Company), a development stage company,
was incorporated under the name of Dental Centers of America, Inc. in Nevada
on December 31, 1992. The Company was inactive until March 2, 1995 and
effective November 17, 1995, the Company changed its name to Virtual Mortgage
Network, Inc.
The Company was formed for the purpose of developing, installing and
operating a wide-area mortgage loan origination network, providing lending
services to home buyers using a PC-based video-conferencing network located in
real estate offices. The Company's "LoanMaker System" is intended to enable
home buyers to work face-to-face via video-conferencing with the Company's
loan counselors located at its corporate headquarters in Southern California.
The Company is in the development stage and has not generated significant
revenues to date. Since inception, the Company has been engaged in
organizational activities, including recruiting personnel, marketing, raising
capital, establishing office facilities and alpha and beta testing
computerized video conferencing systems. The Company's success is dependent
upon numerous items including the successful development and marketing of the
proposed video conferencing system, its ability to sign realtors and lenders
and success in raising additional capital to fund future development. The
failure of the Company to meet any of these conditions could have a materially
adverse effect upon the Company and may force the Company to reduce or curtail
operations.
As of December 31, 1996, the Company has a working capital deficit and
stockholders' deficit and has incurred a cumulative net loss of $8,524,998.
The Company's losses are expected to continue for the foreseeable future until
such time as the Company is able to successfully establish, operate and
sufficiently expand the video conferencing system. Should its proposed public
offering not be completed, the Company would be required to seek alternative
sources of financing to develop the video conferencing system and support its
operations. Such sources of financing could include equity financing or debt
offerings. There can be no assurance that such additional funding will be
available on acceptable terms, if at all, or that such funds, if raised, would
enable the Company to achieve and maintain profitable operations. These
matters raise substantial doubt about the ability of the Company to continue
as a going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification
of assets that might result from the outcome of these uncertainties.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, all of which are inactive.
b. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-7
<PAGE>
VIRTUAL MORTGAGE NETWORK, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
c. Deferred Offering Costs
Certain direct legal, accounting and underwriting fees incurred in
connection with the proposed initial public offering (the IPO) have been
capitalized in the accompanying balance sheet. Such costs will be recorded as
a reduction of the proceeds received in the IPO upon closing or will be
expensed in the future should the IPO not be consummated.
d. Property and Equipment
Property and equipment primarily consists of computers and purchased
software and is stated at cost. Depreciation is provided using the straight-
line method over the estimated useful lives of three years.
e. Revenue Recognition
Substantially all of the Company's revenues to date have been derived from
fees received for processing loans. Loan processing fees are recognized when
related loans are closed and funded by the lenders.
f. Income Taxes
The Company accounts for income taxes using the asset and liability method
as prescribed by Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." Under the asset and liability method, deferred
income tax assets and liabilities are determined based on the differences
between the financial reporting and tax basis of assets and liabilities and
are measured using the currently enacted tax rates and laws.
g. Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS 123
"Accounting for Stock Based Compensation." This standard, if fully adopted,
requires the accounting for employee stock-based compensation using a fair
value methodology. For stock options, fair value is determined using an option
pricing model that takes into account the stock price at the date of grant,
the exercise price, the expected life of the option, the volatility of the
underlying stock, the expected dividends and the risk-free interest rate. For
stock based compensation issued to non-employees, the standard requires
measurement based on the value of the related services performed or the stock
based compensation issued, whichever is more reliably measurable.
The adoption of the accounting methodology of SFAS 123 related to employees
is optional and as permitted under SFAS 123, the Company intends to continue
to account for employee stock options using the intrinsic value methodology in
accordance with APB Opinion No. 25; however, pro forma disclosures as if the
Company adopted the accounting methodology of SFAS 123 are required to be
presented (see Note 6).
h. Pro Forma Net Loss Per Common Share
Pro forma net loss per common share is calculated using the pro forma
weighted average number of common shares outstanding. For the year ended
December 31, 1996 and for the nine months ended September 30, 1997 and 1996,
per share information was computed pursuant to the rules of the Securities and
Exchange Commission (SEC), which require that common stock issued by the
Company during the twelve months immediately preceding the Company's initial
public offering plus the number of common shares issuable pursuant to the
grant of options and warrants issued during the same period, be included in
the calculation of the shares outstanding using the treasury stock method. The
outstanding mandatorily redeemable Series A preferred stock and the effect of
the other stock options are not included because they would be anti-dilutive
or are immaterial.
F-8
<PAGE>
VIRTUAL MORTGAGE NETWORK, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Primary and fully dilutive earnings per share are the same for all periods
presented.
Net loss per share for the year ended December 31, 1996 has been computed on
a pro forma basis, giving effect to the automatic conversion of 368,136
warrants issued to certain note holders (see Note 3). Historical earnings per
share are not presented for all periods as such amounts are not meaningful in
light of the conversion of the warrants.
3. NOTES PAYABLE
Notes payable consist of the following as of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
-------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Note payable bearing interest at five
percent due on July 17, 1995.......... $ 50,000 $ 50,000 $ 50,000
Notes payable bearing interest at prime
(8.75% at December 31, 1995) plus two
percent due on March 27, 1996......... 200,000 -- --
Notes payable bearing interest at
twelve percent per annum. Upon the
Company's failure to pay amounts due
on the Maturity Date, which is the
earlier of (i) March 6, 1997, or (ii)
consummation of the IPO, the interest
rate on the notes increases to fifteen
percent per annum..................... -- 4,703,000 5,973,000
-------- ----------- ----------
250,000 4,753,000 6,023,000
Less--Discount......................... -- (1,010,667) --
-------- ----------- ----------
$250,000 $ 3,742,333 $6,023,000
======== =========== ==========
</TABLE>
As of September 30, 1997, the Company had issued 359,615 detachable warrants
to purchase Common Stock at an exercise price of $.005 per share in
conjunction with substantially all of the notes above. The number of warrants
for the purchase of Common Stock to be issued is calculated by dividing the
principal amount of the notes by $4.00 per share. The issuance of the warrants
with debt resulted in the allocation of $1,408,000 to the warrants and a
discount of the notes payable resulting in a risk adjusted rate of
approximately 43 percent. The value allocated to the warrants was determined
based on the fair value of the Company's Common Stock on the issuance date of
the warrants. The discount will be amortized through July 1997, the date of
the initial extension on the notes. The warrants will automatically convert to
Common Stock upon the successful completion of an initial public offering.
Among the notes issued in 1996 was a note payable in the amount of $130,000,
issued to a third party as compensation for investment services rendered in
relation to the private placement of the above notes. This amount has been
included in prepaid expenses and other current assets as a financing charge,
which was amortized through July 1997.
4. INCOME TAXES
No provision for federal and state income taxes has been recorded as the
Company incurred net operating losses since inception. At December 31, 1996,
the Company had approximately $6,367,000 and $3,183,000 of federal and state
net operating loss carryforwards, respectively, available to offset future
taxable income; such carryforwards expire through 2011 and 2001, respectively.
Under the Tax Reform Act of 1986, the benefits from net operating losses
carried forward may be impaired or limited in certain circumstances. Events
which may cause limitations in the amount of net operating losses that the
Company may utilize in any one year include,
F-9
<PAGE>
VIRTUAL MORTGAGE NETWORK, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
but are not limited to, a cumulative ownership change of more than 50 percent
over a three year period. At December 31, 1996, the effect of such limitation,
if imposed, has not been determined.
Deferred tax assets, totaling approximately $515,000 and $2,407,000 at
December 31, 1995 and 1996, respectively, consist primarily of the tax effect
of net operating loss carryforwards. The Company has provided a full valuation
allowance against the deferred tax assets due to uncertainty regarding
realizability.
5. STOCKHOLDERS' DEFICIT
a. Stock Split
On March 22, 1995, the Company's Board of Directors approved a 50 for 1
stock split to be effected as a stock dividend. All references in the
accompanying consolidated financial statements to the number of shares and per
share amounts have been restated to reflect the effect of this action. (See
Note 9)
b. Series A Preferred Stock
The stockholders of the Company have authorized 10,000,000 shares of
preferred stock, 2,250,000 of which have been set aside for Series A Preferred
Stock (Series A Preferred). In May 1995, the Company completed the sale of
750,000 shares of Series A Preferred at the selling price of $1.00 per share.
500,000 of these shares were sold to the developer of a portion of the
Company's video-conferencing technology (the "Technology Developer"). In
addition, during the period from September 1995 to March 1996 the Company
completed the sale of 1,650,000 shares of Series A Preferred to various
investors at a purchase price of $1.00 per share, which includes 150,000
shares that have been subscribed and paid for, but which are in excess of the
total of Series A Preferred authorized by the Company's board of directors.
In connection with the sale of the Series A Preferred, the Company entered
into a purchase and rights agreement with the Technology Developer which gives
the Technology Developer certain registration rights, as defined. Furthermore,
the agreement stipulates that if the Company does not use the Technology
Developer's technology, the Technology Developer shall have the right to force
the Company to repurchase all of the shares at the higher of: (i) $1.00 per
share plus the amount of any declared but unpaid dividends, plus 10% per
annum, compounded annually; or (ii) the then current fair market value, as
defined.
Each share of Series A Preferred Stock, as of November 30, 1997, is
convertible at the option of the holder into .249 shares of Common Stock,
which number is subject to upward adjustment if the Company issues certain
equity securities in the future for less than $4.01 per share. After June 1,
1998, holders of a majority of the Series A Preferred Stock may require the
Company to redeem the Series A Preferred Stock. The redemption price would be
$1.10 per share, as adjusted for stock splits, stock dividends or
recapitalizations, plus an amount equal to declared but unpaid dividends.
Series A Preferred Stock accrues dividends at a rate of 10% per annum on a
noncumulative basis payable quarterly when, as and if declared by the Board of
Directors of the Company. There have been no dividends declared or paid on the
Series A Preferred Stock. In the event of liquidation, Series A Preferred has
preference over Common Stock in the amount of $1.00 per share, plus declared
but unpaid dividends. Holders of Series A Preferred are entitled to one vote
for each share of Common Stock into which shares can be converted.
c. Common Stock Warrants
In March 1995, the Company issued 35,787 warrants for the purchase of Common
Stock at an exercise price of $3.43 per share to a third party performing
investment services for the Company. During 1996, the Company issued 139,607
warrants at an exercise price of $4.89 per share for various services. As
discussed in
F-10
<PAGE>
VIRTUAL MORTGAGE NETWORK, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Note 7, the Company issued 5,112 warrants to a former employee in conjunction
with a settlement agreement at an exercise price of $4.89 per share. As
discussed in Note 3, the Company issued 353,811 detachable warrants to
purchase Common Stock at an exercise price of $0.005 per share in conjunction
with notes payable. The Company has measured these transactions using the fair
value of the warrants issued which was determined using the Black-Scholes
option-pricing model on the date of grant.
d. Common Stock
In December 1996, the Company issued 40,900 shares of common stock to a
third party for services performed. The Company recorded compensation expense
based on the fair value of the services rendered ($244,420, or $5.98 per
share) during the year ended December 31, 1996.
6. COMPENSATION PLANS
a. Consultant and Employee Stock Compensation Plan
In March 1995, the Company's Board of Directors approved the Company's 1995
Consultant and Employee Stock Compensation Plan (the Compensation Plan).
Employees and consultants of the Company are eligible to participate in the
Compensation Plan. The Company has reserved 102,250 shares of common stock for
issuance under the Compensation Plan, and in December 1995, 102,250 shares
were issued under the Compensation Plan to various employees and consultants
in exchange for services. The Company has recorded $125,000 in compensation
expense based on the estimated fair value of the Company's common stock as
determined by the Board of Directors.
b. Employment Agreement
During March 1995, the Company entered into four-year employment agreements
with key executives. In connection therewith, the Company granted 40,900
options for the purchase of common stock at an exercise price of twenty-five
percent of the book value per share of the Company on the vesting date, as
defined. These options vest ratably over the four year contract. As of
December 31, 1996, 15,337 options were vested. The Company recorded
compensation expense of $9,375 and $84,375 for the years ended December 31,
1995 and 1996, respectively, based on the estimated fair value of the common
stock at the vesting dates. In conjunction with a settlement agreement with
one of the employees, discussed in Note 7, 7,669 unexercised options were
canceled. Future compensation charges will be incurred, based upon the fair
value of the Company's common stock at future vesting dates in 1997 and 1998.
c. Stock Option Plan
In November 1995, the Board of Directors adopted the Company's 1995 Stock
Option Plan (the 1995 Plan). Under the 1995 Plan, awards may consist of any
combination of stock options (incentive and nonqualified), restricted stock,
stock appreciation rights and performance share awards. The Company has
reserved 409,000 shares of common stock for issuance under the 1995 Plan.
Stock options granted under the 1995 Plan are exercisable over a period not to
exceed ten years with 25% vesting after one year and thereafter ratably on a
monthly basis over a three year period. As of December 31, 1996, 208,512 stock
options had been granted to various employees and approximately 200,488
remained available for grant.
F-11
<PAGE>
VIRTUAL MORTGAGE NETWORK, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following represents stock option activity since inception (March 2,
1995):
<TABLE>
<CAPTION>
NUMBER WEIGHTED
OF AVERAGE EXERCISE
OPTIONS PRICE PER SHARE
------- ----------------
<S> <C> <C>
Outstanding at inception (March 2, 1995)............ -- $--
Granted........................................... 40,900 .00
Exercised......................................... -- --
------- ----
Outstanding at December 31, 1995.................... 40,900 .00
Granted........................................... 183,000 1.00
Exercised......................................... 15,388 --
------- ----
Outstanding at December 31, 1996.................... 208,512 $.85
======= ====
Options available for future grant.................. 200,488
=======
</TABLE>
The fair value of each option granted subsequent to December 15, 1995 is
estimated using the Black-Scholes option-pricing model on the date of grant
using the following assumptions: (i) no dividend yield, (ii) volatility of
effectively zero, (iii) risk-free interest rate of seven percent and (iv)
expected life of four to five years.
The following table summarizes the information regarding stock options as of
December 31, 1995 and 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------------------
EXERCISE PRICE NUMBER OUTSTANDING LIFE NUMBER EXERCISABLE EXERCISE PRICE
-------------- ------------------ ---- ------------------ --------------
<S> <C> <C> <C> <C>
$4.16 208,512 5 years 43,251 $4.01
</TABLE>
Had compensation expense for the Company's 1996 stock-based compensation
been recorded under the fair market value principles applicable under SFAS No.
123, the Company's net loss for the year ended December 31, 1996 would be
unchanged from the amounts recorded under the principles of APB No. 25, as the
relationship of the exercise price of the Company's stock-based compensation
and the fair market value of the underlying common stock as of the date of
grant generates no compensation expense under the principles of either SFAS
No. 123 or APB No. 25.
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts.
7. COMMITMENTS AND CONTINGENCIES
a. Legal Proceedings
The Company is involved in litigation arising from the normal course of
business. Management believes, based on the advice of counsel, that the final
outcome will not have a material adverse effect on the Company's financial
position or results of operations.
In 1995 and 1996, the Company received threats of a lawsuit with respect to,
among other things, the Company's refusal to issue shares of Common Stock to
three individuals. These individuals had entered into an agreement with the
Company in March 1995 in connection with the initial capitalization of the
Company to purchase shares of Common Stock in exchange for certain assets to
be delivered to the Company by the individuals. The Company believed the
individuals failed to deliver the consideration required by the agreement, and
the Company refused to issue the Common Stock. The three individuals have made
a variety of allegations against the Company and Michael A. Barron, the
Company's Chairman and Chief Executive Officer, relating to
F-12
<PAGE>
VIRTUAL MORTGAGE NETWORK, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the disputed issuance of Common Stock and the formation of the Company,
however, no legal proceedings have ever been commenced by these individuals.
These allegations include the following: (i) the assertion that in October
1994 Mr. Barron was hired as a consultant to Software Today, a company owned
by the individuals, to develop the business opportunity that has now turned
into the Company, (ii) the assertion that in exchange for Software Today's and
the individuals' agreement to pursue the opportunity through the Company, two
of the individuals ("Meader and Garde") would receive 25% of the initial
equity of the Company and the third individual ("Edwards") would also receive
25% of the initial equity (with Mr. Barron also receiving 25% and two others
(Dianne David and Sandra Sawyer) collectively receiving the remaining 25%),
(iii) the assertion that Mr. Barron breached his consulting agreement with
Software Today and converted an opportunity made available to him while he was
serving as a consultant to Software Today in breach of his fiduciary duties to
Software Today, and (iv) the assertion that the Company has breached its
agreement to deliver the Common Stock. Mr. Barron was able to obtain, on his
behalf and on behalf of the Company, a settlement, an assignment of claims and
a release from the trustee in bankruptcy of Edwards with respect to half of
the shares in dispute in connection with the settlement of a defamation
lawsuit brought by Mr. Barron against Edwards. No legal action has been
commenced by the remaining claimants. The Company believes that the claim is
without merit, and the Company intends to vigorously defend any legal action
that may be commenced in the future. There can be no assurance, however, that
the Company would be successful in defending such a lawsuit, or that the
Company, even if successful, would not expend significant resources in its
defense. Mr. Barron and Ms. David, founding stockholders of the Company, have
agreed to indemnify and hold the Company harmless from any and all losses
(including reasonable attorneys' fees and expenses) the Company might incur
with respect to the foregoing claims. The shares of Common Stock owned by the
founding stockholders of the Company have been pledged subject to certain
pledge arrangements of Mr. Barron, to secure the founding stockholders'
indemnification obligations to the Company. There can be no assurance,
however, that the indemnification provided by the founding stockholders will
be sufficient to fully indemnify the Company with respect to any losses the
Company might incur with respect to the foregoing claims.
b. Operating Leases
The Company has entered into lease agreements for its current office
facilities, which expire on various dates through 1998 and a $20 million
master operating lease agreement (the "Agreement") to supply the Company with
its video-conferencing equipment. The Agreement allows for the leasing of
individual computer systems with a lease period of two to three years. At
December 31, 1996, future minimum lease payments under noncancelable operating
leases are as follows:
<TABLE>
<S> <C>
Year Ending December,
1997......................................................... $ 848,000
1998......................................................... 396,000
1999......................................................... 18,000
2000......................................................... 6,000
----------
$1,268,000
==========
</TABLE>
Rent expense for the period and year ended December 31, 1995 and 1996
aggregated $60,000 and $582,000, respectively.
F-13
<PAGE>
VIRTUAL MORTGAGE NETWORK, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
c. Settlement Agreement
In October 1996, the Company entered into a settlement agreement with one of
its employees and a consulting firm controlled by the employee. The agreement
required the Company to pay the consulting firm approximately $149,000 in cash
for services provided in 1996. In addition, the Company granted the former
consulting firm 5,112 warrants to purchase common stock at an exercise price
of $4.89 per share. Compensation expense totaling approximately $164,000 was
recorded in the accompanying 1996 financial statements for this settlement
agreement.
8. SUBSEQUENT EVENTS
a. Private Placement of Common Stock
In February 1997, the Company completed a private placement of 385,383
shares of its common stock at a purchase price of $7.78 per share, raising net
proceeds of approximately $3,000,000. The investors received certain rights
and privileges, including an ability to convert the common shares into a debt
instrument and the right to receive warrants for the purchase of the Company's
common stock for $7.34 per share should the contemplated IPO not be completed
by August 15, 1997, as well as anti-dilution privileges and registration
rights. The ability to convert the common shares in to a debt instrument was
time-limited and was also subject to restriction in the event that certain
anti-dilution rights were exercised.
9. INFORMATION RELATED TO UNAUDITED INTERIM FINANCIAL STATEMENTS
a. Basis of Presentation
The unaudited financial statements have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and note disclosures normally included in annual financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to those rules and regulations, although the
Company believes that the disclosures made are adequate to make the
information presented not misleading. These unaudited financial statements
reflect, in the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to fairly present the results of
operations, changes in cash flows and financial position as of and for the
periods presented. These unaudited financial statements should be read in
conjunction with the audited financial statements and related notes thereto,
appearing elsewhere herein. The results for the interim periods presented are
not necessarily indicative of results to be expected for a full year.
b. Pro Forma Net Loss Per Share
Net loss per share is calculated using the weighted average number of shares
outstanding. Common equivalent shares are excluded from the computation as
their effect is antidilutive, except that, pursuant to the Securities and
Exchange Commission ("SEC") Staff Accounting Bulletins, common and common
equivalent shares, issued during the period commencing 12 months prior to the
initial filing of a proposed public offering at prices below the public
offering price have been included in the calculation as if they were
outstanding for all periods presented (using the treasury stock method for
stock options and warrants at the estimated initial public offering price).
Earnings per share for each of the nine months ended September 30, 1996 and
1997 have been computed on a pro forma basis giving effect to the automatic
conversion of warrants issued to certain note holders (see Note 3). Historical
earnings per share are not presented as such amounts are not meaningful in
light of the conversion of the warrants.
c. Proposed Initial Public Offering
Subsequent to September 30, 1997, the Company has proposed the filing of a
Form S-1 Registration Statement with the Securities and Exchange Commission to
sell common stock to the public (the IPO). A portion
F-14
<PAGE>
VIRTUAL MORTGAGE NETWORK, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of the proceeds will be used to repay debt. There can be no assurance that the
Company's proposed public offering will be successful.
d. Sutter Mortgage Acquisition
In June 1997, the Company entered into an agreement (the Purchase Agreement)
to acquire the outstanding common stock of Sutter Mortgage Corporation, a
residential mortgage bank. An amendment to the Purchase Agreement was entered
into in December 1997. The amendment stipulates that the purchase price for
Sutter Mortgage will be $2,484,000. Of the purchase price, $950,000 has been
paid through the closing of the acquisition. $500,000 was advanced prior to
September 30, 1997 with the balance paid upon closing. Concurrent with the
closing of the IPO, an additional $1,534,000 will be paid. The former
shareholder will lend $100,000 to the Company for a deposit related to the
Paine Webber warehouse line at an interest rate of 8%. Principal and interest
are payable at the closing of the offering.
e. Stock Split
In October 1997, the Board of Directors of the Company approved a one for
4.89 reverse stock split, approved by the stockholders in November 1997. All
references in the accompanying consolidated financial statements to the number
of shares and per share data have been restated to reflect the effect of this
action.
f. Stock Option Plan
In October 1997, the Board of Directors adopted the Company's 1997 Stock
Option Plan (the 1997 Plan). Under the 1997 Plan, awards may consist of any
combination of stock options (incentive and nonqualified), restricted stock,
stock appreciation rights and performance share awards. The Company has
reserved 1,000,000 shares of common stock for issuance under the 1997 Plan.
The following represents stock option activity since inception December 31,
1996.
<TABLE>
<CAPTION>
NUMBER WEIGHTED
OF AVERAGE EXERCISE
OPTIONS PRICE PER SHARE
------- ----------------
<S> <C> <C>
Outstanding at December 31, 1996.................... 208,512 $4.16
Granted........................................... 56,313 6.75
Exercised......................................... 20,450 .00
------- -----
Outstanding at September 30, 1997................... 244,375 5.04
=======
</TABLE>
g. Financing Activity
In July and September 1997, the Company entered into loan and security
agreements pursuant to which the Company executed promissory notes in the
aggregate principal amount of $1,270,000 and issued 52,488 common stock
purchase warrants exercisable at $.005 per share for shares of the Company's
common stock. The notes are secured by all of the assets of the Company,
mature on the earlier of the consummation of an initial public offering or
January 6, 1998, and accrue interest at 15% per annum.
From July 1, 1997 to October 16, 1997, the Company completed private
placements of 383,242 shares and exercise of 368,136 warrants at $.005 for a
net proceeds of $2,137,000. The proceeds of the private placements were also
used to fund the completion and testing of the Company's technology, to pay
certain outstanding debt, and to fund the Company's working capital needs.
F-15
<PAGE>
VIRTUAL MORTGAGE NETWORK, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On October 21, 1997, the Company made a short-term personal loan to Michael
A. Barron, Chairman and Chief Executive Officer of the Company, in the amount
of $112,500. The loan bears interest at ten percent per annum. The loan was
made to Mr. Barron as an accommodation to bridge a short-term financial need
pending his receipt of funds from a third-party source. The loan is due upon
Mr. Barron's receipt of funds from the third-party source and in no event
later than October 31, 1997. The loan was approved by all of the non-employee
directors of the Company and is secured by a pledge of 58,666 shares of Common
Stock owned by Mr. Barron.
h. Borrowings
In December 1997, the Company borrowed $1,300,000 which was issued at a
discount $350,000. The note matures on the earlier of February 14, 1998 or the
consummation of this offering and accrues interest at 15 percent per annum. In
connection with the borrowing, the Company issued 100,000 Common Stock
Purchase Warrants, exercisable at 105% of the initial price to public for
shares of the Company's Common Stock in the Offering.
i. New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". This
statement is effective for both interim and annual reporting periods ending
after December 15, 1997. SFAS No. 128 replaces primary EPS and basic EPS and
fully diluted EPS with diluted EPS. Basic EPS is computed by dividing reported
earnings by weighted average shares outstanding. Diluted EPS is computed in
the same way as fully diluted EPS, except that the calculation now uses the
average share price for the reporting period to compute dilution from options
under the treasury stock method. Management does not believe that adoption of
this standard will have a significant impact on earnings per share.
In June 1997, the FASB issued SFAS Nos. 130 and 131 "Reporting Comprehensive
Income" and "Disclosures about Segments of an Enterprise and Related
Information." FASB No. 130 and No. 131 are effective for fiscal years
beginning after December 15, 1997, with earlier adoption permitted. The
Company does not believe that adoption of these standards will have a material
effect on the Company.
j. Accrued Liabilities
As of September 30, 1997 the components of accrued liabilities are as
follows:
<TABLE>
<CAPTION>
1997
---------
<S> <C>
Accrued Interest................................................ 734,026
Accrued Legal................................................... 239,766
All Other ...................................................... 334,040
---------
Total......................................................... 1,307,832
=========
</TABLE>
k. Significant Customers
For the nine months ended September 30, 1997 a customer accounted for 20% of
total revenues and another customer accounted for 17% of total revenues for
the period.
F-16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Sutter Mortgage Corporation:
We have audited the accompanying balance sheets of SUTTER MORTGAGE
CORPORATION (the Company) as of December 31, 1996 and 1995 and the related
statements of operations and accumulated deficit and cash flows for the three
years ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sutter Mortgage
Corporation as of December 31, 1996 and 1995 and the results of its operations
and its cash flows for the three years ended December 31, 1996 in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, as of December 31, 1996, the Company has an accumulated
deficit and has suffered recurring losses from operations. The Company's
losses are expected to continue throughout fiscal 1997 and until Virtual
Mortgage Network, Inc (the Buyer--See Note 1) and the Company can successfully
integrate their operations and the Buyer is able to successfully establish,
operate and sufficiently expand its video-conferencing system. Should the
Buyer's proposed public offering not be completed, the Company would be
required to seek alternative sources of financing to support its operations.
Such sources of financing could include equity financing or debt offerings.
There can be no assurance that such additional funding will be available on
acceptable terms, if at all, or that such funds, if raised, would enable the
Company to achieve sufficient revenue levels and maintain profitable
operations. These matters raise substantial doubt about the ability of the
Company to continue as a going concern. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets that might result from the outcome
of these uncertainties.
ARTHUR ANDERSEN LLP
Orange County, California
September 12, 1997
F-17
<PAGE>
SUTTER MORTGAGE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER
DECEMBER 31, 30,
------------------------ -----------
1996 1995 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents............. $ 265,598 $ 378,884 $ 169,142
Accounts receivable................... 84,555 309,031 131,668
Officer notes receivable and employee
advances............................. 93,798 75,576 58,300
Mortgage loans held for sale.......... 23,641,988 34,320,774 44,664,761
Property and equipment, net........... 431,412 459,378 476,133
Prepaid expenses and other assets..... 50,549 56,670 65,055
----------- ----------- -----------
Total assets........................ $24,567,900 $35,600,313 $45,565,059
=========== =========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Lines of credit and financing
arrangements......................... $23,933,654 $34,395,774 $44,798,428
Accounts payable and accrued
liabilities.......................... 889,399 388,227 1,403,556
Other notes payable................... 10,992 19,237 4,492
Obligations under capital leases...... -- 46,081 44,121
----------- ----------- -----------
Total liabilities................... 24,834,045 34,849,319 46,250,597
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDER'S EQUITY (DEFICIT):
Common stock, no par value.
Authorized--1,500,000 shares; 692,000
shares issued and outstanding........ 294,752 294,752 294,752
Additional paid-in capital............ 3,906,679 3,906,679 4,406,679
Accumulated deficit................... (3,323,068) (2,799,867) (4,904,099)
Due from affiliates................... (1,144,508) (650,570) (482,870)
----------- ----------- -----------
Total shareholder's equity
(deficit).......................... (266,145) 750,994 (685,538)
----------- ----------- -----------
Total liabilities and shareholder's
equity (deficit)................... $24,567,900 $35,600,313 $45,565,059
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-18
<PAGE>
SUTTER MORTGAGE CORPORATION
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
NINE-MONTH
PERIODS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1996 1995 1994 1997 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Loan origination
fees................. $ 1,197,946 $ 696,097 $ 1,035,443 $ 3,666,691 $ 3,360,184
Other fees............ 335,763 299,787 68,322 604,042 193,275
Gain on sale of
mortgages and related
servicing rights..... 4,297,914 2,645,664 3,125,420 1,651,422 578,183
Gain on sale of
servicing rights..... 3,623 257,134 151,328 9,431 3,623
Interest income....... 1,618,406 979,500 908,333 1,195,518 1,323,391
Other income.......... 25,140 20,170 16,270 35,079 14,689
----------- ----------- ----------- ----------- -----------
7,478,792 4,898,352 5,305,116 7,162,183 5,473,345
----------- ----------- ----------- ----------- -----------
EXPENSES:
Personnel............. 3,924,597 2,546,737 3,586,630 5,128,282 2,785,902
General and
administrative....... 1,753,830 1,255,153 2,230,915 1,956,262 952,770
Professional fees..... 73,036 56,861 181,254 374,388 258,957
Depreciation and
amortization......... 194,950 247,985 253,925 130,621 155,566
Interest.............. 1,583,180 1,004,873 898,903 1,153,661 1,257,768
Provision for possible
loan losses.......... 470,000 175,000 50,000 -- 352,500
----------- ----------- ----------- ----------- -----------
7,999,593 5,286,609 7,201,627 8,743,214 5,763,463
----------- ----------- ----------- ----------- -----------
Loss before income
taxes.............. (520,801) (388,257) (1,896,511) (1,581,031) (290,118)
INCOME TAX BENEFIT
(PROVISION)............ (2,400) (3,200) 302,870 -- (3,200)
----------- ----------- ----------- ----------- -----------
Net loss............ (523,201) (391,457) (1,593,641) (1,581,031) (293,318)
ACCUMULATED DEFICIT,
beginning of year...... (2,799,867) (2,408,410) (814,769) (3,323,068) (2,799,867)
----------- ----------- ----------- ----------- -----------
ACCUMULATED DEFICIT, end
of year................ $(3,323,068) $(2,799,867) $(2,408,410) $(4,904,099) $(3,093,185)
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
SUTTER MORTGAGE CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
NINE-MONTH PERIODS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- --------------------------
1996 1995 1994 1997 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss................ $ (523,201) $ (391,457) $ (1,593,641) $ (1,581,031) $ (293,318)
Adjustments to
reconcile net loss to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization......... 194,950 247,985 253,925 130,621 155,566
(Increase) decrease
from changes in:
Accounts receivable... 224,476 (47,660) 1,298,740 (47,113) 104,644
Officer notes
receivable and
employee advances.... (18,222) 26,360 174,172 35,498 (50,266)
Loans held for sale... 10,678,786 (25,072,739) 25,060,956 (21,022,773) 14,235,071
Income taxes
receivable........... -- 287,873 (651,609) -- --
Prepaid expenses and
other assets......... 6,121 30,443 101,297 (14,506) 4,660
Accounts payable and
accrued liabilities.. 501,172 8,172 (456,882) 514,157 368,458
------------ ------------ ------------ ------------ ------------
Net cash provided by
(used in) operating
activities......... 11,064,082 (24,911,023) 24,186,958 (21,985,147) 14,524,815
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property
and equipment.......... (166,984) (1,750) (130,183) (175,342) (146,898)
(Increase) Decrease in
due from affiliate..... (493,938) (230,771) (203,163) 661,638 (343,321)
------------ ------------ ------------ ------------ ------------
Net cash (used in)
investing activities... (660,922) (232,521) (333,346) 486,296 (490,219)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings
(repayments) under
lines of credit and
financing
arrangements........... (10,462,120) 25,147,737 (24,899,690) 20,864,774 (14,310,071)
Principal repayments of
obligations under
capital lease and other
notes payable.......... (54,326) (91,453) 74,808 37,621 (51,270)
Shareholder
contribution........... -- -- -- 500,000 --
------------ ------------ ------------ ------------ ------------
Net cash provided by
(used in) financing
activities............. (10,516,446) 25,056,284 (24,824,882) 21,402,395 (14,361,341)
NET DECREASE IN CASH AND
CASH EQUIVALENTS........ $ (113,286) $ (87,260) $ (971,270) $ (96,456) $ (326,745)
CASH AND CASH
EQUIVALENTS, BEGINNING
OF YEAR................. 378,884 466,144 1,437,414 265,598 378,884
------------ ------------ ------------ ------------ ------------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD ................. $ 265,598 $ 378,884 $ 466,144 $ 169,142 $ 52,139
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES:
Interest paid........... 1,623,805 999,769 1,016,796 1,173,000 1,261,272
============ ============ ============ ============ ============
Income taxes paid....... 2,400 3,200 270,200 -- 2,400
============ ============ ============ ============ ============
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
The Company incurred $67,800 of capital lease obligations in 1994 for
furniture, fixtures, and equipment.
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
SUTTER MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1. ORGANIZATION
Sutter Mortgage Corporation (the Company) was incorporated in California on
August 26, 1985 for the purpose of originating and selling residential
mortgage loans. Operations commenced on September 1, 1985. The Company is the
successor to Western States Funding Corporation. The Company is owned by a
sole shareholder, and is the 100% owner of Western States Servicing
Corporation (Western States) which is in turn the sole owner of Better Homes
Realty, Incorporated (Better Homes). Western States is an inactive mortgage
servicing corporation and Better Homes is a real estate brokerage franchiser.
On July 22, 1993, the Company became the 100% owner of Sutter Financial
Incorporated (Sutter Financial). Sutter Financial is engaged in the business
of originating and selling multi-family mortgage loans.
In June 1997, the Company's sole shareholder entered into an agreement to
sell all of the issued and outstanding common stock of the Company to Virtual
Mortgage Network, Inc. (Buyer). The subsidiaries of the Company will be spun-
off prior to the purchase and will not be acquired by the Buyer. The purchase
is expected to close in December 1997.
The Company is a full service mortgage banking company that originates
residential loans throughout California and other western states. Loans are
obtained either directly through employed loan officers (retail) or indirectly
through licensed real estate loan brokers (wholesale). All loans are closed
through the Company's lines of credit and sold in the secondary market. The
Company is approved by the Federal National Mortgage Association (FNMA), the
Federal Home Loan Mortgage Corporation (FHLMC) and The Department of Housing
and Urban Development (HUD). The Company's principal offices are located in
Walnut Creek, California.
As of December 31, 1996, the Company has an accumulated deficit and has
suffered recurring losses from operations. The Company's losses are expected
to continue throughout fiscal 1997 and until the Buyer and the Company can
successfully integrate their operations and the Buyer is able to successfully
establish, operate and sufficiently expand its video conferencing system.
Should the Buyer's proposed public offering not be completed, the Company
would be required to seek alternative sources of financing to support its
operations. Such sources of financing could include equity financing or debt
offerings. There can be no assurance that such additional funding will be
available on acceptable terms, if at all, or that such funds, if raised, would
enable the Company to achieve and maintain profitable operations. These
matters raise substantial doubt about the ability of the Company to continue
as a going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification
of assets that might result from the outcome of these uncertainties.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Presentation
The accompanying financial statements include only the accounts of the
Company, and exclude the accounts and operations of its wholly owned
subsidiaries, Western States and its wholly owned subsidiary, Better Homes,
and Sutter Financial. These wholly owned subsidiaries have been treated as if
they had been spun off for the purposes of complying with the financial
statement requirements of the Securities and Exchange Commission. Amounts due
from these affiliates are included in the accompanying financial statements.
Repayment of amounts due from affiliates will effectively be made through a
reduction in the equity of the sole shareholder prior to acquisition by the
Buyer. As a result, amounts due from affiliates are reflected as a contra-
equity account in the accompanying financial statements.
b. Loan Origination Fees
Loan origination fees and direct loan origination costs are recognized when
the loan is sold.
F-21
<PAGE>
SUTTER MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
c. Sale of Mortgages and Related Servicing Rights
Revenues resulting from sales of mortgages and related servicing rights are
recognized at the date title has irrevocably passed to the buyer and there are
no significant unresolved contingencies. The Company does not currently
provide loan servicing for others.
d. Mortgage Loans Held for Sale
Mortgage loans held for sale are valued at the lower of cost or market as
determined by outstanding commitments from investors or current investor yield
requirements calculated on aggregate mortgage loans outstanding.
Mortgage loans sold by the Company to various investors are subject to
repurchase requirements under certain conditions, including certain instances
of borrower fraud and in some cases of defects resulting from other service
providers, including title and escrow companies. The Company provides a
reserve for possible loan losses resulting from such repurchase requirements.
The reserve for possible loan losses is maintained at a level considered
adequate to provide for losses that can be reasonably anticipated. Management
makes periodic credit reviews of the loan portfolio and outstanding repurchase
requests in determining the adequacy of the reserve. The reserve is based on
estimates and ultimate losses that may vary from the current estimates. These
estimates are reviewed periodically and, as adjustments become necessary, they
are reported in earnings in the periods in which they become known. The
reserve is increased by provisions charged to operating expense and reduced by
net charge-offs.
e. Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-
line method over the lesser of the estimated useful lives of the related
assets or lease terms, generally 3 to 7 years.
f. Income Taxes
The Corporation accounts for income taxes using the asset and liability
method of accounting. Under the asset and liability method, deferred income
taxes are recognized for the future tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future
years to differences between the financial statement carrying amounts and the
tax basis of existing assets and liabilities.
Under the asset and liability method, deferred tax assets are recognized for
deductible temporary differences and operating loss and tax credit carry
forwards, and a valuation allowance is established to reduce deferred tax
assets if it is determined that it is more likely than not that the related
tax benefits will not be realized.
g. Cash Equivalents
The Company classifies all highly liquid investments with original
maturities of three months or less as cash equivalents.
h. Use of Estimates
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
F-22
<PAGE>
SUTTER MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
i. Impact of Recent Accounting Pronouncements
The FASB has issued SFAS No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." This statement provides
new accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. This statement also
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings and requires that
liabilities and derivatives incurred or obtained by transferors as part of a
transfer of financial assets be initially measured at fair value. It also
requires that servicing assets be measured by allocating the carrying amount
between the assets sold and retained interests based on their relative fair
values at the date of transfer. Additionally, this statement requires that the
servicing assets and liabilities be subsequently measured by (a) amortization
in proportion to and over the period of estimated net servicing income and (b)
assessment for asset impairment or increased obligation based on their fair
values. The Company adopted SFAS No. 125 effective January 1, 1997. Management
does not expect adoption of SFAS No. 125 to have a significant impact on the
Company's results of operations or financial position.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 and 1995 and September 30, 1997
are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
1996 1995 (UNAUDITED)
----------- ---------- -------------
<S> <C> <C> <C>
Furniture, fixtures, and
equipment........................ $ 547,709 $ 523,866 603,131
Computer equipment and software... 557,844 505,429 648,843
Automobiles....................... 70,833 70,833 38,316
Leasehold improvements............ 293,737 203,012 324,827
----------- ---------- -----------
1,470,123 1,303,140 1,615,117
Accumulated depreciation and
amortization..................... (1,038,711) (843,762) (1,138,984)
----------- ---------- -----------
$ 431,412 $ 459,378 $ 476,133
=========== ========== ===========
</TABLE>
F-23
<PAGE>
SUTTER MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. LINES OF CREDIT AND FINANCING ARRANGEMENTS
The Company has lines of credit and financing arrangements as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
1996 1995 (UNAUDITED)
----------- ----------- -------------
<S> <C> <C> <C>
Line of credit for $5,000,000
secured by mortgage loans.
Interest is stated at LIBOR plus
2.5%. Maturity date is December
31, 1997.......................... $ 3,901,366 $ 4,058,806 3,646,289
Line of credit for $10,000,000
secured by assignment of presold
conforming mortgage loans.
Interest is stated at prime plus
.75%. Maturity date is November
29, 1997.......................... 7,119,044 10,345,351 8,432,297
Line of credit for $25,000,000
secured by mortgage loans.
Interest is stated at LIBOR plus
.90%. No stated maturity date..... 10,501,199 16,800,234 30,995,780
Line of credit for $5,000,000
secured by mortgage loans.
Interest is stated at LIBOR plus
1%. No stated maturity date....... 2,120,379 3,116,383 1,590,394
Line of credit for $150,000.
Interest is stated at prime plus
1.5%. Maturity date is November
29, 1997.......................... 150,000 75,000 150,000
Note payable for $150,000. Interest
is stated at 9.75%. Maturity date
is September 30, 1999............. 141,666 -- 103,898
----------- ----------- -----------
Total lines of credit and
financing arrangements.......... $23,933,654 $34,395,774 $44,918,658
=========== =========== ===========
</TABLE>
One of the Company's lines of credit requires the Company to comply with
certain debt covenants, including minimum tangible net worth requirements, a
minimum leverage ratio, as defined, and a minimum current ratio, as defined.
As of December 31, 1996, the Company was not in compliance with these
covenants. A waiver of noncompliance for the period from January 1, 1997 to
March 31, 1997 has been obtained from the financial institution. One of the
lines of credit requires a commitment fee of .25% per annum on the average
unused limit if the average outstanding balance falls below 50% of maximum
available borrowings. Certain of the lines of credit are personally guaranteed
by the Company's shareholder.
5. LEASES
The Company has noncancellable operating leases for office space and
branches which expire in periods from 1997 to 2001. The Company's future
minimum payments under operating leases are as follows:
<TABLE>
<S> <C>
1997........................................................... $ 223,665
1998........................................................... 206,250
1999........................................................... 206,250
2000........................................................... 206,250
2001........................................................... 206,250
Thereafter..................................................... 223,438
----------
$1,272,103
==========
</TABLE>
Rental expense for the years ended December 31, 1996, 1995 and 1994 was
$237,571, $237,764 and $497,060, respectively.
F-24
<PAGE>
SUTTER MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES
Income tax provision (benefit) for the years ended December 31 was as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ---------
<S> <C> <C> <C>
Current:
Federal........................................... $ -- $ -- $(306,070)
State............................................. 2,400 3,200 3,200
------ ------ ---------
2,400 3,200 (302,870)
Deferred:
Federal........................................... -- -- --
State............................................. -- -- --
------ ------ ---------
$2,400 $3,200 $(302,870)
====== ====== =========
</TABLE>
The tax effect of temporary differences that give rise to the significant
portion of deferred tax assets and liabilities at December 31 are presented
below:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax asset:
Office furniture and equipment, principally due to
difference in depreciation........................ $ 17,985 $ 10,696
Net operating losses............................... 543,190 513,484
Less: valuation allowance.......................... (561,175) (524,180)
--------- ---------
Total deferred tax asset......................... -- --
--------- ---------
</TABLE>
A valuation allowance is provided for the deferred tax asset when it is more
likely than not that some portion of the deferred tax asset will not be
realized. Therefore, the Company has established a valuation allowance on the
aforementioned deferred tax asset due to the uncertainty of realization.
The Company has federal net operating loss carryforwards of approximately
$1,411,000 expiring in 2011 and California net operating loss carryforwards of
$705,000 expiring in 2001. Under the Tax Reform Act of 1986, the benefits from
net operating losses carried forward may be impaired or limited in certain
circumstances. Events which may cause limitations in the amount of net
operating losses that the Company may utilize in any one year include, but are
not limited to, a cumulative ownership change of more than 50 percent over a
three year period. At December 31, 1996, the effect of such limitation which
would result from the purchase of the Company as described in Note 1 has not
been determined.
7. EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution plan (the Plan), which is a
qualified plan under Section 401(k) of the Internal Revenue Code. The Plan
covers substantially all employees of the Company. Under the Plan,
participants may elect to defer the lesser of the maximum amount permitted by
law from compensation subject to income tax as a salary deferral contribution
or 20% of his or her salary compensation. The Company, at its sole discretion,
may provide matching contributions based on current year earnings. There were
no costs incurred related to the Plan for the years ended December 31, 1996,
1995 and 1994, respectively.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
A significant portion of the Company's assets and liabilities are financial
instruments as defined under SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments." Additionally, the Company is a party to
F-25
<PAGE>
SUTTER MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
financial instruments with off balance sheet risk in the normal course of
business through the origination and sale of mortgage loans. These financial
instruments include mandatory and optional forward commitments which involve,
to varying degrees, elements of credit and interest rate risk. The Company's
policy is to obtain such commitments to sell loans as interest rate
commitments are given to prospective borrowers. Thus, at any time the risk to
the Company is the risk of default by the counter party to the forward
commitment. Historically the Company has not incurred losses due to the
failure or lack of performance of the counter parties to these commitments.
The following summary presents a description of the methodologies and
assumptions used to estimate the fair value of the Corporation's financial
instruments. Much of the information used to determine fair value is highly
subjective. When applicable, readily available market information has been
utilized. However, for a significant portion of the Company's financial
instruments, active markets do not exist. Therefore, considerable judgments
were required in estimating fair value for certain items. The subjective
factors include, among other things, the estimated timing and amount of cash
flows, risk characteristics, and interest rates, all of which are subject to
changes.
Cash and Cash Equivalents
As cash and cash equivalents are highly liquid, their carrying value
approximates their fair value.
Mortgage Loans Held for Sale and Related Financial Instruments
The fair value of mortgage loans held for sale and mandatory commitments to
sell mortgage loans are estimated using quoted market prices for mortgage-
backed securities backed by similar loans. As these financial instruments are
short term in nature, their estimated fair value approximated their net
carrying value.
Lines of Credit
The fair value of lines of credit is believed to be equal to the carrying
amount because the terms of the debt are similar to terms currently offered by
lenders, and the interest rates are variable based on current market rates.
<TABLE>
<CAPTION>
CARRYING VALUE FAIR VALUE
-------------- -----------
<S> <C> <C>
December 31, 1996
Financial assets:
Cash and cash equivalents................... $ 265,598 $ 265,598
Accounts receivable......................... 84,555 84,555
Officer notes receivable and employee
advances................................... 93,798 93,798
Mortgage loans held for sale................ 23,641,988 23,641,988
Mandatory commitments to sell mortgage
loans...................................... 11,910 11,910
Financial liabilities:
Lines of credit and financing arrangements.. 23,933,654 23,933,654
December 31, 1995
Financial assets:
Cash and cash equivalents................... $ 378,884 $ 378,884
Accounts receivable......................... 309,031 309,031
Officer notes receivable and employee
advances................................... 75,576 75,576
Mortgage loans held for sale................ 34,320,774 34,320,774
Mandatory commitments to sell mortgage
loans...................................... -- --
Financial liabilities:
Lines of credit and financing arrangements.. 34,395,774 34,395,774
</TABLE>
F-26
<PAGE>
SUTTER MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business including certain matters pertaining to repurchase
requests on mortgage loans previously originated and sold by the Company. In
the opinion of management, the ultimate disposition of these matters will not
have a material adverse effect on the Company's financial condition.
10. INFORMATION RELATED TO UNAUDITED INTERIM FINANCIAL STATEMENTS
a. Basis of Presentation
The unaudited financial statements have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and note disclosures normally included in annual financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to those rules and regulations, although the
Company believes that the disclosures made are adequate to make the
information presented not misleading. These unaudited financial statements
reflect, in the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to fairly present the results of
operations, changes in cash flows and financial position as of and for the
periods presented. These unaudited financial statements should be read in
conjunction with the audited financial statements and related notes thereto,
appearing elsewhere herein. The results for the interim periods presented are
not necessarily indicative of results to be expected for a full year.
b. Sutter Mortgage Acquisition
In June 1997, the Buyer entered into an agreement (the Purchase Agreement)
to acquire the outstanding common stock of the Company. An amendment to the
Purchase Agreement was entered into in December 1997. The amendment stipulates
that the purchase price for Sutter Mortgage will be $2,484,000. Of the
purchase price, $950,000 will be paid at the closing of the acquisition less
$50,000 of a previously paid deposit and $500,000 in forgiveness of the
secured promissory note of the shareholder of the Company. Concurrent with the
closing of an initial public offering undertaken by the Buyer, the additional
$1,534,000 will be paid.
c. New Accounting Pronouncements
In June 1997, the FASB issued SFAS Nos. 130 and 131 "Reporting Comprehensive
Income" and "Disclosures about Segments of an Enterprise and Related
Information." FASB No. 130 and No. 131 are effective for fiscal years
beginning after December 15, 1997, with earlier adoption permitted. The
Company does not believe that adoption of these standards will have a material
effect on the Company.
F-27
<PAGE>
[GRAPHICS OF VARIOUS COMPANY LOGOS OF THE COMPANY
AND SELECTED STRATEGIC PARTNERS AND FLOW
CHART DISPLAYING TRANSACTION FLOW OF A LOAN ORIGINATED
USING THE LOANMAKER SYSTEM.]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS TO ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 8
Sutter Mortgage Acquisition.............................................. 20
Use of Proceeds.......................................................... 21
Dividend Policy.......................................................... 21
Dilution................................................................. 22
Capitalization........................................................... 23
Selected Financial Information........................................... 24
Pro Forma Combined Financial Information................................. 25
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 27
Business................................................................. 36
Management............................................................... 52
Certain Transactions..................................................... 58
Principal Stockholders................................................... 61
Description of Capital Stock............................................. 62
Shares Eligible for Future Sale.......................................... 66
Underwriting............................................................. 69
Legal Matters............................................................ 70
Experts.................................................................. 70
Additional Information................................................... 71
Index to Consolidated 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 DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF THE DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,700,000 SHARES
[LOGO OF VIRTUAL MORTGAGE NETWORK(TM)]
COMMON STOCK
---------------
PROSPECTUS
---------------
BARINGTON CAPITAL GROUP
VALUE INVESTING PARTNERS, INC.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS TO ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 8
Sutter Mortgage Acquisition.............................................. 20
Use of Proceeds.......................................................... 21
Dividend Policy.......................................................... 21
Dilution................................................................. 22
Capitalization........................................................... 23
Selected Financial Information........................................... 24
Pro Forma Combined Financial Information................................. 25
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 27
Business................................................................. 36
Management............................................................... 52
Certain Transactions..................................................... 58
Principal Stockholders................................................... 61
Registered Stockholders.................................................. 61-1
Plan of Distribution..................................................... 61-2
Description of Capital Stock............................................. 62
Shares Eligible for Future Sale.......................................... 66
Experts.................................................................. 70
Additional Information................................................... 71
Index to Consolidated 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 DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF THE DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,042,096 SHARES
[LOGO OF VIRTUAL MORTGAGE NETWORK(TM)]
COMMON STOCK
---------------
PROSPECTUS
---------------
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses, other than underwriting
discounts and commissions, payable by the Company in connection with the
issuance and distribution of the Common Stock being registered. All amounts
are estimates except the Securities and Exchange Commission registration fee,
the NASD filing fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................ $ 8,584
NASD filing fee.................................................... 4,840
Nasdaq National Market listing fee................................. 34,048
Accounting fees and expenses....................................... 125,000
Legal fees and expenses............................................ 375,000
Blue Sky qualification fees and expenses........................... 7,000
Printing and engraving expenses.................................... 125,000
Transfer agent and registrar fees.................................. 3,000
Road Show expenses................................................. 40,000
Miscellaneous...................................................... 20,590
--------
Total.......................................................... $742,062
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation provides that a director will not be
personally liable for monetary damages to the Company or its stockholders to
the extent permitted under the Delaware General Corporation Law (i.e.,
liability (i) for any breach of the director's duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) for paying
a dividend or approving a stock repurchase in violation of Section 174 of the
Delaware General Corporation Law, or (iv) for any transaction from which the
director derived an improper personal benefit).
While the Certificate of Incorporation provides directors with protection
from awards for monetary damages, it does not eliminate the directors' duty of
care. Accordingly, the Certificate of Incorporation will have no effect on the
availability of equitable remedies, such as an injunction or rescission based
on a director's breach of such director's duty of care.
The Certificate of Incorporation contains provisions authorizing the Company
to indemnify its directors and officers to the fullest extent permitted by the
laws of Delaware.
The Company has entered into indemnity agreements with certain of its
directors and officers that require the Company to indemnify such directors
and officers to the fullest extent permitted by applicable provisions of the
Delaware General Corporation Law. The Company intends to explore alternatives
for obtaining directors' and officers' insurance to cover certain liabilities,
including liabilities under the Securities Act.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Company and
its directors and officers for certain liabilities arising under the
Securities Act or otherwise.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of transactions by the Company during the last
three years preceding the date hereof involving sales of the Company's
securities that were not registered under the Securities Act:
In March 1995, the Company issued 5,113 shares of Common Stock to Camelot
Holdings, Inc. ("Camelot") (which stock was eventually transferred to
Michael Barron) for $25.00, 3,068 shares of Common Stock to Dianne David
for $15.00 and 1,841 shares of Common Stock to Tradenet Financial Banking
Services ("Tradenet") for $9.00. The Company relied on the exemption
provided by Section 4(2) of the Securities Act.
In March 1995, the Company declared a 50-for-1 stock split effected as a
stock dividend on outstanding shares of Common Stock, pursuant to which
Camelot received 250,512 additional shares (which were eventually
transferred to Michael Barron), Dianne David received 93,156 additional
shares and Tradenet received 100,205 additional shares. Exemption from the
registration provisions of the Securities Act is claimed with respect to
the above dividend on the basis that the dividend did not involve a "sale"
of securities and, therefore, registration thereof was not required.
In March 1995, the Company issued 51,125 shares of Common Stock, warrants
to purchase 35,788 shares of Common Stock at an exercise price of $4.89 per
share and promissory notes in the aggregate amount of $300,000 to American
Growth Fund I, L.P. (the "Fund") in exchange for $200,000. From April 1995
to June 1996, the Company issued various promissory notes in favor of the
Fund, but in July 1996, the Company consolidated all outstanding promissory
note indebtedness in favor of the Fund by issuing two promissory notes in
the principal amounts of $200,000 and $300,000 in exchange for the
cancellation of all outstanding promissory notes. The Company relied on the
exemption provided by Section 4(2) of the Securities Act.
In April through December 1995, the Company issued an aggregate of
102,250 shares of Common Stock to 18 employees and consultants pursuant to
the Company's 1995 Consultant and Employee Stock Compensation Plan.
Pursuant to the terms of the plan, the Company repurchased 818 shares at
par value at the time the three employees left the Company. The Company
relied on the exemption provided by Section 4(2) of the Securities Act.
In May 1995, Intel Corporation purchased 500,000 shares of the Company's
Series A Preferred Stock for $500,000. The Company relied on the exemption
provided by Section 4(2) of the Securities Act.
In June 1995, the Company issued 250,000 shares of Series A Preferred
Stock to the Fund for $250,000. The Company relied on the exemption
provided by Section 4(2) of the Securities Act.
From September 1995 to March 1996, the Company sold an aggregate of
1,650,000 shares of Series A Preferred Stock in a private placement to
approximately 80 accredited investors for an aggregate purchase price of
$1,650,000. Of the shares sold, 150,000 were oversubscribed and in
September 1997 such shares were cancelled and the consideration paid was
converted into either part of the bridge financing or into Common Stock as
described below. The Company relied on exemptions provided by Section 4(6)
and Section 4(2) of the Securities Act.
The Company issued 20,450 warrants to purchase Common Stock, exercisable
at $4.89 per share, to Michael Baum in January 1996 in exchange for
consulting services rendered. In March 1996, the Company issued 20,450
warrants to purchase Common Stock, exercisable at $4.89 per share, to South
Coast Communications (currently known as Allen and Caron) in exchange for
consulting services rendered. In March 1996, the Company issued 20,450
warrants to purchase Common Stock, exercisable at $4.89 per share, to
Randall Fowler in exchange for consulting services rendered. In May 1996,
the Company issued 5,113 warrants to purchase Common Stock, exercisable at
$4.89 per share, to Frank Klepetko in exchange for services rendered. For
each of the above transactions, the Company relied on the exemption
provided by Section 4(2) of the Securities Act.
In January 1996, the Company issued 25,563 warrants to purchase Common
Stock, exercisable at $4.89 per share, to American Growth Capital
Investments, Inc. ("AGCI") in exchange for consulting services,
II-2
<PAGE>
and in February 1996 issued 10,225 additional warrants to purchase Common
Stock, exercisable at $4.89 per share, to AGCI in exchange for consulting
services. In March 1996, the Company issued 1,534 warrants, exercisable at
$4.89 per share, to the Fund in exchange for consulting services. In
September 1996, the Company issued 1,245 warrants, exercisable at $4.89 per
share, to AGCI in exchange for AGCI's and the Fund's agreement to adjust
the exercise price of all of the warrants described in this paragraph to
$4.89 per share. For all of the above transactions, the Company relied on
the exemption provided by Section 4(2) of the Securities Act.
Between June 1996 and September 1997, the Company issued 368,136 warrants
to purchase Common Stock, exercisable at $.005 per share, and promissory
notes in the aggregate principal amount of $5,400,000 to certain accredited
investors in connection with a bridge financing. The Company relied on the
exemption provided by Section 4(2) of the Securities Act.
On July 5, 1996, the Company issued 20,450 Warrants to Daystar Partners,
L.P., a fund controlled by Larry Wells, a director of the Company, in
exchange for consulting services rendered. These Warrants have an exercise
price of $7.78 per share. On February 5, 1997, Mr. Wells exercised 12,863
Warrants. The Company relied on the exemption provided by Section 4(2) of
the Securities Act.
Between February and June 1997, pursuant to agreements, dated as of
February 24, 1997, the Company sold 486,950 shares (the "Purchased Shares")
of Common Stock to ten accredited investors (the "February Purchasers") for
an aggregate purchase price of $3,790,000 or $7.88 per share. Each
agreement required the Company to issue warrants, with an exercise price of
$7.34 per share, if an initial public offering was not completed by August
15, 1997. On August 15, 1997, the Company issued 266,101 warrants to the
February Purchasers in compliance with the terms of the agreements. The
Company also provided price protection to the Purchasers by agreeing to
issue additional shares of Common Stock if shares were later sold by the
Company at a lower price. In a private placement and prior to an initial
public offering, pursuant to this price protection provision, the Company
subsequently issued 187,010 shares of Common Stock to the February
Purchasers. The Company relied on the exemption provided by Section 4(2) of
the Securities Act.
From June 1997 to October 1997, the Company raised $3,428,000 by selling
609,467 shares of its Common Stock to 23 accredited investors (the "June
Purchasers") at a price of $5.625 per share. These sales triggered the
Company's price protection obligations to the February Purchasers. The
Company relied on the exemption provided by Section 4(2) of the Securities
Act.
In December 1997, the Company issued a promissory note in the aggregate
amount of $1,300,000 to one investor. The Company relied on the exemption
provided by Section 4(2) of the Securities Act.
In December 1997, the Company issued 100,000 Warrants to such lender.
These Warrants have an exercise price of 105% of the Offering Price per
share. The Company relied on Section 4(2) of the Securities Act.
In January 1998, the Company issued an aggregate of 368,136 shares of
Common Stock to all of the Warrantholders in a conversion of those
Warrants. The issuance of such Common Stock did not involve the offer and
"sale" of a security for purposes of the Securities Act and, therefore,
registration thereof was not required.
Concurrent with the closing of the Offering, the Company will issue
441,053 shares of Series B Preferred Stock in exchange for $4,190,000 in
the aggregate of outstanding principal on certain debt and 105,616 shares
of Common Stock in exchange for accrued interest on such debt. The Company
relied on an exemption provided by Section 3(a)(9) of the Securities Act.
From time to time during the three years preceding the date hereof, the
Registrant issued stock options to purchase Common Stock pursuant to the
Registrant's stock option plans to officers, employees and consultants of
the Registrant. During the period referred to above, no options granted
pursuant to the Company's stock option plans were exercised. Exemption from
the registration provisions of the Securities Act is claimed with respect
to the grant of options referred to above, on the basis that the grant of
options did not involve a "sale" of securities and, therefore, registration
thereof was not required.
II-3
<PAGE>
The recipients of the above-described securities represented their
intention to acquire the securities for investment only and not with a view
to distribution thereof. Appropriate legends were affixed to the stock
certificates and warrants issued in these transactions. All recipients had
access, through employment or other relationships, to information about the
Company.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of the Registrant.*
3.2 Bylaws of the Registrant.*
4.1 Specimen stock certificate.*
5.1 Opinion of O'Melveny & Myers LLP.*
10.1 Form of Indemnity Agreement between the Registrant and each of its
executive officers and directors.***
10.2 Indemnification and Pledge Agreement among the Registrant, Michael
Barron and Dianne David.***
10.2.1 Securities Pledge Agreement, dated December 1, 1997, between the
Company and Dianne David.***
10.2.2 Securities Pledge Agreement, dated December 1, 1997, between the
Company and Michael A. Barron.***
10.3 Office Building Lease--Koll Center Newport No. 8, dated September 5,
1995, by and between Koll Center Newport No. 8 and Virtual Realty
Network, Inc. (now Virtual Mortgage Network, Inc., the
Registrant).**
10.4 Office Building Lease--Koll Center Newport No. 8, dated July 10,
1990, by and between Koll Center Newport No. 8 and Tiempo Escrow
II.**
10.5 Amendment No. 1 to Office Building Lease dated September 23, 1993,
by and between Koll Center Newport No. 8 and Tiempo Escrow II.**
10.6 Sublease Agreement, dated March 21, 1995, by and between Tiempo
Escrow II and Today, Inc.**
10.7 Amendment No. 1 to Office Building Sublease; Name Change, dated
March 21, 1995, by and between Tiempo Escrow II and Today, Inc.**
10.8 Sublease and Operating Agreement, dated October 2, 1996, by and
between five Centerpointe Executive Suites and the Registrant.**
10.9 Master Lease Agreement, dated July 20, 1995, by and between Data
General Corporation and the Registrant.**
10.10 Priority Customer Support Plan Agreement, dated January 15, 1996, by
and between Dynatek, Inc. and the Registrant.**
10.11 Dynatek Software License Agreement, dated August 23, 1995, by and
between Dynatek, Inc. and the Registrant.**
10.12 Agreement, dated December 1, 1995, by and between the Registrant and
American Growth Capital Corporation.**
10.13 Investment Agreement, dated March 21, 1995, by and between the
Registrant and American Growth Fund I, LP.**
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.14 Amendment to Investment Agreement, dated March 21, 1995, between
the Registrant and American Growth Fund I, LP.**
10.15 Second Amendment to Investment Agreement, dated September 9,
1996, by and between the Registrant and American Growth Fund I,
LP.**
10.16 Form of Subscription Agreement.**
10.17 Series A Preferred Stock Purchase Agreement, dated May 19, 1995,
by and between the Registrant and the persons and entities listed
on Exhibit A attached thereto.**
10.18 Addendum to Series A Preferred Stock Purchase Agreement, dated
May 19, 1995, by and between the Registrant and American Growth
Fund I, LP.**
10.19 Rights Agreement, dated May 19, 1995, by and between the
Registrant and the individuals and entities set forth on Exhibit
A attached thereto.**
10.20 Co-sale and Right of First Refusal Agreement, dated May 19, 1995,
by and among the Registrant, the individuals listed on the
signature page attached thereto and the investors listed on
Exhibit A attached thereto.**
10.21 1995 Consultant and Employee Stock Compensation Plan.**
10.22 1995 Stock Option Plan.**
10.23 Form of 1997 Performance Award Plan.**
10.24 Master Registration Rights Agreement dated September 9, 1996
among the Registrant and the other signatories thereto.**
10.25 Agreement, made December 20, 1996, and effective October 1, 1996,
by and between the Registrant and Interealty Corp.**
10.26 Agreement, made and effective December 20, 1996, by and between
the Registrant and Interealty Corp.**
10.27 First Amended and Restated Stock Purchase Agreement, entered into
as of June 6, 1997, between the Registrant, Sutter Mortgage
Corporation ("Sutter") and Arthur H. Sutter.**
10.28 Term Sheet relating to Amendment of First Amended and Restated
Stock Purchase Agreement re: Acquisition of Sutter, dated as of
September 30, 1997, among the Registrant, Sutter and Arthur H.
Sutter.**
10.28.1 Amendment to First Amended and Restated Stock Purchase Agreement,
dated as of December 19, 1997, among the Registrant, Sutter and
Arthur H. Sutter.***
10.28.2 Note, dated December 19, 1997, by the Company in favor of Arthur
H. Sutter in the amount of $1,534,000.***
10.28.3 Note, dated as of December 15, 1997, by Sutter in favor of Arthur
H. Sutter in the amount of $100,000.***
10.28.4 Noncompetition Agreement, dated December 19, 1997, by and among
Arthur H. Sutter, Sutter and the Registrant.***
10.29 Agreement, dated October 21, 1996, between Intel Corporation and
the Registrant.**
10.30 Form of Bridge Loan and Security Agreement (Phase I).***
10.31 Form of Promissory Note (Phase I).***
10.32 Form of Common Stock Purchase Warrant (Phase I).***
10.33 Form of Note Extension Agreement.***
10.34 Form of Common Stock Purchase Warrant regarding Note Extension
Agreement.***
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.35 Form of Bridge Loan and Security Agreement (Phase II).***
10.36 Form of Promissory Note (Phase II).***
10.37 Form of Common Stock Purchase Warrant (Phase II).***
10.38 Mortgage Loan Purchase Agreement, dated June 3, 1994, between Paine
Webber Real Estate Securities Inc. ("Paine Webber") and Sutter.***
10.39 Amendment, dated June 26, 1995, to the Mortgage Loan Purchase
Agreement, by and between Sutter and Paine Webber.***
10.40 Supplemental Agreement, dated June 3, 1994, between Paine Webber and
Sutter.***
10.41 Amendment, dated June 26, 1995, to Mortgage Loan Custodial
Agreement, between Paine Webber and Sutter.***
10.42 Revolving Credit and Collateral Loan Agreement, dated September 6,
1988, between Sutter and Imperial Bank.***
10.43 Letter Agreement, dated September 26, 1988, between Sutter and
Imperial Bank.***
10.44 Note, dated November 30, 1996, by Sutter in favor of Imperial Bank
in the amount of $10,000,000.***
10.44.1 Extension of Letter Agreement, dated November 29, 1997, by Imperial
Bank in favor of Sutter.***
10.44.2 Letter Agreement, dated December 18, 1997, between Imperial Bank and
Sutter.***
10.45 Note, dated November 30, 1996, by Sutter in favor of Imperial Bank
in the amount of $150,000.***
10.45.1 Note, dated July 1, 1996, by Sutter in favor of Imperial Bank in the
amount of $150,000.***
10.46 Letter Agreement, dated February 10, 1997, between Imperial Bank and
Sutter.***
10.47 Letter Agreement, dated December 1, 1996, between Imperial Bank and
Sutter.***
10.48 Mortgage Loan Purchase and Sale Agreement, undated, between Sutter
and Prudential Securities Realty Funding Corporation.***
10.49 Mark-to-Market Agreement, dated April 20, 1995, between Sutter and
Prudential Securities Incorporated.***
10.50 Master Mortgage Loan Purchasing Agreement, dated October 7, 1992,
between First Collateral Services, Inc. ("First Collateral") and
Sutter.***
10.50.1 Letter Agreement, dated December 16, 1997, by First Collateral
Services, Inc. in favor of Sutter.***
10.51 Servicing Agreement, dated October 7, 1992, between First Collateral
and Sutter.***
10.52 Security Agreement (Servicing), dated October 7, 1992, between First
Collateral and Sutter.***
10.53 Bailee Agreement and Amendment to Purchase Contract, dated January
6, 1993, among First Collateral, Sutter and The Prudential Home
Mortgage Company, Inc.***
10.54 Letter Agreement, dated July 11, 1994, between First Collateral and
Sutter.***
10.55 Letter Agreement, dated March 21, 1997, between First Collateral and
Sutter.***
10.56 Form of Representatives' Warrant.*
10.57 Employment Agreement, dated November 1, 1997, between the Company
and John D. Murray.***
10.58 Employment Agreement, dated November 1, 1997, between the Company
and Michael A. Barron.***
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.59 Bridge Loan and Security Agreement, dated December 19, 1997, between
the Company and Kay Capital Group.***
10.60 Note, dated December 19, 1997, by the Registrant in favor of Kay
Capital Group in the amount of $1,300,000.***
10.61 Common Stock Purchase Warrant, dated December 19, 1997, between the
Registrant and Kay Capital Group, for 100,000 shares.***
11.1 Statement re: Computation of Earnings Per Share.***
21.1 List of Subsidiaries.***
23.1 Consent of Arthur Andersen LLP.***
23.3 Consent of O'Melveny & Myers LLP (included in Exhibit 5.1).*
27 Financial Data Schedule.***
</TABLE>
- --------
*To be filed by amendment.
**Previously filed.
***Filed herewith.
(b) FINANCIAL STATEMENT SCHEDULES.
All schedules are omitted because they are not required, are not applicable,
or the information is included in the Consolidated Financial Statements or
notes thereto.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in the denominations and registered in the names as required
by the Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission this indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against these 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 a 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 the indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of the issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part
of a 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
the registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the Offering of those securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-7
<PAGE>
(d) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act,
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the Registration Statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
Registration Statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
Provided, however, That paragraphs (d)(1)(i) and (d)(1)(ii) of this
section do not apply if the Registration Statement is on Form S-3, Form
S-8 or Form F-3, and the information required to be included in a post-
effective amendment by those paragraphs is contained in periodic
reports filed with or furnished to the Commission by the registrant
pursuant to section 13 or section 15(d) of the Securities Exchange Act
of 1934 that are incorporated by reference in the Registration
Statement.
(2) That for the purpose of determining any liability under the
Securities Act, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Newport Beach, County of Orange, State of California, on the 31st
day of December, 1997.
VIRTUAL MORTGAGE NETWORK, INC.
/s/ Michael A. Barron
By: _________________________________
Michael A. Barron
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Michael A. Barron Chairman of the Board, Chief December 31, 1997
____________________________________ Executive Officer (Principal
Michael A. Barron Executive Officer), and
Director
/s/ John D. Murray President, Chief Financial December 31, 1997
____________________________________ Officer (Principal Financial
John D. Murray and Accounting Officer),
Chief Operating Officer and
Director
Director
____________________________________
Randall C. Fowler
/s/ Larry Wells Director December 31, 1997
____________________________________
Larry Wells
/s/ John Wells Director December 31, 1997
____________________________________
John Wells
</TABLE>
II-9
<PAGE>
EXHIBIT 10.1
INDEMNITY AGREEMENT
This Indemnity Agreement (this "Agreement") is made as of October 21, 1997
by and between Virtual Mortgage Network, Inc., (the "Company"), and __________
______ (the "Indemnitee"), a director [officer] of the Company.
W I T N E S S E T H:
WHEREAS, the Indemnitee is currently serving [has agreed to serve] as a
director [officer] of the Company and in such capacity has rendered valuable
services to the Company.
WHEREAS, the Company has investigated the availability and sufficiency of
liability insurance and applicable statutory indemnification provisions to
provide its directors and officers with adequate protection against various
legal risks and potential liabilities to which directors and officers are
subject due to their position with the Company and has concluded that insurance
and statutory provisions may provide inadequate and unacceptable protection to
certain individuals requested to serve as its directors and officers.
WHEREAS, in order to induce and encourage highly experienced and capable
persons such as the Indemnitee [to continue] to serve as a director [officer] of
the Company, the Board of Directors has determined, after due consideration and
investigation of the terms and provisions of this Agreement and the various
other options available to the Company and the Indemnitee in lieu of this
Agreement, that this Agreement is not only reasonable and prudent but necessary
to promote and ensure the best interests of the Company and its stockholders.
<PAGE>
NOW, THEREFORE, in consideration of the [continued] services of the
Indemnitee and in order to induce the Indemnitee [to continue] to serve as a
director [officer], the Company and the Indemnitee agree as follows:
SECTION 1. DEFINITIONS
-----------
As used in this Agreement:
(a) The term "Expenses" includes, without limitation, attorneys' fees,
disbursements and retainers, accounting and witness fees, travel and deposition
costs, expenses of investigations, judicial or administrative proceedings or
appeals, amounts paid in settlement by or on behalf of Indemnitee, and any
expenses of establishing a right to indemnification pursuant to this Agreement
or otherwise including reasonable compensation for time spent by the Indemnitee
in connection with the investigation, defense or appeal of a Proceeding or
action for indemnification for which he is not otherwise compensated by the
Company or any third party. The term "Expenses" does not include the amount of
judgments, fines, liabilities, penalties or ERISA excise taxes actually levied
against the Indemnitee.
(b) The term "Indemnified Costs" shall mean all Expenses, judgments, fines,
liabilities, penalties and ERISA excise taxes actually incurred by the
Indemnitee in connection with the investigation, defense, appeal or settlement
of any Proceeding.
(c) The term "Proceeding" shall include any threatened, pending or
completed action, suit or proceeding, whether brought by or in the name of the
Company or otherwise and whether of a civil, criminal or administrative or
investigative nature, by reason of the fact that the Indemnitee is or was a
director of the Company, or is or was serving at the request of the
Company as a director, officer, employee or agent of another enterprise, whether
or not the Indemnitee is serving in such capacity at the
2
<PAGE>
time any Indemnified Cost is incurred for which indemnification or reimbursement
is to be provided under this Agreement.
SECTION 2. AGREEMENT TO SERVE
------------------
The Indemnitee agrees to continue to serve as a director [officer] of the
Company at the will of the Company for so long as he is duly elected or
appointed or until such time as he tenders his resignation in writing. Any
present or future employment agreement between the Indemnitee and the Company is
not modified by this Agreement and nothing contained herein creates in the
Indemnitee any right of continued employment.
2.1 Repayment of Indemnified Costs. The Indemnitee will reimburse the
------------------------------
Company for all Indemnified Costs paid by the Company if and only to the extent
that a court of competent jurisdiction finally decides that the Indemnitee is
not entitled to be indemnified by the Company for such Indemnified Costs under
the provisions of applicable law, the Company's Articles or Certificate of
Incorporation, as applicable, its Bylaws, this Agreement, or otherwise. The
burden of proving by clear and convincing evidence that indemnification or
advances are not appropriate shall be on the Company.
2.2 Repayment. The Indemnitee will promptly repay to the Company any
---------
amounts paid to the Indemnitee pursuant to other rights of indemnification or
under any insurance policy, to the extent those payments are duplicative of
payments under this Agreement.
SECTION 3. INDEMNIFICATION
---------------
3.1 Indemnification. The Company shall indemnify the Indemnitee if the
---------------
Indemnitee is a party to or threatened to be made a party to or otherwise
involved in any Proceeding, by reason of the fact that the Indemnitee is or was
a director [officer] of the Company, or is or was serving at the request of
the Company as a director, officer,
3
<PAGE>
employee or agent of another enterprise against all Indemnified Costs, to the
fullest extent permitted by applicable law.
3.2 Partial Indemnification. If the Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of, but not the total amount of, the Indemnified Costs, the Company
shall nevertheless indemnify the Indemnitee for the portion of the Indemnified
Costs to which the Indemnitee is entitled.
3.3 Indemnification Hereunder Not Exclusive. The indemnification provided
---------------------------------------
by this Agreement shall not be deemed exclusive of any other rights to which the
Indemnitee may be entitled under the Articles or Certificate of Incorporation,
as applicable, the Bylaws, any other agreement, any vote of stockholders or
disinterested directors, applicable law, or otherwise, both as to action in the
Indemnitee's official capacity and as to action in another capacity on behalf of
the Company while holding office.
3.4 Indemnification of Expenses of Successful Party. Notwithstanding any
-----------------------------------------------
other provisions of this Agreement, to the extent that the Indemnitee has been
successful in defense of any Proceeding or in defense of any claim, issue or
matter therein, on the merits or otherwise, including the dismissal of a
Proceeding without prejudice, the Indemnitee shall be indemnified against all
Expenses incurred in connection therewith to the fullest extent permitted by
applicable law.
SECTION 4. PRESUMPTIONS
------------
4.1 Presumption Regarding Standard of Conduct. The Indemnitee shall be
-----------------------------------------
conclusively presumed to have met the relevant standards of conduct as defined
by applicable law for indemnification pursuant to this Agreement.
4
<PAGE>
4.2 Determination of Right to Indemnification. The Company shall pay all
-----------------------------------------
claims under this Agreement within 15 days of receipt of written notice by the
Indemnitee. The Company agrees that it has no defense to the nonpayment of such
claims and that its remedies are limited to reimbursement as provided in Section
2.1 of this Agreement. The Indemnitee's Expenses incurred in connection with
any Proceeding concerning his right to indemnification or advances in whole or
in part pursuant to this Agreement shall also be indemnified by the Company
regardless of the outcome of the Proceeding.
SECTION 5. ADVANCES OF EXPENSES
--------------------
The Expenses incurred by the Indemnitee in any Proceeding shall be paid
promptly by the Company in advance of the final disposition of the Proceeding at
the written request of the Indemnitee to the fullest extent permitted by
applicable law; provided that as long as applicable law requires an undertaking,
the Indemnitee shall undertake in writing to repay such amount to the extent
that it is ultimately determined that the Indemnitee is not entitled to
indemnification.
SECTION 6. INDEMNIFICATION PROCEDURE
-------------------------
6.1 Notice. Promptly after receipt by the Indemnitee of notice of the
------
commencement of any Proceeding, the Indemnitee will, if a claim is to be made
against the Company under this Agreement, notify the Company of the commencement
thereof. The omission to so notify the Company will not relieve the Company
from any liability which the Company may have to the Indemnitee otherwise than
under this Agreement.
6.2 Company Participation. With respect to any Proceeding for which
---------------------
indemnification is requested, the Company will be entitled to participate
therein at its own expense and, except as otherwise provided below, to the
extent that it may wish, the
5
<PAGE>
Company may assume the defense of the Proceeding, with counsel satisfactory to
the Indemnitee. After notice from the Company to the Indemnitee of its election
to assume the defense of a Proceeding, the Company will not be liable to the
Indemnitee under this Agreement for any legal or other expenses subsequently
incurred by the Indemnitee with the defense thereof, other than reasonable costs
of investigation or as otherwise provided below. The Indemnitee shall have the
right to employ the Indemnitee's counsel in any Proceeding but the fees and
expenses of the counsel incurred after notice from the Company of its assumption
of the defense of the Proceeding shall be at the expense of the Indemnitee,
unless (i) the employment of counsel by the Indemnitee has been authorized by
the Company, (ii) the Indemnitee shall have reasonably concluded that there may
be a conflict of interest between the Company and the Indemnitee in the conduct
of the defense of a Proceeding, or (iii) the Company shall not in fact have
employed counsel to assume the defense of a Proceeding, in each of which cases
the fees and expenses of the Indemnitee's counsel shall be at the expense of the
Company. The Company shall not be entitled to assume the defense of any
Proceeding brought by or on behalf of the Company or as to which the Indemnitee
has made the conclusion that there may be a conflict of interest between the
Company and the Indemnitee.
6.3 Settlement. Neither the Company nor the Indemnitee shall settle or
----------
compromise any Proceeding in any manner which would impose any penalty or
limitation on either the Indemnitee or the Company without the written consent
of either the Company or the Indemnitee, as the case may be; provided, however,
that neither the Company nor the Indemnitee shall unreasonably withhold such
consent.
6.4 Subrogation. If the Company pays Indemnified Costs, the Company will
-----------
be subrogated to the extent of such payment to all of the rights of recovery of
the Indemnitee against third parties. The Indemnitee will do all things
reasonably necessary to secure such rights, including the execution of documents
necessary to enable the Company effectively to bring suit to enforce such
rights.
6
<PAGE>
SECTION 7. LIMITATIONS ON INDEMNIFICATION
------------------------------
No payments pursuant to this Agreement shall be made by the Company:
(a) to indemnify or advance Expenses to the Indemnitee with respect to
Proceedings initiated or brought voluntarily by the Indemnitee and not by way of
defense, except with respect to Proceedings brought to establish or enforce a
right to indemnification under this Agreement or any other statute or law or
otherwise as required under applicable law, but the indemnification or
advancement of Expenses may be provided by the Company in specific cases if the
Board of Directors finds it to be appropriate;
(b) to indemnify the Indemnitee for any Indemnified Costs for which
payment is actually made to the Indemnitee under a valid and collectible
insurance policy, except in respect of any excess beyond the amount of payment
under such policy;
(c) to indemnify the Indemnitee for any Indemnified Costs sustained in any
Proceeding for an accounting of profits made from the purchase or sale by
Indemnitee of securities of the Company pursuant to the provisions of Section
16(b) of the Securities Exchange Act of 1934, as amended, the rules and
regulations promulgated thereunder and amendments thereto or similar provisions
of any federal, state or local statutory law; or
(d) if a court of competent jurisdiction shall finally determine that any
indemnification hereunder is unlawful.
SECTION 8. MAINTENANCE OF LIABILITY INSURANCE
----------------------------------
8.1 Affirmative Covenant of the Company. The Company hereby covenants and
-----------------------------------
agrees that, as long as the Indemnitee shall continue to serve as a director of
the Company and thereafter so long as the Indemnitee shall be subject to any
possible Proceeding, the Company, subject to subsection 8.3 of this Agreement,
shall promptly
7
<PAGE>
obtain and maintain in full force and effect directors' and officers' liability
insurance ("D&O Insurance") in reasonable amounts from established and reputable
insurers.
8.2 Indemnitee Named as Insured. In all D&O Insurance policies, the
---------------------------
Indemnitee shall be named as an insured in a manner that provides the Indemnitee
the same rights and benefits as are accorded to the most favorably insured of
the Company's directors and officers.
8.3 Exemption from Maintenance of Insurance. Notwithstanding the
----------------------------------------
foregoing, the Company shall have no obligation to obtain or maintain D&O
Insurance if the Company determines in good faith that insurance is not
reasonably available, the premium costs for insurance are, in the opinion of the
Company, disproportionate to the amount of coverage provided, the coverage
provided by such insurance is so limited by exclusions that it provides an
insufficient benefit, or the Indemnitee is covered by similar insurance
maintained by a subsidiary of the Company. If the Company provides D&O
Insurance for any officer or director of the Company, the Company shall provide
D&O Insurance for the Indemnitee under terms at least as favorable to the
Indemnitee as those secured for such other officers or directors.
SECTION 9. MISCELLANEOUS
-------------
9.1 Successors and Assigns. This Agreement shall be binding upon, and
----------------------
shall inure to the benefit of the Indemnitee and the Indemnitee's heirs,
personal representatives and assigns, and the Company and its successors and
assigns.
9.2 Separability. Each provision of this Agreement is a separate and
------------
distinct agreement and independent of the others, so that if any provision of
this Agreement shall be held to be invalid or unenforceable for any reason, the
invalidity or unenforceability shall not affect the validity or enforceability
of the other provisions hereof. To the extent required, any provision of this
Agreement may be modified by a
8
<PAGE>
court of competent jurisdiction to preserve its validity and to provide the
Indemnitee with the broadest possible indemnification permitted under applicable
law.
9.3 Savings Clause. If this Agreement or any portion hereof shall be
--------------
invalidated on any ground by any court of competent jurisdiction, then the
Company shall nevertheless indemnify Indemnitee as to Indemnified Costs with
respect to any Proceeding to the full extent permitted by any applicable portion
of this Agreement that shall not have been invalidated or by any applicable
provision of applicable law.
9.4 Interpretation; Governing Law. This Agreement shall be construed as a
-----------------------------
whole and in accordance with its fair meaning. Headings are for convenience
only and shall not be used in construing meaning. This Agreement shall be
governed by and interpreted in accordance with the laws of the State of Nevada;
provided that, in the event the Company should reincorporate in the State of
Delaware, this Agreement shall be governed by and interpreted in accordance with
the laws of the State of Delaware. Any claims made pursuant to this Agreement
shall be governed by the governing law in effect on the date such claim is made.
9.5 Amendments. No amendment, waiver, modification, termination or
----------
cancellation of this Agreement shall be effective unless in writing signed by
the party against whom enforcement is sought. The indemnification rights
afforded to the Indemnitee by this Agreement are contract rights and may not be
diminished, eliminated or otherwise affected by amendments to the Company's
Articles or Certificate of Incorporation, as applicable, Bylaws or other
agreements, including D&O Insurance policies.
9.6 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
party and delivered to the other.
9
<PAGE>
9.7 Notices. Any notice required to be given under this Agreement shall
-------
be directed to Virtual Mortgage Network, Inc. at 4590 MacArthur Boulevard, Suite
175, Newport Beach, California 92660, Attention: President, and to Indemnitee at
the address set forth below or to another address as either shall designate in
writing.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
INDEMNITEE
-------------------------------------------------------
Name:
--------------------------------------------------
Address:
----------------------------------------------
----------------------------------------------
----------------------------------------------
----------------------------------------------
VIRTUAL MORTGAGE NETWORK, INC.
By:
----------------------------------------------------
Name:
--------------------------------------------------
Title:
-------------------------------------------------
10
<PAGE>
EXHIBIT 10.2
INDEMNITY AGREEMENT
This Indemnity Agreement is dated this 21st day of October, 1997 and is made
by MICHAEL A. BARRON, an individual, with an address at 4590 MacArthur
Boulevard, Suite 175, Newport Beach, California 92660 ("Barron"), CAMELOT
HOLDINGS, INC., a ___________________________ corporation with an address of
____________________________________ ("Camelot"), and DIANNE D. DAVID, an
individual with an address at 4590 MacArthur Boulevard, Suite 175, Newport
Beach, California 92660 ("David," and collectively with Barron and Camelot, the
"Indemnitors") in favor of Virtual Mortgage Network, Inc., a Nevada corporation
with an address at 4590 MacArthur Boulevard, Suite 175, Newport Beach,
California 92660 ("Company" or "Indemnitee").
Recitals
--------
Indemnitors are founders of the Company. Certain individuals, namely Jeanne
Garde, James Meader and Garylyn Edwards ("Claimants"), have made claims, and
may in the future make or threaten claims, that such persons are entitled to
equity interests in the Company, damages or other relief, due to agreements,
promises, courses of dealing, inducements, breaches, representations or similar
actions or omissions of the Company and/or one or more of the Indemnitors
occurring, or alleged to have occurred, prior to the date hereof (the "Claims").
The Company has requested that the Indemnitors provide this Indemnity Agreement
for its benefit and the benefit of its existing and future stockholders.
NOW, THEREFORE, for and in consideration of the foregoing recitals and
premises set forth herein, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, Indemnitors hereby
agree as follows:
Indemnitors and all of their heirs, executors, administrators, successors
and assigns, shall protect, defend, indemnify and hold harmless the Indemnitee,
all of Indemnitee's past, present and future partners, officers, directors,
employees, agents and professionals employed thereby, stockholders, and all of
Indemnitee's parent corporations, subsidiaries, and affiliates, from and against
any and all claims, demands, suits, liens, proceedings, violations, losses,
costs, fines, penalties, liabilities, judgments, and/or damages and expenses of
any kind or nature whatsoever (including, without limitation, court costs and
attorneys' fees) relating to or arising from the Claims whenever brought, which
may at any time be brought or asserted by the Claimants or others asserting
Claims through the Claimants against Indemnitee, all of Indemnitee's past,
present and future partners, officers, directors, employees, agents and
professionals employed thereby, stockholders, and all of Indemnitee's parent
corporations, subsidiaries, and affiliates, in connection with, based upon, in
any way related to, or arising (directly or indirectly) from the Claims asserted
by the Claimants.
Indemnitee shall promptly notify Indemnitors of any Claims. Indemnitee may
either: (a) tender its defense of such Claims to Indemnitors, which Claims shall
then be defended by Indemnitors with legal counsel of Indemnitee's choosing,
provided that Indemnitors shall not settle any Claims without the prior written
consent of the Company (which consent shall not
1
<PAGE>
be unreasonably withheld); or (b) if the Indemnitors shall fail to defend any
Claim, retain its own legal counsel and defend against such Claims without
waiving any of Indemnitee's rights to indemnification hereunder. In either case,
the Company agrees to advance such attorneys' fees, costs and other sums as may
be reasonably necessary to defend any and all Claims that may be brought or
asserted by Claimants against Indemnitees. Indemnitors shall be obligated to
repay the Company for all such advances upon the entry of a final judgment or
settlement adjudicating and/or resolving the Claims. This Indemnity shall inure
to the benefit of and shall be binding upon the parties hereto and their
respective legal representatives, heirs, successors and assigns. Indemnitors
hereby expressly waive and relinquish any right to cause Indemnitee to proceed
against Indemnitors in any particular order.
The liability hereunder of each of the Indemnitors shall be joint and
several. The death of any one or more of the Indemnitors shall not affect this
Indemnity or the obligations hereunder of any of the Indemnitors. The respective
liabilities of each of the Indemnitors hereunder are not contingent on the
signature of any other Indemnitor. The release of any one Indemnitor from this
Indemnity or from his or her liability and obligations hereunder shall not
release any of the other Indemnitors from this Indemnity or from their
respective liabilities and obligations hereunder. This Indemnity may be executed
in counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement. This Indemnity shall not be modified except with the express prior
written consent of Indemnitee, which consent may be withheld for any reason or
for no reason. The modification of this Indemnity with respect to any one
Indemnitor shall not modify this Indemnity with respect to any of the other
Indemnitors.
To secure the obligations of the Indemnitors hereunder, the Indemnitors
have entered into pledge agreements in favor of the Company, with respect to the
common stock of the Company.
This Indemnity shall be governed by and construed in accordance with the
laws of the State of California without regard to conflicts of law principles.
The parties hereto irrevocably consent and submit to the exclusive jurisdiction
of the courts of the State of California over any suit, action or proceeding
arising out of or related to this Indemnity. The parties hereto intend and
believe that each provision in this Indemnity comports with all applicable
local, state and federal laws. However, if any provision or portion of any
provision in this Indemnity is found by a court of law to be in violation of any
applicable local, state or federal ordinance, statute, law, administrative or
judicial decision or public policy, and if such court should declare such
portion or provision to be illegal, invalid, unlawful, void or unenforceable,
then it is the intent of all parties hereto that such portion or provision shall
be given force to the fullest possible extent that it is legal, valid and
enforceable, that the remainder of this Indemnity shall be construed as if such
portion or provision were not contained herein, and that the rights, obligations
and interest of the Indemnitee under the remainder of this Indemnity shall
continue in full force and effect.
Any notice, demand, request or other communication which any party hereto
may be required or may desire to give hereunder shall be in writing and shall be
deemed to have
2
<PAGE>
been properly given if delivered personally, or sent by certified mail, return
receipt requested, or by reputable air courier service, or by telecopier (with
confirmation of transmission) to the addresses first hereinabove written for
each of the parties, or to such other address as the party to be served with
notice may have furnished in writing to the party seeking or desiring to serve
notice as a place for service of notice. Notices given in any other manner shall
be deemed effective only upon receipt.
Indemnitors hereby waive, as to the Claims, all rights to be indemnified by
the Company or to protection against liability afforded the Indemnitors by
statute, contract or the Company's charter documents or bylaws to which the
Indemnitors might otherwise be entitled by virtue of their status as current or
former officers or directors of the Company.
IN WITNESS WHEREOF, the parties have executed this Indemnity Agreement as
of the date first above written.
/s/ MICHAEL A. BARRON
-------------------------
MICHAEL A. BARRON
CAMELOT HOLDINGS, INC.
By: /s/ MICHAEL A. BARRON
---------------------
Name: Michael A. Barron
Title: President
/s/ DIANNE D. DAVID
-------------------------
DIANNE D. DAVID
Agreed and Accepted:
VIRTUAL MORTGAGE NETWORK, INC.
By: /s/ JOHN D. MURRAY
-----------------------------------
John Murray, President, CFO and COO
3
<PAGE>
EXHIBIT 10.2.1
SECURITIES PLEDGE AGREEMENT
---------------------------
SECURITIES PLEDGE AGREEMENT (the "Agreement"), dated as of December 21,
1997, between DIANNE DAVID ("Pledgor") and VIRTUAL MORTGAGE NETWORK, INC., a
corporation organized and existing under the laws of the State of Nevada (the
"Company").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company is the holder of an indemnity agreement dated the date
hereof, made by the Pledgor in favor of the Company (the "Indemnity"); and
WHEREAS, the Pledgor is the legal, beneficial and record owners of shares
of Common Stock, par value $.001 per share (the "Pledged Stock") of the Company
in the amount set forth on the signature page hereto; and
WHEREAS, the Pledgor and the Company deem it necessary and advisable to
enter into this Agreement so as to secure the Pledgor's obligations under the
Indemnity.
NOW, THEREFORE, in consideration of the premises and in order to induce the
Company to accept the Indemnity, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Pledge. The Pledgor hereby pledges to the Company for the benefit of
------
the Company all the Pledged Stock and hereby grants the Company a first lien on,
and security interest in, such Pledged Stock and in all proceeds thereof as
collateral security for the prompt and complete payment and performance when due
of all obligations of the Pledgor, now or hereafter existing, under the
Indemnity (all the foregoing being hereinafter called the "Obligations").
-----------
2. Stock Dividends, Distributions, etc., with Respect to Pledged Stock.
-------------------------------------------------------------------
If, while this Agreement is in effect, the Pledgor shall become entitled to
receive or shall receive any stock certificate (including, without limitation,
any certificate representing a stock dividend or a distribution in connection
with any reclassification or any increase or reduction of capital, or issued in
connection with any reorganization, reincorporation or merger), option or right,
whether as an addition to, in substitution of, or in exchange for any Pledged
Stock, the Pledgor agrees that she shall accept and hold the same in trust on
behalf of the Company and deliver the same forthwith to the Company in the exact
form received, with the indorsement of the Pledgor when necessary and/or with
appropriate undated stock powers duly executed in blank, to be held by the
Company subject to the terms hereof, as additional collateral security for the
Obligations. Any sums paid upon or in respect of the Pledged Stock upon the
liquidation or dissolution of the Company, shall be paid over to the Company to
be held by it in trust as additional collateral security for the Obligations;
and in case any distribution of capital shall be made on or in respect of the
Pledged Stock or any property shall be distributed upon or with respect to the
Pledged Stock pursuant to the recapitalization or reclassification of the
capital of the Company or pursuant to the reorganization of the Company, the
property so distributed shall be delivered to the Company to be held by its as
additional collateral security for the Obligations. All sums of
<PAGE>
money and property so paid or distributed in respect of the Pledged Stock which
are received by the Pledgor shall be segregated from the other property or funds
of the Pledgor and held by the Pledgor in trust as additional collateral
security for the Obligations. So long as no Event of Default, as defined herein,
has occurred and is continuing, the Pledgor shall be entitled to retain and use
any and all cash dividends paid on the Pledged Stock, except for any sums paid
upon liquidation or dissolution as described above.
3. Collateral. All property at any time pledged to the Company hereunder
----------
(whether described herein or not) and all income therefrom (except cash
dividends) and proceeds thereof are herein collectively sometimes called the
"Collateral."
----------
4. Voting Rights. Unless an Event of Default shall have occurred and be
-------------
continuing, the Pledgor shall be entitled to vote the Pledged Stock and to give
proxies, consents, waivers and ratification in respect of the Pledged Stock,
provided, however, that no vote shall be cast, or consent, waiver or
- -------- -------
ratification given or action taken, which the Pledgor believes in good faith
would impair the value of the Collateral or be inconsistent with or violate any
provision of this Agreement.
5. Rights of The Company. The Company shall not be liable for failure to
---------------------
collect or realize upon the Obligations or any collateral security or guarantee
therefor, or any part thereof, or for any delay in so doing, nor shall the
Company be under any obligation to take any action whatsoever with regard
thereto. If an Event of Default has occurred and is continuing, and if the
Company shall have given prior written notice of its intention to do so to the
Pledgor, such number of shares of the Pledged Stock as may be necessary to
remedy the Event of Default may be registered in the name of the Company or its
nominee, and the Company or its nominee may, to the extent permitted by
applicable law, thereafter exercise all voting and other rights at any meeting
of stockholders of the Company thereto and exercise any and all rights of
conversion, exchange, subscription or any other rights, privileges or options
pertaining to any of the Pledged Stock as if it were the absolute owner thereof,
including, without limitation, the right to exchange at its discretion the
Pledged Stock upon the merger, consolidation, reorganization, recapitalization
or other readjustment of the Company or upon the exercise by the Pledgor of any
right, privilege or option pertaining to the Pledged Stock, and in connection
therewith, to deposit and deliver the Pledged Stock with any committee,
depositary, transfer agent, registrar or other designated agency upon such terms
and conditions as the Company may determine, all without liability except to
account for property actually received by it, but the Company shall have no duty
to exercise any of the aforesaid rights, privileges or options and shall not be
responsible for any failure to do so or for any delay in so doing. The number of
shares of Pledged Stock to be registered in the name of the Company, as
described above, shall be determined by reference to the closing or last sale
price on the day such shares are to be registered in the name of the Company of
a share of the Company's Common Stock on Nasdaq or the principal exchange upon
which the Company's Common Stock is then traded (or, if the Company's Common
Stock is not then traded on Nasdaq or an exchange, by reference to the closing
bid price in the over-the-counter market, or, if there are no such bids, by
determination of the Board of Directors of the Company, acting in good faith).
For example, if an Event of Default has arisen as a result of an Obligation in
the amount of $1,000,000, and the closing price of a share of Common Stock on
2
<PAGE>
the day the shares are to be registered in the name of the Company is $10.00,
the Company shall only be entitled to register in its name under this Agreement
100,000 shares of Pledged Stock, less any shares of Common Stock to be
registered in its name pursuant to similar Securities Pledge Agreements with
other pledgors with respect to the same Obligation.
6. Remedies. In the event that any portion of the Obligations has been
--------
declared, or becomes, due and payable, the Company shall, as pledgee of the
Pledged Stock, turn over the Collateral (or portion thereof) in accordance with
any court order or settlement agreement in connection with the subject matter of
the Indemnity or exercise its rights set forth in Section 5 hereof.
7. Representations, Warranties and Covenants of the Pledgor. The Pledgor
--------------------------------------------------------
represents and warrants that (a) such Pledgor is the record, legal and
beneficial owner of the Pledged Stock as set forth on the signature page hereto,
subject to no lien or adverse claim, except the claims described in the
Indemnity and the lien created by this Agreement and (b) upon delivery to the
Company, the pledge and delivery of such Pledged Stock pursuant to this
Agreement creates a valid first lien on and a first perfected security interest
in the Pledged Stock, and the proceeds thereof, subject to no other lien. The
Pledgor covenants and agrees to defend the right, title and security interest of
the Company in and to the Pledged Stock and the proceeds thereof against the
claims and demands of all persons whomsoever; and will defend the right to and
security interest of the Company in any other property at any time hereafter
pledged to the Company as Collateral hereunder.
8. No Disposition, etc. The Pledgor agrees that, without the prior
-------------------
written consent of the Company, she will not sell, assign, transfer, exchange,
or otherwise dispose of, or grant any option with respect to, the Collateral,
nor will she create, incur or permit to exist any lien with respect to any of
the Collateral, or any interest therein, or any proceeds thereof, except for the
lien and security interest provided for by this Agreement.
9. Further Assurances. The Pledgor agrees that at any time and from time
------------------
to time upon the written request of the Company, the Pledgor will execute and
deliver such further documents and do such further acts and things as the
Company may reasonably request in order to effect the purposes of this
Agreement.
10. Events of Default. If (a) the Pledgor shall default in the due
-----------------
performance of her obligations under the Indemnity, or (b) the Pledgor shall
become insolvent, or shall make a transfer in fraud of creditors, or shall make
any assignment for the benefit of creditors, or shall admit in writing his or
its inability to pay his or its debts as they become due, or (c) the Pledgor
shall file a petition or an answer under any present or future applicable law or
statute of any jurisdiction relevant to bankruptcy, insolvency or other relief
of debtors (each such event being an "Event of Default"), then, at any time
thereafter the Company may exercise any or all of the remedies provided for
hereunder.
11. Severability. Any provision of this Agreement which is prohibited or
------------
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such
3
<PAGE>
prohibition or unenforceability without invalidating the remaining provisions
hereof, and any such prohibition or unenforceability in any jurisdiction shall
not invalidate or render unenforceable such provisions in any other
jurisdiction.
12. No Waiver; Cumulative Remedies. No failure to exercise nor any delay
------------------------------
in exercising on the part of the Company any right, power or privilege hereunder
shall operate as a waiver thereof; nor shall any single or partial exercise of
any right, power or privilege herein preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies hereunder provided are cumulative and may be exercised singly or
concurrently, and are not exclusive of any rights or remedies provided by law.
13. Waivers; Amendments. None of the terms or provisions of this
-------------------
Agreement may be waived, altered, modified or amended except by an instrument
in writing, duly executed by the Company. This Agreement and all obligations of
the Pledgor hereunder shall be binding upon by the respective heirs,
administrators, successors and assigns of the Pledgor.
14. Governing Law. This Agreement shall be governed by, and construed in
-------------
accordance with, the laws of the State of California, except to the extent that
the validity or perfection of the security interest hereunder or remedies
hereunder, in respect of any particular Collateral are governed by the laws of a
jurisdiction other than California.
15. Termination. This Agreement and the security interest of the Company
-----------
hereunder shall terminate upon the earlier of (a) May 31, 1999, provided that no
claim has been made by the Company prior to that date under the Indemnity, (b)
the fulfillment by the Pledgor of all of her Obligations under the Indemnity or
(c) termination, satisfaction or release of all claims which were the subject of
the Indemnity. At that time the Company shall immediately reassign and deliver
to the Pledgor such of the Pledged Stock and any other Collateral (if any) as
shall not have been sold or otherwise applied by the Company to satisfy
Indemnity claims.
IN WITNESS WHEREOF, the Pledgor and the Company have executed and
delivered this Agreement on the day and year first above written.
VIRTUAL MORTGAGE NETWORK, INC.
By: /s/ JOHN MURRAY
--------------------------
John Murray, President, Chief Financial
Officer and Chief Operating Officer
1,041,666 Shares /s/ DIANNE DAVID
--------------------------
Dianne David
<PAGE>
EXHIBIT 10.2.2
SECURITIES PLEDGE AGREEMENT
---------------------------
SECURITIES PLEDGE AGREEMENT (the "Agreement"), dated as of December 21,
1997, between MICHAEL A. BARRON and CAMELOT HOLDINGS, INC. (each, a "Pledgor,"
and collectively, the "Pledgors") and VIRTUAL MORTGAGE NETWORK, INC., a
corporation organized and existing under the laws of the State of Nevada (the
"Company").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company is the holder of an indemnity agreement dated the date
hereof, made by the Pledgors in favor of the Company (the "Indemnity"); and
WHEREAS, the Pledgors are the legal, beneficial and record owners of shares
of Common Stock, par value $.001 per share (the "Pledged Stock") of the Company
in the respective amounts set forth on the signature page hereto; and
WHEREAS, Pledgors and the Company deem it necessary and advisable to enter
into this Agreement so as to secure the Pledgors' obligations under the
Indemnity.
NOW, THEREFORE, in consideration of the premises and in order to induce the
Company to accept the Indemnity, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Pledge. The Pledgors hereby jointly and severally pledge to the
------
Company for the benefit of the Company all the Pledged Stock and hereby grant
the Company a first lien on (subject to the exception set forth in Section 7
hereof), and security interest in, such Pledged Stock and in all proceeds
thereof as collateral security for the prompt and complete payment and
performance when due of all obligations of the Pledgors, now or hereafter
existing, under the Indemnity (all the foregoing being hereinafter called the
"Obligations").
-----------
2. Stock Dividends, Distributions, etc., with Respect to Pledged Stock.
------------------------------------------------------------------
If, while this Agreement is in effect, the Pledgors shall become entitled to
receive or shall receive any stock certificate (including, without limitation,
any certificate representing a stock dividend or a distribution in connection
with any reclassification or any increase or reduction of capital, or issued in
connection with any reorganization, reincorporation or merger), option or right,
whether as an addition to, in substitution of, or in exchange for any Pledged
Stock, the Pledgors agree that they shall accept and hold the same in trust on
behalf of the Company and deliver the same forthwith to the Company in the exact
form received, with the indorsement of the Pledgors when necessary and/or with
appropriate undated stock powers duly executed in blank, to be held by the
Company subject to the terms hereof, as additional collateral security for the
Obligations. Any sums paid upon or in respect of the Pledged Stock upon the
liquidation or dissolution of the Company, shall be paid over to the Company to
be held by it in trust as additional collateral security for the Obligations;
and in case any distribution of capital shall be made on or in respect of the
Pledged Stock or any property shall be distributed upon or with respect to the
Pledged Stock pursuant to the recapitalization or reclassification of the
capital of the Company or pursuant to the reorganization of the Company, the
property so
<PAGE>
distributed shall be delivered to the Company to be held by its as additional
collateral security for the Obligations. All sums of money and property so paid
or distributed in respect of the Pledged Stock which are received by the
Pledgors shall be segregated from the other property or funds of the Pledgors
and held by the Pledgors in trust as additional collateral security for the
Obligations. So long as no Event of Default, as defined herein, has occurred and
is continuing, the Pledgor shall be entitled to retain and use any and all cash
dividends paid on the Pledged Stock, except for any sums paid upon liquidation
or dissolution as described above.
3. Collateral. All property at any time pledged to the Company hereunder
----------
(whether described herein or not) and all income therefrom (except cash
dividends) and proceeds thereof are herein collectively sometimes called the
"Collateral."
----------
4. Voting Rights. Unless an Event of Default shall have occurred and be
-------------
continuing, the Pledgors shall be entitled to vote the Pledged Stock and to give
proxies, consents, waivers and ratification in respect of the Pledged Stock,
provided, however, that no vote shall be cast, or consent, waiver or
- -------- -------
ratification given or action taken, which either Pledgor believes in good faith
would impair the value of the Collateral or be inconsistent with or violate any
provision of this Agreement.
5. Rights of The Company. The Company shall not be liable for failure to
---------------------
collect or realize upon the Obligations or any collateral security or guarantee
therefor, or any part thereof, or for any delay in so doing, nor shall the
Company be under any obligation to take any action whatsoever with regard
thereto. If an Event of Default has occurred and is continuing, and if the
Company shall have given prior written notice of its intention to do so to the
Pledgors, such number of shares of the Pledged Stock as may be necessary to
remedy the Event of Default may be registered in the name of the Company or its
nominee, and the Company or its nominee may, to the extent permitted by
applicable law, thereafter exercise all voting and other rights at any meeting
of stockholders of the Company thereto and exercise any and all rights of
conversion, exchange, subscription or any other rights, privileges or options
pertaining to any of the Pledged Stock as if it were the absolute owner thereof,
including, without limitation, the right to exchange at its discretion the
Pledged Stock upon the merger, consolidation, reorganization, recapitalization
or other readjustment of the Company or upon the exercise by the Pledgors of any
right, privilege or option pertaining to the Pledged Stock, and in connection
therewith, to deposit and deliver the Pledged Stock with any committee,
depositary, transfer agent, registrar or other designated agency upon such terms
and conditions as the Company may determine, all without liability except to
account for property actually received by it, but the Company shall have no duty
to exercise any of the aforesaid rights, privileges or options and shall not be
responsible for any failure to do so or for any delay in so doing. The number of
shares of Pledged Stock to be registered in the name of the Company, as
described above, shall be determined by reference to the closing or last sale
price on the day such shares are to be registered in the name of the Company of
a share of the Company's Common Stock on Nasdaq or the principal exchange upon
which the Company's Common Stock is then traded (or, if the Company's Common
Stock is not then traded on Nasdaq or an exchange, by reference to the closing
bid price in the over-the-counter market, or, if there are
2
<PAGE>
no such bids, by determination of the Board of Directors of the Company, acting
in good faith). For example, if an Event of Default has arisen as a result of
an Obligation in the amount of $1,000,000, and the closing price of a share of
Common Stock on the day the shares are to be registered in the name of the
Company is $10.00, the Company shall only be entitled to register in its name
under this Agreement 100,000 shares of Pledged Stock, less any shares of Common
Stock to be registered in its name pursuant to similar Securities Pledge
Agreements with other pledgors with respect to the same Obligation.
6. Remedies. In the event that any portion of the Obligations has been
--------
declared, or becomes, due and payable, the Company shall, as pledgee of the
Pledged Stock, turn over the Collateral (or portion thereof) in accordance with
any court order or settlement agreement in connection with the subject matter of
the Indemnity or exercise its rights set forth in Section 5 hereof.
7. Representations, Warranties and Covenants of the Pledgors. Each
---------------------------------------------------------
Pledgor represents and warrants that (a) such Pledgor is the record, legal and
beneficial owner of his or its portion of the Pledged Stock as set forth on the
signature page hereto, subject to no lien or adverse claim, except the claims
described in the Indemnity, the lien created by this Agreement and the liens
described on Exhibit A hereto and (b) upon delivery to the Company, the pledge
and delivery of such Pledged Stock pursuant to this Agreement creates a valid
first lien on and a first perfected security interest in the Pledged Stock, and
the proceeds thereof, subject to no other lien, except the liens described on
Exhibit A hereto. Each Pledgor convenants and agrees to defend the right, title
and security interest of the Company in and to the Pledged Stock and the
proceeds thereof against the claims and demands of all persons whomsoever; and
will defend the right to and security interest of the Company in any other
property at any time hereafter pledged to the Company as Collateral hereunder.
8. No Disposition, etc. Each Pledgor agrees that, without the prior
-------------------
written consent of the Company, he or it will not sell, assign, transfer,
exchange, or otherwise dispose of, or grant any option with respect to, the
Collateral, nor will it create, incur or permit to exist any lien with respect
to any of the Collateral, or any interest therein, or any proceeds thereof,
except for the lien and security interest provided for by this Agreement.
9. Further Assurances. The Pledgors agree that at any time and from time
------------------
to time upon the written request of the Company, the Pledgors will execute and
deliver such further documents and do such further acts and things as the
Company may reasonably request in order to effect the purposes of this
Agreement.
10. Events of Default. If (a) the Pledgors, or either of them shall
-----------------
default in the due performance of their obligations under the Indemnity, or (b)
the Pledgors, or either of them, shall become insolvent, or shall make a
transfer in fraud of creditors, or shall make any assignment for the benefit of
creditors, or shall admit in writing his or its inability to pay his or its
debts as they become due, or (c) the Pledgors, or either of them, shall file a
petition or an answer under any present or future applicable law or statute of
any jurisdiction relevant to bankruptcy, insolvency or other relief of debtors
(each such event being an "Event of
3
<PAGE>
Default"), then, at any time thereafter the Company may exercise any or all of
the remedies provided for hereunder.
11. Severability. Any provision of this Agreement which is prohibited or
------------
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability, without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisidiction shall not invalidate or render unenforceable such provisions in
any other jurisdiction.
12. No Waiver; Cumulative Remedies. No failure to exercise nor any delay
------------------------------
in exercising on the part of the Company any right, power or privilege hereunder
shall operate as a waiver thereof; nor shall any single or partial exercise of
any right, power or privilege herein preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies hereunder provided are cumulative and may be exercised singly or
concurrently, and are not exclusive of any rights or remedies provided by law.
13. Waivers; Amendments. None of the terms or provisions of this
-------------------
Agreement may be waived, altered, modified or amended except by an instrument in
writing, duly executed by the Company. This Agreement and all obligations of
the Pledgors hereunder shall be binding upon by the respective heirs,
administrators, successors and assigns of the Pledgors.
14. Governing Law. This Agreement shall be governed by, and construed in
-------------
accordance with, the laws of the State of California, except to the extent that
the validity or perfection of the security interest hereunder or remedies
hereunder, in respect of any particular Collateral are governed by the laws of a
jurisdiction other than California.
15. Termination. This Agreement and the security interest of the Company
-----------
hereunder shall terminate upon the earlier of (a) May 31, 1999, provided that no
claim has been made by the Company prior to that date under the Indemnity, (b)
the fulfillment by the Pledgors of all of their Obligations under the Indemnity
or (c) termination, satisfaction or release of all claims which were the subject
of the Indemnity. At that time the Company shall immediately reassign and
deliver to the Pledgors such of the Pledged Stock and any other Collateral
(if any) as shall not have been sold or otherwise applied by the Company to
satisfy Indemnity claims.
4
<PAGE>
IN WITNESS WHEREOF, the Pledgors and the Company have executed and
delivered this Agreement on the day and year first above written.
VIRTUAL MORTGAGE NETWORK, INC.
By: /s/ John Murray
--------------------------------------
John Murray, President, Chief Financial
Officer and Chief Operating Officer
25,000 Shares /s/ Michael A. Barron
--------------------------------------
Michael A. Barron
1,250,000 Shares CAMELOT HOLDINGS, INC.
By: /s/ Michael A. Barron
--------------------------------------
Name: Michael A. Barron
Title: President
5
<PAGE>
EXHIBIT A
Mr. Barron and Camelot Holdings, Inc. have pledged an aggregate of 427,125
shares of Common Stock of VMN to Selig Zises and an aggregate of 561,000 shares
of Common Stock of VMN to Boston Provident Partners, L.P. in order to secure
certain personal indebtedness of Mr. Barron.
<PAGE>
EXHIBIT 10.28.1
AMENDMENT TO FIRST AMENDED
AND
RESTATED STOCK PURCHASE AGREEMENT
THIS AMENDMENT TO FIRST AMENDED AND RESTATED STOCK PURCHASE AGREEMENT
(this "Amendment") is made and entered into as of December 19, 1997 by and
among Virtual Mortgage Network, Inc., a Nevada corporation ("Buyer"), Sutter
Mortgage Corporation, a California corporation (the "Company"), and Arthur H.
Sutter, an individual and the sole stockholder of the Company ("Stockholder"),
and is made with reference to that certain First Amended and Restated Stock
Purchase Agreement (the "Agreement") dated as of June 6, 1997, by and among
Buyer, the Company and Stockholder. Capitalized terms used herein without
definition shall have the same meanings herein as set forth in the Agreement.
BACKGROUND INFORMATION
WHEREAS, the parties desire to amend the Agreement to change the
amount and form of consideration, among other things:
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, the parties hereto agree as follows:
Section 1. AMENDMENTS TO THE AGREEMENT
A. Section 1.2 of the Agreement is hereby amended and restated in
its entirety to read as follows:
"1.2 Purchase Price. The aggregate consideration to be paid by Buyer
--------------
to Stockholder pursuant to this Agreement (the "Total Purchase Price")
shall be $2,484,000, payable as follows:
(i) An aggregate cash payment of $950,000 shall be payable at
the Closing less (a) the $50,000 deposit referred to in Section 1.3 of
the Agreement and (b) $500,000 in forgiveness of the Secured
Promissory Note, dated September 30, 1997 entered into by Stockholder
and payable to Buyer; and
(ii) An aggregate cash payment of $1.534 million shall be due
and payable at the closing of the Offering. The obligation to pay
such amount shall be evidenced by a promissory note of Buyer payable
to Stockholder, dated the date hereof."
<PAGE>
B. Section 1.3(b) of the Agreement is hereby deleted in its
entirety.
C. Section 3.1 of the Agreement is hereby amended and restated in
its entirety to read as follows:
"3.1 Closing. The Closing of the purchase and sale of the Shares and
-------
the consummation of the other transactions contemplated by this Agreement
shall occur on the later of (i) the closing of the Offering or (ii) the
date all conditions precedent to the Closing shall be fulfilled or waived,
in either case, at 10:00 a.m., California time, at the offices of O'Melveny
& Myers LLP in Newport Beach, California, or at such other hour or place or
on such other date as shall be agreed upon among Stockholder, the Company
and Buyer the actual date being herein generally referred to as the
"Closing Date." If the Closing fails to occur by October 31, 1997, or by
such later date to which the Closing may be extended as provided above,
Buyer shall have until December 31, 1997 to close the Acquisition and if
the Closing has not occurred by the end of such time, this Agreement shall
automatically terminate, and except as expressly provided herein, neither
Stockholder, the Company nor Buyer shall have any further obligations
hereunder."
D. Section 3.2(vi) of the Agreement is hereby deleted in its
entirety.
E. Section 7.4 of the Agreement is hereby deleted in its entirety.
F. Section 8.6 of the Agreement is hereby amended and restated in
its entirety to read as follows:
"8.6 New Transactions. Before the Closing Date, the Company will
----------------
not: (i) enter into any contract, commitment, or transaction not in the
usual and ordinary course of its business; (ii) enter into any contract,
commitment, or transaction in the usual and ordinary course of business
involving an amount exceeding Ten Thousand Dollars ($10,000) individually,
or Twenty-Five Thousand Dollars ($25,000) in the aggregate, except that the
Company may borrow up to $100,000 from Stockholder for deposit with
PaineWebber -Warehouse Line, pursuant to that certain Promissory Note,
dated December __, 1997, made by the Company in favor of Stockholder (the
"PaineWebber Note"); (iii) make any capital expenditures in excess of Two
Thousand Dollars ($2,000) for any single item or Five Thousand Dollars
($5,000) in the aggregate, or enter into any leases of capital equipment or
property under which the annual lease charge is in excess of Ten Thousand
Dollars ($10,000); (iv) sell or dispose of any capital assets; or (v) agree
to do any of the above listed
2
<PAGE>
acts."
G. Section 8.13 of the Agreement is hereby added as follows:
"8.13 Guaranties. Stockholder shall maintain each personal guaranty of
----------
any credit facility of the Company that is in effect on the Closing Date
until the earlier of (a) the mutual agreement between the Stockholder and
the lender under such credit facility to terminate the personal guaranty
while maintaining the availability of the credit facility to the Company
for at least the borrowing limit in effect on the Closing Date for the
period of time specified in each such credit facility or such other period
of time mutually agreed on after the Closing Date by the Company and the
applicable lender and (b) March 31, 1998."
H. Section 9.4, 9.5 and 9.6 of the Agreement are hereby added as
follows:
"9.4 Status of Resolution of Claims. Buyer agrees to inform
------------------------------
Stockholder quarterly of the status of the claims with respect to all loan
repurchase obligations, notifications and settlements of Stockholder listed
on Schedule 9.4 hereto. Schedule 9.4 shall also set forth the loan loss
provisions as of the Closing Date with respect to such claims (the "Loan
Loss Provision").
9.5 Payment of Claims. Upon the ultimate settlement or resolution
-----------------
of all loan repurchase claims listed on Schedule 9.4 hereto, if the amount
recorded as a loss upon resolution of all such claims (net of any insurance
proceeds or other recoveries in respect of such claims less Buyer's cost to
effect such recoveries) in the aggregate, is less than the aggregate of the
Loan Loss Provision, Buyer agrees to split equally with Stockholder the
amount of such deficit.
9.6 New Borrowings under Guarantied Credit Facilities. Buyer agrees
-------------------------------------------------
that following the Closing Date, it will not permit the Company to make any
new borrowings under any credit facility as to which a personal guaranty of
Stockholder is still in effect, unless the proceeds of such new borrowing
are used solely to fund origination of mortgage loans for which a
commitment to purchase from an investor, pursuant to delegated underwriting
guidelines, is in place and such mortgage loans conform to such
guidelines."
H. Section 10.5 of the Agreement is hereby amended and restated in
its entirety to read as follows:
"10.5 Indebtedness. The Company shall not incur any
------------
3
<PAGE>
Indebtedness other than current liabilities incurred in the usual and
ordinary course of business and liabilities incurred in connection with the
PaineWebber Note. The Company shall refrain from paying any obligation or
liability, absolute or contingent, except current liabilities shown on the
Balance Sheet or current liabilities incurred since the Balance Sheet Date
in the usual and ordinary course of business."
I. Section 11.1(h) of the Agreement is hereby amended and restated
in its entirety to read as follows:
"(h) Noncompetition Agreements. Stockholder shall have executed and
-------------------------
delivered to Buyer a Noncompetition Agreement in a form reasonably
acceptable to Buyer and its legal counsel (the "Sutter Noncompetition
Agreement")."
J. Sections 12.1, 12.2 and 12.3 of the Agreement are hereby deleted
in their entirety.
K. Section 12.5 to the Agreement shall be added as follows:
"12.5 PaineWebber Note. On the Closing Date, Stockholder shall lend
----------------
the Company $100,000 for deposit with PaineWebber - Warehouse Line, which
shall be evidenced by the PaineWebber Note, pursuant to the terms thereto."
L. Section 14.1 of the Agreement is hereby amended by deleting
clause (iii)(b) and relettering clause (iii)(c) as clause (iii)(b).
M. Section 14.2 of the Agreement is hereby amended and restated in
its entirety as follows:
"(a) Indemnification of Buyer. Stockholder and, in the event the
------------------------
Acquisition is not consummated and only to the extent applicable, the
Company, jointly and severally covenant and agree to indemnify and save and
hold Buyer, its officers, directors, employees, agents and representatives,
each person who controls Buyer within the meaning of the Securities Act,
and the Company (in the event the Acquisition is consummated and only to
the extent applicable) harmless from and against any loss, expense,
liability, claim or legal damages (including, without limitation,
reasonable fees and disbursements of counsel and other costs and expenses
incident to any actual or threatened claim, suit, action or proceeding)
arising out of or resulting from: (i) any inaccuracy in or breach of any
representation, warranty, covenant or agreement made by Stockholder or the
Company in this Agreement or in any writing delivered pursuant to this
Agreement or at the Closing; (ii) the failure of Stockholder or the Company
to
4
<PAGE>
perform or observe fully any covenant, agreement or provision to be
performed or observed by it pursuant to this Agreement; (iii) any actual or
threatened claim, suit, action or proceeding arising out of or resulting
from the conduct by the Company of its business or operations on or before
the Closing Date, including, but not limited to, those arising out of or
relating to (A) the employment relationship existing before Closing between
the Company and its affiliates and any and all current or former employees
of either, or (B) the compliance with all Agency and other standards and
regulations and contractual commitments applicable to mortgage loans
originated before Closing by the Company; (iv) any failure to have obtained
all Permits, consents, waivers, approvals, licenses and authorizations
required in connection with the execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby; (v) the
Company maintaining after the Closing its existing escrow practices through
the date it completes its first post-closing annual escrow analysis; (vi)
the Company maintaining its existing practices relating to adjusting
mortgage interest rates through the anniversary date of the Closing; and
(vii) any tax liabilities incurred by the Company and/or Buyer as a result
of the divestiture by the Company of the Divested Business provided,
--------
however, that Stockholder shall have no obligation to indemnify Buyer
-------
pursuant to any of the foregoing to the extent the Buyer is obligated to
indemnify Stockholder with respect to such matter pursuant to Section
14.2(b). Stockholder agrees to reimburse Buyer, the Company, or other
indemnified party, as the case may be, promptly upon demand for any
unreimbursed payment made or loss suffered by Buyer, the Company, or other
indemnified party, as the case may be, at any time after the Closing Date
in respect of any damage, loss, cost, expense, deficiency, liability,
judgment, claim, action or demand to which the foregoing indemnity relates,
provided, however, any such unreimbursed payment or loss suffered that does
not exceed $5,000 shall not be reimbursed until the aggregate amount of
such unreimbursed payments or losses exceeds $5,000."
(b) Indemnification of Stockholder. Buyer covenants and agrees to
------------------------------
indemnify and save and hold Stockholder harmless from and against any loss,
expense, liability, claim or legal damages (including, without limitation,
reasonable fees and disbursements of counsel and other costs and expenses
incident to (i) any actual or threatened claim, suit, action or proceeding)
arising out of or resulting from any inaccuracy in or breach of any
representation, warranty, covenant or agreement made by Buyer in this
Agreement or in any writing delivered pursuant to this Agreement or at the
Closing; (ii) the failure by Buyer to perform or observe any covenant,
agreement or condition to be performed or observed by it pursuant to this
Agreement; and (iii) any loan repurchase obligations, notifications and
settlements,
5
<PAGE>
whether arising prior to or after the Closing, including without
limitation, those referenced on Schedule 9.4 to the Agreement. Buyer agrees
to reimburse Stockholder promptly upon demand for any payment made or loss
suffered by Stockholder at any time after the Closing Date in respect of
any damage, loss, cost, expense, deficiency, liability, judgment, claim,
action or demand to which the foregoing indemnity relates.
(c) Term; Aggregate Dollar Limitation; Indemnification Procedure. The
------------------------------------------------------------
indemnification provided for in this Section 14.2 shall be effective for a
period of one year following the Closing Date, subject to the exceptions
contained in clauses (i) through (iii) of Section 14.1 of this Agreement
and clause (vii) of Section 14.2(a) of this Agreement. The aggregate
dollar amount of all payments the Stockholder shall be obligated to make
pursuant to this Section 14.2 and Section 14.1 shall not exceed $1,000,000.
Whenever a claim shall arise for indemnification under this Section 14.2,
the party entitled to indemnification (the "Indemnified Party") shall
promptly notify the party from whom indemnification is sought (the
"Indemnifying Party") of such claim and, when known, the facts constituting
the basis for such claim. In the event of any such claim for
indemnification resulting from or in connection with a claim or legal
proceeding by a third party, the Indemnifying Party shall have the right,
at its option and at its own expense, to be represented by counsel of its
choice who must be reasonably satisfactory to the Indemnified Party, and to
defend against, negotiate, settle or otherwise deal with any claim or
proceeding which relates to any loss, liability, damage or deficiency
resulting from a third party claim indemnified against hereunder; provided,
--------
however, that no settlement shall be made without the prior written consent
-------
of the Indemnified Party, which consent shall not be unreasonably withheld;
and provided further, however, that the Indemnified Party may, at its own
---------------- -------
expense, participate in any such proceeding with the counsel of its choice.
As long as the Indemnifying Party is in good faith defending such claim or
proceeding, the Indemnified Party shall not compromise or settle such claim
without the prior written consent of the Indemnifying Party. If the
Indemnifying Party does not assume the defense of any such claim or
litigation in accordance with the terms hereof, the Indemnified Party may
defend against such claim or litigation in such manner as it may deem
appropriate, including, but not limited to, settling such claim or
litigation (after giving notice of the same to the Indemnifying Party) on
such terms as the Indemnified Party may deem appropriate, and the
Indemnifying Party will promptly indemnify the Indemnified Party in
accordance with the provisions of this Section 14.2."
N. Section 14.3 of the Agreement shall be deleted
6
<PAGE>
in its entirety.
Section 2. MISCELLANEOUS
A. Reference to and Effect on the Agreement and the Other
Documents.
(i) On and after the date hereof, each reference in the Agreement to
"this Agreement," "hereunder," "hereof," "herein" or words of like import
referring to the Agreement, and each reference to the "Agreement,"
"thereunder," "thereof" or words of like import referring to the Agreement
in the other documents delivered and executed pursuant to the Agreement,
shall mean and be a reference to the Agreement as amended by this
Amendment.
(ii) Except as specifically amended by this Amendment, the Agreement
and any ancillary agreements executed pursuant to the Agreement shall
remain in full force and effect and are hereby ratified and confirmed.
(iii) Upon the Closing, Buyer hereby forgives Stockholder's promise to
pay to Buyer $500,000 evidenced by that certain Secured Promissory Note,
dated September 30, 1997.
(iv) The execution, delivery and performance of this Amendment shall
not, except as expressly provided herein, constitute a waiver of any
provision of, or operate as a waiver of any right, power or remedy of
Buyer, Stockholder or the Company under, the Agreement or any of the other
ancillary agreements executed pursuant to the Agreement.
B. Headings. Section and subsection headings in this Amendment are
included herein for convenience of reference only and shall not constitute a
part of this Amendment for any other purpose or be given any substantive effect.
C. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, INTERPRETED
UNDER, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS, AND NOT
THE LAWS PERTAINING TO CONFLICTS OR CHOICE OF LAWS, OF THE STATE OF CALIFORNIA
APPLICABLE TO AGREEMENTS MADE OR TO BE PERFORMED WHOLLY IN CALIFORNIA. THE SOLE
FORUM FOR RESOLVING DISPUTES ARISING UNDER OR RELATING TO THIS AMENDMENT SHALL
BE THE MUNICIPAL AND SUPERIOR COURTS FOR THE COUNTY OF ORANGE, CALIFORNIA, OR
THE FEDERAL DISTRICT COURT FOR THE CENTRAL DISTRICT OF CALIFORNIA AND ALL
RELATED APPELLATE COURTS, AND THE PARTIES HEREBY CONSENT TO THE JURISDICTION OF
SUCH COURTS AND AGREE THAT VENUE SHALL BE IN ORANGE COUNTY, CALIFORNIA.
D. Counterparts; Effectiveness. This Amendment may be executed in
any number of counterparts and by different
7
<PAGE>
parties hereto in separate counterparts, each of which when so executed and
delivered shall be deemed an original, but all such counterparts together shall
constitute but one and the same instrument.
8
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this
Amendment, or has caused this Amendment to be executed on its behalf by a
representative duly authorized, all as of the date first above set forth.
"BUYER"
VIRTUAL MORTGAGE NETWORK, INC.
By: /s/ John D. Murray
_________________________________
Name: John D. Murray
_________________________________
Title: President and
_______________________________
Chief Financial Officer
_______________________________
"STOCKHOLDER"
ARTHUR H. SUTTER
/s/ Arthur H. Sutter
_______________________________________
Arthur H. Sutter
"COMPANY"
SUTTER MORTGAGE CORPORATION
By: /s/ Arthur H. Sutter
_________________________________
Name: Arthur H. Sutter
_________________________________
Title: Chairman
_______________________________
9
<PAGE>
EXHIBIT 10.28.2
UNSECURED PROMISSORY NOTE
-------------------------
$100,000 Walnut Creek, California
December 15, 1997
1. Principal. FOR VALUE RECEIVED, the undersigned, Sutter Mortgage
---------
Corporation, a California corporation ("Maker"), hereby promises to pay to
Arthur H. Sutter, an individual ("Holder"), or his successors or assigns, at 461
Second Street, Unit 320, San Francisco, California 94107, or at such other place
as Holder may from time to time designate, in lawful money of the United States
of America, the principal sum of One Hundred Thousand Dollars ($100,000.00) (the
"Principal Sum"), together with interest on the unpaid balance accrued from the
date first written above at a rate equal to eight percent (8%) per annum, or
such other consideration as herein provided, all in accordance with the terms of
this Promissory Note (this "Note"). The parties hereto hereby agree that the
proceeds from this Note shall be contributed to the capital of Maker immediately
upon receipt by Maker. This Note is issued in connection with the First Amended
and Restated Stock Purchase Agreement, dated June 6, 1997, as amended by that
Amendment dated of even date herewith, (the "Stock Purchase Agreement") by and
among Holder, Maker and Virtual Mortgage Network, Inc. (the "Company").
Capitalized terms used herein without definition have the same meaning as set
forth in the Stock Purchase Agreement.
2. Maturity of Note. The Principal Sum and all accrued interest
----------------
thereon shall be due and payable on the earlier of (a) the closing of the
Offering or the later of (i) the closing of the Offering or (ii) any other
financing transaction in which the Company raises more than $2 million of net
proceeds (including net proceeds payable in installments), or (b) if no such
closing has occurred by March 31, 1998, then on April 1, 1998.
3. Terms of Payment. Maker hereby agrees to make, and Holder hereby
----------------
agrees to accept, the payment terms of this Note. In the event this Note
becomes due and payable pursuant to Section 2, Maker shall be required to pay
the outstanding Principal Sum and all accrued interest thereon out of the cash
proceeds to be received at the Closing of the Acquisition.
4. Event of Default. As used herein, an "Event of Default" shall be
----------------
defined as the failure of Maker to make any payment of principal or interest
when due under the terms of this Note or a material breach by Maker or the
Company of the terms of the Stock Purchase Agreement, with such failure or
breach continuing for a period of five (5) calendar days without being cured.
Upon the occurrence of an Event of Default, interest shall accrue at the rate of
twelve percent (12%) per annum on the unpaid balance from the date of such Event
of Default and, upon notice from Holder, the Principal Sum and all interest
thereon shall become immediately due and payable.
5. Interest Rate Limitation. It is the intent of Maker and Holder
------------------------
that none of
<PAGE>
the terms and provisions contained herein shall be construed to create a
contract for use, forbearance or detention of money requiring the payment of
interest at a rate in excess of the maximum interest rate permitted by
applicable law. If any Holder of this Note shall collect monies which are deemed
to constitute interest which would otherwise increase the effective interest
rate of this Note to a rate in excess of the maximum rate permitted to be
charged by applicable law, all such sums deemed to constitute interest in excess
of such maximum rate shall, at the option of Holder, be credited to the payment
of the sums due hereunder or returned to Maker.
6. Waiver. No delay or omission on the part of Holder hereof in
------
exercising any right under this Note shall operate as a waiver of such right.
Moreover, a waiver of any term or condition contained under this Note by Holder
must be in writing to be effective and shall not be construed as a waiver of any
subsequent breach or failure of the same term or condition or of any other term
or condition contained in this Note.
7. Amendments. Neither this Note nor any provision hereof may be
----------
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against whom enforcement of the change, waiver,
discharge or termination is sought.
8. Successors. This Note shall be binding upon and inure to the
----------
benefit of the parties hereto and their respective successors and permitted
assigns. Maker may not assign or transfer all or any part of its rights and
obligations hereunder.
9. Costs of Collection. Maker promises to pay all costs and
-------------------
expenses, including reasonable attorneys' fees and expenses, incurred in
connection with the collection and enforcement of this Note. Maker hereby
waives diligence, presentment, protest, demand and notice of every kind, to the
fullest extent permitted by law, and the right to plead any statute of
limitations as a defense to any demand hereunder.
10. Governing Law. This Note shall be governed by, and construed and
-------------
enforced in accordance with, the laws of the State of California, without regard
to conflict of laws principles.
11. Drafting. Maker hereby waives the benefit of any statute or rule
--------
of law or judicial decision, which would otherwise require that the provisions
of this Note be construed or interpreted most strongly against the party
responsible for the drafting thereof.
12. Severability. If any provision of this Note is held to be
------------
unenforceable for any reason, it shall be adjusted rather than voided, if
possible, to achieve the intent of the parties to the extent possible. In any
event, if any term of this Note, or the application thereof to any person,
entity or circumstance, shall, to any extent, be invalid or unenforceable, the
remainder of this Note, or the application of such term to persons, entities or
circumstances other than those as to which it is invalid or unenforceable, shall
not be affected thereby, and each term of this Note shall be valid and
enforceable to the fullest extent permitted by law.
2
<PAGE>
13. Headings. Headings at the beginning of each numbered paragraph
--------
of this Note are intended solely for convenience and are not to be deemed or
construed to be part of this Note.
14. Entire Agreement. This Note and the Stock Purchase Agreement set
----------------
forth the entire agreement and understanding of the parties with respect to the
subject matter hereof and supersede all prior agreements, arrangements and
understandings with respect to the subject matter hereof. No representation,
promise, oral or written agreement, understanding, inducement or statement of
intention has been made by Maker or Holder which is not embodied in this Note.
Neither Maker nor Holder shall be bound by or liable for any alleged
representation, promise, oral or written agreement, understanding, inducement or
statement of intention not so set forth.
IN WITNESS WHEREOF, the undersigned have executed this Note as of the
day and year first written above.
MAKER:
-----
SUTTER MORTGAGE CORPORATION
a California corporation
By: /s/ Arthur H. Sutter
--------------------------
Name: Arthur H. Sutter
------------------------
Title: Chairman
-----------------------
Acknowledged and Agreed:
/s/ Arthur H. Sutter
- -------------------------
Arthur H. Sutter
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Noncompetition Agreement as of the day and year first written above.
The "SHAREHOLDER"
/s/ Arthur H. Sutter
---------------------------------
Arthur H. Sutter
"COMPANY"
SUTTER MORTGAGE CORPORATION
By: /s/ Arthur H. Sutter
------------------------------
Name: Arthur H. Sutter
----------------------------
Title: Chairman
---------------------------
"BUYER"
VIRTUAL MORTGAGE NETWORK, INC.
By: /s/ Michael A. Barron
------------------------------
Name: Michael A. Barron
----------------------------
Title: Chief Executive Officer
---------------------------
4
<PAGE>
SCHEDULE A
----------
ALASKA
ARIZONA
COLORADO
FLORIDA
IDAHO
ILLINOIS
MINNESOTA
NEW JERSEY
NEVADA
NEW MEXICO
OREGON
TEXAS
UTAH
VIRGINIA
5
<PAGE>
EXHIBIT 10.28.3
UNSECURED PROMISSORY NOTE
-------------------------
$100,000 Walnut Creek, California
December 15, 1997
1. Principal. FOR VALUE RECEIVED, the undersigned, Sutter Mortgage
---------
Corporation, a California corporation ("Maker"), hereby promises to pay to
Arthur H. Sutter, an individual ("Holder"), or his successors or assigns, at 461
Second Street, Unit 320, San Francisco, California 94107, or at such other place
as Holder may from time to time designate, in lawful money of the United States
of America, the principal sum of One Hundred Thousand Dollars ($100,000.00) (the
"Principal Sum"), together with interest on the unpaid balance accrued from the
date first written above at a rate equal to eight percent (8%) per annum, or
such other consideration as herein provided, all in accordance with the terms of
this Promissory Note (this "Note"). The parties hereto hereby agree that the
proceeds from this Note shall be contributed to the capital of Maker immediately
upon receipt by Maker. This Note is issued in connection with the First Amended
and Restated Stock Purchase Agreement, dated June 6, 1997, as amended by that
Amendment dated of even date herewith, (the "Stock Purchase Agreement") by and
among Holder, Maker and Virtual Mortgage Network, Inc. (the "Company").
Capitalized terms used herein without definition have the same meaning as set
forth in the Stock Purchase Agreement.
2. Maturity of Note. The Principal Sum and all accrued interest
----------------
thereon shall be due and payable on the earlier of (a) the closing of the
Offering or the later of (i) the closing of the Offering or (ii) any other
financing transaction in which the Company raises more than $2 million of net
proceeds (including net proceeds payable in installments), or (b) if no such
closing has occurred by March 31, 1998, then on April 1, 1998.
3. Terms of Payment. Maker hereby agrees to make, and Holder hereby
----------------
agrees to accept, the payment terms of this Note. In the event this Note
becomes due and payable pursuant to Section 2, Maker shall be required to pay
the outstanding Principal Sum and all accrued interest thereon out of the cash
proceeds to be received at the Closing of the Acquisition.
4. Event of Default. As used herein, an "Event of Default" shall be
----------------
defined as the failure of Maker to make any payment of principal or interest
when due under the terms of this Note or a material breach by Maker or the
Company of the terms of the Stock Purchase Agreement, with such failure or
breach continuing for a period of five (5) calendar days without being cured.
Upon the occurrence of an Event of Default, interest shall accrue at the rate of
twelve percent (12%) per annum on the unpaid balance from the date of such Event
of Default and, upon notice from Holder, the Principal Sum and all interest
thereon shall become immediately due and payable.
5. Interest Rate Limitation. It is the intent of Maker and Holder
------------------------
that none of
<PAGE>
the terms and provisions contained herein shall be construed to create a
contract for use, forbearance or detention of money requiring the payment of
interest at a rate in excess of the maximum interest rate permitted by
applicable law. If any Holder of this Note shall collect monies which are deemed
to constitute interest which would otherwise increase the effective interest
rate of this Note to a rate in excess of the maximum rate permitted to be
charged by applicable law, all such sums deemed to constitute interest in excess
of such maximum rate shall, at the option of Holder, be credited to the payment
of the sums due hereunder or returned to Maker.
6. Waiver. No delay or omission on the part of Holder hereof in
------
exercising any right under this Note shall operate as a waiver of such right.
Moreover, a waiver of any term or condition contained under this Note by Holder
must be in writing to be effective and shall not be construed as a waiver of any
subsequent breach or failure of the same term or condition or of any other term
or condition contained in this Note.
7. Amendments. Neither this Note nor any provision hereof may be
----------
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against whom enforcement of the change, waiver,
discharge or termination is sought.
8. Successors. This Note shall be binding upon and inure to the
----------
benefit of the parties hereto and their respective successors and permitted
assigns. Maker may not assign or transfer all or any part of its rights and
obligations hereunder.
9. Costs of Collection. Maker promises to pay all costs and
-------------------
expenses, including reasonable attorneys' fees and expenses, incurred in
connection with the collection and enforcement of this Note. Maker hereby
waives diligence, presentment, protest, demand and notice of every kind, to the
fullest extent permitted by law, and the right to plead any statute of
limitations as a defense to any demand hereunder.
10. Governing Law. This Note shall be governed by, and construed and
-------------
enforced in accordance with, the laws of the State of California, without regard
to conflict of laws principles.
11. Drafting. Maker hereby waives the benefit of any statute or rule
--------
of law or judicial decision, which would otherwise require that the provisions
of this Note be construed or interpreted most strongly against the party
responsible for the drafting thereof.
12. Severability. If any provision of this Note is held to be
------------
unenforceable for any reason, it shall be adjusted rather than voided, if
possible, to achieve the intent of the parties to the extent possible. In any
event, if any term of this Note, or the application thereof to any person,
entity or circumstance, shall, to any extent, be invalid or unenforceable, the
remainder of this Note, or the application of such term to persons, entities or
circumstances other than those as to which it is invalid or unenforceable, shall
not be affected thereby, and each term of this Note shall be valid and
enforceable to the fullest extent permitted by law.
2
<PAGE>
13. Headings. Headings at the beginning of each numbered paragraph
--------
of this Note are intended solely for convenience and are not to be deemed or
construed to be part of this Note.
14. Entire Agreement. This Note and the Stock Purchase Agreement set
----------------
forth the entire agreement and understanding of the parties with respect to the
subject matter hereof and supersede all prior agreements, arrangements and
understandings with respect to the subject matter hereof. No representation,
promise, oral or written agreement, understanding, inducement or statement of
intention has been made by Maker or Holder which is not embodied in this Note.
Neither Maker nor Holder shall be bound by or liable for any alleged
representation, promise, oral or written agreement, understanding, inducement or
statement of intention not so set forth.
IN WITNESS WHEREOF, the undersigned have executed this Note as of the
day and year first written above.
MAKER:
-----
SUTTER MORTGAGE CORPORATION
a California corporation
By: /s/ Arthur H. Sutter
--------------------------
Name: Arthur H. Sutter
------------------------
Title: Chairman
-----------------------
Acknowledged and Agreed:
/s/ Arthur H. Sutter
- -------------------------
Arthur H. Sutter
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Noncompetition Agreement as of the day and year first written above.
The "SHAREHOLDER"
/s/ Arthur H. Sutter
---------------------------------
Arthur H. Sutter
"COMPANY"
SUTTER MORTGAGE CORPORATION
By: /s/ Arthur H. Sutter
------------------------------
Name: Arthur H. Sutter
----------------------------
Title: Chairman
---------------------------
"BUYER"
VIRTUAL MORTGAGE NETWORK, INC.
By: /s/ Michael A. Barron
------------------------------
Name: Michael A. Barron
----------------------------
Title: Chief Executive Officer
---------------------------
4
<PAGE>
SCHEDULE A
----------
ALASKA
ARIZONA
COLORADO
FLORIDA
IDAHO
ILLINOIS
MINNESOTA
NEW JERSEY
NEVADA
NEW MEXICO
OREGON
TEXAS
UTAH
VIRGINIA
5
<PAGE>
EXHIBIT 10.28.4
NONCOMPETITION AGREEMENT
------------------------
This NONCOMPETITION AGREEMENT (this "AGREEMENT) is entered into among
Virtual Mortgage Network, Inc. ("BUYER") Sutter Mortgage Corporation, a
California corporation (the "COMPANY") and Arthur H. Sutter (the "SHAREHOLDER")
as of December 19, 1997. Terms used herein and not otherwise defined shall have
the meaning assigned to them in the First Amended and Restated Stock Purchase
Agreement dated as of June 6, 1997 by and among the Buyer, the Company and the
Shareholder (the "STOCK PURCHASE AGREEMENT").
WHEREAS, Buyer, the Company and the Shareholder have entered into the
Stock Purchase Agreement pursuant to which Buyer is acquiring all of the
outstanding capital stock of the Company; and
WHEREAS, the Shareholder owns 100% of the outstanding capital stock of
the Company; and
WHEREAS, the Company is engaged in the residential mortgage banking
business (the "BUSINESS"); and
WHEREAS, as an inducement for Buyer to enter into the Stock Purchase
Agreement and to purchase all of the issued and outstanding stock of the
Company, the Shareholder has agreed to enter into this Agreement;
NOW, THEREFORE, pursuant to the Stock Purchase Agreement and in
consideration of the foregoing, and other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereby agree
as follows:
1. AGREEMENT NOT TO COMPETE. The parties acknowledge that the
------------------------
Shareholder has acquired much knowledge and information concerning the Business
and that the Business is very competitive. Moreover, the parties acknowledge
that the Company is presently doing business throughout California and in the
States listed on Schedule A attached hereto. Accordingly, the Shareholder agrees
that he will not, for a period of four years from the date hereof, be engaged in
any way with a competing business within California or any of the jurisdictions
listed on Schedule A hereto.
The undersigned shall "be engaged in any way with a competing
business" if as a shareholder, proprietor, partner, trustee, consultant,
employee, director, officer, lender, investor or otherwise he is participating
in the operation or management or control of a competing business. A "competing
business" is a person, firm or corporation which performs or sells competitive
services or sells competitive products. "Competitive services" are services
competitive with those
<PAGE>
services performed by the Company in the conduct of its business on the date
hereof and as may be performed by the Company or any of its subsidiaries or
associates at any time after the date hereof. "Competitive products" are
products competitive with those products produced by the Company in the conduct
of its business on the date hereof and as may be produced by the Company or its
subsidiaries or associates at any time after the date hereof. "Within" a state,
territory, jurisdiction or country includes the sale or distribution to a person
in or within, or for resale within, said state, territory, jurisdiction or
country even if the service is performed in another state or the product sold or
distributed is sold from another place.
2. PERMITTED ACTIVITIES. Nothing contained herein shall limit the
--------------------
right of the Shareholder to conduct or in any way own, operate or otherwise be
associated with a commercial mortgage banking business, or as an investor, to
hold and make investments in securities of any corporation or limited
partnership that is registered on a national securities exchange or admitted to
trading privileges thereon or actively traded in a generally recognized
over-the-counter market, provided the Shareholder's equity interest therein does
not exceed 5% of the outstanding shares or interests in such corporation or
partnership.
3. RESTRICTIONS ON SOLICITING EMPLOYEES. In addition, to protect
------------------------------------
Buyer and the Company against any efforts by the Shareholder to cause employees
of the Company to terminate their employment, the Shareholder agrees that for a
period of four years following the date hereof, the Shareholder will not
directly or indirectly (i) induce any employee of the Company to leave the
Company or to accept any other employment or position, or (ii) assist any other
entity in hiring any such employee. Nothing herein shall authorize the
Shareholder to solicit employees in violation of any applicable law.
4. SPECIAL REMEDIES AND ENFORCEMENT. The Shareholder recognizes and
--------------------------------
agrees that a breach by the Shareholder of any of the covenants set forth in
this Agreement could cause irreparable harm to Buyer and the Company, that the
remedies at law in the event of such breach would be inadequate, and that,
accordingly, in the event of such breach a restraining order or injunction or
both may be issued against the Shareholder without any requirement that Buyer or
the Company post any bond or security, in addition to any other rights and
remedies which are available to Buyer or the Company.
5. SEVERABILITY. The parties intend that all of the covenants
------------
contained herein shall be deemed to be separate covenants as to each state,
territory, jurisdiction and country and that if in any judicial proceeding a
court shall refuse to enforce all of the separate covenants included herein
because, taken together, they cover too extensive a geographic area or
2
<PAGE>
because any one includes too large an area or because they cover too long a
period of time or because they cover too broad a range of activities, the
parties intend that those of such covenants shall be reduced in scope to the
extent required by law, or, if necessary, eliminated from the provisions hereof,
and that all remaining covenants hereof not so affected shall remain fully
effective and enforceable.
6. GOVERNING LAW. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of California.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Noncompetition Agreement as of the day and year first written above.
The "SHAREHOLDER"
/s/ Arthur H. Sutter
---------------------------------
Arthur H. Sutter
"COMPANY"
SUTTER MORTGAGE CORPORATION
By: /s/ Arthur H. Sutter
------------------------------
Name: Arthur H. Sutter
----------------------------
Title: Chairman
---------------------------
"BUYER"
VIRTUAL MORTGAGE NETWORK, INC.
By: /s/ Michael A. Barron
------------------------------
Name: Michael A. Barron
----------------------------
Title: Chief Executive Officer
---------------------------
4
<PAGE>
SCHEDULE A
----------
ALASKA
ARIZONA
COLORADO
FLORIDA
IDAHO
ILLINOIS
MINNESOTA
NEW JERSEY
NEVADA
NEW MEXICO
OREGON
TEXAS
UTAH
VIRGINIA
5
<PAGE>
EXHIBIT 10.30
BRIDGE LOAN AND SECURITY AGREEMENT
BY AND BETWEEN
VIRTUAL MORTGAGE NETWORK, INC.,
A NEVADA CORPORATION AND
_______________________________
This BRIDGE LOAN AND SECURITY AGREEMENT (the "Agreement") is made this ___ day
of ____, 1997, by and between _______________________ (the "Investor" or
"Secured Party") and Virtual Mortgage Network, Inc., a Nevada corporation
("Company", "Debtor", "Borrower" or "VMN"). The Investor and VMN are referred
to collectively herein as the "Parties."
In consideration of the mutual covenants, agreements, representations,
and warranties contained in this agreement, the Parties agree as follows:
1. LOAN AMOUNT.
-----------
The Investor agrees to loan, on _________, 1997, to the Company the
aggregate principal amount of $__________ (the "Loan"). The Loan will be made
for the purpose of paying normal and reasonable operating expenses and obtaining
and paying for professional services in connection with the offering of
securities of VMN.
2. PROMISSORY NOTE.
---------------
In consideration thereof, VMN will issue, cause to be executed and
delivered to the Investor, upon the execution hereof, a promissory note in the
principal amount equal to the amount of the Loan, upon the terms and conditions
specified herein, and in the form set forth in Exhibit A, hereto (the "Note").
The Note is one of several notes of the Company sold to investors (collectively,
the "Investors") that collectively aggregate $5,500,000 (the "Notes") and are
equally secured by the security interest (i) granted by Section 8.1 of this
Agreement and Section 8.1 of the Company's other Bridge Loan and Security
Agreements, pursuant to which the Notes were issued or are to be issued and,
(ii) granted to American Growth Fund I, L.P. ("AGF") to secure up to $500,000 in
notes of the Company payable to AGF.
3. WARRANTS OF THE COMPANY.
-----------------------
VMN agrees to issue, convey and transfer, and cause to be issued,
conveyed and transferred to the Investor, Common Stock Purchase Warrants to
purchase shares of Company Common Stock.
1
<PAGE>
The number of whole shares of Company Common Stock subject to the Warrants
accompanying an Investor's Note will be determined by using conventional
rounding and by dividing the principal amount of the Note by (i) if the IPO
occurs prior to March 6, 1997, the IPO price, or (ii) if the IPO occurs on or
after March 6, 1997, $4.00 per share. The exercise price of the Warrants is
$0.001 per share of Common Stock, except that this price is adjustable in
certain circumstances as set forth in the Warrant Agreement. A registration
right is also included in the Warrant Agreement (Exhibit B hereto).
4. PERIODIC FINANCE CHARGES.
------------------------
The unpaid principal under the Note shall bear interest at a rate of
twelve percent (12%) per annum simple interest. Upon the Company's failure to
pay amounts due on the Maturity Date (as such term is defined in the Note), the
interest rate on the Note shall increase to fifteen percent (15%) per annum, as
set forth in the Note.
5. PAYMENTS.
--------
5.1 VMN shall make payments of principal and accrued interest on the
Note to Investor upon the closing of a public offering of securities by VMN, as
set forth in the Note.
5.2 Except as otherwise set forth in the Note, the unpaid principal
under the Note plus all accrued but unpaid interest thereon shall be payable
upon the Maturity Date. If the Company has not repaid the principal amount
together with interest by the Maturity Date, the Company then agrees to repay
the principal amount together with accrued interest under the Note in equal
monthly payments of principal and interest at fifteen percent (15%) per annum
over a twelve (12) month period. The first installment of such payments of
principal and interest shall be due on April 6, 1997.
VMN may, from time to time, in it sole discretion, make one or more
periodic payments to the Investor. Such payments shall be credited to VMN's
account on the date that such payment is placed in the United States mail, first
class postage prepaid, by VMN. Such payments shall be applied first to accrued
and unpaid interest, and then to the principal amount then outstanding.
6. DEFAULT PROVISIONS.
------------------
The occurrence and continuance of one or more of the following events
shall constitute an event of default of this entire Agreement:
2
<PAGE>
6.1 The nonpayment of any principal or interest by VMN on this loan
within five business days of when the same shall have become due and payable.
6.2 The entry of a decree or order by a court having appropriate
jurisdiction adjudging VMN bankrupt or insolvent, or approving as properly filed
a petition seeking reorganization, arrangement, adjustment or composition of or
in respect of VMN under the federal Bankruptcy Act or any other applicable
federal or state law, or appointing a receiver, liquidator, assignee or trustee
of VMN, or any substantial part of its property, or if the Collateral, as
defined in Section 8, or ordering the winding up or liquidation of its affairs,
and the continuance of any such decree or order unstayed and in effect for a
period of sixty (60) consecutive days.
6.3 The institution by VMN of proceedings to be adjudicated a
bankrupt or insolvent, or the consent by it to the institution of bankruptcy or
insolvency proceedings against it, or the filing by it of a petition or answer
or consent seeking reorganization or relief under the federal Bankruptcy Act or
any other applicable federal or state law, or the consent by it to the filing of
any such petition or to the appointment of a receiver, liquidator, assignee or
trustee of the Company, or of any substantial part of its property, or if the
Collateral, as defined in Section 8, shall become subject to the jurisdiction of
a federal bankruptcy court or similar state court, or if VMN shall make an
assignment for the benefit of its creditors, or if there is a receivership,
execution or other material judicial seizure, or if there is an admission in
writing by VMN of its inability to pay its debts generally as they become due,
or the taking of corporate action by VMN in furtherance of any such action.
6.4 Default in the obligation of VMN for borrowed money, other than
this Loan, which shall continue for a period of sixty (60) days, or any event
that results in acceleration of the maturity of any material indebtedness of VMN
under any note, indenture, contract, or agreement.
6.5 VMN's failure to comply with any material term, obligation,
covenant, or condition contained in this Agreement, within 10 days after the
expiration of all cure periods and receipt of written notice from the Investor
demanding such compliance.
6.6 Any warranty, covenant, or representation made to the Investor by
VMN under this Agreement, proves to have been false in any material respect when
made or furnished.
6.7 Any material levy, seizure, attachment, lien, or encumbrance of
or on the Collateral, other than those existing as
3
<PAGE>
of the date hereof, which is not discharged by VMN within 30 days.
6.8 Any sale, transfer, or disposition of any material interest in
the Collateral, other than in the ordinary course of business, without the
written consent of the Investor.
6.9 Any default that results in acceleration of the maturity of any
indebtedness of VMN in the outstanding principal amount of $50,000 or more,
under any note, indenture, contract or agreement.
7. ACCELERATION.
------------
At the option of the Investor, and without demand or notice, all
principal and any unpaid interest shall become immediately due and payable upon
a default as set forth in Section 6 above. Any reasonable attorneys' fees and
other expenses incurred by the Investor in connection with VMN's bankruptcy or
any of the other events described in Section 6 shall be additional indebtedness
of VMN secured by this Agreement.
8. SECURITY AGREEMENT.
------------------
8.1 GRANT OF SECURITY INTEREST.
--------------------------
VMN, in consideration of the indebtedness described in this Agreement,
hereby grants, conveys, and assigns to the Investors, collectively, for
security, all of VMN's existing and future right, title and interest in the
property listed in Section 8.2 of this Agreement. This security interest is
granted to the Investors, collectively, to secure (a) the payment of the
indebtedness evidenced by the Notes, including all renewals, extensions, and
modification thereof; (b) the payment, performance and observance of all
warranties, obligations, covenants and agreements to be paid, performed or
observed under this Agreement; and the payment of all other sums, with interest
thereon, advanced under the terms of this Agreement.
8.2 PROPERTY.
--------
The property subject to the security interest (the
"Collateral") is as follows:
8.2.1 EQUIPMENT.
---------
All equipment of VMN, other than the equipment and
related software licenses and other tangible and intangible property leased by
VMN from Data General Corporation or its assignee.
4
<PAGE>
8.2.2 ACCOUNTS RECEIVABLE.
-------------------
All of VMN's accounts, chattel paper, contract rights,
commissions, warehouse receipts, bills of lading, delivery orders, drafts,
acceptances, notes, securities and other instruments; documents; and all other
forms of receivables, and all guaranties and securities therefor.
8.2.3 INVENTORY AND OTHER TANGIBLE PERSONAL PROPERTY.
----------------------------------------------
All of VMN's inventory, including all goods,
merchandise, materials, raw materials, work in progress, finished goods, now
owned or hereinafter acquired and held for sale or lease or furnished or to be
furnished under contracts or service agreements or to be used or consumed in
VMN's business and all other tangible personal property of VMN, except as
excluded in 8.2.1.
8.2.4 GENERAL INTANGIBLES.
-------------------
All "general intangibles" (as defined in the Uniform
Commercial Code in effect in the State of California), including, without
limitation, (i) all right, title and interest of VMN in and to all agreements,
leases and contracts to which VMN is or may become a party, (ii) all obligations
or indebtedness owing to VMN from whatever source arising, (iii) all tax
refunds, (iv) all intellectual property, including, without limitation, all
copyrights, copyright applications, copyright licenses, patents, patent
applications, patent licenses, trademarks, trademark applications and trademark
licenses, (v) all computer software, source code, object code, manuals and
instructions, together with all diskettes, tape and any other physical
representation or eminent thereof and (vi) all trade secrets and other
confidential information relating to the business of VMN.
8.2.5 AFTER-ACQUIRED PROPERTY.
-----------------------
All property of the types described in Sections
8.2.1 - 8.2.4, or similar thereto, that at any time hereafter may be acquired
by VMN, including but not limited to all accessions, parts, additions, and
replacements.
8.2.6 PROCEEDS.
--------
All proceeds of the sale or other disposition of any
of the Collateral described or referred to in Sections 8.2.1 - 8.2.5. Sale or
disposition of Collateral is prohibited except as provided herein.
5
<PAGE>
8.3 COVENANTS OF VMN.
----------------
VMN agrees and covenants as follows:
8.3.1 PAYMENT OF PRINCIPAL AND INTEREST.
---------------------------------
VMN shall promptly pay when due the principal of and
interest on the indebtedness evidenced by the Notes, any prepayment and late
charges provided in the Notes, and all other sums secured by this Agreement and
the Notes.
8.3.2 CORPORATE EXISTENCE.
-------------------
VMN is a corporation duly organized and existing under the
laws of the State of Nevada and is duly qualified in every other state in which
it is doing business, except where the failure to be so qualified would not have
a material adverse effect on VMN.
8.3.3 CORPORATE AUTHORITY.
-------------------
The execution, delivery, and performance of this
Agreement, and the execution and payment of the Notes are within VMN's corporate
powers, have been duly authorized, and are not in contravention of law or the
terms of VMN's articles of incorporation and bylaws, or of any indenture,
agreement, or undertaking to which VMN is a party or by which it is bound.
8.3.4 OWNERSHIP OF COLLATERAL.
-----------------------
Except for the security interests in the Collateral
referred to herein, VMN is the sole owner of the Collateral and will defend the
Collateral against the claims and demands of all other persons at any time
claiming the same or any interest therein.
8.3.5 ISSUANCE OF SHARES.
------------------
That the shares of common stock contemplated to be issued
hereby (upon exercise of the Warrants) will be, when issued in accordance with
the terms of the Warrants, duly authorized, fully paid and non-assessable.
8.4 REMOVAL OF COLLATERAL PROHIBITED.
--------------------------------
VMN shall not remove the Collateral from its premises, other than in
the ordinary course of business, without the written consent of the Investor.
8.5 TAXES AND ASSESSMENTS.
---------------------
VMN will pay or cause to be paid promptly when due all taxes and
assessments on the Collateral. VMN may, however,
6
<PAGE>
withhold payment of any tax assessment or claim if a good faith dispute exists
as to the obligation to pay.
8.6 INSURANCE.
---------
VMN shall have and maintain, or cause to be maintained,
insurance at all times with respect to all Collateral except accounts
receivable, against such risks, and in such form, for such periods, and written
by such companies as may be satisfactory to the Investor. All policies of
insurance shall have endorsed a loss payable clause acceptable to the Investor
or such other endorsements as the Investor may from time to time request, and
VMN will promptly provide the Investor upon request with the original policies
or certificates of such insurance. VMN shall promptly notify the Investor of any
loss or damage that may occur to the Collateral. The Investor is hereby
authorized to make proof of loss if it is not made promptly by VMN. All proceeds
of any insurance on the Collateral shall be held by the Investor as a part of
the Collateral. Such proceeds shall be paid out from time to time upon order of
VMN for the purpose of paying the reasonable cost of repairing or restoring the
property damaged. Any proceeds that have not been so paid out within 120 days
following their receipt by the Investor shall be applied to the prepayment of
principal on the Notes according to the terms hereof. In the event of failure to
provide insurance as herein provided, Investor may, at its option, provide such
insurance at VMN's expense.
8.7 PROTECTION OF THE INVESTOR'S SECURITY.
-------------------------------------
If VMN fails to perform the covenants and agreements contained or
incorporated in this Agreement, or if any action or proceeding is commenced
which affects the Collateral or title thereto or the interest of the Investor
therein, including, but not limited to eminent domain, insolvency, code
enforcement, or arrangements or proceedings involving a bankrupt or decedent,
then the Investor may make such appearance, disburse such sums, and take such
action as the Investor deems necessary, in its sole discretion, to protect the
Investor's interest, including but not limited to (i) disbursement of reasonable
attorney's fees, (ii) entry upon VMN's property to make repairs to the
Collateral, and (iii) procurement of satisfactory insurance. Any amounts
disbursed by the Investor pursuant to this Section, with interest thereon, shall
become additional indebtedness of VMN secured by this Agreement. Unless VMN and
the Investor agree to other terms of payment, such amounts shall be immediately
due and payable and shall bear interest from the date of disbursement at the
default rate stated in the Note unless collection from VMN of interest at such
rate would be contrary to applicable law, in which event such amounts shall bear
interest at the highest rate which may be collected from VMN under applicable
law. Nothing contained in this Section shall require the Investor to incur any
expense or take any action.
7
<PAGE>
8.8 INSPECTION.
----------
The Investor may make or cause to be made reasonable entries upon
and inspections of VMN's premises to inspect the Collateral.
8.9 VMN AND LIEN NOT RELEASED.
-------------------------
From time to time, the Investor may, at the Investor's option,
without giving notice to or obtaining the consent of VMN or its successors or
assigns or of any other lienholder or guarantors, without liability on the
Investor's part, and notwithstanding VMN's breach of any covenant or agreement
of VMN in this Agreement, extend the time for payment of said indebtedness or
any part thereof, reduce the payments thereon, release anyone liable on any of
said indebtedness, accept a renewal note or notes therefor, modify the terms and
the time of payment of said indebtedness, release from the lien of this
Agreement any part of the Collateral, take or release other or additional
security, reconvey any part of the Collateral, consent to any plan of the
Collateral, join in any extension or subordination agreement, and agree in
writing with VMN to modify the rate of interest or period of amortization of the
Note or change the amount of any installments payable thereunder. Any actions
taken by the Investor pursuant to the terms of this Section shall not affect the
obligation of VMN or VMN successors or assigns to pay the sums secured by this
Agreement and to observe the covenants of VMN contained herein, shall not affect
the guaranty of any person, corporation, partnership, or other entity for
payment of the indebtedness secured hereby, and shall not affect the lien or
priority of lien hereof on the Collateral. VMN shall pay the Investor a
reasonable service charge, together with such reasonable attorneys' fees as may
be incurred at the Investor's option for any such action if taken at VMN's
request.
8.10 FORBEARANCE BY THE INVESTOR NOT A WAIVER.
----------------------------------------
Any forbearance by the Investor in exercising any right or
remedy hereunder, or otherwise afforded by applicable law, shall not be a waiver
of or preclude the exercise of any right or remedy. The acceptance by the
Investor of payment of any sum secured by this Agreement after the due date of
such payment shall not be a waiver of the Investor's right to either require
prompt payment when due of all other sums so secured or to declare a default for
failure to make prompt payment. The procurement of insurance or the payment of
taxes, rents or other liens or charges by the Investor shall not be a waiver of
the Investor's right to accelerate the maturity of the indebtedness secured by
this Agreement, nor shall the Investor's receipt of any awards, proceeds or
damages as provided in this Agreement operate to cure or waive VMN default in
payment of sums secured by this Agreement.
8
<PAGE>
8.11 UNIFORM COMMERCIAL CODE SECURITY AGREEMENT.
------------------------------------------
This Agreement is intended to be a security agreement pursuant
to the Uniform Commercial Code for any of the items specified above as part of
the Collateral which, under applicable law, may be subject to a security
interest pursuant to the Uniform Commercial Code, and VMN hereby grants the
Investors, collectively, a security interest in said items. VMN agrees to
execute and file financing statements, as well as extensions, renewals and
amendments thereof, and reproductions of this Agreement, and do whatever may be
necessary under the applicable Uniform Commercial Code in the state where the
Collateral is located, to perfect and continue the Investors' interest in the
Collateral, all at VMN's expense. The parties agree that such financing
statements, extensions and renewals may be filed in the name of the Investor and
all other holders of the Notes and AGF, collectively. VMN also agrees that the
Investor may file on behalf of the Investors any appropriate document in the
appropriate index as a financing statement for any of the items specified above
as part of the Collateral. VMN shall pay all costs of filing such financing
statements and any extensions, renewals, amendments, and releases thereof, and
shall pay all reasonable costs and expenses of any record searches for financing
statements the Investor may reasonably require. Without the prior written
consent of the Investor, VMN shall not create or allow to be created, pursuant
to the Uniform Commercial Code, any other security interest in the Collateral
(other than AGF), including replacements and additions thereto. Upon the
occurrence of an event of default, Investor shall have the remedies of a secured
party under the Uniform Commercial Code and, at the Investor's option, may also
invoke the other remedies provided in this Agreement as to such items. In
exercising any of said remedies, the Investor may proceed against the items of
real property and any items of personal property specified above as part of the
Collateral separately or together and in any order whatsoever, without in any
way affecting the availability of the Investor's remedies under the Uniform
Commercial Code or of the other remedies provided in this Agreement.
8.12 RIGHTS OF THE INVESTOR.
----------------------
8.12.1 Upon the occurrence and continuance of an event of
default the Investor may require VMN to assemble the Collateral and make it
available to the Investor at the place to be designated by the Investor which is
reasonably convenient to both parties. The Investor may sell all or any part of
the Collateral as reasonably necessary to satisfy VMN's obligations hereunder to
Investor, as a whole or in parcels wither by public auction, private sale, or
any other reasonable method of disposition. Nothing in this Section 8.12.1 shall
be construed to limit any other of Investor's rights in connection with any and
all of the Collateral as provided herein. The Investor may bid at any public
sale on all or any portion of the Collateral.
9
<PAGE>
Unless the Collateral is perishable or threatens to rapidly decline in value or
is of the type customarily sold on a recognized market, the Investor shall give
VMN reasonable notice of the time and place of any public sale, or of the time
after which any private sale or other disposition of the Collateral is to be
made, and notice given at least 10 days before the time of the sale or other
disposition shall be conclusively presumed to be reasonable. A public sale in
the following fashion shall be conclusively presumed to be reasonable:
8.12.2 Notice shall be given at least 10 days before the date of
sale by mail to VMN and publication once in a newspaper of general circulation
published in the county in which the sale is to be held;
8.12.3 The sale shall be held in a county in which the Collateral or
any part is located or in a county in which VMN has a place of business;
8.12.4 Payment shall be in cash or by certified check immediately
following the close of the sale;
8.12.5 The sale shall be by auction, but it need not be by a
professional auctioneer; and
8.12.6 The Collateral may be sold as is and without any preparation
for sale.
8.13 OBLIGATION TO SELL COLLATERAL.
-----------------------------
Notwithstanding any provision of this Agreement, Investor shall be
under no obligation to offer to sell the Collateral. In the event any Investor
offers to sell the Collateral, there will be no obligation to consummate a sale
of the Collateral if, in Investor's reasonable business judgment, none of the
offers received by it reasonably approximates the fair value of the Collateral.
In the event the Investor elects not to sell the Collateral, Investor may elect
to follow the procedures set forth in the Uniform Commercial Code for retaining
the Collateral in satisfaction of VMN's obligation, subject to VMN's rights
under such procedures.
8.14 RECEIVER.
--------
In addition to the rights under this Agreement, upon the occurrence
and continuance of an event of default by VMN, the Investor shall be entitled to
the appointment of a receiver for the Collateral as a matter of right whether or
not the apparent value of the Collateral exceeds the outstanding principal
amount of the Note.
10
<PAGE>
8.15 WAIVER OF MARSHALING.
--------------------
Notwithstanding the existence of any other security interest in
the Collateral held by the Investor or by any other party, the Investor shall
have the right to determine the order in which any or all of the Collateral
shall be subjected to the remedies provided by this Agreement. The Investor
shall have the right to determine the order in which any or all portions of the
indebtedness secured by this Agreement are satisfied from the proceeds realized
upon the exercise of the remedies provided in this Agreement. VMN, any party who
consents to this Agreement, and any party who now or hereafter acquires a
security interest in the Collateral and who has actual or constructive notice of
this Agreement, hereby waive any and all rights to require the marshaling of
assets in connection with the exercise of any of the remedies permitted by
applicable law or by this Agreement.
9. REMEDIES CUMULATIVE.
-------------------
Each remedy provided in this Agreement is distinct and cumulative to
all other rights or remedies under this Agreement or afforded by law or equity,
and may be exercised concurrently, independently, or successively, in any order.
10. WAIVER OF STATUTE OF LIMITATIONS.
--------------------------------
VMN hereby waives the right to assert any statute of limitations as a
bar to the enforcement of this Agreement or to any action brought to enforce the
Note or any other obligation secured by this Agreement.
11. NOTICES AND DELIVERY.
--------------------
Any notices permitted or required under this Agreement shall be deemed
given upon the date of personal delivery or 72 hours after deposit in the United
States mail, postage fully prepaid, return receipt requested, addressed as
follows:
VMN:
4950 MacArthur Boulevard, Suite 175
Newport Beach, California 92660
Attention: Chief Financial Officer
With a copy to:
O'Melveny & Myers LLP
610 Newport Center Drive, Suite 1700
Newport Beach, California 92660
Attention: David A. Krinsky, Esq.
11
<PAGE>
The Investor:
____________________________
____________________________
____________________________
or at any other address as any party may, from time to time, designate by notice
given in compliance with this Section. Any deliveries required under this
Agreement must be made by personal delivery at the applicable address listed
above.
12. INDEMNIFICATION.
---------------
12.1 GENERAL.
-------
Each party at fault hereto agrees to indemnify, reimburse, and
hold harmless the other party, (the "indemnitee") from and against all claims,
damages, losses, liabilities, demands, suits, judgments, causes of action, civil
and criminal proceedings, penalties, fines, and other sanctions, and any
reasonable attorney fees and other reasonable costs and expenses, arising or
imposed on such other party (collectively "claims"), relating to or arising in
any manner out of:
12.1.1 this Agreement or the breach of any representation,
warranty, or covenant made by the party at fault under this Agreement; or
12.1.2 any issuance, offering, or sale of securities of VMN;
or
12.1.3 any transaction, approval, or document contemplated by
the Agreement.
The parties hereto intend that this Agreement shall provide for
indemnification in excess of that expressly provided for by statute, including
but not limited to, any indemnification provided by VMN's articles of
incorporation, its bylaws, a vote of its shareholders or disinterested
directors, or applicable law.
12.2 DEFINITIONS.
-----------
12.2.1 EXPENSES. For purposes of Section 12, the term
"expenses" shall mean (i) any expense, liability, or loss, including reasonable
attorney fees, judgments, fines, ERISA excise taxes and penalties, and amounts
paid or to be paid in settlement; (ii) any interest, assessments, or other
charges imposed on any of the items in part (i) of this subsection; and (iii)
any federal, state, local, or foreign taxes imposed as a result of the actual or
deemed receipt of any payments under this Agreement paid or incurred in
connection with investigating, defending, being a witness in, participating in
(including on
12
<PAGE>
appeal), or preparing for any of the foregoing in any proceeding relating to any
indemnifiable event.
12.3 MANDATORY INDEMNIFICATION. Notwithstanding any other provision
-------------------------
of this Agreement, to the extent that the indemnitee has been successful on the
merits in defense of any proceeding relating in whole or in part to an
indemnifiable event or in defense of any issue or matter in such proceeding, the
indemnitee shall be indemnified against all reasonable expenses incurred in
connection with such whole or part, as the case may be.
12.4 PARTIAL INDEMNIFICATION. If the indemnitee is entitled under
-----------------------
any provision of this Agreement to indemnification by a party for a portion of
expenses, but not for the total amount of expenses, that party shall indemnify
the indemnitee for the portion to which the indemnitee is entitled.
12.5 INDEMNIFICATION PAYMENT. The indemnitee shall receive
-----------------------
indemnification of expenses in accordance with this Agreement as soon as
practicable after the indemnitee has made written demand for indemnification.
If the indemnitee has not received full indemnification within 30 days after
making a demand in accordance with the terms hereof, the indemnitee shall have
the right to enforce its indemnification rights under this Agreement by
commencing arbitration per the terms of this Agreement seeking an initial
determination. The parties hereby consent to service of process and to appear
in any such proceeding. The remedy provided for in this Section shall be in
addition to any other remedies available to the indemnitee in law or equity.
12.6 CONSENT. A party shall not settle any proceeding in any manner
-------
that would impose any penalty or limitation on the indemnitee without the
indemnitee's written consent. Neither party will unreasonably withhold their
consent to any proposed settlement. A party at fault shall not be liable to
indemnify the indemnitee under this Agreement with regard to any judicial award
if the party at fault was not given a reasonable and timely opportunity, at its
expense, to participate in the defense of such action; however, the party's
liability under this Agreement shall not be excused if participation in the
proceeding by the party was barred by this Agreement.
12.7 DEFENSE. In the event of any controversy or claim arising out
-------
of this Agreement or the breach of the Agreement for which indemnification is
available, the indemnitee may tender a defense to the party at fault, who hereby
agrees to promptly evaluate such defense. If the party at fault agrees to
defend against such controversy or claim, the indemnitee shall notify the party
at fault within thirty (30) days of the indemnitee's receipt of any written
instrument or pleading relating to any such controversy or claim arising out of
this Agreement or the
13
<PAGE>
breach of this Agreement. If timely acceptance of tender is not forthcoming,
the indemnitee may, at the expense of the party at fault, retain its own counsel
and the party at fault is not released of its obligations to otherwise indemnify
the indemnitee.
13. INVESTOR'S REPRESENTATIONS AND WARRANTIES.
-----------------------------------------
13.1 ACCREDITED INVESTOR. The Investor represents and warrants that
-------------------
he or she is an Accredited Investor as that term is defined in Rule 501(a) of
Regulation D as promulgated by the Securities and Exchange Commission under the
Securities Act of 1933 (the "1933 Act") and is willing and able to bear the
economic risk of an investment herein. The Investor has adequate means of
providing for current needs and current contingencies, has no need for liquidity
in the investment, and is able to bear the economic risk of an investment in the
Company of the size contemplated.
13.2 ACQUIRED FOR INVESTMENT. The Investor represents and warrants
-----------------------
that the Notes and Warrants are being acquired by the Investor in good faith for
investment and not with a view to or for sale in connection with any
distribution. The Investor understands and agrees that he/she must hold the
Notes and Warrants (or shares if the Warrants are exercised) indefinitely unless
they are subsequently registered under the 1933 Act or an exemption from
registration is available.
14. ENTIRE AGREEMENT.
----------------
This Agreement, the Note, and the Warrant, and all exhibits and
attachments thereto, contains the entire understanding between and among the
Parties and supersedes any prior understandings and agreements among them
respecting the subject matter of this Agreement.
15. SURVIVAL OF SPECIFIC OBLIGATIONS.
--------------------------------
The rights and obligations created by Section 12 with respect to the
duties to indemnify shall survive termination of this Agreement and will
continue into perpetuity.
16. AGREEMENT BINDING.
-----------------
This Agreement shall be binding upon the heirs, executors,
administrators, successors and assigns of the Parties hereto.
17. AMENDMENT AND MODIFICATION.
--------------------------
Subject to applicable law, this Agreement may be amended, modified, or
supplemented only by a written agreement
14
<PAGE>
signed by the Parties, including an extension of the maturity date for the Note.
18. ATTORNEY FEES.
-------------
In the event arbitration is brought by any party under this Agreement
to enforce any of its terms, it is agreed that the prevailing party shall be
entitled to reasonable attorney fees to be fixed by the arbiter(s).
19. ARBITRATION.
-----------
If at any time during the term of this Agreement any dispute,
difference, or disagreement shall arise upon or in respect of the Agreement, and
the meaning and construction hereof, every such dispute, difference, and
disagreement shall be referred to a single arbiter agreed upon by the Parties,
or if no single arbiter can be agreed upon, an arbiter or arbiters shall be
selected in accordance with the rules of the American Arbitration Association
and such dispute, difference, or disagreement shall be settled by binding
arbitration ion accordance with the then prevailing commercial rules of the
American Arbitration Association, and judgment upon the award rendered by the
arbiter may be entered in any court having jurisdiction thereof. The parties
hereto each jointly and severally waive any and all rights to appeal the
judgement or award of such arbiter(s).
20. LAW GOVERNING.
-------------
This Agreement shall be governed by and construed in accordance with
the laws of the State of California, except to the extent of Nevada statutory
law related to the set-up and existence of the Company.
21. TITLES AND CAPTIONS.
-------------------
All section titles or captions contained in this Agreement are for
convenience only and shall not be deemed part of the context nor effect the
interpretation of this Agreement.
22. FURTHER ACTION.
--------------
The Parties hereto shall execute and deliver all documents, provide
all information and take or forbear from all such action as may be necessary or
appropriate to achieve the purposes of the Agreement.
23. INTERCREDITOR AGREEMENT.
-----------------------
a. Section 3. The parties agree that the first sentence of
---------
Section 3 of the Intercreditor Agreement is hereby amended to read as
follows:
15
<PAGE>
"3. Enforcement Action. Each of the Lenders agrees not to commence
------------------
Enforcement (as defined below) prior to (i) such Lender's receipt of the
consent of Lenders representing more than 50% (including the percentage
held by such Lender) aggregate principal amount of money loaned to
Borrower pursuant to the Loan Documents and (ii) such Lender's delivery to
each of the other Lenders of an Enforcement Notice."
b. Section 19. Section 19 of the Intercreditor Agreement is
----------
hereby added in its entirety to read as follows:
"19. Investor Exhibit. Exhibit A attached hereto sets
----------------
forth a list of Investors under this Agreement.
c. Exhibit A. Exhibit A to the Intercreditor shall be in the
---------
form attached hereto as Attachment 1, as amended from time to time.
INVESTOR
Dated: _________, 1997 By: _______________________________
Name: ____________________________
Title: ____________________________
VIRTUAL MORTGAGE NETWORK, INC.,
a Nevada corporation
Dated: _________, 1997 By: _______________________________
Name: ____________________________
Title: ____________________________
16
<PAGE>
ATTACHMENT 1
VIRTUAL MORTGAGE NETWORK, INC.
BRIDGE FINANCING INVESTORS
<TABLE>
<CAPTION>
AMOUNT FROM ADDRESS
- ------ ---- -------
<S> <C> <C>
$75,000 Maritime Global Subsidiary I, Ltd. 2050 Center Ave., Ste. 300
Fort Lee, NJ 07024
$40,000 BP Institutional Partners, L.P. 2050 Center Ave., Ste. 300
Fort Lee, NJ 07024
$385,000 Boston Provident Partners, L.P. 2050 Center Ave., Ste. 300
Fort Lee, NJ 07024
$50,000 Anacapa Venture Partners 10600 N. Deanza Blvd.
Ste. 215
Cupertino, CA. 95014
$50,000 Randall C. Fowler 210 Yerba Buena Ave.
Los Altos, CA. 94022
$25,000 Andrew J. Malik 10600 N. Deanza Blvd.
Ste. 215
Cupertino, CA. 95014
$75,000 Daystar Partners, L.P. 10600 N. Deanza Blvd.
Ste. 215
Cupertino, CA. 95014
$50,000 Vance Driscoll 522 Clearview Dr.
Los Gatos, CA. 95030
$25,000 Steven Nemirov 1050 Lorain Place
Los Gatos, CA. 95030
$50,000 Robert Weiss 17121 Los Robles Way
Los Gatos, CA. 95032
$50,000 James P. Scullion 15820 Bruce Ct.
Monte Sereno, CA 95030
</TABLE>
Attachment 1-1
<PAGE>
<TABLE>
AMOUNT FROM ADDRESS
- ------ ---- -------
<S> <C> <C>
$600,000 Sundance Venture Partners, L.P. One Arizona Center
400 E. Van Buren, Ste. 750
Phoenix, AZ. 85004
$300,000 American Growth Fund 1455 E. Tropicana Ave.
Ste. 100
Las Vegas, NV 89119
$1,000,000 Moore Global Investments, Ltd. 1251 Ave of the Americas
53rd Floor
New York, NY 10020
$500,000 St. James Capital Partners, L.P. c/o St. James Capital
Corp.
5599 San Felipe, 3rd Floor
Houston, Texas 77056
</TABLE>
*** AN UPDATED LIST OF INVESTORS IS AVAILABLE FROM THE COMPANY AT ANY TIME AT
THE REQUEST OF THE INVESTOR.
Attachment 1-2
<PAGE>
EXHIBIT 10.31
PROMISSORY NOTE
---------------
Dated as of
___________, 1997
Amount: $_______________
FOR VALUE RECEIVED, the undersigned Virtual Mortgage Network, Inc., a
Nevada corporation ("Maker"), promises to pay to the order of _______________
("Lender"), the principal sum of $___________, together with interest on the
unpaid principal balance on the earlier of (i) March 6, 1997, or (ii)
consummation of an initial public offering ("IPO") of the securities of the
Maker (the "Maturity Date"), except as set forth in Section 3 below.
1. INTEREST RATE.
-------------
The unpaid principal under this Promissory Note shall bear interest at
a rate of twelve percent (12%) per annum simple interest. Upon the Maker's
failure to pay amounts due on the Maturity Date, the interest rate on this Note
shall increase to fifteen percent (15%) per annum.
2. COMPUTATION.
-----------
Interest chargeable hereunder shall be calculated from the date
hereof, and if increased to 15% pursuant to Section 1, from the Maturity Date,
on the basis of a three hundred sixty (360) day year for the actual number of
days elapsed. Interest not paid when due shall be added to the unpaid principal
balance and shall thereafter bear interest at the same rate as principal. All
payments (including prepayments) hereunder are to be applied first to the
payment of accrued interest and the balance remaining applied to the payment of
principal.
3. PAYMENTS.
--------
Except as otherwise set forth herein, the unpaid principal under this
Promissory Note plus all accrued but unpaid interest thereon shall be payable
upon the Maturity Date. If the Maker has not repaid the principal amount
together with interest on the Maturity Date pursuant to Section 1, the Maker
then agrees to repay the principal amount together with accrued interest
hereunder in equal monthly payments of principal and interest at fifteen percent
(15%) per annum over a twelve month period. The
<PAGE>
first installment of such payments of principal and interest shall be due on
April 6, 1997.
4. VOLUNTARY PREPAYMENT.
--------------------
Maker may, at any time, upon five (5) Business Days prior written
notice to Lender, prepay the unpaid principal amount evidenced by this
Promissory Note, in whole or in part, without penalty or premium, by paying to
Lender, in cash or by wire transfer or immediately available federal funds, the
amount of such prepayment. If any such prepayment is less than a full
repayment, then such prepayment shall be applied first to the payment of accrued
interest and the balance remaining applied to the payment of principal.
5. LAWFUL MONEY; DESIGNATED PLACES OF PAYMENT.
------------------------------------------
All principal and interest due hereunder is payable in lawful money of
the United States of America, in immediately available funds, at Lender's
designated address not later than 6:00 p.m., Pacific time, on the day of
payment.
6. WAIVERS.
-------
Except as set forth elsewhere herein, Maker, for itself and its legal
representatives, successors, and assigns, expressly waives presentment, protest,
demand, notice of dishonor, notice of nonpayment, notice of maturity, notice of
protest, notice of intent to accelerate, notice of acceleration, presentment for
the purpose of accelerating maturity, and diligence in collection.
7. DEFAULT.
-------
Maker will be in default if any of the following happens: a) Maker
fails to make payments when due, (b) Maker breaks any promise made herein to
Lender, or Maker fails to perform at the time and strictly in the manner
provided in this Note, (c) any representation or statement made or furnished to
Lender by Maker or on Maker's behalf is false or misleading in any material
respect, (d) Maker becomes insolvent, a receiver is appointed for any part of
Maker's property, Maker makes an assignment for the benefit of creditors, or any
proceeding is commenced either by Maker or against Maker under any bankruptcy or
insolvency laws, and (e) any creditor tries to take any of Maker's property on
or in which Lender has a lien or security interest. It is expressly agreed
that, upon the occurrence of an event of default, as defined herein, the unpaid
principal balance of this promissory note, together with interest accrued
hereon, shall be due and payable without presentment, demand, protest, or notice
of protest, all of which are hereby expressly waived.
2
<PAGE>
8. SECURITY INTERESTS.
------------------
It is further understood that this Note is secured by, among other
things, security interests granted to Lender under other agreements.
9. ATTORNEYS' FEES.
---------------
In the event it should become necessary to employ counsel to collect
this Promissory Note, Maker agrees to pay the reasonable attorneys' fees and
costs of the holder hereof, incurred in connection with the holder's collection
efforts, irrespective of whether suit is brought.
10. SECTION HEADINGS.
----------------
Headings and numbers have been set forth for convenience only. Unless
the contrary is compelled by the context, everything contained in each paragraph
applies equally to this entire Promissory Note.
11. AMENDMENTS IN WRITING.
---------------------
This Promissory Note may be changed, modified, amended, only in
writing.
12. CHOICE OF LAW
-------------
This Promissory Note and all transactions hereunder and/or evidenced
hereby shall be governed by, construed under, and enforced in accordance with
the laws of the State of California.
13. WAIVER OF TRIAL BY JURY.
-----------------------
Maker hereby waives, to the extent permitted under applicable law, any
right to trial by jury in any action or proceeding relating to this Promissory
Note.
14. TRANSFERABILITY.
---------------
The right to principal and interest under this Promissory Note may be
transferred only through a book entry system maintained by Maker. Any other
means of transfer, including, without limitation, transfers by endorsement,
shall be null and void. Ownership of the obligation must be reflected in a book
entry. A book entry is a record of ownership that identifies the owner of an
interest in this Promissory Note.
3
<PAGE>
Made and Executed at
Newport Beach, California Virtual Mortgage Network, Inc.,
a Nevada corporation
By: _______________________________________
Name: _____________________________________
Title: ____________________________________
4
<PAGE>
EXHIBIT 10.32
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE BEEN ACQUIRED FOR INVESTMENT FOR
THE HOLDER'S OWN ACCOUNT AND NOT WITH A VIEW TO OR FOR SALE IN CONNECTION WITH
ANY DISTRIBUTION OF THE SECURITIES. THE SECURITIES HAVE NOT BEEN REGISTERED OR
QUALIFIED UNDER THE SECURITIES ACT OF 1933 ("SECURITIES ACT") OR UNDER ANY
APPLICABLE STATE SECURITIES LAWS ("BLUE SKY LAWS"). AN OFFER TO SELL OR
TRANSFER OR THE SALE OR TRANSFER OF THESE SECURITIES IS UNLAWFUL UNLESS MADE
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR PERMIT, AS APPLICABLE, UNDER
THE SECURITIES ACT OR APPLICABLE BLUE SKY LAWS OR UNLESS AN EXEMPTION FROM
REGISTRATION AND/OR QUALIFICATION UNDER THE SECURITIES ACT AND APPLICABLE BLUE
SKY LAWS IS AVAILABLE AND AN OPINION OF COUNSEL OR OTHER EVIDENCE REASONABLY
SATISFACTORY TO THE COMPANY IS PROVIDED TO THE COMPANY TO THE EFFECT THAT SUCH
REGISTRATION OR QUALIFICATION IS NOT REQUIRED UNDER THE SECURITIES ACT AND
APPLICABLE BLUE SKY LAWS.
Warrant No. 96-___
COMMON STOCK PURCHASE WARRANT
____________, 1997
THIS CERTIFIES THAT, for value received, ________________________
("Warrantholder") is entitled to subscribe for and purchase from Virtual
Mortgage Network, Inc., a Nevada corporation (the "Company"), that number of
shares of the Company's Common Stock, $.001 par value, established in Section
4(b) hereof ("Warrant Stock") at the Exercise Price (as hereafter determined
under Section 4) at any time from the date hereof to and including the
Expiration Date (as defined below), subject to the terms and conditions stated
herein. For purposes of this Warrant, the term "Expiration Date" shall mean
five years from the date hereof.
1. EXERCISE OF WARRANT.
-------------------
(a) The rights represented by this Warrant may be exercised, in whole or
in part (subject to the minimum exercise limitation set forth in this Section
1), by the holder hereof before the time of the Company's initial public
offering of its Common Stock ("IPO"). This Warrant shall be deemed
automatically exercised at the time of the Company's IPO in accordance with
Section 8 hereof. This Warrant may be exercised by the surrender of this
Warrant and delivery of an executed Subscription Agreement in the form attached
hereto as Exhibit A to the Company at its principal executive office, or such
other place as the Company shall designate in writing, accompanied by payment
for the Warrant Stock so subscribed for in cash or certified bank or cashier's
checks. In the event of a partial exercise of this Warrant, a substitute
Warrant representing the number of shares
<PAGE>
of Warrant Stock which were not acquired upon the exercise of the Warrant shall
be issued to the holder of this Warrant. No exercise of this Warrant may be
made for less than one-third of the number of shares of Warrant Stock initially
subject to this Warrant.
(b) Notwithstanding the provisions of Section 1(a) requiring payment by
cash or check, the Warrantholder may elect to make payment of the exercise
price, or any portion thereof, by delivering for cancellation securities of the
Company (including the unexercised portion of this Warrant) outstanding prior to
the exercise of this Warrant, with such securities to be credited toward such
exercise price at the fair market value (as determined below) of the securities,
in which event the certificates evidencing the securities delivered shall
accompany the notice of exercise and shall be duly endorsed or accompanied by
duly executed stock powers to transfer the same to the Company; provided,
however, that such payment in securities instead of cash or check shall not be
effective and shall be rejected by the Company if the Company is then prohibited
by applicable law from purchasing or acquiring the tendered securities.
If the Company rejects the payment in securities, the tendered notice of
exercise shall not be effective hereunder unless promptly after being notified
of such rejection the Warrantholder pays the purchase price in cash. For
purposes of this Section 1(b), the fair market value of securities delivered
upon exercise of the Warrant shall (i) if "publicly traded" (as defined below),
be valued at the average of the closing prices for the securities for the 30-day
period immediately preceding the delivery to the Company of the certificate(s)
evidencing such securities or (ii) if not publicly traded, be valued in good
faith by the Board of Directors of the Company; provided, however, that if in
the good faith judgement of the Warrantholder the valuation established by the
Board of Directors under this clause (ii) does not reasonably reflect the fair
market value of the securities to be delivered in exercise of this Warrant, then
the determination of fair market value shall be made by an independent appraiser
or investment banking institution mutually acceptable to the Company and to the
Warrantholder (or, if such selection cannot be made by the Company and the
Warrantholder, by an independent appraiser or investment banking firm selected
by the American Arbitration Association in accordance with its rules), with the
fees and expenses of such independent appraiser or investment banking
institution to be paid by the Warrantholder. For purposes of the preceding
sentence, the "closing prices" shall mean the closing prices of securities of
the class and series of securities delivered as reported with respect to the
market (or the composite of the markets, if more than one) in which such
securities are then traded, or if no such closing prices are reported, the
lowest independent offer quotation reported therefor in Level 2 of NASDAQ for
trading days
2
<PAGE>
during the applicable 30-day averaging period. "Publicly traded" means a
security which is listed or admitted to unlisted trading privileges on a
national securities exchange or as to which sales or bid and offer quotations
are reported in the automated quotation system ("NASDAQ") operated by the
National Association of Securities Dealers, Inc.
2. INVESTMENT REPRESENTATION. The holder by accepting this Warrant
-------------------------
represents that the Warrant is acquired for the holder's own account for
investment purposes and not with a view to any offering or distribution and that
the holder has no present intention of selling or otherwise disposing of the
Warrant or the Warrant Stock in violation of applicable securities laws. Upon
exercise, the holder will confirm, in respect of securities obtained upon such
exercise, that the holder is acquiring such securities for the holder's own
account and not with a view to any offering or distribution in violation of
applicable securities laws. The holder acknowledges that the certificate(s)
representing the Warrant Stock issued upon exercise of this Warrant shall be
endorsed with the legend set forth on this Warrant and all other legends, if
any, required by applicable federal, state and foreign securities laws to be
placed on the certificate(s).
3. VALIDITY OF WARRANT STOCK. The Company warrants and agrees that all
-------------------------
shares of Warrant Stock which may be issued upon the exercise of this Warrant
will, upon issuance, be validly issued, fully paid and nonassessable and free
from all taxes, liens and charges with respect to the issue thereof. The
Company further warrants and agrees that during the period within which this
Warrant may be exercised, the Company will at all times have authorized and
reserved a sufficient number of shares of Warrant Stock to provide for the
exercise of this Warrant.
4. EXERCISE PRICE; NUMBER OF WARRANT SHARES.
----------------------------------------
(a) The Exercise Price shall initially be $0.001 per share of Warrant
Stock.
(b) The number of shares of Warrant Stock to be issued upon exercise of
this Warrant shall be that number of whole shares with aggregate value of
approximately $__________ using conventional rounding, with the value of each
share calculated as follows:
(i) if the initial Public Offering of the Company's Common Stock
occurs prior to March 6, 1997, the value of each share shall be such Public
Offering price; or
(ii) if the initial Public Offering of the Company's Common Stock
does not occur prior to March 6, 1997, the value of each share shall be $4
(four) per share.
3
<PAGE>
(c) Upon occurrence of any of the following, the Exercise Price and
the number of shares of Warrant Stock to be issued upon exercise of this Warrant
shall be adjusted as follows:
(i) If at any time after the date hereof the number of shares of
Common Stock outstanding is increased by a stock dividend payable in shares
of Common Stock or by a subdivision or split-up of shares of Common Stock,
then, on the record date of such stock dividend, subdivision, or split-up,
the Exercise Price shall be appropriately decreased and the number of
shares of Warrant Stock issuable on exercise of this Warrant shall be
appropriately increased in proportion to such increase of outstanding
shares.
(ii) If at any time after the date hereof the number of shares
of Common Stock outstanding is decreased by a combination of the
outstanding shares of Common Stock, then, on the effective date of such
combination, the Exercise Price shall be appropriately increased and the
number of shares of Warrant Stock issuable on exercise of this Warrant
shall be appropriately decreased in proportion to such decrease in
outstanding shares.
(d) All calculations under this Section 4 shall be made to the
nearest cent or to the nearest whole share, as the case may be. No fractional
shares of Warrant Stock shall be issued upon exercise of this Warrant. Any
fractional shares of Warrant Stock which might otherwise be issued upon exercise
of this Warrant shall be rounded to the nearest whole share (with one-half
rounded up).
(e) If the Exercise Price shall be adjusted, the Company shall
prepare and mail to the holder hereof a certificate setting forth the event
requiring the adjustment, the amount of the adjustment, the method by which the
adjustment was calculated, and (after giving effect to the adjustment) the
Exercise Price.
(f) A calculation of any adjustment under this Section 4 evidenced by
a certificate of any firm of independent certified public accountants of
recognized standing selected by the Company and satisfactory to the holder
hereof (which may be the firm of independent certified public accountants
regularly employed by the Company) shall be presumed a correct calculation of
the adjustment for purposes of this Section 4. The foregoing presumption shall
constitute a rebuttable presumption, with the party disputing the calculation
bearing the burden of proving the incorrectness of the calculation.
4
<PAGE>
5. NOTICE OF CERTAIN EVENTS. If at any time:
------------------------
(a) The Company shall declare any dividend upon the Common Stock,
whether payable in cash, property or capital stock, or make any distribution to
the holders of Common Stock;
(b) There shall be any recapitalization or reclassification of the
capital stock of the Company, or consolidation or merger of the Company with
another corporation;
(c) There shall be a voluntary or involuntary dissolution, liquidation
or winding up of the Company; or
(d) The Company shall propose to enter into a Terminating Transaction
not covered by the preceding paragraphs (a) through (c),
then, in each such case, the Company shall give to the holder of this Warrant at
the holder's address registered on the books of the Company, not less than 20
days' prior written notice of the proposed event, by first class certified mail,
postage prepaid and return receipt requested, of (x) the date on which the books
of the Company shall close or a record shall be taken for purposes of
ascertaining which stockholders will be entitled to vote on such
reclassification, reorganization, consolidation, merger, dissolution,
liquidation or winding up, as the case may be; (y) the date on which the vote
shall be taken concerning such reclassification, reorganization, consolidation,
merger, dissolution, liquidation or winding up, as the case may be; and (z) the
date on which such dividend or distribution is to be paid or such
reclassification, reorganization, consolidation, merger, dissolution,
liquidation or winding up, as the case may be, is to be effective. Such notice
shall also specify the date as of which the record holders of capital stock of
the Company shall participate in said dividend or distribution or shall be
entitled to exchange their shares of capital stock for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, dissolution, liquidation or winding up, as the case may be.
For purposes of this Section 5, the term "Terminating Transaction"
shall mean any one of the following events: (a) the dissolution or liquidation
of the Company; (b) a reorganization, merger, or consolidation of the Company
with one or more entities, as a result of which the Company goes out of
existence or becomes a subsidiary of another entity (which shall be deemed to
have occurred if another entity, group of entities or persons acting in concert
shall own, directly or indirectly, more than 50% of the aggregate voting power
of all outstanding equity securities of the Company); or (c) a sale of all or
substantially all of the Company's assets.
5
<PAGE>
6. TRANSFER OF WARRANT.
-------------------
(a) Subject to Section 6(b) below, the holder of this Warrant
agrees to give the Company not less than 30 days' prior written notice before
transferring this Warrant. The foregoing notice shall describe the manner of any
proposed transfer of this Warrant or any interest therein and the consideration
to be received by the holder. The Company shall have a right of first refusal
(for 30 days after receipt of the holder's notice) to purchase this Warrant at
the same price and on the same terms offered by a third party if this Warrant is
proposed to be transferred.
(b) Notwithstanding the Company's right of first refusal set
forth in Section 6(a), this Warrant, in whole or in part, may be freely and
successively assigned, held in trust or otherwise transferred to or in favor of
any Warrantholder Associate (as hereinafter defined). Each assignment of this
Warrant shall be deemed a partitioned right which is separately enforceable by
the assignee, transferee or other beneficiary. Each assignee, transferee or
other beneficiary shall be entitled to the full benefit of the Warrant assigned,
subject to any conditions to which the Warrant is subject and provided always
that such assignee, transferee or other beneficiary shall carry out all the
obligations, liabilities and responsibilities of the holder of the Warrant
hereunder. No company or other entity may enjoy the benefit of any Warrant after
the company or entity has first ceased to be a Warrantholder Associate. For
purposes of this Section 6(b), a "Warrantholder Associate" means any person
controlling, controlled by, or under common control with the initial
Warrantholder.
(c) No transfer or assignment of this Warrant shall be made
without compliance with the provisions of Section 2 and the legend set forth on
the first page of this Warrant.
(d) Notwithstanding the provisions of Section 6(b) above, this
Warrant may not be assigned, held in trust, or otherwise transferred to any
Warrantholder Associate in amounts of less than one-third of the number of
shares subject to this Warrant.
7. NO STOCKHOLDER RIGHTS. This Warrant shall not entitle the holder
---------------------
hereof to any voting rights or other rights as a stockholder of the Company, or
to any other rights whatsoever except the rights herein expressed, and no cash
dividend paid out of earnings or surplus or interest shall be payable or accrue
in respect of this Warrant or the interest represented hereby or the shares
which may be subscribed for and purchased hereunder until and unless and except
to the extent that the rights represented by this Warrant shall be exercised.
6
<PAGE>
8. REGISTRATION OF WARRANT STOCK.
-----------------------------
If at any time after the date hereof, the Company files a
registration statement pursuant to an initial public offering of its securities
("IPO"), the Company agrees to file concurrently therewith a parallel
registration statement on Form S-1 or on a form of general use then in effect
under the Securities Act of 1933, as amended ("Securities Act"), and available
for use by the Company to register the Warrant Stock issuable to the
Warrantholder. Upon the effectiveness of the registration statement (which
effectiveness shall occur concurrently with the effectiveness of the IPO
registration statement), any Warrants not already exercised shall be deemed
automatically exercised in full and the registered shares of Warrant Stock shall
be issued to the Warrantholder. The Company agrees to keep such parallel
registration statement effective for up to one year from the date of
effectiveness to the extent reasonably necessary (as determined by legal counsel
to the holder of the Warrant Stock) to permit any desired resale of such Warrant
Stock. The Warrantholder agrees not to sell, transfer or otherwise dispose of
any Warrant Stock for a period of 120 days from the date of effectiveness of the
parallel registration statement and shall enter into a customary lock-up
agreement with the underwriters in the IPO to such effect. The Warrantholder
agrees that stop transfer instructions may be given to the Company's transfer
agent regarding the foregoing lock-up arrangement.
9. MISCELLANEOUS MATTERS.
---------------------
(a) As used herein, the term "Warrant Stock" shall mean the
Company's presently authorized Common Stock par value $.001, and stock of any
other series or class into which such presently authorized Common Stock may
hereafter have been converted or changed pursuant to any recapitalization or
change in such Common Stock.
(b) As used herein, the word "person" shall mean an individual or
entity.
(c) This Warrant and the name and address of the holder will be
registered in a Warrant Register that is kept at the principal office of the
Company, and the Company may treat the holder so registered as the owner of this
Warrant for all purposes.
(d) This Warrant shall be governed by and interpreted in
accordance with the internal laws, and not the law of conflicts, of the State of
California.
7
<PAGE>
IN WITNESS WHEREOF, the Company has executed this Warrant effective as
of the date first written above.
VIRTUAL MORTGAGE NETWORK, INC.
A NEVADA CORPORATION
By: _______________________________
Name: _________________________
Title: ________________________
8
<PAGE>
EXHIBIT A
SUBSCRIPTION AGREEMENT
___________________, 19___
To: Virtual Mortgage Network, Inc.
The undersigned, pursuant to the provisions set forth in Warrant No.
96-__, hereby agrees to subscribe for and purchase _____________ shares of the
Warrant Stock covered by such Warrant, and makes payment herewith in full for
such Warrant Stock at the Exercise Price.
Signature: ________________________
Printed Name
and Title: ________________________
Address: __________________________
------------------------------
------------------------
A-1
<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED ____________________________ hereby sells, assigns
and transfers all of the rights of the undersigned under Warrant No. 96-__, with
respect to the number of shares of Warrant Stock covered thereby set forth below
unto:
Name of Assignee Address No. of Shares
________________ _______ _____________
________________ ______________________________ _____________
______________________________
Dated: ____________________, 19___
Signature: ________________________
Printed Name
and Title: ________________________
Address: __________________________
__________________________
__________________________
A-2
<PAGE>
EXHIBIT 10.34
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE BEEN ACQUIRED FOR INVESTMENT FOR
THE HOLDER'S OWN ACCOUNT AND NOT WITH A VIEW TO OR FOR SALE IN CONNECTION WITH
ANY DISTRIBUTION OF THE SECURITIES. THE SECURITIES HAVE NOT BEEN REGISTERED OR
QUALIFIED UNDER THE SECURITIES ACT OF 1933 ("SECURITIES ACT") OR UNDER ANY
APPLICABLE STATE SECURITIES LAWS ("BLUE SKY LAWS"). AN OFFER TO SELL OR
TRANSFER OR THE SALE OR TRANSFER OF THESE SECURITIES IS UNLAWFUL UNLESS MADE
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR PERMIT, AS APPLICABLE, UNDER
THE SECURITIES ACT OR APPLICABLE BLUE SKY LAWS OR UNLESS AN EXEMPTION FROM
REGISTRATION AND/OR QUALIFICATION UNDER THE SECURITIES ACT AND APPLICABLE BLUE
SKY LAWS IS AVAILABLE AND AN OPINION OF COUNSEL OR OTHER EVIDENCE REASONABLY
SATISFACTORY TO THE COMPANY IS PROVIDED TO THE COMPANY TO THE EFFECT THAT SUCH
REGISTRATION OR QUALIFICATION IS NOT REQUIRED UNDER THE SECURITIES ACT AND
APPLICABLE BLUE SKY LAWS.
Warrant No. 96-________
COMMON STOCK PURCHASE WARRANT
JULY 6, 1997
THIS CERTIFIES THAT, for value received, _____________ ("Warrantholder") is
entitled to subscribe for and purchase from Virtual Mortgage Network, Inc., a
Nevada corporation (the "Company"), _________ shares of the Company's Common
Stock, $.001 par value (the "Warrant Stock") at the Exercise Price (as hereafter
determined under Section 4) at any time from the date hereof to and including
the Expiration Date (as defined below), subject to the terms and conditions
stated herein. For purposes of this Warrant, the term "Expiration Date" shall
mean five years from the date hereof.
1. EXERCISE OF WARRANT.
-------------------
(a) The rights represented by this Warrant may be exercised, in whole or
in part (subject to the minimum exercise limitation set forth in this Section
1), by the holder hereof at any time before the Expiration Date. This Warrant
may be exercised by the surrender of this Warrant and delivery of an executed
Subscription Agreement in the form attached hereto as Exhibit A to the Company
at its principal executive office, or such other place as the Company shall
designate in writing, accompanied by payment for the Warrant Stock so subscribed
for in cash or certified bank or cashier's checks. In the event of a partial
exercise of this Warrant, a substitute Warrant representing the number of shares
of Warrant Stock which were not acquired upon the exercise of the Warrant shall
be issued to the holder of this Warrant. No exercise of this Warrant may be
made
<PAGE>
for less than one-third of the number of shares of Warrant Stock initially
subject to this Warrant.
(b) Notwithstanding the provisions of Section 1(a) requiring payment by
cash or check, the Warrantholder may elect to make payment of the exercise
price, or any portion thereof, by delivering for cancellation securities of the
Company (including the unexercised portion of this Warrant) outstanding prior to
the exercise of this Warrant, with such securities to be credited toward such
exercise price at the fair market value (as determined below) of the securities,
in which event the certificates evidencing the securities delivered shall
accompany the notice of exercise and shall be duly endorsed or accompanied by
duly executed stock powers to transfer the same to the Company; provided,
however, that such payment in securities instead of cash or check shall not be
effective and shall be rejected by the Company if the Company is then prohibited
by applicable law from purchasing or acquiring the tendered securities.
If the Company rejects the payment in securities, the tendered notice of
exercise shall not be effective hereunder unless promptly after being notified
of such rejection the Warrantholder pays the purchase price in cash. For
purposes of this Section 1(b), the fair market value of securities delivered
upon exercise of the Warrant shall (i) if "publicly traded" (as defined below),
be valued at the average of the closing prices for the securities for the 30-day
period immediately preceding the delivery to the Company of the certificate(s)
evidencing such securities or (ii) if not publicly traded, be valued in good
faith by the Board of Directors of the Company; provided, however, that if in
the good faith judgement of the Warrantholder the valuation established by the
Board of Directors under this clause (ii) does not reasonably reflect the fair
market value of the securities to be delivered in exercise of this Warrant, then
the determination of fair market value shall be made by an independent appraiser
or investment banking institution mutually acceptable to the Company and to the
Warrantholder (or, if such selection cannot be made by the Company and the
Warrantholder, by an independent appraiser or investment banking firm selected
by the American Arbitration Association in accordance with its rules), with the
fees and expenses of such independent appraiser or investment banking
institution to be paid by the Warrantholder. For purposes of the preceding
sentence, the "closing prices" shall mean the closing prices of securities of
the class and series of securities delivered as reported with respect to the
market (or the composite of the markets, if more than one) in which such
securities are then traded, or if no such closing prices are reported, the
lowest independent offer quotation reported therefor in Level 2 of NASDAQ for
trading days during the applicable 30-day averaging period. "Publicly traded"
means a security which is listed or admitted to unlisted trading privileges on a
national securities exchange or as to which sales
2
<PAGE>
or bid and offer quotations are reported in the automated quotation system
("NASDAQ") operated by the National Association of Securities Dealers, Inc.
2. INVESTMENT REPRESENTATION. The holder by accepting this Warrant
-------------------------
represents that the Warrant is acquired for the holder's own account for
investment purposes and not with a view to any offering or distribution and that
the holder has no present intention of selling or otherwise disposing of the
Warrant or the Warrant Stock in violation of applicable securities laws. Upon
exercise, the holder will confirm, in respect of securities obtained upon such
exercise, that the holder is acquiring such securities for the holder's own
account and not with a view to any offering or distribution in violation of
applicable securities laws. The holder acknowledges that the certificate(s)
representing the Warrant Stock issued upon exercise of this Warrant shall be
endorsed with the legend set forth on this Warrant and all other legends, if
any, required by applicable federal, state and foreign securities laws to be
placed on the certificate(s).
3. VALIDITY OF WARRANT STOCK. The Company warrants and agrees that all
-------------------------
shares of Warrant Stock which may be issued upon the exercise of this Warrant
will, upon issuance, be validly issued, fully paid and nonassessable and free
from all taxes, liens and charges with respect to the issue thereof. The
Company further warrants and agrees that during the period within which this
Warrant may be exercised, the Company will at all times have authorized and
reserved a sufficient number of shares of Warrant Stock to provide for the
exercise of this Warrant.
4. EXERCISE PRICE; NUMBER OF WARRANT SHARES.
----------------------------------------
(a) The Exercise Price shall initially be $0.001 per share of Warrant
Stock.
(b) Upon occurrence of any of the following, the Exercise Price and the
number of shares of Warrant Stock to be issued upon exercise of this Warrant
shall be adjusted as follows:
(i) If at any time after the date hereof the number of shares of
Common Stock outstanding is increased by a stock dividend payable in shares
of Common Stock or by a subdivision or split-up of shares of Common Stock,
then, on the record date of such stock dividend, subdivision, or split-up,
the Exercise Price shall be appropriately decreased and the number of
shares of Warrant Stock issuable on exercise of this Warrant shall be
appropriately increased in proportion to such increase of outstanding
shares.
3
<PAGE>
(ii) If at any time after the date hereof the number of shares
of Common Stock outstanding is decreased by a combination of the
outstanding shares of Common Stock, then, on the effective date of such
combination, the Exercise Price shall be appropriately increased and the
number of shares of Warrant Stock issuable on exercise of this Warrant
shall be appropriately decreased in proportion to such decrease in
outstanding shares.
(c) All calculations under this Section 4 shall be made to the
nearest cent or to the nearest whole share, as the case may be. No fractional
shares of Warrant Stock shall be issued upon exercise of this Warrant. Any
fractional shares of Warrant Stock which might otherwise be issued upon exercise
of this Warrant shall be rounded to the nearest whole share (with one-half
rounded up).
(d) If the Exercise Price shall be adjusted, the Company shall
prepare and mail to the holder hereof a certificate setting forth the event
requiring the adjustment, the amount of the adjustment, the method by which the
adjustment was calculated, and (after giving effect to the adjustment) the
Exercise Price.
(e) A calculation of any adjustment under this Section 4 evidenced by
a certificate of any firm of independent certified public accountants of
recognized standing selected by the Company and satisfactory to the holder
hereof (which may be the firm of independent certified public accountants
regularly employed by the Company) shall be presumed a correct calculation of
the adjustment for purposes of this Section 4. The foregoing presumption shall
constitute a rebuttable presumption, with the party disputing the calculation
bearing the burden of proving the incorrectness of the calculation.
5. NOTICE OF CERTAIN EVENTS. If at any time:
------------------------
(a) The Company shall declare any dividend upon the common Stock,
whether payable in cash, property or capital stock, or make any distribution to
the holders of Common Stock;
(b) There shall be any recapitalization or reclassification of the
capital stock of the Company, or consolidation or merger of the Company with
another corporation;
(c) There shall be a voluntary or involuntary dissolution, liquidation
or winding up of the Company; or
(d) The Company shall propose to enter into a Terminating Transaction
not covered by the preceding paragraphs (a) through (c),
4
<PAGE>
then, in each such case, the Company shall give to the holder of this Warrant at
the holder's address registered on the books of the Company, not less than 20
days' prior written notice of the proposed event, by first class certified mail,
postage prepaid and return receipt requested, of (x) the date on which the books
of the Company shall close or a record shall be taken for purposes of
ascertaining which stockholders will be entitled to vote on such
reclassification, reorganization, consolidation, merger, dissolution,
liquidation or winding up, as the case may be; (y) the date on which the vote
shall be taken concerning such reclassification, reorganization, consolidation,
merger, dissolution, liquidation or winding up, as the case may be; and (z) the
date on which such dividend or distribution is to be paid or such
reclassification, reorganization, consolidation, merger, dissolution,
liquidation or winding up, as the case may be, is to be effective. Such notice
shall also specify the date as of which the record holders of capital stock of
the Company shall participate in said dividend or distribution or shall be
entitled to exchange their shares of capital stock for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, dissolution, liquidation or winding up, as the case may be.
For purposes of this Section 5, the term "Terminating Transaction"
shall mean any one of the following events: (a) the dissolution or liquidation
of the Company; (b) a reorganization, merger, or consolidation of the Company
with one or more entities, as a result of which the Company goes out of
existence or becomes a subsidiary of another entity (which shall be deemed to
have occurred if another entity, group of entities or persons acting in concert
shall own, directly or indirectly, more than 50% of the aggregate voting power
of all outstanding equity securities of the Company); or (c) a sale of all or
substantially all of the Company's assets.
6. TRANSFER OF WARRANT.
-------------------
(a) Subject to Section 6(b) below, the holder of this Warrant agrees
to give the Company not less than 30 days' prior written notice before
transferring this Warrant. The foregoing notice shall describe the manner of
any proposed transfer of this Warrant or any interest therein and the
consideration to be received by the holder. The Company shall have a right of
first refusal (for 30 days after receipt of the holder's notice) to purchase
this Warrant at the same price and on the same terms offered by a third party if
this Warrant is proposed to be transferred.
(b) Notwithstanding the Company's right of first refusal set forth in
Section 6(a), this Warrant, in whole or in part, may be freely and successively
assigned, held in trust or otherwise transferred to or in favor of any
Warrantholder Associate (as hereinafter defined). Each assignment of this
5
<PAGE>
Warrant shall be deemed a partitioned right which is separately enforceable by
the assignee, transferee or other beneficiary. Each assignee, transferee or
other beneficiary shall be entitled to the full benefit of the Warrant assigned,
subject to any conditions to which the Warrant is subject and provided always
that such assignee, transferee or other beneficiary shall carry out all the
obligations, liabilities and responsibilities of the holder of the Warrant
hereunder. No company or other entity may enjoy the benefit of any Warrant
after the company or entity has first ceased to be a Warrantholder Associate.
For purposes of this Section 6(b), a "Warrantholder Associate" means any person
controlling, controlled by, or under common control with the initial
Warrantholder.
(c) No transfer or assignment of this Warrant shall be made without
compliance with the provisions of Section 2 and the legend set forth on the
first page of this Warrant.
(d) Notwithstanding the provisions of Section 6(b) above, this
Warrant may not be assigned, held in trust, or otherwise transferred to any
Warrantholder Associate in amounts of less than one-third of the number of
shares subject to this Warrant.
7. NO STOCKHOLDER RIGHTS. This Warrant shall not entitle the holder
---------------------
hereof to any voting rights or other rights as a stockholder of the Company, or
to any other rights whatsoever except the rights herein expressed, and no cash
dividend paid out of earnings or surplus or interest shall be payable or accrue
in respect of this Warrant or the interest represented hereby or the shares
which may be subscribed for and purchased hereunder until and unless and except
to the extent that the rights represented by this Warrant shall be exercised.
8. REGISTRATION OF WARRANT STOCK.
-----------------------------
If at any time after the date hereof, the Company files a registration
statement pursuant to an initial public offering of its securities ("IPO"), the
Company agrees to file concurrently therewith a parallel registration statement
on Form S-1 or on a form of general use then in effect under the Securities Act
of 1933, as amended ("Securities Act"), and available for use by the Company to
register the Warrant Stock issuable to the Warrantholder. Upon the
effectiveness of the registration statement (which effectiveness shall occur
concurrently with the effectiveness of the IPO registration statement), any
Warrants not already exercised shall be deemed automatically exercised in full
and the registered shares of Warrant Stock shall be issued to the Warrantholder.
The Company agrees to keep such parallel registration statement effective for up
to one year from the date of effectiveness to the extent reasonably necessary
(as determined by legal counsel to the holder of the Warrant Stock) to permit
any desired resale of such
6
<PAGE>
Warrant Stock. The Warrantholder agrees not to sell, transfer or otherwise
dispose of any Warrant Stock for a period of 120 days from the date of
effectiveness of the parallel registration statement and shall enter into a
customary lock-up agreement with the underwriters in the IPO to such effect.
The Warrantholder agrees that stop transfer instructions may be given to the
Company's transfer agent regarding the foregoing lock-up arrangement.
9. MISCELLANEOUS MATTERS.
---------------------
(a) As used herein, the term "Warrant Stock" shall mean the Company's
presently authorized Common Stock par value $.001, and stock of any other series
or class into which such presently authorized Common Stock may hereafter have
been converted or changed pursuant to any recapitalization or change in such
Common Stock.
(b) As used herein, the word "person" shall mean an individual or
entity.
(c) This Warrant and the name and address of the holder will be
registered in a Warrant Register that is kept at the principal office of the
Company, and the Company may treat the holder so registered as the owner of this
Warrant for all purposes.
(d) This Warrant shall be governed by and interpreted in accordance
with the internal laws, and not the law of conflicts, of the State of
California.
IN WITNESS WHEREOF, the Company has executed this Warrant effective as
of the date first written above.
VIRTUAL MORTGAGE NETWORK, INC.
A NEVADA CORPORATION
By: ________________________________
Name: ________________________
Title: _______________________
7
<PAGE>
EXHIBIT A
SUBSCRIPTION AGREEMENT
___________________, 19___
To: Virtual Mortgage Network, Inc.
The undersigned, pursuant to the provisions set forth in Warrant No.
96-__, hereby agrees to subscribe for and purchase _____________ shares of the
Warrant Stock covered by such Warrant, and makes payment herewith in full for
such Warrant Stock at the Exercise Price.
Signature: ________________________
Printed Name
and Title: ________________________
Address: __________________________
__________________________
__________________________
________________________
8
<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED ____________________________ hereby sells, assigns
and transfers all of the rights of the undersigned under Warrant No. 96-__, with
respect to the number of shares of Warrant Stock covered thereby set forth below
unto:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
________________ _________________________ _________
_________________________
Dated: ____________________, 19___
Signature: ________________________
Printed Name
and Title: ________________________
Address: __________________________
__________________________
__________________________
9
<PAGE>
EXHIBIT 10.35
BRIDGE LOAN AND SECURITY AGREEMENT
BY AND BETWEEN
VIRTUAL MORTGAGE NETWORK, INC.,
A NEVADA CORPORATION AND
_______________________________
This BRIDGE LOAN AND SECURITY AGREEMENT (the "Agreement") is made this ___ day
of ____, 1997, by and between _______________________ (the "Investor" or
"Secured Party") and Virtual Mortgage Network, Inc., a Nevada corporation
("Company", "Debtor", "Borrower" or "VMN"). The Investor and VMN are referred
to collectively herein as the "Parties."
In consideration of the mutual covenants, agreements, representations,
and warranties contained in this agreement, the Parties agree as follows:
1. LOAN AMOUNT.
-----------
The Investor agrees to loan, on _________, 1997, to the Company the
aggregate principal amount of $__________ (the "Loan"). The Loan will be made
for the purpose of paying normal and reasonable operating expenses and obtaining
and paying for professional services in connection with the offering of
securities of VMN.
2. PROMISSORY NOTE.
---------------
In consideration thereof, VMN will issue, cause to be executed and
delivered to the Investor, upon the execution hereof, a promissory note in the
principal amount equal to the amount of the Loan, upon the terms and conditions
specified herein, and in the form set forth in Exhibit A, hereto (the "Note").
The Note is one of several notes of the Company sold to investors (collectively,
the "Investors") that collectively aggregate $5,500,000 (the "Notes") and are
equally secured by the security interest (i) granted by Section 8.1 of this
Agreement and Section 8.1 of the Company's other Bridge Loan and Security
Agreements, pursuant to which the Notes were issued or are to be issued and,
(ii) granted to American Growth Fund I, L.P. ("AGF") to secure up to $500,000 in
notes of the Company payable to AGF.
3. WARRANTS OF THE COMPANY.
-----------------------
VMN agrees to issue, convey and transfer, and cause to be issued,
conveyed and transferred to the Investor, Common Stock Purchase Warrants to
purchase shares of Company Common Stock.
1
<PAGE>
The number of whole shares of Company Common Stock subject to the Warrants
accompanying an Investor's Note will be determined by using conventional
rounding and by dividing the principal amount of the Note by (i) if the IPO
occurs prior to March 6, 1997, the IPO price, or (ii) if the IPO occurs on or
after March 6, 1997, $4.00 per share. The exercise price of the Warrants is
$0.001 per share of Common Stock, except that this price is adjustable in
certain circumstances as set forth in the Warrant Agreement. A registration
right is also included in the Warrant Agreement (Exhibit B hereto).
4. PERIODIC FINANCE CHARGES.
------------------------
The unpaid principal under the Note shall bear interest at a rate of
twelve percent (12%) per annum simple interest. Upon the Company's failure to
pay amounts due on the Maturity Date (as such term is defined in the Note), the
interest rate on the Note shall increase to fifteen percent (15%) per annum, as
set forth in the Note.
5. PAYMENTS.
--------
5.1 VMN shall make payments of principal and accrued interest on the
Note to Investor upon the closing of a public offering of securities by VMN, as
set forth in the Note.
5.2 Except as otherwise set forth in the Note, the unpaid principal
under the Note plus all accrued but unpaid interest thereon shall be payable
upon the Maturity Date. If the Company has not repaid the principal amount
together with interest by the Maturity Date, the Company then agrees to repay
the principal amount together with accrued interest under the Note in equal
monthly payments of principal and interest at fifteen percent (15%) per annum
over a twelve (12) month period. The first installment of such payments of
principal and interest shall be due on April 6, 1997.
VMN may, from time to time, in it sole discretion, make one or more
periodic payments to the Investor. Such payments shall be credited to VMN's
account on the date that such payment is placed in the United States mail, first
class postage prepaid, by VMN. Such payments shall be applied first to accrued
and unpaid interest, and then to the principal amount then outstanding.
6. DEFAULT PROVISIONS.
------------------
The occurrence and continuance of one or more of the following events
shall constitute an event of default of this entire Agreement:
2
<PAGE>
6.1 The nonpayment of any principal or interest by VMN on this loan
within five business days of when the same shall have become due and payable.
6.2 The entry of a decree or order by a court having appropriate
jurisdiction adjudging VMN bankrupt or insolvent, or approving as properly filed
a petition seeking reorganization, arrangement, adjustment or composition of or
in respect of VMN under the federal Bankruptcy Act or any other applicable
federal or state law, or appointing a receiver, liquidator, assignee or trustee
of VMN, or any substantial part of its property, or if the Collateral, as
defined in Section 8, or ordering the winding up or liquidation of its affairs,
and the continuance of any such decree or order unstayed and in effect for a
period of sixty (60) consecutive days.
6.3 The institution by VMN of proceedings to be adjudicated a
bankrupt or insolvent, or the consent by it to the institution of bankruptcy or
insolvency proceedings against it, or the filing by it of a petition or answer
or consent seeking reorganization or relief under the federal Bankruptcy Act or
any other applicable federal or state law, or the consent by it to the filing of
any such petition or to the appointment of a receiver, liquidator, assignee or
trustee of the Company, or of any substantial part of its property, or if the
Collateral, as defined in Section 8, shall become subject to the jurisdiction of
a federal bankruptcy court or similar state court, or if VMN shall make an
assignment for the benefit of its creditors, or if there is a receivership,
execution or other material judicial seizure, or if there is an admission in
writing by VMN of its inability to pay its debts generally as they become due,
or the taking of corporate action by VMN in furtherance of any such action.
6.4 Default in the obligation of VMN for borrowed money, other than
this Loan, which shall continue for a period of sixty (60) days, or any event
that results in acceleration of the maturity of any material indebtedness of VMN
under any note, indenture, contract, or agreement.
6.5 VMN's failure to comply with any material term, obligation,
covenant, or condition contained in this Agreement, within 10 days after the
expiration of all cure periods and receipt of written notice from the Investor
demanding such compliance.
6.6 Any warranty, covenant, or representation made to the Investor by
VMN under this Agreement, proves to have been false in any material respect when
made or furnished.
6.7 Any material levy, seizure, attachment, lien, or encumbrance of
or on the Collateral, other than those existing as
3
<PAGE>
of the date hereof, which is not discharged by VMN within 30 days.
6.8 Any sale, transfer, or disposition of any material interest in
the Collateral, other than in the ordinary course of business, without the
written consent of the Investor.
6.9 Any default that results in acceleration of the maturity of any
indebtedness of VMN in the outstanding principal amount of $50,000 or more,
under any note, indenture, contract or agreement.
7. ACCELERATION.
------------
At the option of the Investor, and without demand or notice, all
principal and any unpaid interest shall become immediately due and payable upon
a default as set forth in Section 6 above. Any reasonable attorneys' fees and
other expenses incurred by the Investor in connection with VMN's bankruptcy or
any of the other events described in Section 6 shall be additional indebtedness
of VMN secured by this Agreement.
8. SECURITY AGREEMENT.
------------------
8.1 GRANT OF SECURITY INTEREST.
--------------------------
VMN, in consideration of the indebtedness described in this Agreement,
hereby grants, conveys, and assigns to the Investors, collectively, for
security, all of VMN's existing and future right, title and interest in the
property listed in Section 8.2 of this Agreement. This security interest is
granted to the Investors, collectively, to secure (a) the payment of the
indebtedness evidenced by the Notes, including all renewals, extensions, and
modification thereof; (b) the payment, performance and observance of all
warranties, obligations, covenants and agreements to be paid, performed or
observed under this Agreement; and the payment of all other sums, with interest
thereon, advanced under the terms of this Agreement.
8.2 PROPERTY.
--------
The property subject to the security interest (the
"Collateral") is as follows:
8.2.1 EQUIPMENT.
---------
All equipment of VMN, other than the equipment and
related software licenses and other tangible and intangible property leased by
VMN from Data General Corporation or its assignee.
4
<PAGE>
8.2.2 ACCOUNTS RECEIVABLE.
-------------------
All of VMN's accounts, chattel paper, contract rights,
commissions, warehouse receipts, bills of lading, delivery orders, drafts,
acceptances, notes, securities and other instruments; documents; and all other
forms of receivables, and all guaranties and securities therefor.
8.2.3 INVENTORY AND OTHER TANGIBLE PERSONAL PROPERTY.
----------------------------------------------
All of VMN's inventory, including all goods,
merchandise, materials, raw materials, work in progress, finished goods, now
owned or hereinafter acquired and held for sale or lease or furnished or to be
furnished under contracts or service agreements or to be used or consumed in
VMN's business and all other tangible personal property of VMN, except as
excluded in 8.2.1.
8.2.4 GENERAL INTANGIBLES.
-------------------
All "general intangibles" (as defined in the Uniform
Commercial Code in effect in the State of California), including, without
limitation, (i) all right, title and interest of VMN in and to all agreements,
leases and contracts to which VMN is or may become a party, (ii) all obligations
or indebtedness owing to VMN from whatever source arising, (iii) all tax
refunds, (iv) all intellectual property, including, without limitation, all
copyrights, copyright applications, copyright licenses, patents, patent
applications, patent licenses, trademarks, trademark applications and trademark
licenses, (v) all computer software, source code, object code, manuals and
instructions, together with all diskettes, tape and any other physical
representation or eminent thereof and (vi) all trade secrets and other
confidential information relating to the business of VMN.
8.2.5 AFTER-ACQUIRED PROPERTY.
-----------------------
All property of the types described in Sections
8.2.1 - 8.2.4, or similar thereto, that at any time hereafter may be acquired
by VMN, including but not limited to all accessions, parts, additions, and
replacements.
8.2.6 PROCEEDS.
--------
All proceeds of the sale or other disposition of any
of the Collateral described or referred to in Sections 8.2.1 - 8.2.5. Sale or
disposition of Collateral is prohibited except as provided herein.
5
<PAGE>
8.3 COVENANTS OF VMN.
----------------
VMN agrees and covenants as follows:
8.3.1 PAYMENT OF PRINCIPAL AND INTEREST.
---------------------------------
VMN shall promptly pay when due the principal of and
interest on the indebtedness evidenced by the Notes, any prepayment and late
charges provided in the Notes, and all other sums secured by this Agreement and
the Notes.
8.3.2 CORPORATE EXISTENCE.
-------------------
VMN is a corporation duly organized and existing under the
laws of the State of Nevada and is duly qualified in every other state in which
it is doing business, except where the failure to be so qualified would not have
a material adverse effect on VMN.
8.3.3 CORPORATE AUTHORITY.
-------------------
The execution, delivery, and performance of this
Agreement, and the execution and payment of the Notes are within VMN's corporate
powers, have been duly authorized, and are not in contravention of law or the
terms of VMN's articles of incorporation and bylaws, or of any indenture,
agreement, or undertaking to which VMN is a party or by which it is bound.
8.3.4 OWNERSHIP OF COLLATERAL.
-----------------------
Except for the security interests in the Collateral
referred to herein, VMN is the sole owner of the Collateral and will defend the
Collateral against the claims and demands of all other persons at any time
claiming the same or any interest therein.
8.3.5 ISSUANCE OF SHARES.
------------------
That the shares of common stock contemplated to be issued
hereby (upon exercise of the Warrants) will be, when issued in accordance with
the terms of the Warrants, duly authorized, fully paid and non-assessable.
8.4 REMOVAL OF COLLATERAL PROHIBITED.
--------------------------------
VMN shall not remove the Collateral from its premises, other than in
the ordinary course of business, without the written consent of the Investor.
8.5 TAXES AND ASSESSMENTS.
---------------------
VMN will pay or cause to be paid promptly when due all taxes and
assessments on the Collateral. VMN may, however,
6
<PAGE>
withhold payment of any tax assessment or claim if a good faith dispute exists
as to the obligation to pay.
8.6 INSURANCE.
---------
VMN shall have and maintain, or cause to be maintained,
insurance at all times with respect to all Collateral except accounts
receivable, against such risks, and in such form, for such periods, and written
by such companies as may be satisfactory to the Investor. All policies of
insurance shall have endorsed a loss payable clause acceptable to the Investor
or such other endorsements as the Investor may from time to time request, and
VMN will promptly provide the Investor upon request with the original policies
or certificates of such insurance. VMN shall promptly notify the Investor of any
loss or damage that may occur to the Collateral. The Investor is hereby
authorized to make proof of loss if it is not made promptly by VMN. All proceeds
of any insurance on the Collateral shall be held by the Investor as a part of
the Collateral. Such proceeds shall be paid out from time to time upon order of
VMN for the purpose of paying the reasonable cost of repairing or restoring the
property damaged. Any proceeds that have not been so paid out within 120 days
following their receipt by the Investor shall be applied to the prepayment of
principal on the Notes according to the terms hereof. In the event of failure to
provide insurance as herein provided, Investor may, at its option, provide such
insurance at VMN's expense.
8.7 PROTECTION OF THE INVESTOR'S SECURITY.
-------------------------------------
If VMN fails to perform the covenants and agreements contained or
incorporated in this Agreement, or if any action or proceeding is commenced
which affects the Collateral or title thereto or the interest of the Investor
therein, including, but not limited to eminent domain, insolvency, code
enforcement, or arrangements or proceedings involving a bankrupt or decedent,
then the Investor may make such appearance, disburse such sums, and take such
action as the Investor deems necessary, in its sole discretion, to protect the
Investor's interest, including but not limited to (i) disbursement of reasonable
attorney's fees, (ii) entry upon VMN's property to make repairs to the
Collateral, and (iii) procurement of satisfactory insurance. Any amounts
disbursed by the Investor pursuant to this Section, with interest thereon, shall
become additional indebtedness of VMN secured by this Agreement. Unless VMN and
the Investor agree to other terms of payment, such amounts shall be immediately
due and payable and shall bear interest from the date of disbursement at the
default rate stated in the Note unless collection from VMN of interest at such
rate would be contrary to applicable law, in which event such amounts shall bear
interest at the highest rate which may be collected from VMN under applicable
law. Nothing contained in this Section shall require the Investor to incur any
expense or take any action.
7
<PAGE>
8.8 INSPECTION.
----------
The Investor may make or cause to be made reasonable entries upon
and inspections of VMN's premises to inspect the Collateral.
8.9 VMN AND LIEN NOT RELEASED.
-------------------------
From time to time, the Investor may, at the Investor's option,
without giving notice to or obtaining the consent of VMN or its successors or
assigns or of any other lienholder or guarantors, without liability on the
Investor's part, and notwithstanding VMN's breach of any covenant or agreement
of VMN in this Agreement, extend the time for payment of said indebtedness or
any part thereof, reduce the payments thereon, release anyone liable on any of
said indebtedness, accept a renewal note or notes therefor, modify the terms and
the time of payment of said indebtedness, release from the lien of this
Agreement any part of the Collateral, take or release other or additional
security, reconvey any part of the Collateral, consent to any plan of the
Collateral, join in any extension or subordination agreement, and agree in
writing with VMN to modify the rate of interest or period of amortization of the
Note or change the amount of any installments payable thereunder. Any actions
taken by the Investor pursuant to the terms of this Section shall not affect the
obligation of VMN or VMN successors or assigns to pay the sums secured by this
Agreement and to observe the covenants of VMN contained herein, shall not affect
the guaranty of any person, corporation, partnership, or other entity for
payment of the indebtedness secured hereby, and shall not affect the lien or
priority of lien hereof on the Collateral. VMN shall pay the Investor a
reasonable service charge, together with such reasonable attorneys' fees as may
be incurred at the Investor's option for any such action if taken at VMN's
request.
8.10 FORBEARANCE BY THE INVESTOR NOT A WAIVER.
----------------------------------------
Any forbearance by the Investor in exercising any right or
remedy hereunder, or otherwise afforded by applicable law, shall not be a waiver
of or preclude the exercise of any right or remedy. The acceptance by the
Investor of payment of any sum secured by this Agreement after the due date of
such payment shall not be a waiver of the Investor's right to either require
prompt payment when due of all other sums so secured or to declare a default for
failure to make prompt payment. The procurement of insurance or the payment of
taxes, rents or other liens or charges by the Investor shall not be a waiver of
the Investor's right to accelerate the maturity of the indebtedness secured by
this Agreement, nor shall the Investor's receipt of any awards, proceeds or
damages as provided in this Agreement operate to cure or waive VMN default in
payment of sums secured by this Agreement.
8
<PAGE>
8.11 UNIFORM COMMERCIAL CODE SECURITY AGREEMENT.
------------------------------------------
This Agreement is intended to be a security agreement pursuant
to the Uniform Commercial Code for any of the items specified above as part of
the Collateral which, under applicable law, may be subject to a security
interest pursuant to the Uniform Commercial Code, and VMN hereby grants the
Investors, collectively, a security interest in said items. VMN agrees to
execute and file financing statements, as well as extensions, renewals and
amendments thereof, and reproductions of this Agreement, and do whatever may be
necessary under the applicable Uniform Commercial Code in the state where the
Collateral is located, to perfect and continue the Investors' interest in the
Collateral, all at VMN's expense. The parties agree that such financing
statements, extensions and renewals may be filed in the name of the Investor and
all other holders of the Notes and AGF, collectively. VMN also agrees that the
Investor may file on behalf of the Investors any appropriate document in the
appropriate index as a financing statement for any of the items specified above
as part of the Collateral. VMN shall pay all costs of filing such financing
statements and any extensions, renewals, amendments, and releases thereof, and
shall pay all reasonable costs and expenses of any record searches for financing
statements the Investor may reasonably require. Without the prior written
consent of the Investor, VMN shall not create or allow to be created, pursuant
to the Uniform Commercial Code, any other security interest in the Collateral
(other than AGF), including replacements and additions thereto. Upon the
occurrence of an event of default, Investor shall have the remedies of a secured
party under the Uniform Commercial Code and, at the Investor's option, may also
invoke the other remedies provided in this Agreement as to such items. In
exercising any of said remedies, the Investor may proceed against the items of
real property and any items of personal property specified above as part of the
Collateral separately or together and in any order whatsoever, without in any
way affecting the availability of the Investor's remedies under the Uniform
Commercial Code or of the other remedies provided in this Agreement.
8.12 RIGHTS OF THE INVESTOR.
----------------------
8.12.1 Upon the occurrence and continuance of an event of
default the Investor may require VMN to assemble the Collateral and make it
available to the Investor at the place to be designated by the Investor which is
reasonably convenient to both parties. The Investor may sell all or any part of
the Collateral as reasonably necessary to satisfy VMN's obligations hereunder to
Investor, as a whole or in parcels wither by public auction, private sale, or
any other reasonable method of disposition. Nothing in this Section 8.12.1 shall
be construed to limit any other of Investor's rights in connection with any and
all of the Collateral as provided herein. The Investor may bid at any public
sale on all or any portion of the Collateral.
9
<PAGE>
Unless the Collateral is perishable or threatens to rapidly decline in value or
is of the type customarily sold on a recognized market, the Investor shall give
VMN reasonable notice of the time and place of any public sale, or of the time
after which any private sale or other disposition of the Collateral is to be
made, and notice given at least 10 days before the time of the sale or other
disposition shall be conclusively presumed to be reasonable. A public sale in
the following fashion shall be conclusively presumed to be reasonable:
8.12.2 Notice shall be given at least 10 days before the date of
sale by mail to VMN and publication once in a newspaper of general circulation
published in the county in which the sale is to be held;
8.12.3 The sale shall be held in a county in which the Collateral or
any part is located or in a county in which VMN has a place of business;
8.12.4 Payment shall be in cash or by certified check immediately
following the close of the sale;
8.12.5 The sale shall be by auction, but it need not be by a
professional auctioneer; and
8.12.6 The Collateral may be sold as is and without any preparation
for sale.
8.13 OBLIGATION TO SELL COLLATERAL.
-----------------------------
Notwithstanding any provision of this Agreement, Investor shall be
under no obligation to offer to sell the Collateral. In the event any Investor
offers to sell the Collateral, there will be no obligation to consummate a sale
of the Collateral if, in Investor's reasonable business judgment, none of the
offers received by it reasonably approximates the fair value of the Collateral.
In the event the Investor elects not to sell the Collateral, Investor may elect
to follow the procedures set forth in the Uniform Commercial Code for retaining
the Collateral in satisfaction of VMN's obligation, subject to VMN's rights
under such procedures.
8.14 RECEIVER.
--------
In addition to the rights under this Agreement, upon the occurrence
and continuance of an event of default by VMN, the Investor shall be entitled to
the appointment of a receiver for the Collateral as a matter of right whether or
not the apparent value of the Collateral exceeds the outstanding principal
amount of the Note.
10
<PAGE>
8.15 WAIVER OF MARSHALING.
--------------------
Notwithstanding the existence of any other security interest in
the Collateral held by the Investor or by any other party, the Investor shall
have the right to determine the order in which any or all of the Collateral
shall be subjected to the remedies provided by this Agreement. The Investor
shall have the right to determine the order in which any or all portions of the
indebtedness secured by this Agreement are satisfied from the proceeds realized
upon the exercise of the remedies provided in this Agreement. VMN, any party who
consents to this Agreement, and any party who now or hereafter acquires a
security interest in the Collateral and who has actual or constructive notice of
this Agreement, hereby waive any and all rights to require the marshaling of
assets in connection with the exercise of any of the remedies permitted by
applicable law or by this Agreement.
9. REMEDIES CUMULATIVE.
-------------------
Each remedy provided in this Agreement is distinct and cumulative to
all other rights or remedies under this Agreement or afforded by law or equity,
and may be exercised concurrently, independently, or successively, in any order.
10. WAIVER OF STATUTE OF LIMITATIONS.
--------------------------------
VMN hereby waives the right to assert any statute of limitations as a
bar to the enforcement of this Agreement or to any action brought to enforce the
Note or any other obligation secured by this Agreement.
11. NOTICES AND DELIVERY.
--------------------
Any notices permitted or required under this Agreement shall be deemed
given upon the date of personal delivery or 72 hours after deposit in the United
States mail, postage fully prepaid, return receipt requested, addressed as
follows:
VMN:
4950 MacArthur Boulevard, Suite 175
Newport Beach, California 92660
Attention: Chief Financial Officer
With a copy to:
O'Melveny & Myers LLP
610 Newport Center Drive, Suite 1700
Newport Beach, California 92660
Attention: David A. Krinsky, Esq.
11
<PAGE>
The Investor:
____________________________
____________________________
____________________________
or at any other address as any party may, from time to time, designate by notice
given in compliance with this Section. Any deliveries required under this
Agreement must be made by personal delivery at the applicable address listed
above.
12. INDEMNIFICATION.
---------------
12.1 GENERAL.
-------
Each party at fault hereto agrees to indemnify, reimburse, and
hold harmless the other party, (the "indemnitee") from and against all claims,
damages, losses, liabilities, demands, suits, judgments, causes of action, civil
and criminal proceedings, penalties, fines, and other sanctions, and any
reasonable attorney fees and other reasonable costs and expenses, arising or
imposed on such other party (collectively "claims"), relating to or arising in
any manner out of:
12.1.1 this Agreement or the breach of any representation,
warranty, or covenant made by the party at fault under this Agreement; or
12.1.2 any issuance, offering, or sale of securities of VMN;
or
12.1.3 any transaction, approval, or document contemplated by
the Agreement.
The parties hereto intend that this Agreement shall provide for
indemnification in excess of that expressly provided for by statute, including
but not limited to, any indemnification provided by VMN's articles of
incorporation, its bylaws, a vote of its shareholders or disinterested
directors, or applicable law.
12.2 DEFINITIONS.
-----------
12.2.1 EXPENSES. For purposes of Section 12, the term
"expenses" shall mean (i) any expense, liability, or loss, including reasonable
attorney fees, judgments, fines, ERISA excise taxes and penalties, and amounts
paid or to be paid in settlement; (ii) any interest, assessments, or other
charges imposed on any of the items in part (i) of this subsection; and (iii)
any federal, state, local, or foreign taxes imposed as a result of the actual or
deemed receipt of any payments under this Agreement paid or incurred in
connection with investigating, defending, being a witness in, participating in
(including on
12
<PAGE>
appeal), or preparing for any of the foregoing in any proceeding relating to any
indemnifiable event.
12.3 MANDATORY INDEMNIFICATION. Notwithstanding any other provision
-------------------------
of this Agreement, to the extent that the indemnitee has been successful on the
merits in defense of any proceeding relating in whole or in part to an
indemnifiable event or in defense of any issue or matter in such proceeding, the
indemnitee shall be indemnified against all reasonable expenses incurred in
connection with such whole or part, as the case may be.
12.4 PARTIAL INDEMNIFICATION. If the indemnitee is entitled under
-----------------------
any provision of this Agreement to indemnification by a party for a portion of
expenses, but not for the total amount of expenses, that party shall indemnify
the indemnitee for the portion to which the indemnitee is entitled.
12.5 INDEMNIFICATION PAYMENT. The indemnitee shall receive
-----------------------
indemnification of expenses in accordance with this Agreement as soon as
practicable after the indemnitee has made written demand for indemnification.
If the indemnitee has not received full indemnification within 30 days after
making a demand in accordance with the terms hereof, the indemnitee shall have
the right to enforce its indemnification rights under this Agreement by
commencing arbitration per the terms of this Agreement seeking an initial
determination. The parties hereby consent to service of process and to appear
in any such proceeding. The remedy provided for in this Section shall be in
addition to any other remedies available to the indemnitee in law or equity.
12.6 CONSENT. A party shall not settle any proceeding in any manner
-------
that would impose any penalty or limitation on the indemnitee without the
indemnitee's written consent. Neither party will unreasonably withhold their
consent to any proposed settlement. A party at fault shall not be liable to
indemnify the indemnitee under this Agreement with regard to any judicial award
if the party at fault was not given a reasonable and timely opportunity, at its
expense, to participate in the defense of such action; however, the party's
liability under this Agreement shall not be excused if participation in the
proceeding by the party was barred by this Agreement.
12.7 DEFENSE. In the event of any controversy or claim arising out
-------
of this Agreement or the breach of the Agreement for which indemnification is
available, the indemnitee may tender a defense to the party at fault, who hereby
agrees to promptly evaluate such defense. If the party at fault agrees to
defend against such controversy or claim, the indemnitee shall notify the party
at fault within thirty (30) days of the indemnitee's receipt of any written
instrument or pleading relating to any such controversy or claim arising out of
this Agreement or the
13
<PAGE>
breach of this Agreement. If timely acceptance of tender is not forthcoming,
the indemnitee may, at the expense of the party at fault, retain its own counsel
and the party at fault is not released of its obligations to otherwise indemnify
the indemnitee.
13. INVESTOR'S REPRESENTATIONS AND WARRANTIES.
-----------------------------------------
13.1 ACCREDITED INVESTOR. The Investor represents and warrants that
-------------------
he or she is an Accredited Investor as that term is defined in Rule 501(a) of
Regulation D as promulgated by the Securities and Exchange Commission under the
Securities Act of 1933 (the "1933 Act") and is willing and able to bear the
economic risk of an investment herein. The Investor has adequate means of
providing for current needs and current contingencies, has no need for liquidity
in the investment, and is able to bear the economic risk of an investment in the
Company of the size contemplated.
13.2 ACQUIRED FOR INVESTMENT. The Investor represents and warrants
-----------------------
that the Notes and Warrants are being acquired by the Investor in good faith for
investment and not with a view to or for sale in connection with any
distribution. The Investor understands and agrees that he/she must hold the
Notes and Warrants (or shares if the Warrants are exercised) indefinitely unless
they are subsequently registered under the 1933 Act or an exemption from
registration is available.
14. ENTIRE AGREEMENT.
----------------
This Agreement, the Note, and the Warrant, and all exhibits and
attachments thereto, contains the entire understanding between and among the
Parties and supersedes any prior understandings and agreements among them
respecting the subject matter of this Agreement.
15. SURVIVAL OF SPECIFIC OBLIGATIONS.
--------------------------------
The rights and obligations created by Section 12 with respect to the
duties to indemnify shall survive termination of this Agreement and will
continue into perpetuity.
16. AGREEMENT BINDING.
-----------------
This Agreement shall be binding upon the heirs, executors,
administrators, successors and assigns of the Parties hereto.
17. AMENDMENT AND MODIFICATION.
--------------------------
Subject to applicable law, this Agreement may be amended, modified, or
supplemented only by a written agreement
14
<PAGE>
signed by the Parties, including an extension of the maturity date for the Note.
18. ATTORNEY FEES.
-------------
In the event arbitration is brought by any party under this Agreement
to enforce any of its terms, it is agreed that the prevailing party shall be
entitled to reasonable attorney fees to be fixed by the arbiter(s).
19. ARBITRATION.
-----------
If at any time during the term of this Agreement any dispute,
difference, or disagreement shall arise upon or in respect of the Agreement, and
the meaning and construction hereof, every such dispute, difference, and
disagreement shall be referred to a single arbiter agreed upon by the Parties,
or if no single arbiter can be agreed upon, an arbiter or arbiters shall be
selected in accordance with the rules of the American Arbitration Association
and such dispute, difference, or disagreement shall be settled by binding
arbitration ion accordance with the then prevailing commercial rules of the
American Arbitration Association, and judgment upon the award rendered by the
arbiter may be entered in any court having jurisdiction thereof. The parties
hereto each jointly and severally waive any and all rights to appeal the
judgement or award of such arbiter(s).
20. LAW GOVERNING.
-------------
This Agreement shall be governed by and construed in accordance with
the laws of the State of California, except to the extent of Nevada statutory
law related to the set-up and existence of the Company.
21. TITLES AND CAPTIONS.
-------------------
All section titles or captions contained in this Agreement are for
convenience only and shall not be deemed part of the context nor effect the
interpretation of this Agreement.
22. FURTHER ACTION.
--------------
The Parties hereto shall execute and deliver all documents, provide
all information and take or forbear from all such action as may be necessary or
appropriate to achieve the purposes of the Agreement.
23. INTERCREDITOR AGREEMENT.
-----------------------
a. Section 3. The parties agree that the first sentence of
---------
Section 3 of the Intercreditor Agreement is hereby amended to read as
follows:
15
<PAGE>
"3. Enforcement Action. Each of the Lenders agrees not to commence
------------------
Enforcement (as defined below) prior to (i) such Lender's receipt of the
consent of Lenders representing more than 50% (including the percentage
held by such Lender) aggregate principal amount of money loaned to
Borrower pursuant to the Loan Documents and (ii) such Lender's delivery to
each of the other Lenders of an Enforcement Notice."
b. Section 19. Section 19 of the Intercreditor Agreement is
----------
hereby added in its entirety to read as follows:
"19. Investor Exhibit. Exhibit A attached hereto sets
----------------
forth a list of Investors under this Agreement.
c. Exhibit A. Exhibit A to the Intercreditor shall be in the
---------
form attached hereto as Attachment 1, as amended from time to time.
INVESTOR
Dated: _________, 1997 By: _______________________________
Name: ____________________________
Title: ____________________________
VIRTUAL MORTGAGE NETWORK, INC.,
a Nevada corporation
Dated: _________, 1997 By: _______________________________
Name: ____________________________
Title: ____________________________
16
<PAGE>
ATTACHMENT 1
VIRTUAL MORTGAGE NETWORK, INC.
BRIDGE FINANCING INVESTORS
<TABLE>
<CAPTION>
AMOUNT FROM ADDRESS
- ------ ---- -------
<S> <C> <C>
$75,000 Maritime Global Subsidiary I, Ltd. 2050 Center Ave., Ste. 300
Fort Lee, NJ 07024
$40,000 BP Institutional Partners, L.P. 2050 Center Ave., Ste. 300
Fort Lee, NJ 07024
$385,000 Boston Provident Partners, L.P. 2050 Center Ave., Ste. 300
Fort Lee, NJ 07024
$50,000 Anacapa Venture Partners 10600 N. Deanza Blvd.
Ste. 215
Cupertino, CA. 95014
$50,000 Randall C. Fowler 210 Yerba Buena Ave.
Los Altos, CA. 94022
$25,000 Andrew J. Malik 10600 N. Deanza Blvd.
Ste. 215
Cupertino, CA. 95014
$75,000 Daystar Partners, L.P. 10600 N. Deanza Blvd.
Ste. 215
Cupertino, CA. 95014
$50,000 Vance Driscoll 522 Clearview Dr.
Los Gatos, CA. 95030
$25,000 Steven Nemirov 1050 Lorain Place
Los Gatos, CA. 95030
$50,000 Robert Weiss 17121 Los Robles Way
Los Gatos, CA. 95032
$50,000 James P. Scullion 15820 Bruce Ct.
Monte Sereno, CA 95030
</TABLE>
Attachment 1-1
<PAGE>
<TABLE>
AMOUNT FROM ADDRESS
- ------ ---- -------
<S> <C> <C>
$600,000 Sundance Venture Partners, L.P. One Arizona Center
400 E. Van Buren, Ste. 750
Phoenix, AZ. 85004
$300,000 American Growth Fund 1455 E. Tropicana Ave.
Ste. 100
Las Vegas, NV 89119
$1,000,000 Moore Global Investments, Ltd. 1251 Ave of the Americas
53rd Floor
New York, NY 10020
$500,000 St. James Capital Partners, L.P. c/o St. James Capital
Corp.
5599 San Felipe, 3rd Floor
Houston, Texas 77056
</TABLE>
*** AN UPDATED LIST OF INVESTORS IS AVAILABLE FROM THE COMPANY AT ANY TIME AT
THE REQUEST OF THE INVESTOR.
Attachment 1-2
<PAGE>
EXHIBIT 10.36
PROMISSORY NOTE
---------------
Dated as of
___________, 1997
Amount: $_______________
FOR VALUE RECEIVED, the undersigned Virtual Mortgage Network, Inc., a
Nevada corporation ("Maker"), promises to pay to the order of _______________
("Lender"), the principal sum of $___________, together with interest on the
unpaid principal balance on the earlier of (i) March 6, 1997, or (ii)
consummation of an initial public offering ("IPO") of the securities of the
Maker (the "Maturity Date"), except as set forth in Section 3 below.
1. INTEREST RATE.
-------------
The unpaid principal under this Promissory Note shall bear interest at
a rate of twelve percent (12%) per annum simple interest. Upon the Maker's
failure to pay amounts due on the Maturity Date, the interest rate on this Note
shall increase to fifteen percent (15%) per annum.
2. COMPUTATION.
-----------
Interest chargeable hereunder shall be calculated from the date
hereof, and if increased to 15% pursuant to Section 1, from the Maturity Date,
on the basis of a three hundred sixty (360) day year for the actual number of
days elapsed. Interest not paid when due shall be added to the unpaid principal
balance and shall thereafter bear interest at the same rate as principal. All
payments (including prepayments) hereunder are to be applied first to the
payment of accrued interest and the balance remaining applied to the payment of
principal.
3. PAYMENTS.
--------
Except as otherwise set forth herein, the unpaid principal under this
Promissory Note plus all accrued but unpaid interest thereon shall be payable
upon the Maturity Date. If the Maker has not repaid the principal amount
together with interest on the Maturity Date pursuant to Section 1, the Maker
then agrees to repay the principal amount together with accrued interest
hereunder in equal monthly payments of principal and interest at fifteen percent
(15%) per annum over a twelve month period. The
<PAGE>
first installment of such payments of principal and interest shall be due on
April 6, 1997.
4. VOLUNTARY PREPAYMENT.
--------------------
Maker may, at any time, upon five (5) Business Days prior written
notice to Lender, prepay the unpaid principal amount evidenced by this
Promissory Note, in whole or in part, without penalty or premium, by paying to
Lender, in cash or by wire transfer or immediately available federal funds, the
amount of such prepayment. If any such prepayment is less than a full
repayment, then such prepayment shall be applied first to the payment of accrued
interest and the balance remaining applied to the payment of principal.
5. LAWFUL MONEY; DESIGNATED PLACES OF PAYMENT.
------------------------------------------
All principal and interest due hereunder is payable in lawful money of
the United States of America, in immediately available funds, at Lender's
designated address not later than 6:00 p.m., Pacific time, on the day of
payment.
6. WAIVERS.
-------
Except as set forth elsewhere herein, Maker, for itself and its legal
representatives, successors, and assigns, expressly waives presentment, protest,
demand, notice of dishonor, notice of nonpayment, notice of maturity, notice of
protest, notice of intent to accelerate, notice of acceleration, presentment for
the purpose of accelerating maturity, and diligence in collection.
7. DEFAULT.
-------
Maker will be in default if any of the following happens: a) Maker
fails to make payments when due, (b) Maker breaks any promise made herein to
Lender, or Maker fails to perform at the time and strictly in the manner
provided in this Note, (c) any representation or statement made or furnished to
Lender by Maker or on Maker's behalf is false or misleading in any material
respect, (d) Maker becomes insolvent, a receiver is appointed for any part of
Maker's property, Maker makes an assignment for the benefit of creditors, or any
proceeding is commenced either by Maker or against Maker under any bankruptcy or
insolvency laws, and (e) any creditor tries to take any of Maker's property on
or in which Lender has a lien or security interest. It is expressly agreed
that, upon the occurrence of an event of default, as defined herein, the unpaid
principal balance of this promissory note, together with interest accrued
hereon, shall be due and payable without presentment, demand, protest, or notice
of protest, all of which are hereby expressly waived.
2
<PAGE>
8. SECURITY INTERESTS.
------------------
It is further understood that this Note is secured by, among other
things, security interests granted to Lender under other agreements.
9. ATTORNEYS' FEES.
---------------
In the event it should become necessary to employ counsel to collect
this Promissory Note, Maker agrees to pay the reasonable attorneys' fees and
costs of the holder hereof, incurred in connection with the holder's collection
efforts, irrespective of whether suit is brought.
10. SECTION HEADINGS.
----------------
Headings and numbers have been set forth for convenience only. Unless
the contrary is compelled by the context, everything contained in each paragraph
applies equally to this entire Promissory Note.
11. AMENDMENTS IN WRITING.
---------------------
This Promissory Note may be changed, modified, amended, only in
writing.
12. CHOICE OF LAW
-------------
This Promissory Note and all transactions hereunder and/or evidenced
hereby shall be governed by, construed under, and enforced in accordance with
the laws of the State of California.
13. WAIVER OF TRIAL BY JURY.
-----------------------
Maker hereby waives, to the extent permitted under applicable law, any
right to trial by jury in any action or proceeding relating to this Promissory
Note.
14. TRANSFERABILITY.
---------------
The right to principal and interest under this Promissory Note may be
transferred only through a book entry system maintained by Maker. Any other
means of transfer, including, without limitation, transfers by endorsement,
shall be null and void. Ownership of the obligation must be reflected in a book
entry. A book entry is a record of ownership that identifies the owner of an
interest in this Promissory Note.
3
<PAGE>
Made and Executed at
Newport Beach, California Virtual Mortgage Network, Inc.,
a Nevada corporation
By: _______________________________________
Name: _____________________________________
Title: ____________________________________
4
<PAGE>
EXHIBIT 10.37
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE BEEN ACQUIRED FOR INVESTMENT FOR
THE HOLDER'S OWN ACCOUNT AND NOT WITH A VIEW TO OR FOR SALE IN CONNECTION WITH
ANY DISTRIBUTION OF THE SECURITIES. THE SECURITIES HAVE NOT BEEN REGISTERED OR
QUALIFIED UNDER THE SECURITIES ACT OF 1933 ("SECURITIES ACT") OR UNDER ANY
APPLICABLE STATE SECURITIES LAWS ("BLUE SKY LAWS"). AN OFFER TO SELL OR
TRANSFER OR THE SALE OR TRANSFER OF THESE SECURITIES IS UNLAWFUL UNLESS MADE
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR PERMIT, AS APPLICABLE, UNDER
THE SECURITIES ACT OR APPLICABLE BLUE SKY LAWS OR UNLESS AN EXEMPTION FROM
REGISTRATION AND/OR QUALIFICATION UNDER THE SECURITIES ACT AND APPLICABLE BLUE
SKY LAWS IS AVAILABLE AND AN OPINION OF COUNSEL OR OTHER EVIDENCE REASONABLY
SATISFACTORY TO THE COMPANY IS PROVIDED TO THE COMPANY TO THE EFFECT THAT SUCH
REGISTRATION OR QUALIFICATION IS NOT REQUIRED UNDER THE SECURITIES ACT AND
APPLICABLE BLUE SKY LAWS.
Warrant No. 96-___
COMMON STOCK PURCHASE WARRANT
____________, 1997
THIS CERTIFIES THAT, for value received, ________________________
("Warrantholder") is entitled to subscribe for and purchase from Virtual
Mortgage Network, Inc., a Nevada corporation (the "Company"), that number of
shares of the Company's Common Stock, $.001 par value, established in Section
4(b) hereof ("Warrant Stock") at the Exercise Price (as hereafter determined
under Section 4) at any time from the date hereof to and including the
Expiration Date (as defined below), subject to the terms and conditions stated
herein. For purposes of this Warrant, the term "Expiration Date" shall mean
five years from the date hereof.
1. EXERCISE OF WARRANT.
-------------------
(a) The rights represented by this Warrant may be exercised, in whole or
in part (subject to the minimum exercise limitation set forth in this Section
1), by the holder hereof before the time of the Company's initial public
offering of its Common Stock ("IPO"). This Warrant shall be deemed
automatically exercised at the time of the Company's IPO in accordance with
Section 8 hereof. This Warrant may be exercised by the surrender of this
Warrant and delivery of an executed Subscription Agreement in the form attached
hereto as Exhibit A to the Company at its principal executive office, or such
other place as the Company shall designate in writing, accompanied by payment
for the Warrant Stock so subscribed for in cash or certified bank or cashier's
checks. In the event of a partial exercise of this Warrant, a substitute
Warrant representing the number of shares
<PAGE>
of Warrant Stock which were not acquired upon the exercise of the Warrant shall
be issued to the holder of this Warrant. No exercise of this Warrant may be
made for less than one-third of the number of shares of Warrant Stock initially
subject to this Warrant.
(b) Notwithstanding the provisions of Section 1(a) requiring payment by
cash or check, the Warrantholder may elect to make payment of the exercise
price, or any portion thereof, by delivering for cancellation securities of the
Company (including the unexercised portion of this Warrant) outstanding prior to
the exercise of this Warrant, with such securities to be credited toward such
exercise price at the fair market value (as determined below) of the securities,
in which event the certificates evidencing the securities delivered shall
accompany the notice of exercise and shall be duly endorsed or accompanied by
duly executed stock powers to transfer the same to the Company; provided,
however, that such payment in securities instead of cash or check shall not be
effective and shall be rejected by the Company if the Company is then prohibited
by applicable law from purchasing or acquiring the tendered securities.
If the Company rejects the payment in securities, the tendered notice of
exercise shall not be effective hereunder unless promptly after being notified
of such rejection the Warrantholder pays the purchase price in cash. For
purposes of this Section 1(b), the fair market value of securities delivered
upon exercise of the Warrant shall (i) if "publicly traded" (as defined below),
be valued at the average of the closing prices for the securities for the 30-day
period immediately preceding the delivery to the Company of the certificate(s)
evidencing such securities or (ii) if not publicly traded, be valued in good
faith by the Board of Directors of the Company; provided, however, that if in
the good faith judgement of the Warrantholder the valuation established by the
Board of Directors under this clause (ii) does not reasonably reflect the fair
market value of the securities to be delivered in exercise of this Warrant, then
the determination of fair market value shall be made by an independent appraiser
or investment banking institution mutually acceptable to the Company and to the
Warrantholder (or, if such selection cannot be made by the Company and the
Warrantholder, by an independent appraiser or investment banking firm selected
by the American Arbitration Association in accordance with its rules), with the
fees and expenses of such independent appraiser or investment banking
institution to be paid by the Warrantholder. For purposes of the preceding
sentence, the "closing prices" shall mean the closing prices of securities of
the class and series of securities delivered as reported with respect to the
market (or the composite of the markets, if more than one) in which such
securities are then traded, or if no such closing prices are reported, the
lowest independent offer quotation reported therefor in Level 2 of NASDAQ for
trading days
2
<PAGE>
during the applicable 30-day averaging period. "Publicly traded" means a
security which is listed or admitted to unlisted trading privileges on a
national securities exchange or as to which sales or bid and offer quotations
are reported in the automated quotation system ("NASDAQ") operated by the
National Association of Securities Dealers, Inc.
2. INVESTMENT REPRESENTATION. The holder by accepting this Warrant
-------------------------
represents that the Warrant is acquired for the holder's own account for
investment purposes and not with a view to any offering or distribution and that
the holder has no present intention of selling or otherwise disposing of the
Warrant or the Warrant Stock in violation of applicable securities laws. Upon
exercise, the holder will confirm, in respect of securities obtained upon such
exercise, that the holder is acquiring such securities for the holder's own
account and not with a view to any offering or distribution in violation of
applicable securities laws. The holder acknowledges that the certificate(s)
representing the Warrant Stock issued upon exercise of this Warrant shall be
endorsed with the legend set forth on this Warrant and all other legends, if
any, required by applicable federal, state and foreign securities laws to be
placed on the certificate(s).
3. VALIDITY OF WARRANT STOCK. The Company warrants and agrees that all
-------------------------
shares of Warrant Stock which may be issued upon the exercise of this Warrant
will, upon issuance, be validly issued, fully paid and nonassessable and free
from all taxes, liens and charges with respect to the issue thereof. The
Company further warrants and agrees that during the period within which this
Warrant may be exercised, the Company will at all times have authorized and
reserved a sufficient number of shares of Warrant Stock to provide for the
exercise of this Warrant.
4. EXERCISE PRICE; NUMBER OF WARRANT SHARES.
----------------------------------------
(a) The Exercise Price shall initially be $0.001 per share of Warrant
Stock.
(b) The number of shares of Warrant Stock to be issued upon exercise of
this Warrant shall be that number of whole shares with aggregate value of
approximately $__________ using conventional rounding, with the value of each
share calculated as follows:
(i) if the initial Public Offering of the Company's Common Stock
occurs prior to March 6, 1997, the value of each share shall be such Public
Offering price; or
(ii) if the initial Public Offering of the Company's Common Stock
does not occur prior to March 6, 1997, the value of each share shall be $4
(four) per share.
3
<PAGE>
(c) Upon occurrence of any of the following, the Exercise Price and
the number of shares of Warrant Stock to be issued upon exercise of this Warrant
shall be adjusted as follows:
(i) If at any time after the date hereof the number of shares of
Common Stock outstanding is increased by a stock dividend payable in shares
of Common Stock or by a subdivision or split-up of shares of Common Stock,
then, on the record date of such stock dividend, subdivision, or split-up,
the Exercise Price shall be appropriately decreased and the number of
shares of Warrant Stock issuable on exercise of this Warrant shall be
appropriately increased in proportion to such increase of outstanding
shares.
(ii) If at any time after the date hereof the number of shares
of Common Stock outstanding is decreased by a combination of the
outstanding shares of Common Stock, then, on the effective date of such
combination, the Exercise Price shall be appropriately increased and the
number of shares of Warrant Stock issuable on exercise of this Warrant
shall be appropriately decreased in proportion to such decrease in
outstanding shares.
(d) All calculations under this Section 4 shall be made to the
nearest cent or to the nearest whole share, as the case may be. No fractional
shares of Warrant Stock shall be issued upon exercise of this Warrant. Any
fractional shares of Warrant Stock which might otherwise be issued upon exercise
of this Warrant shall be rounded to the nearest whole share (with one-half
rounded up).
(e) If the Exercise Price shall be adjusted, the Company shall
prepare and mail to the holder hereof a certificate setting forth the event
requiring the adjustment, the amount of the adjustment, the method by which the
adjustment was calculated, and (after giving effect to the adjustment) the
Exercise Price.
(f) A calculation of any adjustment under this Section 4 evidenced by
a certificate of any firm of independent certified public accountants of
recognized standing selected by the Company and satisfactory to the holder
hereof (which may be the firm of independent certified public accountants
regularly employed by the Company) shall be presumed a correct calculation of
the adjustment for purposes of this Section 4. The foregoing presumption shall
constitute a rebuttable presumption, with the party disputing the calculation
bearing the burden of proving the incorrectness of the calculation.
4
<PAGE>
5. NOTICE OF CERTAIN EVENTS. If at any time:
------------------------
(a) The Company shall declare any dividend upon the Common Stock,
whether payable in cash, property or capital stock, or make any distribution to
the holders of Common Stock;
(b) There shall be any recapitalization or reclassification of the
capital stock of the Company, or consolidation or merger of the Company with
another corporation;
(c) There shall be a voluntary or involuntary dissolution, liquidation
or winding up of the Company; or
(d) The Company shall propose to enter into a Terminating Transaction
not covered by the preceding paragraphs (a) through (c),
then, in each such case, the Company shall give to the holder of this Warrant at
the holder's address registered on the books of the Company, not less than 20
days' prior written notice of the proposed event, by first class certified mail,
postage prepaid and return receipt requested, of (x) the date on which the books
of the Company shall close or a record shall be taken for purposes of
ascertaining which stockholders will be entitled to vote on such
reclassification, reorganization, consolidation, merger, dissolution,
liquidation or winding up, as the case may be; (y) the date on which the vote
shall be taken concerning such reclassification, reorganization, consolidation,
merger, dissolution, liquidation or winding up, as the case may be; and (z) the
date on which such dividend or distribution is to be paid or such
reclassification, reorganization, consolidation, merger, dissolution,
liquidation or winding up, as the case may be, is to be effective. Such notice
shall also specify the date as of which the record holders of capital stock of
the Company shall participate in said dividend or distribution or shall be
entitled to exchange their shares of capital stock for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, dissolution, liquidation or winding up, as the case may be.
For purposes of this Section 5, the term "Terminating Transaction"
shall mean any one of the following events: (a) the dissolution or liquidation
of the Company; (b) a reorganization, merger, or consolidation of the Company
with one or more entities, as a result of which the Company goes out of
existence or becomes a subsidiary of another entity (which shall be deemed to
have occurred if another entity, group of entities or persons acting in concert
shall own, directly or indirectly, more than 50% of the aggregate voting power
of all outstanding equity securities of the Company); or (c) a sale of all or
substantially all of the Company's assets.
5
<PAGE>
6. TRANSFER OF WARRANT.
-------------------
(a) Subject to Section 6(b) below, the holder of this Warrant
agrees to give the Company not less than 30 days' prior written notice before
transferring this Warrant. The foregoing notice shall describe the manner of any
proposed transfer of this Warrant or any interest therein and the consideration
to be received by the holder. The Company shall have a right of first refusal
(for 30 days after receipt of the holder's notice) to purchase this Warrant at
the same price and on the same terms offered by a third party if this Warrant is
proposed to be transferred.
(b) Notwithstanding the Company's right of first refusal set
forth in Section 6(a), this Warrant, in whole or in part, may be freely and
successively assigned, held in trust or otherwise transferred to or in favor of
any Warrantholder Associate (as hereinafter defined). Each assignment of this
Warrant shall be deemed a partitioned right which is separately enforceable by
the assignee, transferee or other beneficiary. Each assignee, transferee or
other beneficiary shall be entitled to the full benefit of the Warrant assigned,
subject to any conditions to which the Warrant is subject and provided always
that such assignee, transferee or other beneficiary shall carry out all the
obligations, liabilities and responsibilities of the holder of the Warrant
hereunder. No company or other entity may enjoy the benefit of any Warrant after
the company or entity has first ceased to be a Warrantholder Associate. For
purposes of this Section 6(b), a "Warrantholder Associate" means any person
controlling, controlled by, or under common control with the initial
Warrantholder.
(c) No transfer or assignment of this Warrant shall be made
without compliance with the provisions of Section 2 and the legend set forth on
the first page of this Warrant.
(d) Notwithstanding the provisions of Section 6(b) above, this
Warrant may not be assigned, held in trust, or otherwise transferred to any
Warrantholder Associate in amounts of less than one-third of the number of
shares subject to this Warrant.
7. NO STOCKHOLDER RIGHTS. This Warrant shall not entitle the holder
---------------------
hereof to any voting rights or other rights as a stockholder of the Company, or
to any other rights whatsoever except the rights herein expressed, and no cash
dividend paid out of earnings or surplus or interest shall be payable or accrue
in respect of this Warrant or the interest represented hereby or the shares
which may be subscribed for and purchased hereunder until and unless and except
to the extent that the rights represented by this Warrant shall be exercised.
6
<PAGE>
8. REGISTRATION OF WARRANT STOCK.
-----------------------------
If at any time after the date hereof, the Company files a
registration statement pursuant to an initial public offering of its securities
("IPO"), the Company agrees to file concurrently therewith a parallel
registration statement on Form S-1 or on a form of general use then in effect
under the Securities Act of 1933, as amended ("Securities Act"), and available
for use by the Company to register the Warrant Stock issuable to the
Warrantholder. Upon the effectiveness of the registration statement (which
effectiveness shall occur concurrently with the effectiveness of the IPO
registration statement), any Warrants not already exercised shall be deemed
automatically exercised in full and the registered shares of Warrant Stock shall
be issued to the Warrantholder. The Company agrees to keep such parallel
registration statement effective for up to one year from the date of
effectiveness to the extent reasonably necessary (as determined by legal counsel
to the holder of the Warrant Stock) to permit any desired resale of such Warrant
Stock. The Warrantholder agrees not to sell, transfer or otherwise dispose of
any Warrant Stock for a period of 120 days from the date of effectiveness of the
parallel registration statement and shall enter into a customary lock-up
agreement with the underwriters in the IPO to such effect. The Warrantholder
agrees that stop transfer instructions may be given to the Company's transfer
agent regarding the foregoing lock-up arrangement.
9. MISCELLANEOUS MATTERS.
---------------------
(a) As used herein, the term "Warrant Stock" shall mean the
Company's presently authorized Common Stock par value $.001, and stock of any
other series or class into which such presently authorized Common Stock may
hereafter have been converted or changed pursuant to any recapitalization or
change in such Common Stock.
(b) As used herein, the word "person" shall mean an individual or
entity.
(c) This Warrant and the name and address of the holder will be
registered in a Warrant Register that is kept at the principal office of the
Company, and the Company may treat the holder so registered as the owner of this
Warrant for all purposes.
(d) This Warrant shall be governed by and interpreted in
accordance with the internal laws, and not the law of conflicts, of the State of
California.
7
<PAGE>
IN WITNESS WHEREOF, the Company has executed this Warrant effective as
of the date first written above.
VIRTUAL MORTGAGE NETWORK, INC.
A NEVADA CORPORATION
By: _______________________________
Name: _________________________
Title: ________________________
8
<PAGE>
EXHIBIT A
SUBSCRIPTION AGREEMENT
___________________, 19___
To: Virtual Mortgage Network, Inc.
The undersigned, pursuant to the provisions set forth in Warrant No.
96-__, hereby agrees to subscribe for and purchase _____________ shares of the
Warrant Stock covered by such Warrant, and makes payment herewith in full for
such Warrant Stock at the Exercise Price.
Signature: ________________________
Printed Name
and Title: ________________________
Address: __________________________
------------------------------
------------------------
A-1
<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED ____________________________ hereby sells, assigns
and transfers all of the rights of the undersigned under Warrant No. 96-__, with
respect to the number of shares of Warrant Stock covered thereby set forth below
unto:
Name of Assignee Address No. of Shares
________________ _______ _____________
________________ ______________________________ _____________
______________________________
Dated: ____________________, 19___
Signature: ________________________
Printed Name
and Title: ________________________
Address: __________________________
__________________________
__________________________
A-2
<PAGE>
EXHIBIT 10.38
MORTGAGE LOAN PURCHASE AGREEMENT
--------------------------------
PURCHASER: PAINE WEBBER REAL ESTATE SECURITIES INC.
ADDRESS: 1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
ATTENTION: AL MARRAPODI
SELLER: Sutter Mortgage Corp. DBA Parkside Financial
------------------------------
ADDRESS: 1556 Parkside Drive
------------------------------
Walnut Creek, CA 94596
------------------------------
______________________________
DATE OF AGREEMENT: June 3, 1994
------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Section 1. Definitions................................................ 1
Section 2. Procedures for Purchases of Mortgage Loans................. 7
Section 3. Sale of Mortgage Loans to the Agency....................... 8
Section 4. Servicing of the Mortgage Loans............................ 10
Section 5. Trade Assignments.......................................... 11
Section 6. Transfers of Mortgage Loan by Purchaser.................... 11
Section 7. Record Title to Mortgage Loans; Intent of Parties; Security
Interest................................................... 12
Section 8. Representations and Warranties............................. 12
Section 9. Covenants of Seller........................................ 17
Section 10. Term....................................................... 20
Section 11. Exclusive Benefit of Parties; Assignment................... 20
Section 12. Amendments; Waivers; Cumulative Rights.................... 20
Section 13. Execution in Counterparts.................................. 20
Section 14. Effect of Invalidity of Provisions......................... 20
Section 15. Governing Law.............................................. 20
Section 16. Notices.................................................... 21
Section 17. Entire Agreement........................................... 21
Section 18. Costs of Enforcement....................................... 21
Section 19. Consent to Service......................................... 21
Section 20. Construction............................................... 21
</TABLE>
i
<PAGE>
Exhibit A-1 Loan Purchase Detail
Exhibit A-2 Takeout Proceeds Identification Letter
Exhibit A-3 Unidentified Funds Notice
Exhibit A-4 Resubmission Letter
Exhibit B-1 Warehouse Lender's Release
Exhibit B-2 Warehouse Lender's Wire Instructions
Exhibit C-1 Seller's Release
Exhibit C-2 Seller's Wire Instructions
Exhibit D Purchaser's Wire Instructions to Seller
Exhibit E UCC-1 Financing Statement
ii
<PAGE>
MORTGAGE LOAN PURCHASE AGREEMENT
--------------------------------
This Mortgage Loan Purchase Agreement ("Agreement"), dated as of the
date set forth on the cover page hereof, between PAINE WEBBER REAL ESTATE
SECURITIES INC. ("Purchaser") and the Seller whose name is set forth on the
cover page hereof ("Seller").
PRELIMINARY STATEMENT
---------------------
Seller may, in its sole discretion, offer to sell to Purchaser from
time to time Mortgage Loans, and Purchaser, in its sole discretion, may agree to
purchase such Mortgage Loans from Seller in accordance with the terms and
conditions set forth in this Agreement. Seller, subject to the terms hereof,
will cause each Mortgage Loan to be purchased by the Agency. During the period
from the purchase of a Mortgage Loan to the sale of the Mortgage Loan to the
Agency, Purchaser expects to rely entirely upon Seller to service each such
Mortgage Loan.
The parties hereto hereby agree as follows:
Section 1. Definitions.
------------
Capitalized terms used but not defined herein shall have the meanings
set forth in the Custodial Agreement. As used in this Agreement, the following
terms shall have the following meanings:
"Act of Insolvency": With respect to Seller, (a) the
commencement by Seller as debtor of any case or proceeding under any
bankruptcy, insolvency, reorganization, liquidation, dissolution or
similar law, or Seller's seeking the appointment of a receiver,
trustee, custodian or similar official for Seller or any substantial
part of its property, or (b) the commencement of any such case or
proceeding against Seller, or another's seeking such appointment, or
the filing against Seller of an application for a protective decree
which (1) is consented to or not timely contested by Seller, (2)
results in the entry of an order for relief, such an appointment, the
issuance of such a protective decree or the entry of an order having a
similar effect, or (3) is not dismissed within sixty (60) days, (c)
the making by Seller of a general assignment for the benefit of
creditors, or (d) the admission in writing by Seller that Seller is
unable to pay its debts as they become due or the nonpayment generally
by Seller of its debts as they become due.
"Agency": FNMA or FHLMC, as applicable.
"Assignee": Chemical Bank, as agent for certain beneficiaries
pursuant to certain Repurchase Transaction Tri-Party Custody
Agreements.
<PAGE>
"Applicable Guide": The Freddie Mac Sellers' Guide, or the
------------------------------
Fannie Mae Selling Guide, as applicable, and as each may be amended or
------------------------
supplemented from time to time.
"Business Day": Any day other than (a) a Saturday, Sunday or
other day on which banks located in the City of New York, New York are
authorized or obligated by law or executive order to be closed, or
(b) any day on which Paine Webber Real Estate Securities Inc. is
closed for business, provided that notice thereof shall have been
given not less than seven calendar days prior to such day.
"Cash Window Submission Package": As defined in the Custodial
Agreement.
"Collateral": The Mortgage Loans (including all servicing
rights related thereto), any Custodial Accounts, the Takeout
Commitments and the proceeds of any and all of the foregoing.
"Commitment Expiration Date": With respect to any Takeout
Commitment, the expiration date thereof.
"Commitment Requirements": The requirements issued by the
Agency in the Applicable Guide regarding the issuance of Takeout
Commitments, as amended from time to time by the Agency.
"Credit File": All papers and records of whatever kind or
description, whether developed or originated by Seller or others,
required to document or service the Mortgage Loan; provided, however,
that such Mortgage Loan papers, documents and records shall not
include any Mortgage Loan papers, documents or records which are
contained in the Cash Window Submission Package.
"Cure Expiration Date": With respect to a Defective Mortgage
Loan, the date occurring five Business Days after the Commitment
Expiration Date.
"Custodial Account": A separate custodial account, established
and maintained by Seller under the conditions set forth in Section
4(b), for the deposit by Seller of all collections in respect of a
Mortgage Loan that are payable to Purchaser as the owner of the
Mortgage Loan.
"Custodial Agreement": The Mortgage Loan Custodial Agreement,
dated as of the date set forth on the cover sheet thereof, among
Seller, Purchaser and Custodian, as amended from time to time.
"Custodian": Chemical Bank and its permitted successors
hereunder.
"Defective Mortgage Loan": A Mortgage Loan that is not in
compliance with the Applicable Guide and this Agreement.
2
<PAGE>
"Defective Settlement Information": Any Settlement Information
(i) that does not accurately identify Mortgage Loans by the
Mortgagor's name, (ii) in which the aggregate disbursement information
does not equal the precise amount of Takeout Proceeds received by
Purchaser from the Agency or (iii) does not include a Takeout Proceeds
Identification Letter, when applicable.
"Discount": With respect to each Mortgage Loan, the amount set
forth on such related Funding Confirmation as the Discount.
"Document File": The Credit File and the Cash Window Submission
Package.
"Due Date": The day of the month on which the Monthly Payment
is due on a Mortgage Loan.
"FDIC": The Federal Deposit Insurance Corporation or any
successor thereto.
"FHLMC" or "Freddie Mac": The Federal Home Loan Mortgage
Corporation or any successor thereto.
"FHLMC Commitment": A commitment executed by FHLMC and Seller
evidencing FHLMC's agreement to purchase one or more Mortgage Loans
from Seller and Seller's agreement to sell one or more Mortgage Loans
to FHLMC by the applicable Commitment Expiration Date under any FHLMC
cash program.
"FNMA" or "Fannie Mae": The Federal National Mortgage
Association or any successor thereto.
"FNMA Commitment": A commitment executed by FNMA and Seller,
evidencing FNMA's agreement to purchase one or more Mortgage Loans
from Seller and Seller's agreement to sell one or more Mortgage Loans
to FNMA by the applicable Commitment Expiration Date under any FNMA
cash program.
"Funding Confirmation": With respect to all Mortgage Loans
purchased by Purchaser from Seller via a single wire funds transaction
on a particular Business Day, the trade confirmation from Purchaser to
Seller confirming the terms of Purchaser's purchase of such Mortgage
Loans.
"Incremental Pass-Through Rate": The amount by which the Pass-
Through Rate is increased upon the occurrence of (i) a Cure Expiration
Date or (ii) any event giving Participant the right to elect a remedy
pursuant to Section 3, which amount shall be set forth in a Funding
Confirmation as the "Incremental Pass-Through Rate".
"Loan Purchase Detail": A loan purchase detail, transmitted via
facsimile in the form of Exhibit A-1, or transmitted electronically in
an appropriate data layout provided by Purchaser, prepared by Seller,
containing certain information
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regarding the characteristics of all Mortgage Loans being offered for
sale by Seller on a particular Business Day.
"Losses": Any and all losses, claims, damages, liabilities or
expenses (including reasonable attorneys' fees) incurred by any person
specified; provided, however, that "Losses" shall not include any
losses, claims, damages, liabilities or expenses which would have been
avoided had such person taken reasonable actions to mitigate such
losses, claims, damages, liabilities or expenses.
"Monthly Payment": The scheduled monthly payment of principal
and interest on a Mortgage Loan.
"Mortgage": The mortgage, deed of trust or other instrument
creating a first lien on an estate in fee simple in real property
securing a Mortgage Note.
"Mortgage Loan": A conventional single family residential
mortgage loan which is subject to this Agreement, and which satisfies
the Commitment Requirements as the same may be modified from time to
time.
"Mortgage Note": The note or other evidence of the indebtedness
of a Mortgagor secured by a Mortgage.
"Mortgaged Property": The property subject to the lien of the
Mortgage securing a Mortgage Note.
"Mortgagor": The obligor on a Mortgage Note.
"NCUA": The National Credit Union Administration, or any
successor thereto.
"OTS": The Office of Thrift Supervision, or any successor
thereto.
"Parent Company": A corporation or other entity owning at least
50% of the outstanding shares of voting stock of Seller.
"Pass-Through Rate": With respect to each Mortgage Loan, the
rate at which interest is passed through to Purchaser which initially
shall be the rate of interest specified on a Funding Confirmation as
the Pass-Through Rate.
"Performance Fee": With respect to each Mortgage Loan, an
amount equal to the Discount, plus the Yield Compensation Adjustment
plus or minus any other adjustments permitted hereunder, which amount
shall be payable to Seller by Purchaser as compensation to Seller for
its services hereunder.
"Purchase Advice": An advice delivered to Seller by the Agency
via either MIDANET or MORNET, as applicable, confirming the amount of
Takeout Proceeds allocable to each Mortgage Loan purchased by the
Agency.
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"Purchase Date": With respect to any Mortgage Loan, the date
of payment thereof by Purchaser to Seller of the Purchase Price.
"Purchase Price": With respect to each Mortgage Loan, an amount
equal to the Trade Principal less an amount equal to the product of
the Trade Principal and the Discount. Accrued interest shall be
allocated in accordance with Section 2(c).
"Purchaser": Paine Webber Real Estate Securities Inc. and its
successors.
"Purchaser's Wire Instructions to Seller": The wire
instructions, set forth in a notice delivered by Purchaser to Seller
containing the information set forth in Exhibit D, to be used for the
payment of all amounts due and payable to Purchaser hereunder.
"Resubmission Letter": A letter in the form of Exhibit A-4
delivered by Seller to Purchaser requesting Purchaser's permission to
resubmit a Mortgage Loan to the Agency.
"RTC": The Resolution Trust Corporation or any successor
thereto.
"Seller": The Seller whose name is set forth on the cover page
hereof, and its permitted successors hereunder.
"Seller's Release": A letter in the form of Exhibit C-1,
delivered by Seller when no Warehouse Lender has an interest in a
Mortgage Loan, conditionally releasing all of Seller's interest in a
Mortgage Loan upon receipt of payment by Seller.
"Seller's Wire Instructions": The wire instructions, set forth
in a letter in the form of Exhibit C-2, to be used for the payment of
funds to Seller when no Warehouse Lender has an interest in the
Mortgage Loans to which such payment relates.
"Settlement Date": With respect to any Mortgage Loan, the date
the allocable Pass-Through Rate shall cease to accrue upon payment by
the Agency to Purchaser of the Takeout Proceeds as confirmed by
Purchaser's receipt from Seller of the related Settlement Information
in accordance with Section 3(a).
"Settlement Information": (i) The Purchase Advice or group of
Purchase Advices which shall identify or be modified by Seller to
identify each Mortgage Loan by the Mortgagor's name, and of which the
aggregate disbursement amount equals the precise dollar amount of
Takeout Proceeds received by Purchaser from the Agency and (ii) when
applicable, a Takeout Proceeds Identification Letter.
"Successor Servicer": An entity designated by Purchaser, in
conformity with Section 16, to replace Seller as servicer for
Purchaser, and as seller/servicer of the Mortgage Loans for the
Agency.
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"Takeout Commitment": A FHLMC Commitment or a FNMA Commitment.
"Takeout Proceeds": The amount of funds the Agency pays to
Purchaser on a particular Business Day as identified by the related
Settlement Information.
"Takeout Proceeds Identification Letter": A letter in the form
of Exhibit A-2, delivered by Seller to Purchaser identifying Takeout
Proceeds received by Purchaser from the Agency which funds do not
relate to Mortgage Loans purchased by Purchaser from Seller.
"Trade Price": The trade price set forth on a Takeout
Commitment.
"Trade Principal": With respect to any Mortgage Loan, the
outstanding principal balance of the Mortgage Loan multiplied by a
percentage equal to the Trade Price.
"Unidentified Funds Notice": A letter, in the form of Exhibit
A-3, from Purchaser to Seller notifying Seller that Purchaser has
received Takeout Proceeds which have not yet been properly identified
by Seller.
"Warehouse Lender": Any lender, including, without limitation,
Purchaser, providing financing to the Seller in any fractional amount
for the purpose of originating or purchasing Mortgage Loans, which
lender has a security interest in such Mortgage Loans as collateral
for the obligations of Seller to such lender.
"Warehouse Lender's Release": A letter in the form of Exhibit
B-1, from a Warehouse Lender to Purchaser, conditionally releasing all
of Warehouse Lender's right, title and interest in certain Mortgage
Loans identified therein upon receipt of payment by Warehouse Lender.
"Warehouse Lender's Wire Instructions": The wire instructions,
set forth in a letter in the form of Exhibit B-2, from a Warehouse
Lender to Purchaser, setting forth wire instructions for all amounts
due and payable to such Warehouse Lender hereunder.
"Yield Compensation Adjustment": Subject to any further
adjustment provided in this Agreement, an amount (which may be a
negative number) equal to:
A(BC-DE)
-------
360
where (i) A equals the number of days in the period beginning on the
Purchase Date to but not including the Settlement Date, (ii) B equals
the principal amount of the Mortgage Loan, (iii) C equals the interest
rate (expressed as a decimal) on the Mortgage Loan, (iv) D equals the
Purchase Price and (v) E equals the Pass-Through Rate (expressed as a
decimal).
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Section 2. Procedures for Purchases of Mortgage Loans.
------------------------------------------
(a)(1) Purchaser may, in its sole discretion, from time to time,
purchase one or more Mortgage Loans from Seller. Seller shall be deemed to make
for the benefit of Purchaser, as of the applicable dates specified in Section 8,
the representations and warranties set forth in Section 8 in respect of each
such Mortgage Loan.
(a)(2) Prior to Purchaser's election to purchase any Mortgage Loan,
Purchaser shall have received from Seller a Loan Purchase Detail, either
electronically or via a facsimile transmission, and Custodian shall have
received all applicable documents required by Section 2 of the Custodial
Agreement. The terms and conditions of such purchase shall be set forth in this
Agreement and in each Funding Confirmation.
(b)(1) If Purchaser elects to purchase any Mortgage Loan, Purchaser
shall pay the amount of the Purchase Price for such Mortgage Loan by wire
transfer of immediately available funds (i) if a Warehouse Lender's Release has
been included in the related Cash Window Submission Package, in accordance with
the Warehouse Lender's Wire Instructions or (ii) if there is no Warehouse
Lender's Release included in the related Cash Window Submission Package, in
accordance with the Seller's Wire Instructions. If Purchaser is the Warehouse
Lender with respect to a Mortgage Loan, the amount transferred shall be reduced
to account for amounts previously advanced by Purchaser with respect to such
Mortgage Loan. With respect to each Mortgage Loan which Purchaser has elected to
purchase, Custodian shall deliver to the Agency the Cash Window Submission
Package in respect of such Mortgage Loans, in the manner and at the time set
forth in the Custodial Agreement. Seller shall thereafter promptly deliver to
the Agency any and all additional documents requested by the Agency to enable
the Agency to make payment to Purchaser of the Takeout Proceeds.
(b)(2) Simultaneously with the payment by Purchaser of the Purchase
Price of a Mortgage Loan, in accordance with the Warehouse Lender's Wire
Instructions or the Seller's Wire Instructions, as applicable, with respect to a
Mortgage Loan, Seller hereby conveys to Purchaser all of Seller's right, title
and interest in and to such Mortgage Loan, free and clear of any lien, claim or
encumbrance.
(c) With respect to each Mortgage Loan that Purchaser elects to
purchase hereunder, Purchaser shall owe to Seller a Performance Fee. The Yield
Compensation Adjustment component of the Performance Fee shall include an
accrued interest calculation. Purchaser's accrued interest calculation shall be
identical to that of the Agency, therefore the amount of accrued interest
included in a settlement calculation will represent accrued interest - paid to
Purchaser and paid by Purchaser.
(d) Notwithstanding the satisfaction by Seller of the conditions
specified in Section 2(a), Purchaser is not obligated to purchase any Mortgage
Loan offered to it hereunder. In the event that Purchaser rejects a Mortgage
Loan for purchase for any reason and/or does not transmit the Purchase Price,
any Cash Window Submission Package delivered to Custodian in anticipation of
such purchase shall be returned by Custodian in accordance with the terms of
Custodial Agreement.
Section 3. Sale of Mortgage Loans to the Agency.
------------------------------------
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(a)(1) Upon the sale to the Agency of a Mortgage Loan previously
purchased by Purchaser hereunder, Seller shall cause Takeout Proceeds relating
to such Mortgage Loan to be paid to Purchaser in accordance with Purchaser's
Wire Instructions to Seller. Since the Agency may aggregate Takeout Proceeds
from several Mortgage Loans in one wire transfer, it may be necessary, from time
to time, for Seller to cause the Agency to also pay to Purchaser Takeout
Proceeds relating to Mortgage Loans not purchased by Purchaser.
(a)(2) Upon receipt by Purchaser of any Takeout Proceeds, Purchaser
will attempt to identify such Takeout Proceeds by reviewing the Settlement
Information that has been supplied by Seller in advance of the purchase of
Mortgage Loans by the Agency.
(a)(3) If Settlement Information has not been supplied by Seller to
Purchaser, or if Purchaser has received Defective Settlement Information,
Purchaser will deliver an Unidentified Funds Notice to Seller. Upon receipt of
an Unidentified Funds Notice from Purchaser, Seller shall promptly deliver
Settlement Information to Purchaser. If Seller fails to deliver Settlement
Information to Purchaser within one Business Day after receipt by Seller of an
Unidentified Funds Notice, Purchaser may, in its sole discretion, return any
Takeout Proceeds that it can not identify to the source from which such Takeout
Proceeds were received by Purchaser.
(a)(4) The Settlement Date will occur on the earliest date Settlement
Information is made available by Seller to Purchaser. Purchaser will (i) place
all unidentified Takeout Proceeds in a non-interest bearing account and (ii)
continue to accrue interest at the Pass-Through Rate on all Mortgage Loans which
relate to such unidentified Takeout Proceeds until the Settlement Date of such
Mortgage Loans.
(a)(5) All Takeout Proceeds received by Purchaser from the Agency and
all Settlement Information received by Purchaser from Seller after 2:00 P.M. New
York City time on a Business Day (or at any time on a day which is not a
Business Day) shall be deemed, with regard to determining the Settlement Date,
received by Purchaser on the next succeeding Business Day.
(b)(1) If any Mortgage Loan is rejected by the Agency because it is a
Defective Mortgage Loan, Seller shall promptly notify Purchaser. If any Mortgage
Loan is a Defective Mortgage Loan on the Purchase Date and in Purchaser's sole
judgement the defects in such Mortgage Loan will not be cured (or in fact are
not cured) by Seller prior to the Cure Expiration Date, the Pass-Through Rate
applicable to such Defective Mortgage Loan shall, on such Cure Expiration Date,
increase by the Incremental Pass-Through Rate and Purchaser, at its election,
may require that Seller, upon receipt of notice from Purchaser, either (i)
immediately repurchase Purchaser's ownership interest in such Defective Mortgage
Loan by remitting to Purchaser (in immediately available funds in accordance
with Purchaser's instructions) the amount paid by Purchaser for such Defective
Mortgage Loan plus interest at the Pass-Through Rate on the principal amount
thereof from the Purchase Date of such Mortgage Loan to the date of such
repurchase or (ii) pursuant to a request from Seller evidenced by the receipt by
Purchaser of a Resubmission Letter, permit Seller to resubmit such modified
Mortgage Loan to the Agency under a new Takeout Commitment. If at any time prior
to the repurchase of a Defective Mortgage Loan by Seller or the purchase of a
Mortgage Loan by the Agency, Seller receives the Mortgage Note or any other
portion
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<PAGE>
of the Cash Window Submission Package, Seller shall promptly forward such
Mortgage Note and/or other portion of the Cash Window Submission Package to
Purchaser.
(b)(2) If Seller fails to comply with its obligations in the manner
described in Section 3(b)(1), upon receipt by Seller of notice from Purchaser,
Seller's rights and obligations to service Mortgage Loans, as provided in this
Agreement, shall terminate. If an Act of Insolvency occurs at any time, Seller's
rights and obligations to service the Mortgage Loans, as provided in this
Agreement, shall terminate immediately, without any notice or action by
Purchaser. Upon any such termination, Purchaser is hereby authorized and
empowered as the exclusive agent for Seller to sell and transfer such rights to
service the Mortgage Loans for such price and on such terms and conditions as
Purchaser shall reasonably determine, and Seller shall not otherwise attempt to
sell or transfer such rights to service without the prior consent of Purchaser.
Seller shall perform all acts and take all action so that all files and
documents relating to the Mortgage Loans held by Seller, together with all
escrow amounts relating to such Mortgage Loans, are delivered to Successor
Servicer. To the extent that the approval of the Agency or any other person is
required for any such sale or transfer, Seller shall fully cooperate with
Purchaser to obtain such approval. Upon exercise by Purchaser of its remedies
under this Section 3(b)(2), Seller hereby authorizes Purchaser to receive all
amounts paid by any purchaser of such rights to service the Mortgage Loans and
to remit such amounts to Seller subject to Purchaser's rights of set-off under
this Agreement. Upon exercise by Purchaser of its remedies under this Section
3(b)(2), Purchaser's obligation to pay and Seller's right to receive any portion
of the Performance Fee relating to such Mortgage Loans shall automatically be
canceled and become null and void, provided that such cancellation shall in no
way relieve Seller or otherwise affect the obligation of Seller to indemnify and
hold Purchaser harmless as specified in Section 3(c).
(b)(3) Each Mortgage Loan required to be delivered to Successor
Servicer by Section 3(b)(2) shall be delivered free of any servicing rights in
favor of Seller and free of any title, interest, lien, encumbrance or claim of
any kind of Seller. Seller shall deliver or cause to be delivered all files and
documents relating to each Mortgage Loan held by Seller to Successor Servicer.
Seller shall promptly take such actions and furnish to Purchaser such documents
that Purchaser deems necessary or appropriate to enable Purchaser to cure any
defect in each such Mortgage Loan or to enforce such Mortgage Loans, as
appropriate.
(c) Seller agrees to indemnify and hold Purchaser and its
assignees harmless from and against all Losses resulting from or relating to any
breach or failure to perform by Seller of any representation, warranty,
covenant, term or condition made or to be performed by Seller under this
Agreement.
(d) No exercise by Purchaser of its rights under this Section 3
shall relieve Seller of responsibility or liability for any breach of this
Agreement.
(e) Seller hereby grants Purchaser a right of set-off against the
payment of any amounts that may be due and payable to Purchaser from Seller,
such right to be upon any and all monies or other property of Seller held or
received by Purchaser, or due and owing from Purchaser to Seller.
9
<PAGE>
Section 4. Servicing of the Mortgage Loans.
-------------------------------
(a) Seller shall service and administer each Mortgage Loan on
behalf of Purchaser in accordance with prudent mortgage loan servicing standards
and procedures generally accepted in the mortgage banking industry and in
accordance with the requirements of the Agency as though the Agency's
requirement were set forth in independent contract between Seller and Purchaser,
provided that Seller shall at all times comply with applicable law, and the
requirements of any applicable insurer or guarantor so that the insurance in
respect of any Mortgage Loan is not voided or reduced. Seller shall at all times
maintain accurate and complete records of its servicing of each Mortgage Loan,
and Purchaser may, at any time during Seller's business hours on reasonable
notice, examine and make copies of such records. In addition, if a Mortgage Loan
is not purchased by the Agency on or before the Cure Expiration Date, Seller
shall at Purchaser's request deliver to Purchaser monthly reports regarding the
status of such Mortgage Loan, which reports shall include, but shall not be
limited to, a description of each Mortgage Loan in default for more than thirty
days, and such other circumstances with respect to any Mortgage Loan (whether or
not such Mortgage Loan is included in the foregoing list) that could materially
adversely affect any such Mortgage Loan, Purchaser's ownership of any such
Mortgage Loan or the collateral securing any such Mortgage Loan. Seller shall
deliver such a report to Purchaser every thirty days until (i) the purchase by
the Agency of such Mortgage Loan pursuant to the related Takeout Commitment or
(ii) the exercise by Purchaser of any remedial election pursuant to Section 3.
(b) Within five Business Days of notice from Purchaser or, with
respect to any Mortgage Loan, on the Cure Expiration Date, Seller shall
establish and maintain a Custodial Account entitled "[name of Seller], in trust
for Paine Webber Real Estate Securities Inc. and its assignees under the
Mortgage Loan Purchase Agreement dated [the date of this Agreement]" and shall
promptly deposit into such Custodial Account, in the form received with any
necessary endorsements, all collections received in respect of each Mortgage
Loan that are payable to Purchaser as the owner of each such Mortgage Loan.
(c) Amounts deposited in the Custodial Account with respect to any
Mortgage Loan shall be held in trust for Purchaser as the owner of such Mortgage
Loan and shall be released only as follows:
(1) Except as otherwise provided in this Section 4(c),
following receipt by Purchaser or its designee of the Takeout
Proceeds for such Mortgage Loan from the Agency or Seller amounts
deposited in the Custodial Account shall be paid in accordance with
Section 2(c). Notwithstanding the foregoing, all amounts deposited in
the Custodial Account shall be paid to Seller upon the purchase by the
Agency of the related Mortgage Loan(s) from Purchaser if, and to the
extent that, the amounts due and payable to Purchaser hereunder have
been set off against the Purchase Price for the Mortgage Loan or the
Performance Fee relating to the Mortgage Loan. The amounts paid to
Seller (if any) pursuant to this Section 4(c)(1) shall constitute
Seller's sole compensation for servicing the Mortgage Loans as
provided in this Section 4.
(2) If Successor Servicer is appointed by Purchaser (either
under the circumstances set forth in Section 3 or otherwise), all
amounts deposited in the Custodial Account shall be paid to Purchaser
promptly upon such delivery.
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<PAGE>
(3) If a Mortgage Loan is not purchased by the Agency on or
before the Cure Expiration Date, during the period thereafter that
Seller remains as servicer, all amounts deposited in the Custodial
Account shall be released only in accordance with a Purchaser's
written instructions.
Section 5. Trade Assignments. Seller hereby assigns to Purchaser,
-----------------
free of any security interest, lien, claim or encumbrance of any kind, Seller's
rights, under each Takeout Commitment to the full extent permitted by the
Agency, to deliver the Mortgage Loan(s) specified therein to the related the
Agency and to receive the Takeout Proceeds therefor from the Agency. Purchaser
shall not be deemed to have accepted such rights of Seller which relate to a
particular Mortgage Loan unless and until it purchases the Mortgage Loan, and
nothing set forth herein shall be deemed to impair Purchaser's right to reject
any Mortgage Loan for any reason, in its sole discretion.
Section 6. Transfers of Mortgage Loan by Purchaser. Purchaser may, in
---------------------------------------
its sole discretion, assign all of its right, title and interest in or grant a
security interest in any Mortgage Loan sold by Seller hereunder and all rights
of Purchaser under this Agreement and the Custodial Agreement, in respect of
such Mortgage Loan to Assignee, subject only to an obligation on the part of
Assignee to deliver each such Mortgage Loan to the Agency pursuant to Section 5
or to Purchaser to permit Purchaser or its designee to make delivery thereof to
a the Agency pursuant to Section 5. It is anticipated that such assignment to
Assignee will be made by Purchaser, and Seller hereby irrevocably consents to
such assignment. No notice of such assignment shall be given by Purchaser to
Seller or the Agency. Assignment by Purchaser of the Mortgage Loans as provided
in this Section 6 shall not release Purchaser from its obligations otherwise
under this Agreement.
Without limitation of the foregoing, an assignment of a Mortgage Loan
to Assignee, as described in this Section 6, shall be effective upon delivery to
Assignee of a Cash Window Submission Package.
Section 7. Record Title to Mortgage Loans: Intent of Parties:
--------------------------------------------------
Security Interest.
- -----------------
(a) From and after the delivery of the related Cash Window
Submission Package, and subject to the remedies of Purchaser in Section 3,
Seller shall remain the last named payee or endorsee of each Mortgage Note and
the mortgagee or assignee of record of each Mortgage in trust for the benefit of
Purchaser, for the sole purpose of facilitating the servicing of such Mortgage
Loan.
(b) Seller shall maintain a complete set of books and records for
each Mortgage Loan which shall be clearly marked to reflect the ownership
interest in each Mortgage Loan of Purchaser.
(c) Purchaser and Seller confirm that the transactions contemplated
herein are intended to be sales of the Mortgage Loans by Seller to Purchaser
rather than borrowings secured by the Mortgage Loans. In the event, for any
reason, any transaction is construed by any court or regulatory authority as a
borrowing rather than as a sale, the Seller and Purchaser intend that Purchaser
or Assignee, as the case may be, shall have a perfected first priority security
interest in the Collateral, free and clear of adverse claims. In such case,
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<PAGE>
Seller shall be deemed to have hereby granted to Purchaser or Assignee, as the
case may be, a first priority security interest in and lien upon the Collateral,
free and clear of adverse claims. In such event, this Agreement shall constitute
a security agreement, the Custodian shall be deemed to be an independent
custodian for purposes of perfection of the security interest granted to
Purchaser or Assignee, as the case may be, and Purchaser or Assignee, as the
case may be, shall have all of the rights of a secured party under applicable
law. Seller shall, not later than the date of the first purchase of a Mortgage
Loan by Purchaser under this Agreement, deliver to Purchaser a UCC-1 Financing
Statement, executed by Seller, containing a description of collateral in the
form attached hereto in Exhibit E.
Section 8. Representations and Warranties.
------------------------------
(a) Seller hereby represents and warrants to Purchaser as of the date
hereof and as of the date of each delivery of a Cash Window Submission Package
that:
(i) Seller is duly organized, validly existing and in good
standing under the laws of the state of its organization or of the
United States of America and has all licenses necessary to carry on its
business as now being conducted and is licensed, qualified and in good
standing in the state where the Mortgaged Property is located if the
laws of such state require licensing or qualification in order to
conduct business of the type conducted by Seller. Seller has all
requisite power and authority (including, if applicable, corporate
power) to execute and deliver this Agreement and to perform in
accordance herewith; the execution, delivery and performance of this
Agreement (including all instruments of transfer to be delivered
pursuant to this Agreement) by Seller and the consummation of the
transactions contemplated hereby have been duly and validly authorized;
this Agreement evidences the valid, binding and enforceable obligation
of Seller; and all requisite action (including, if applicable, corporate
action) has been taken by Seller to make this Agreement valid and
binding upon Seller in accordance with its terms;
(ii) No approval of the transactions contemplated by this
Agreement from the OTS, the NCUA, the FDIC or any similar federal or
state regulatory authority having jurisdiction over Seller is required,
or if required, such approval has been obtained. There are no actions or
proceedings pending or affecting Seller which would adversely affect its
ability to perform hereunder. The transfers, assignments and conveyances
provided for herein are not subject to the bulk transfer or any similar
statutory provisions in effect in any applicable jurisdiction;
(iii) The consummation of the transactions contemplated by this
Agreement are in the ordinary course of business of Seller and will not
result in the breach of any term or provision of the charter or by-laws
of Seller or result in the breach of any term or provision of, or
conflict with or constitute a default under or result in the
acceleration of any obligation under, any agreement, indenture or loan
or credit agreement or other instrument to which Seller or its property
is subject, or result in the violation of any law, rule, regulation,
order, judgment or decree to which Seller or its property is subject;
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<PAGE>
(iv) This Agreement, the Custodial Agreement and every document
to be executed by Seller pursuant to this Agreement is and will be
valid, binding and subsisting obligations of Seller, enforceable in
accordance with their respective terms. No consents or approvals are
required to be obtained by Seller or its Parent Company for the
execution, delivery and performance of this Agreement or the Custodial
Agreement by Seller;
(v) Purchaser will be the sole owner of the related Mortgage Loan,
free and clear of any lien, claim or encumbrance; and
(vi) All information relating to Seller that Seller has delivered
or caused to be delivered to Purchaser, including, but not limited to,
all documents related to this Agreement, the Custodial Agreement or
Seller's financial statements, does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made therein or herein in light of the circumstances under
which they were made, not misleading.
(b) Seller hereby represents, warrants and covenants to Purchaser with
respect to each Mortgage Loan as of the related Purchase Date that:
(i) The Mortgage Loan conforms in all respects to the requirements
of this Agreement, the Commitment Requirements and all other
requirements of the Agency;
(ii) Seller is the sole owner and holder of the Mortgage Loan free
and clear of any and all liens, pledges, charges or security interests
of any nature and has full right and authority, subject to no interest
or participation of, or agreement with, any other party, to sell and
assign the same pursuant to this Agreement;
(iii) No servicing agreement has been entered into with respect to
the Mortgage Loan, or any such servicing agreement has been terminated
and there are no restrictions, contractual or governmental, which would
impair the ability of Purchaser or Purchaser's designees from servicing
the Mortgage Loan;
(iv) The Mortgage is a valid and subsisting first lien on the
property therein described and the Mortgaged Property is free and clear
of all encumbrances and liens having priority over the first lien of the
Mortgage except for liens for real estate taxes and special assessments
not yet due and payable. Any pledge account, security agreement, chattel
mortgage or equivalent document related to, and delivered to Purchaser
with the Mortgage, establishes in Seller a valid and subsisting first
lien on the property described therein, and Seller has full right to
sell and assign the same to Purchaser;
(v) Neither Seller nor any prior holder of the Mortgage has
modified the Mortgage in any material respect; satisfied, canceled or
subordinated the Mortgage in whole or in part; released the Mortgaged
Property in whole or in part from the lien of the Mortgage; or executed
any instrument of release, cancellation, modification or satisfaction
unless such release, cancellation,
13
<PAGE>
modification or satisfaction does not adversely affect the value of the
Mortgage Loan and is contained in the related Document File;
(vi) The Mortgage Loan is not in default, and all Monthly Payments
due prior to the Purchase Date and all taxes, governmental assessments,
insurance premiums, water, sewer and municipal charges, leasehold
payments or ground rents have been paid. Seller has not advanced funds,
or induced or solicited any advance of funds by a party other than the
Mortgagor directly or indirectly, for the payment of any amount required
by the Mortgage Loan. The collection practices used by each entity which
has serviced the Mortgage Loan have been in all respects legal, proper,
prudent, and customary in the mortgage servicing business. With respect
to escrow deposits and payments in those instances where such were
required, there exist no deficiencies in connection therewith for which
customary arrangements for repayment thereof have not been made and no
escrow deposits or payments or other charges or payments have been
capitalized under any Mortgage or the related Mortgage Note;
(vii) There is no default, breach, violation or event of
acceleration existing under the Mortgage or the related Mortgage Note
and no event which, with the passage of time or with notice and the
expiration of any grace of cure period, would constitute a default,
breach, violation or event of acceleration; and Seller has not waived
any default, breach, violation or event of acceleration;
(viii) The Mortgage Loan is not subject to any right of rescission,
set-off, counterclaim or defense, including the defense of usury, nor
will the operation of any of the terms of the Mortgage Note or the
Mortgage, or the exercise of any right thereunder, render either the
Mortgage Note or the Mortgage unenforceable, in whole or in part, or
subject to any right of rescission, set-off, counterclaim or defense,
including the defense of usury, and no such right of rescission, set-
off, counterclaim or defense has been asserted with respect thereto;
(ix) The Mortgage Note and the related Mortgage are genuine and
each is the legal, valid and binding obligation of the maker thereof,
enforceable in accordance with its terms. All parties to the Mortgage
Note and the Mortgage had legal capacity to execute the Mortgage Note
and the Mortgage and each Mortgage Note and Mortgage have been duly and
property executed by the Mortgagor;
(x) The Mortgage Loan meets, or is exempt from, applicable state
or federal laws, regulations and other requirements pertaining to usury,
and the Mortgage Loan is not usurious;
(xi) Any and all requirements of any federal, state or local law
including, without limitation, truth-in-lending, real estate settlement
procedures, consumer credit protection, equal credit opportunity or
disclosure laws applicable to the Mortgage Loan have been complied with,
and Seller shall deliver to Purchaser upon demand, evidence of
compliance with all such requirements;
14
<PAGE>
(xii) Either: (i) Seller and every other holder of the Mortgage,
if any, were authorized to transact and do business in the jurisdiction
in which the Mortgaged Property is located at all times when such party
held the Mortgage; or (ii) the loan of mortgage funds, the acquisition
of the Mortgage (if Seller was not the original lender), the holding of
the Mortgage and the transfer of the Mortgage did not constitute the
transaction of business or the doing of business in such jurisdiction;
(xiii) The proceeds of the Mortgage Loan have fully disbursed,
there is no requirement for future advances thereunder and any and all
requirements as to completion of any on-site or off-site improvements
and as to disbursements of any escrow funds, therefore, have been
complied with. All costs, fees and expenses incurred in making, or
closing or recording the Mortgage Loans were paid;
(xiv) The related Mortgage contains customary and enforceable
provisions such as to render the rights and remedies of the holder
thereof adequate for the realization against the Mortgaged Property of
the benefits of the security, including, (i) in the case of a Mortgage
designated as a deed of trust, by trustee's sale, and (ii) otherwise by
judicial foreclosure. There is no homestead or other exemption available
to the Mortgagor which would interfere with the right to sell the
Mortgaged Property at a trustee's sale or the right to foreclose the
Mortgage;
(xv) Each Mortgage Loan was originated by an institution that is
eligible to issue Mortgage Loans under the Applicable Guide;
(xvi) At origination, the Mortgaged Property was free and clear of
all mechanics' and materialmen's liens or liens in the nature thereof
which are or could be prior to the Mortgage lien, and no rights are
outstanding that under law could give rise to any such lien;
(xvii) All of the improvements which are included for the purpose
of determining the appraised value of the Mortgaged Property lie wholly
within the boundaries and building restriction lines of such property,
and no improvements on adjoining properties encroach upon the Mortgaged
Property;
(xviii) At origination, no improvement located on or being part of
the Mortgaged Property was in violation of any applicable zoning law or
regulation and all inspections, licenses and certificates required to be
made or issued with respect to all occupied portions of the Mortgaged
Property, and with respect to the use and occupancy of the same,
including but not limited to certificates of occupancy and fire
underwriting certificates, had been made or obtained from the
appropriate authorities and the Mortgaged Property was lawfully occupied
under applicable law. No improvement located on or being part of the
Mortgaged Property is in violation of any applicable zoning law or
regulation and all inspections, licenses and certificates required to be
made or issued with respect to Property, and with respect to the use and
occupancy of the same, including but not limited to certificates of
occupancy and fire underwriting certificates, have
15
<PAGE>
been made or obtained from the appropriate authorities and the Mortgaged
Property is lawfully occupied under applicable law;
(xix) There is no proceeding pending for the total or partial
condemnation of the Mortgaged Property and said property is undamaged by
waste, fire, earthquake or earth movement, windstorm, flood, tornado or
other casualty;
(xx) All buildings upon the Mortgaged Property are insured
against loss by fire, hazards of extended coverage and such other
hazards as are customary in the area where the Mortgaged Property is
located, pursuant to fire and hazard insurance policies with extended
coverage or other insurance required by the Applicable Guide, in an
amount at least equal to the lesser of (i) the outstanding principal
balance of the Mortgage Loan or (ii) the maximum insurable value
(replacement cost without deduction for depreciation) of the
improvements constituting the Mortgaged Property. If applicable laws
limit the amount of such insurance to the replacement cost of the
improvements constituting the Mortgaged Property or to some other
amount, then such insurance is in an amount equal to the maximum allowed
by such laws. Such insurance amount is sufficient to prevent the
Mortgagor or the loss payee under the policy from becoming a co-insurer.
The insurer issuing such insurance is acceptable pursuant to the
Applicable Guide. All individual insurance policies contain a standard
mortgagee clause naming Seller, its successors and assigns, as mortgagee
and all premiums thereon have been paid. Each Mortgage obligates the
Mortgagor thereunder to maintain all such insurance at Mortgagor's cost
and expense, and upon the Mortgagor's failure to do so, authorizes the
holder of the Mortgage to obtain and maintain such insurance at
Mortgagor's cost and expense and to seek reimbursement therefor from the
Mortgagor. Any flood insurance required by applicable law has been
obtained;
(xxi) The related Mortgage Note is payable on the Due Date of each
month in self-amortizing monthly installments of principal and interest,
with interest payable in arrears, providing for full amortization by
maturity, over an original term of not more than thirty years;
(xxii) The Mortgaged Property consists of a single parcel of real
property; and
(xxiii) There are no circumstances or conditions with respect to the
Mortgage, the Mortgaged Property, the Mortgagor or the Mortgagor's
credit standing that can be reasonably expected to cause the Agency or
private institutional investors to regard the Mortgage Loan as an
unacceptable investment, cause the Mortgage Loan to become delinquent or
adversely affect the value or marketability of the Mortgage Loan.
The representations and warranties of Seller in this Section 8 are
unaffected by and supersede any provision in any endorsement of any Mortgage
Loan or in any assignment with respect to such Mortgage Loan to the effect that
such endorsement or assignment is without recourse or without representation or
warranty.
16
<PAGE>
Section 9. Covenants of Seller. Seller hereby covenants and agrees with
-------------------
Purchaser as follows:
(a) Seller shall deliver to Purchaser:
(i) Within one hundred twenty (120) days after the end of each
fiscal year of Seller, consolidated balance sheets of Seller and its
consolidated subsidiaries and the related consolidated statements of
income showing the financial condition of Seller and its consolidated
subsidiaries as of the close of such fiscal year and the results of
operations during such year, and a consolidated statement of cash flows,
as of the close of such fiscal year, setting forth, in each case, in
comparative form the corresponding figures for the preceding year, all
the foregoing consolidated financial statements to be reported on by,
and to carry the report (acceptable in form and content to Purchaser) of
an independent public accountant of national standing acceptable to
Purchaser;
(ii) Within sixty (60) days after the end of each of the first
three fiscal quarters of each fiscal year of Seller, unaudited
consolidated balance sheets and consolidated statements of income, all
to be in a form acceptable to Purchaser, showing the financial condition
and results of operations of Seller and its consolidated subsidiaries on
a consolidated basis as of the end of each such quarter and for the then
elapsed portion of the fiscal year, setting forth, in each case, in
comparative form the corresponding figures for the corresponding periods
of the preceding fiscal year, certified by a financial officer of Seller
(acceptable to Purchaser) as presenting fairly the financial position
and results of operations of Seller and its consolidated subsidiaries
and as having been prepared in accordance with generally accepted
accounting principles consistently applied, in each case, subject to
normal year-end audit adjustments;
(iii) Promptly upon receipt thereof, a copy of each other report
submitted to Seller by its independent public accountants in connection
with any annual, interim or special audit of Seller;
(iv) Promptly upon becoming aware thereof, notice of (1) the
commencement of, or any determination in, any legal, judicial or
regulatory proceedings, (2) any dispute between Seller or its Parent
Company and any governmental or regulatory body, (3) any event or
condition, which, in any case of (1) or (2) if adversely determined,
would have a material adverse effect on (A) the validity or
enforceability of this Agreement, (B) the financial condition or
business operations of Seller, or (C) the ability of Seller to fulfill
its obligations under this Agreement or (4) any material adverse change
in the business, operations, prospects or financial condition of Seller,
including, without limitation, the insolvency of Seller or its Parent
Company;
(v) Promptly upon becoming available, copies of all financial
statements, reports, notices and proxy statements sent by its Parent
Company, Seller or any of Seller's consolidated subsidiaries in a
general mailing to their respective stockholders and of all reports and
other material (including copies of all registration statements under
the Securities Act of 1933, as amended) filed by
17
<PAGE>
any of them with any securities exchange or with the Securities and
Exchange Commission or any governmental authority succeeding to any or
all of the functions of said Commission;
(vi) Promptly upon becoming available, copies of any press
releases issued by its Parent Company or Seller and copies of any annual
and quarterly financial reports and any reports on Form H-(b)12 which
its Parent Company or Seller may be required to file with the OTS or the
RTC or comparable reports which a Parent Company or Seller may be
required to file with the FDIC or any other federal banking agency
containing such financial statements and other information concerning
such Parent Company's or Seller's business and affairs as is required to
be included in such reports in accordance with the rules and regulations
of the OTS, the RTC, the FDIC or such other banking agency, as may be
promulgated from time to time;
(vii) Such supplements to the aforementioned documents and such
other information regarding the operations, business, affairs and
financial condition of its Parent Company, Seller or any of Seller's
consolidated subsidiaries as Purchaser may request;
(viii) A copy of (1) the articles of incorporation of Seller and any
amendments thereto, certified by the Secretary of State of Seller's
state of incorporation, (2) a copy of Seller's by-laws, together with
any amendments thereto, (3) a copy of the resolutions adopted by
Seller's Board of Directors authorizing Seller to enter into this
Agreement and the Custodial Agreement and authorizing one or more of
Seller's officers to execute the documents related to this Agreement and
Custodial Agreement, and (4) a certificate of incumbency and signature
of each officer of Seller executing any document in connection with this
Agreement; and
(ix) Not later than 2:00 P.M. New York City time on a Settlement
Date, the related Settlement Information.
(b) The consideration received by the Seller upon the sale of each
Mortgage Loan will constitute reasonably equivalent value and fair consideration
for the ownership interest in the Mortgage Loan.
(c) Neither the Seller nor any affiliate thereof will acquire at any
time any Mortgage Loan or any other economic interest in or obligation with
respect to any Mortgage Loan.
(d) Under generally accepted accounting principles ("GAAP") and for
federal income tax purposes, the Seller will report each sale of a Mortgage Loan
to the Purchaser as a sale of the ownership interest in tile Mortgage Loan. The
Seller has been advised by or has confirmed with its independent public
accountants that the foregoing transactions will be so classified under GAAP.
(e) The Seller will be solvent at all relevant times prior to, and will
not be rendered insolvent by, any sale of a Mortgage Loan to the Purchaser.
18
<PAGE>
(f) The Seller will not sell any Mortgage Loan to the Purchaser with any
intent to hinder, delay or defraud any of the Seller's creditors.
(g) Seller shall comply, in all material respects, with all laws, rules
and regulations to which it is or may become subject.
(h) Seller shall, upon request of Purchaser, promptly execute and
deliver to Purchaser all such other and further documents and instruments of
transfer, conveyance and assignment, and shall take such other action as
Purchaser may require more effectively to transfer, convey, assign to and vest
in Purchaser and to put Purchaser in possession of the property to be
transferred, conveyed, assigned and delivered hereunder and otherwise to carry
out more effectively the intent of the provisions under this Agreement.
(i) Seller shall ensure that all Takeout Proceeds paid by the Agency
resulting from Takeout Commitments that relate to Mortgage Loans purchased by
Purchaser pursuant to the terms of this Agreement are paid to Purchaser by the
Agency in accordance with Purchaser's Wire Instructions to Seller.
Section 10. Term. This Agreement shall continue in effect until
----
terminated as to future transactions by written instruction signed by either
Seller or Purchaser and delivered to the other, provided that no termination
will affect the obligations hereunder as to any of the Mortgage Loans with
respect to which Cash Window Submission Packages have been delivered to
Custodian pursuant to the terms of this Agreement or the Custodial Agreement.
Section 11. Exclusive Benefit of Parties: Assignment. This Agreement is
----------------------------------------
for the exclusive benefit of the parties hereto and their respective successors
and assigns and shall not be deemed to give any legal or equitable right to any
other person, including the Custodian. Except as provided in Section 6, no
rights or obligations created by this Agreement may be assigned by any party
hereto without the prior written consent of the other parties.
Section 12. Amendments: Waivers: Cumulative Rights. This Agreement may
--------------------------------------
be amended from time to time only by written agreement of Seller and Purchaser.
Any forbearance, failure or delay by either party in exercising any right, power
or remedy hereunder shall not be deemed to be a waiver thereof, and any single
or partial exercise by Purchaser of any right, power or remedy hereunder shall
not preclude the further exercise thereof. Every right, power and remedy of
Purchaser shall continue in full force and effect until specifically waived by
Purchaser in writing. No right, power or remedy shall be exclusive, and each
such right, power or remedy shall be cumulative and in addition to any other
right, power or remedy, whether conferred hereby or hereafter available at law
or in equity or by statute or otherwise.
Section 13. Execution in Counterparts. This Agreement may be executed
-------------------------
in any number of counterparts, each of which shall be deemed an original, but
all of which shall constitute one and the same instrument.
Section 14. Effect of Invalidity of Provisions. In case any one or more
----------------------------------
of the provisions contained in this Agreement should be or become invalid,
illegal or unenforceable
19
<PAGE>
in any respect, the validity, legality and enforceability of the remaining
provisions contained herein or therein shall in no way be affected, prejudiced
or disturbed thereby.
Section 15. Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of New York, without regard
to conflict of laws rules.
Section 16. Notices. Any notices, consents, elections, directions and
-------
other communications given under this Agreement shall be in writing and shall be
deemed to have been duly given when telecopied or delivered by overnight courier
to, personally delivered to, or on the third day following the placing thereof
in the mail, first class postage prepaid to, the respective addresses set forth
on the cover page hereof for Seller and Purchaser, or to such other address as
either party shall give notice to the other party pursuant to this Section 16.
Notices to Assignee shall be given to such address as Assignee shall provide to
Seller in writing.
Section 17. Entire Agreement. This Agreement, the Funding Confirmations
----------------
and the Custodial Agreement contain the entire agreement between the parties
hereto with respect to the subject matter hereof, and supersede all prior and
contemporaneous agreements between them, oral or written, of any nature
whatsoever with respect to the subject matter hereof.
Section 18. Costs of Enforcement. In addition to any other indemnity
--------------------
specified in this Agreement, in the event of a breach by Seller of this
Agreement, the Custodial Agreement or a Takeout Commitment, Seller agrees to pay
the reasonable attorneys' fees and expenses of Purchaser and, when applicable,
Assignee incurred as a consequence of such breach.
Section 19. Consent to Service. Each party irrevocably consents to the
------------------
service of process by registered or certified mail, postage prepaid, to it at
its address given in or pursuant to Section 16.
Section 20. Construction. The headings in this Agreement are for
------------
convenience only and are not intended to influence its construction. References
to Sections, Exhibits and Annexes in this Agreement are to the Sections of and
Exhibits to this Agreement. The Exhibits are part of this Agreement, and are
incorporated herein by reference. The singular includes the plural, the plural
the singular, and the words "and" and "or" are used in the conjunctive or
disjunctive as the sense and circumstances may require.
20
<PAGE>
IN WITNESS WHEREOF, Purchaser and Seller have duly executed this
Agreement as of the date and year set forth on the cover page hereof.
PAINE WEBBER REAL ESTATE SECURITIES INC.
By /s/ AL MARRAPODI
-------------------------------------
Name: Al Marrapodi
Title: Managing Director
Seller's Name: Sutter Mortgage
-------------------------
Ronald Morck
-------------------------
By /s/ RONALD MORCK
-------------------------------------
Name:
Title:
Address (if different from cover page):
21
<PAGE>
EXHIBIT A-1
PAINE WEBBER REAL ESTATE SECURITIES INC.
CASH WINDOW LOAN PURCHASE DETAIL
CLIENT:___________
PAYEE NUMBER (ONLY APPLICABLE TO FNMA CASH WINDOW TRANSACTIONS):
EXPECTED DELIVERY DATE
OF MORTGAGE FILE IS: __________, 199_
<TABLE>
<CAPTION>
FACE # OF MONTHS TO TAKEOUT COMMIT. EXP DELIVERY WAREHOUSE
LOAN # LAST NAME AMOUNT MATURITY NOTE RATE INVESTOR SALE PRICE COMMIT. # DATE DATE LENDER
- ------ ----------- -------- -------------- --------- -------- ----------- --------- ------------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------ ----------- -------- -------------- --------- -------- ----------- --------- ------------ ------- --------
- ------ ----------- -------- -------------- --------- -------- ----------- --------- ------------ ------- --------
- ------ ----------- -------- -------------- --------- -------- ----------- --------- ------------ ------- --------
- ------ ----------- -------- -------------- --------- -------- ----------- --------- ------------ ------- --------
- ------ ----------- -------- -------------- --------- -------- ----------- --------- ------------ ------- --------
- ------ ----------- -------- -------------- --------- -------- ----------- --------- ------------ ------- --------
- ------ ----------- -------- -------------- --------- -------- ----------- --------- ------------ ------- --------
- ------ ----------- -------- -------------- --------- -------- ----------- --------- ------------ ------- --------
- ------ ----------- -------- -------------- --------- -------- ----------- --------- ------------ ------- --------
- ------ ----------- -------- -------------- --------- -------- ----------- --------- ------------ ------- --------
- ------ ----------- -------- -------------- --------- -------- ----------- --------- ------------ ------- --------
- ------ ----------- -------- -------------- --------- -------- ----------- --------- ------------ ------- --------
- ------ ----------- -------- -------------- --------- -------- ----------- --------- ------------ ------- --------
- ------ ----------- -------- -------------- --------- -------- ----------- --------- ------------ ------- --------
- ------ ----------- -------- -------------- --------- -------- ----------- --------- ------------ ------- --------
- ------ ----------- -------- -------------- --------- -------- ----------- --------- ------------ ------- --------
- ------ ----------- -------- -------------- --------- -------- ----------- --------- ------------ ------- --------
- ------ ----------- -------- -------------- --------- -------- ----------- --------- ------------ ------- --------
- ------ ----------- -------- -------------- --------- -------- ----------- --------- ------------ ------- --------
- ------ ----------- -------- -------------- --------- -------- ----------- --------- ------------ ------- --------
- ------ ----------- -------- -------------- --------- -------- ----------- --------- ------------ ------- --------
- ------ ----------- -------- -------------- --------- -------- ----------- --------- ------------ ------- --------
- ------ ----------- -------- -------------- --------- -------- ----------- --------- ------------ ------- --------
</TABLE>
22
<PAGE>
EXHIBIT A-2
[TAKEOUT PROCEEDS IDENTIFICATION LETTER]
[SELLER'S LETTERHEAD]
[Date]
Paine Webber Real Estate Securities Inc.
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
On [date] FNMA or FHLMC wired to your account at Chemical Bank [total
amount of agency wire]. Contained within the total amount of the wire was a
disbursement amount of ___________. This amount represents proceeds for one or
more loans which were not purchased through PaineWebber's Conforming Whole Loan
Purchase: Cash Window Program the details of which are:
loan #: ___________________
borrower's name: ________________
loan #: ___________________
borrower's name: ________________
[list additional Mortgage Loans, if necessary]
Please wire these funds to:
[insert wire instructions here]
Very truly yours,
[SELLER]
By:____________________________
Name:__________________________
Title:_________________________
23
<PAGE>
EXHIBIT A-3
[UNIDENTIFIED FUNDS NOTICE]
[DATE]
[SELLER]
[ADDRESS]
RE: Settlement - Cash Windows
The following proceeds have been received by PaineWebber from FNMA or
FHLMC regarding our Conforming Whole Loan Purchase: Cash Window Program. We can
not proceed without receipt of all settlement information that is required by
the Conforming Mortgage Loan Purchase Agreement ("Agreement"). Please forward
the settlement information which relates to the individual amounts listed below
by facsimile transmission to me at [PaineWebber's facsimile number].
Unidentified proceeds will not earn interest, while loans which we have
purchased and which have subsequently been purchased by FNMA or FHLMC will be
deemed to continue to accrue interest in accordance with Section 3(a)(4) of the
Agreement until we have all settlement information required by the Agreement. If
I can be of any further assistance, please call me at [PaineWebber's telephone]
number].
AGENCY: __________________________
AMOUNT: __________________________
AGENCY: __________________________
AMOUNT: __________________________
AGENCY: __________________________
AMOUNT: __________________________
[1ist additional amounts, if necessary]
Very truly yours,
PAINE WEBBER REAL ESTATE SECURITIES INC.
By: _______________________________
Name: _______________________________
Title: _______________________________
24
<PAGE>
EXHIBIT A-4
[RESUBMISSION LETTER]
[SELLER'S LETTERHEAD]
[Date]
Paine Webber Real
Estate Securities Inc.
1285 Avenue of the Americas
11th Floor
New York, New York 10019
Ladies and Gentlemen:
The following loan which was purchased through PaineWebber's Conforming
Whole Loan Purchase: Cash Window Program has been rejected for purchase by the
FNMA or FHLMC Cash Window. FNMA or FHLMC will continue to hold the related
-----------------------------------------------
mortgage note which was delivered to them by PaineWebber's agent Chemical Bank.
- -------------------------------------------------------------------------------
The modified loan is being resubmitted under a new commitment the details of
- ----------------------------------------------------------------------------
which are as follows:
- --------------------
Loan #: Investor:
Last Name: Commitment #:
Face Amount: Window Term:
1st Pay Date: Commitment Expiration Date:
Coupon: Sale Price:
Loan Term:
If the loan should again be rejected for purchase by the FNMA or FHLMC,
we will notify PaineWebber and repurchase the loan immediately upon FNMA or
FHLMC notification of rejection. If for any reason we receive the related
mortgage note from FNMA or FHLMC, we will notify PaineWebber immediately and
either repurchase the loan or deliver the mortgage note to PaineWebber, in
accordance with PaineWebber's instructions.
Very truly yours,
[SELLER]
By: ____________________________
Name: ____________________________
Title:____________________________
25
<PAGE>
EXHIBIT B-1
[WAREHOUSE LENDER'S RELEASE]
Paine Webber Real Estate Securities Inc.
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
We hereby release all right, interest or claim of any kind, including
any security interest or lien, with respect to the mortgage loan(s) referenced
below, such release to be effective automatically without any further action by
any party, upon receipt, in one or more installments, from Paine Webber Real
Estate Securities Inc., in accordance with the wire instructions which we
delivered to you in a letter dated _________, 199__, in immediately available
funds, of an aggregate amount equal to the product of A multiplied by B (such
product being rounded to the nearest $0.01) multiplied by C.*
Street
Loan # Mortgagor Address City State Zip
- --------- ------------ ----------- ------- --------- ------
Very truly yours,
[WAREHOUSE LENDER]
By: ___________________________
Name: ___________________________
Title:___________________________
*A = weighted average trade price
B = principal amount of the mortgage loan(s)
C = 1 minus the discount set forth on the related funding
confirmation
26
<PAGE>
EXHIBIT B-2
[WAREHOUSE LENDER'S WIRE INSTRUCTIONS]
Paine Webber Real Estate Securities, Inc.
1285 Avenue of the Americas
New York, New York 10019
Re: Paine Webber Real Estate Securities, Inc. Conforming Whole Loan
Purchase: Cash Window Program with [Seller]
----------------------------------------------------------------
Ladies and Gentlemen:
Set forth below are [Warehouse Lender's] wire instructions
applicable to the above-referenced Conforming Whole Loan Purchase: Cash Window
Program.
Wire Instructions:
- -----------------
Bank Name:
City, State:
ABA #:
Account #:
Account Name:
Please acknowledge receipt of this letter in the space provided
below. This letter supersedes and replaces any prior notice specifying the name
of [Warehouse Lender] and setting forth wire instructions and shall remain in
effect until superseded and replaced by a letter, in the form of this letter,
executed by each of us and acknowledged by you.
Very truly yours,
[SELLER]
By: ________________________
Name: ________________________
Title:________________________
[WAREHOUSE LENDER(S)]*
By: _______________________
Name: _______________________
Title:_______________________
PAINE WEBBER REAL ESTATE SECURITIES INC.
By: _________________________
Name: Al Marrapodi
Tide: Managing Director
____________________________
. The authorized officer of each warehouse lender executing this letter must
be the same authorized officer as signs the Warehouse Lender's Release. Not
applicable if there is no warehouse lender.
27
<PAGE>
EXHIBIT C-1
[SELLER'S RELEASE]
Paine Webber Real Estate Securities Inc.
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
With respect to the mortgage loan(s) referenced below (a) we hereby
certify to you that the mortgage loan(s) is not subject to a lien of any
warehouse lender and (b) we hereby release all right, interest or claim of any
kind with respect to such mortgage loan, such release to be effective
automatically without any further action by any party upon payment from
Purchaser to Seller of an aggregate amount equal to the product of A multiplied
by B (such product being rounded to the newest $0.01) multiplied by C* in
accordance with our wire instructions in effect on the date of such payment.
Street
Loan # Mortgagor Address City State Zip
- ---------- ------------ ----------- -------- -------- --------
Very truly yours,
[SELLER]
By: ________________________
Name: ________________________
Title:________________________
*A = weighted average trade price
B = principal amount of the mortgage loan(s)
C = 1 minus the discount set forth on the related funding confirmation
28
<PAGE>
EXHIBIT C-2
[SELLER'S WIRE INSTRUCTIONS]
Paine Webber Real Estate Securities Inc.
1285 Avenue of the Americas
New York, New York 10019
Re: Conforming Whole Loan Purchase: Cash Window
Program with [Seller]
--------------------------------------------
Ladies and Gentlemen:
Set forth below are the [Seller's] wire instructions applicable to
the abovereferenced Conforming Whole Loan Purchase: Cash Window Program with
[Seller].
Wire Instructions:
- -----------------
Bank Name:
City, State:
ABA #:
Account #:
Account Name:
Please acknowledge receipt of this letter in the space provided
below. This letter supersedes and replaces any prior notice specifying our wire
instructions and shall remain in effect until superseded and replaced by a
letter, in the form of this letter, executed by us and acknowledged by you.
Very truly yours,
[SELLER]*
By: ____________________________
Name: ____________________________
Title:____________________________
Receipt acknowledged by:
PAINE WEBBER REAL ESTATE SECURITIES INC.
By: _____________________________
Name: Al Marrapodi
Title: Managing Director
_________________________
. The authorized officer of executing this letter must be the same authorized
officer as signs the Seller's Release. Applicable only if there is no
Warehouse Lender.
29
<PAGE>
EXHIBIT D
[PURCHASER'S WIRE INSTRUCTIONS TO SELLER]
Wire Instructions:
- -----------------
Bank Name:
City, State:
ABA #:
Account #:
Account Name:
Ref: [Name of Seller]
30
<PAGE>
EXHIBIT E
UCC-1 FINANCING STATEMENT
Debtor: [Seller]
Secured Party: Paine Webber Real Estate Securities Inc.
Item :
- -----
All right (including the power to convey title thereto), title and
interest of Debtor in and to the property listed below:
All participation certificates evidencing an interest in
mortgage loans, and all mortgage loans, mortgage notes,
mortgages or deeds of trust, assignments thereof and any and
all documents and instruments related thereto, which are
subject to the interest of Secured Party or any assignee
under or pursuant to the Mortgage Loan Participation
Agreements and Mortgage Loan Purchase Agreements between
Secured Party and the Debtor.
31
<PAGE>
EXHIBIT 10.39
AMENDMENT dated as of June 26, 1995 to the MORTGAGE LOAN PURCHASE
AGREEMENT, by and between Sutter Mortgage Corporation DBA Parkside Financial
("Seller") and Paine Webber Real Estate Securities Inc. ("Purchaser") dated as
of June 3, 1994 (the "Purchase Agreement").
WHEREAS, Buyer and Seller have entered into the Purchase Agreement to
engage in transactions under Purchaser's "Cash Window Purchase Program"; and
WHEREAS, Buyer and Seller desire to amend the Purchase Agreement.
NOW, THEREFORE, in consideration of the mutual promises set forth
herein and intending to be legally bound hereby, and for other good and valuable
consideration, the parties hereto agree as follows:
1. The definition of the term "Assignee" of the Purchase Agreement
is amended in its entirety to read as follows:
"Assignee": The Chase Manhattan Bank, National Association, as
agent for certain beneficiaries pursuant to certain Repurchase
Transaction Tri-Party Custody Agreements."
2. Paragraph 2 of the Purchase Agreement is amended by adding after
the definition of "Custodial Agreement" the following:
"Custodial Fee": With respect to each Mortgage Loan, the amount
set forth on the related Funding Confirmation as the "Custodial Fee".
3. The definition of the term "Custodian" of the Purchase
Agreement is amended in its entirety to read as follows:
"Custodian." The Chase Manhattan Bank, National Association and
its permitted successors hereunder.
4. The definition of the term "Performance Fee" of the Purchase
Agreement is amended in its entirety to read as follows:
"With respect to each Mortgage Loan, an amount equal to the
Discount less the Custodial Fee, plus the Yield Compensation
Adjustment plus or minus any other adjustments permitted hereunder,
which amount shall be payable to Seller by Purchaser as compensation
to Seller for its services hereunder."
5. This Amendment shall become effective as of the date first set
forth above.
<PAGE>
6. The Purchase Agreement shall remain in full force and effect in
its original form when this Amendment shall become effective except as the
Purchase Agreement is specifically amended by the terms of this Amendment.
7. Any reference to the Purchase Agreement made hereafter by any
party hereto shall be to the Purchase Agreement as amended by this Agreement.
Any reference in the Purchase Agreement to "this Agreement," "herein" or
"hereof," or words of like effect, shall be deemed to refer to the Purchase
Agreement as so amended.
8. This Amendment shall be construed in accordance with the internal
laws of the State of New York applicable to agreements made to be performed in
the State of New York.
9. This Amendment may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, and all of which taken
together shall constitute one and the same instrument, and it shall not be
necessary in making proof of this Amendment to produce or account for more than
one such counterpart.
10. Initially capitalized terms used herein but not defined herein
shall have the meanings ascribed to such terms in the Purchase Agreement.
IN WITNESS WHEREOF, the parties hereto caused this Amendment to be
executed by their respective duly authorized officers as of the date first set
forth above.
SUTTER MORTGAGE CORPORATION DBA PARKSIDE FINANCIAL
By: /s/ RONALD MORCK
-------------------------------
Name: Ronald Morck
-----------------------------
Title: President
----------------------------
PAINE WEBBER REAL ESTATE SECURITIES INC.
By: /s/ AL MARRAPODI
-------------------------------
Name: Al Marrapodi
Title: Managing Director
<PAGE>
EXHIBIT 10.40
THIS SUPPLEMENTAL AGREEMENT is entered into as of June 3, 1994,
------ --
between PAINEWEBBER REAL ESTATE SECURITIES INC. ("PWRES") and Sutter Mortgage
---------------
Corp, DBA:Parkside Financial ("Seller").
PRELIMINARY STATEMENT
---------------------
PWRES offers a Cash Window Funding Program and a Conduit Funding
Program (collectively, "PWRES Purchase Programs") which provide funding to
Seller after Seller has successfully closed single-family residential mortgage
loans. This Supplemental Agreement enables Seller as a user of one or more of
the PWRES Purchase Programs to accelerate the sale of those single-family
residential mortgage loans to PWRES to the closing date provided that all the
requirements of the applicable PWRES Purchase Program are satisfied.
The parties hereto agree as follows:
Section 1: Definitions.
-----------
"Cash Account": A separate cash account established and maintained by
Seller at Paine Webber Real Estate Securities Inc. under the conditions set
forth in Section 2.
"Cash Account Adjustment": An adjustment to the Cash Account Balance
pursuant to a Cash Account Adjustment Notice.
"Cash Account Adjustment Notice": The cash account adjustment notice,
in the form of Exhibit D, to be used by Purchaser to notify Seller of any
adjustment to the Cash Account Balance.
"Cash Account Balance": The net amount of funds in the Cash Account.
"Cash Account Interest Accrual": The simple interest calculation
posted on the last Business Day of each month resulting from the product of
each Business Day's Cash Account Balance and Cash Account Interest Rate.
"Cash Account Interest Rate": The opening federal funds rate for each
Business Day. The opening federal funds rate on a Business Day shall be
counted as the Cash Account Interest Rate until the next Business Day.
"Cash Account Wire Instructions": The wire instructions, set forth in
a letter in the form of Exhibit C, to be used for the payment of funds to
Seller.
"Collateral": The Mortgage Loans (including all servicing rights
related thereto), any Custodial Account, the Cash Account and the proceeds
of any and all of the foregoing.
<PAGE>
-2-
"Disbursement Amount": With respect to a Mortgage Loan the amount set
forth on the Dry/Cash Window, Conduit Loan Purchase Detail in the
"DISBURSEMENT AMOUNT" column.
"Dry/Cash Window, Conduit Loan Purchase Detail": A loan purchase
detail in the form of Exhibit A hereto.
"Escrow Agent": The agent appointed by a Title Insurance Company to
administer the closing of a Mortgage Loan.
"Escrow Agent Wire Instructions": With respect to a Mortgage Loan the
wire instructions set forth on the related Dry/Cash Window, Conduit Loan
Purchase Detail on the "WIRE INSTRUCTIONS" line.
"Purchase Price": The amount set forth in the PWRES Purchase
Agreement as the "Purchase Price" .
"PWRES Purchase Agreement": The Mortgage Loan Purchase Agreement used
in connection with the Cash Window Funding Program or the Mortgage Loan
Purchase Agreement used in connection with the Conduit Funding Program, as
applicable.
"PWRES Purchase Program": The PWRES Cash Window Funding Program or
the PWRES Conduit Funding Program, as applicable.
"Supplemental Amount": With respect to each Mortgage Loan an amount
equal to the Disbursement Amount less the Purchase Price.
"Title Insurance Company": A title insurance company acceptable to
Purchaser.
"Withdrawal/Deposit Notice": A notice, substantially in the form of
Exhibit B, delivered by Seller to PWRES, from time to time, in connection
with withdrawals from and deposits to the Cash Account.
"Wire Fee": For each disbursement relating to PWRES' purchase of a
Mortgage Loan, a fee payable to PWRES by Seller.
Capitalized terms used but not deflned herein shall have the meanings
set forth in the PWRES Purchase Agreement.
<PAGE>
-3-
Section 2: Cash Account.
------------
(a) Seller hereby authorizes and directs PWRES to create the Cash Account.
The Cash Account shall be held in trust for Seller subject to the terms and
conditions of this Section 2 and the PWRES Purchase Agreement. PWRES shall
notify Seller, via electronic or facsimile transmission, of the Cash Account
Balance on each Business Day that PWRES purchases a Mortgage Loan pursuant to
the terms of this Supplemental Agreement and the PWRES Purchase Agreement.
(b) PWRES shall credit the Cash Account for (i) any deposits therein by
Seller upon Seller's written direction pursuant to a Withdrawal/Deposit Notice,
(ii) any amounts due Seller and payable by PWRES under the PWRES Purchase
Program, (iii) any Supplemental Amount for any Mortgage Loan upon the refunding
to PWRES of the Disbursement Amount for such Mortgage Loan by the Escrow Agent
upon any failure to apply the Disbursement Amount in connection with the
proposed funding of a Mortgage Loan, (iv) any credit pursuant to a Cash Account
Adjustment and (v) any Cash Account Interest Accruals .
(c) PWRES shall debit the Cash Account for (i) any withdrawals therefrom
by Seller upon Seller's written direction pursuant to a Withdrawal/Deposit
Notice, (ii) any amounts due PWRES and payable by Seller under any PWRES
Purchase Program, (iii) the Supplemental Amount for any Mortgage Loan upon
payment of the Disbursement Amount for such Mortgage Loan to the Escrow Agent by
PWRES pursuant to Section 3(b) of this Supplemental Agreement, (iv) any debit
pursuant to a Cash Account Adjustment and (v) any Wire Fees.
(d) Upon termination of this Supplemental Agreement and payment in full of
all obligations owing by Seller hereunder and under the Custodial Agreement,
PWRES shall remit to Seller the Cash Account Balance.
Section 3. Procedure for Purchase of Mortgage Loans.
----------------------------------------
(a) Prior to PWRES' election to purchase any Mortgage Loan PWRES shall
have received from Seller:
(i) a Dry/Cash Window, Conduit Loan Purchase Detail containing all
information required by the PWRES Purchase Agreement plus the Escrow Agent
Wire Instructions; and
<PAGE>
-4-
(ii) all other documents required to be received by PWRES in
Section 2 of the PWRES Purchase Agreement, provided, however, that,
receipt by PWRES of a Dry/Cash Window, Conduit Loan Purchase Detail
shall satisfy the requirement that a Loan Purchase Detail be received
by PWRES
(b) If PWRES elects to purchase a Mortgage Loan, rather than paying
the Purchase Price in accordance with the Warehouse Lender's Instructions
or the Seller's Wire Instructions, PWRES shall pay the Purchase Price in
accordance with the terms of the Escrow Agent Wire Instructions.
Section 4. Applicability of Purchase Agreements. Seller hereby
------------------------------------
acknowledges that all other terms and conditions and all representations,
warranties and covenants of Seller set forth in the applicable Purchase
Agreements shall remain unaffected by this Supplemental Agreement.
Section 5. Construction. The headings in this Supplemental Agreement
------------
are for convenience only and are not intended to influence its construction.
References to Sections, Exhibits and Schedules in this Supplemental Agreement
are to the Sections of and Exhibits and Schedules to this Supplemental
Agreement. The Exhibits and Schedules are part of this Supplemental Agreement,
and are incorporated herein by reference. The singular includes the plural, the
plural the singular, and the words "and" and "or" are used in the conjunctive or
disjunctive as the sense and circumstances may require.
<PAGE>
-5-
IN WITNESS WHEREOF, PWRES and Seller have duly executed this Supplemental
Agreement gags of the date and year set forth on the cover page hereof.
PAINE WEBBER REAL ESTATE SECURITIES INC.
By: /s/ AL MARRAPODI
-------------------------------------
Name: Al Marrapodi
Title: Managing Director
By: /s/ RONALD MORCK
-------------------------------------
Name: Ronald Morck
Title: President
Address (if different from cover page):
<PAGE>
EXHIBIT A
PAINE WEBBER REAL ESTATE SECURITIES INC.
DRY/CASH WINDOW, CONDUIT LOAN PURCHASE DETAIL
CLIENT:_____________
EXPECTED DELIVERY DATE
OF MORTGAGE FILE IS:_____, 199_
<TABLE>
<CAPTION>
DISBURSEMENT NOTE # OF MONTHS TO
LOAN # LAST NAME FACE AMOUNT AMOUNT RATE MATURITY
----------- ----------- ------------- --------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
LOAN [TO BE COMPLETED BY SELLER]
DATA [TO BE COMPLETED BY CUSTODIAN]
BANK NAME CITY STATE ABA NUMBER ACCT. # TITLE COMPANY ORDER#
---------- ----------- ------------ --------------- ----------- ----------------- -------
WIRE [TO BE COMPLETED BY SELLER]
INSTRUCTIONS
COMMITMENT DELIVERY
TAKEOUT INVESTOR SALE PRICE COMMITMENT # EXPIRATION DATE DATE
------------------ ----------- ------------ ---------------- ------------
TAKEOUT [TO BE COMPLETED BY SELLER]
INFORMATION
</TABLE>
<TABLE>
<CAPTION>
DISBURSEMENT NOTE # OF MONTHS TO
LOAN # LAST NAME FACE AMOUNT AMOUNT RATE MATURITY
----------- ----------- ------------- --------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
LOAN [TO BE COMPLETED BY SELLER]
DATA [TO BE COMPLETED BY CUSTODIAN]
BANK NAME CITY STATE ABA NUMBER ACCT. # TITLE COMPANY ORDER#
---------- ----------- ------------ --------------- ----------- ----------------- -------
WIRE [TO BE COMPLETED BY SELLER]
INSTRUCTIONS
COMMITMENT DELIVERY
TAKEOUT INVESTOR SALE PRICE COMMITMENT EXPIRATION DATE DATE
------------------ ----------- ----------- ----------------- ------------
TAKEOUT [TO BE COMPLETED BY SELLER]
INFORMATION
</TABLE>
<PAGE>
EXHIBIT B
[SELLER'S LETTERHEAD]
WITHDRAWAL/DEPOSIT NOTICE: CASH ACCOUNT
Please process a wire transfer representing a:
WITHDRAWAL [_] (Please check
appropriate
DEPOSIT [_] box)
From/To our Cash Account in the amount of $________
The funds should be transferred in accordance with the following instructions:
Bank Name:
City, State:
ABA #
Account Name
Ref: [Name of Seller)
Deposits only require "Bank Name" and "City, State" information to be completed.
[SELLER]
By:__________________________
Name:________________________
<PAGE>
EXHIBIT C
[CASH ACCOUNT WIRE INSTRUCTIONS]
Paine Webber Real Estate Securities Inc.
1285 Avenue of the Americas
New York, New York 10019
Re: Dry Funding Program
-------------------
Ladies and Gentlemen:
Set forth below are the [Seller's] wire instructions applicable to the
above-referenced Dry Funding Program with [Seller].
Wire Instructions :
- -----------------
Wire Location No.1 Wire Location No.2
------------------ ------------------
Bank Name: Bank Name
City, State: City, State
ABA #: ABA #
Account #: Account #
Account Name: Account Name
Please acknowledge receipt of this letter in the space provided below.
This letter supersedes and replaces any prior notice specifying our wire
instructions for the Dry Funding Program and shall remain in effect until
superseded and replaced by a letter, in the form of this letter, executed by us
and acknowledged by you.
Very truly yours,
[SELLER]
By:__________________________________
Name:________________________________
Title:_______________________________
Receipt acknowledged by :
PAINE WEBBER REAL ESTATE SECURITIES INC.
By: _____________________________________
Name: Al Marrapodi
Title: Managing Director
*Please add additional signatures of any person authorized to execute a Cash
Account Withdrawal/Deposit Notice.
<PAGE>
EXHIBIT D
[CASH ACCOUNT ADJUSTMENT NOTICE]
[Date]
To: [SELLER]
Re: [SELLER'S CASH ACCOUNT #___]
A journal entry will be processed today reflecting the following adjustment
to your Cash Account Balance.
[_] CREDIT OF $ ___________
[_] DEBIT OF $ ___________
Explanation is as follows: ________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Upon request, additional backup documentation will be provided.
Very truly yours,
PAINE WEBBER REAL ESTATE SECURITIES INC
By:_____________________________________
Name:___________________________________
Title:__________________________________
<PAGE>
EXHIBIT 10.41
AMENDMENT dated as of June 26, 1995 to the MORTGAGE LOAN CUSTODIAL
AGREEMENT dated as of June 3, 1994 by and among Sutter Mortgage Corporation DBA
Parkside Financial ("Seller"), Paine Webber Real Estate Securities Inc.
("Purchaser") and Chemical Bank ("Predecessor Custodian").
WHEREAS, Seller and Purchaser have entered into one or more agreements
to engage from time to time in transactions pursuant to certain purchase
agreements ("Purchase Agreement"); and
WHEREAS, Seller, Purchaser and Predecessor Custodian have entered into
a Mortgage Loan Custodial Agreement, dated as of June 3, 1994 ("Custodial
Agreement"), to facilitate the transactions; and
WHEREAS, by letter dated as of the date hereof, Predecessor Custodian
has given Seller and Purchaser notice of its resignation as "Custodian" under
the Custodial Agreement effective as of June 30, 1995; and
WHEREAS, Seller and Purchaser desire to amend the Custodial Agreement
to provide for, among other things, the appointment of The Chase Manhattan Bank,
National Association ("Chase") as successor custodian to Predecessor Custodian;
and
WHEREAS, Chase is willing to accept its appointment and assume the
related obligations as successor custodian under the Custodial Agreement; and
NOW, THEREFORE, in consideration of the mutual promises set forth
herein and intending to be legally bound hereby, and for other good and valuable
consideration, the parties hereto agree as follows:
1. The cover page of the Custodial Agreement is amended by deleting
the following:
"CUSTODIAN: CHEMICAL BANK
ADDRESS: 55 WATER STREET
NEW YORK, NEW YORK 10041
ATTENTION:_________ "
and by replacing it with the following:
"CUSTODIAN: THE CHASE MANHATTAN BANK,
NATIONAL ASSOCIATION
ADDRESS : 4 METROTECH CENTER
BROOKLYN, NEW YORK 11245
ATTENTION: INSTITUTIONAL
TRUST GROUP, 3RD FLOOR"
<PAGE>
2. The definition of the term "Assignee" of the Custodial Agreement
is amended in its entirety to read as follows:
"Assignee": The Chase Manhattan Bank, National
Association, as agent for certain beneficiaries pursuant to
certain Repurchase Transaction Tri-Party Custody Agreements."
3. The definition of the term "Custodian" of the Custodial Agreement
is amended in its entirety to read as follows:
"Custodian." The Chase Manhattan Bank, National
Association and its permitted successors hereunder.
4. Clause (a) of Section 8 of the Custodial Agreement is amended in
its entirety to read as follows:
"It is understood that Seller will be charged for
Custodian's fees for its services under this Agreement in
such amounts and in the manner set forth in the related
Purchase Agreement. Notwithstanding the foregoing, Custodian
has no lien on, and shall not attempt to place a lien on,
any of the Mortgage Loans or proceeds thereof to secure the
payment of its fees."
5. The first sentence of clause (b) of Section 8 of the Custodial
Agreement is amended in its entirety to read as follows:
"Subject to the provisions of any other agreement
between Custodian and Purchaser, Custodian may only resign
with cause."
6. This Amendment shall become effective as of the date first set
forth above.
7. The Custodial Agreement shall remain in full force and effect in
its original form when this Amendment shall become effective except as the
Custodial Agreement is specifically amended by the terms of this Amendment.
8. Any reference to the Custodial Agreement made hereafter by any
party hereto shall be to the Custodial Agreement as amended by this Agreement.
Any reference in the Custodial Agreement to "this Agreement," "herein" or
"hereof," or words of like effect, shall be deemed to refer to the Custodial
Agreement as so amended.
9. This Amendment shall be construed in accordance with the internal
laws of the State of New York applicable to agreements made to be performed in
the State of New York.
10. This Amendment may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, and all of which taken
together shall constitute one and the same instrument, and it shall not be
necessary in making proof of this Amendment to produce or account for more than
one such counterpart.
<PAGE>
11. Initially capitalized terms used herein but not defined herein
shall have the meanings ascribed to such terms in the Custodial Agreement.
IN WITNESS WHEREOF, the parties hereto caused this Amendment to be
executed by their respective duly authorized officers as of the date first set
forth above.
SUTTER MORTGAGE CORPORATION DBA
PARKSIDE FINANCIAL
By: /s/ RONALD MORCK
--------------------------------
Name: Ronald Morck
------------------------------
Title: President
-----------------------------
PAINE WEBBER REAL ESTATE
SECURITIES INC.
By: /s/ AL MARRAPODI
--------------------------------
Name: Al Marrapodi
Title: Managing Director
THE CHASE MANHATTAN BANK,
NATIONAL ASSOCIATION
By: /s/ FRANK MILILLO
--------------------------------
Name: Frank Milillo
Title: Vice President
<PAGE>
EXHIBIT 10.42
REVOLVING CREDIT AND COLLATERAL LOAN AGREEMENT
REVOLVING CREDIT AND COLLATERAL LOAN AGREEMENT dated as of September 6,
1988, by and between Sutter Mortgage Corporation, a California corporation
(hereinafter called "Company"), and IMPERIAL BANK (hereinafter called "Bank").
In consideration of the mutual covenants and agreements contained
herein, Company and Bank agree as follows:
Section 1. DEFINITIONS
1.1 Defined Terms. All terms defined in this Agreement shall have the
-------------
defined meanings when used herein or in any note, certificate, report or other
document made or delivered pursuant to this Agreement, unless the context
otherwise requires. The following terms shall have the following meanings.
'Agreement' means this Revolving Credit and Collateral Loan Agreement as
originally executed and as the same may from time to time be amended or
supplemented.
'Business Day' means any day other than a Saturday, Sunday, or holiday
on which banks in the State of California are authorized by law to close.
'Collateral' means all property referred to and described in Section 2.6
hereof.
'Deed of Trust' means a deed of trust or mortgage in form satisfactory
to Bank (a) which secures a Mortgage Note and (b) the lien of which constitutes
a first lien on the real property described therein subject only to (i) liens
for taxes, assessments, or similar governmental charges not yet due and payable,
(ii) zoning restrictions, (iii) mineral reservations, easements, covenants,
conditions and restrictions of record which shall neither defeat nor render
invalid such lien, nor materially impair the merchantability, or value of such
real property, and (iv) such other exceptions to title as have been approved in
writing by Bank.
'Event of Default' means any event described in Section 8.1 hereof.
'FHA' means the Federal Housing Administration and any successor
thereto.
'FHA Mortgage' means a mortgage loan within acceptable limits insured by
the FHA.
'FHLMC' means the Federal Home Loan Mortgage Corporation and any
successor thereto.
'GNMA' means the Government National Mortgage Association and any
successor thereto.
-1-
<PAGE>
`Investor' means a bank, trust company, savings and loan association,
pension fund, governmental authority, insurance company, investment company, or
securities broker or dealer, designated by Company and approved by Bank.
`Investor Commitment' means an existing, written agreement, in form and
substance satisfactory to Bank, to Company from an Investor to purchase Mortgage
Loans.
`VA' means the Veterans' Administration and any successor thereto.
`VA Mortgage' means a mortgage loan within acceptable limits guaranteed
by the VA.
`Mortgage Loan' means any loan evidenced by a Mortgage Note.
`Mortgage Note' means a negotiable promissory note executed by a bona
fide third party who has the capability to contract, payable to Company in
monthly installments, matures in thirty (30) years or less, and is secured by a
Deed of Trust on such real property described therein.
`Person' means a corporation, association, partnership, trust,
organization, business, individual or government or governmental agency or
political subdivision thereof.
`Prime Rate' means the floating commercial loan base or reference rate
of interest announced by Bank from time to time as its 'Prime Rate'.
`Revolving Loan' and 'Revolving Loans' mean any or all of the loans from
Bank to Company established pursuant to this Agreement.
`Revolving Note' means the Company's promissory note issued to Bank
pursuant to Section 2.2 hereof with appropriate insertions.
`Servicing Portfolio' means a number of mortgage notes serviced by
Company for the purpose of processing payments thereon on behalf of the owner
thereof, for which service Company is paid a fee.
`Tangible Net Worth' shall mean the excess of all of the Company's
assets (excluding any value for goodwill, trademarks, patents, copyrights,
organization expense and other similar intangible items) over all its
liabilities as determined and computed in accordance with generally accepted
accounting principles consistently applied.
`Total Debt' shall mean the total of all items of indebtedness,
obligation or liability which in accordance with generally accepted accounting
principles consistently applied would be included in determining total
liabilities as shown on the liability side of a balance sheet of the Company at
the date as of which Total Debt is to be determined.
-2-
<PAGE>
Section 2. AMOUNT AND TERMS OF CREDIT
2.1 Revolving Loans. Subject to the terms and conditions of this
---------------
Agreement, Bank agrees to make loans (herein the 'Revolving Loan') to which
amounts shall not exceed the sum of Five Million and No/100 Dollars ($5,000,000)
in the aggregate outstanding at any one time. Bank's obligation to make the
Revolving Loans shall terminate on the maturity date set forth in the Revolving
Note as described in Section 2.2 hereof subject to any renewal extension of the
Revolving Note.
2.2 Revolving Note. The obligation of Company to repay the Revolving
--------------
Loans shall be evidenced by a Revolving Note, payable as set forth in Sections
2.4 and 2.5 hereof, all amounts outstanding becoming finally due and payable as
specified in the Revolving. Note if not paid before. Bank shall record the
principal amount of the initial Revolving Loan on the schedule annexed to the
Revolving Note. Additional Revolving Loans made by Bank and payments and
prepayments of principal with respect to the Revolving Note shall be evidenced
by notations made by Bank on the schedule annexed to the Revolving Note showing
the date and amount of each Revolving Loan, payment or prepayment of principal.
The aggregate unpaid amount of Revolving Loans set forth on the schedule annexed
to the Revolving Note or in the records of Bank shall be presumptive evidence of
the principal amount owing and unpaid on the Revolving Note.
2.3 Interest. The Revolving Note shall bear interest upon the unpaid
--------
principal balance from its date at a fluctuating rate per annum equal to Bank's
Prime Rate plus One and One-half percent (P + 1 1/2%), due and payable on the
thirtieth (30th) day of each month, commencing October 30, 1988, and at maturity
of the Revolving Note or on termination of this Agreement, on which date all
interest remaining unpaid shall be due and payable. Should interest not be paid
before the first day of the succeeding month, it shall thereafter bear like
interest as the principal. All interest shall be calculated on the basis of a
year of 360 days and the actual number of days. Any change in the interest rate
on the Revolving Note resulting from a change in the Prime Rate shall become
effective as of the day on which such change in the Prime Rate shall become
effective.
2.4 Regular Principal Payments. The amount received directly by
--------------------------
Company or from sale of said Mortgage Loans to any designated government or
institutional investor or by any other collection of any principal amount shall
be due and payable to Bank immediately following such receipt for application
to unpaid principal and interest on the Revolving Loans.
2.5 Payment of Principal on Demand. Company will pay Bank on demand the
------------------------------
full amount of any outstanding Revolving Loan in the event that:
-3-
<PAGE>
A. Said Revolving Loan shall be outstanding for more than 120 days.
B. Any default shall occur with respect to the corresponding Mortgage
Loan.
2.6 Collateral. As security for the Revolving Loans and any other
----------
obligations of Company under this Agreement, Company does hereby pledge, assign
and hypothecate to Bank, and grant to Bank a security interest in, the
following:
A. Mortgage Notes, Deeds of Trust, documents and other property as
shall be deposited with or held by Bank or its agent in trust for Bank pursuant
to this Agreement, the Mortgage Loans evidenced thereby and the proceeds
thereof;
B. All hazard insurance policies, title insurance policies, and any
proceeds thereof, and any condemnation proceeds;
C. All files, surveys, certificates, correspondence, appraisals,
computer programs, tapes, discs, cards, accounting records and all other
records, information and data of Company relating to the Mortgage Loans assigned
hereunder;
D. Any and all deposit accounts maintained by Company with Bank; and
E. Any other property and proceeds thereof that may from time to time
hereafter be delivered by Company to Bank or to its agent to be held in trust
for Bank pursuant to this Agreement.
F. Any and all assets of Company, real or personal.
G. All Investor Commitments covering the Mortgage Loans assigned
hereunder to the extent that the granting of a security interest in same shall
not violate any restrictions against assignment contained in said investor
commitments, and in the proceeds resulting from sales by Company pursuant
thereto.
2.7 Limitations on Amounts Funded. In no event shall any advance under
-----------------------------
the Revolving Loan exceed the maximum investor commitment ceiling of the
corresponding Mortgage Loan assigned hereunder, as those ceilings may change
from time to time. Bank reserves the right to approve any changes in these
ceilings.
2.8 Transmittal of Mortgage Loans.
-----------------------------
A. So long as no Event of Default shall occur or exist, Bank may, in
its discretion, deliver or release any Mortgage Loan constituting Collateral and
all related documents to Company so that Company may transmit such documents to
the appropriate investor for purchase in accordance with the Purchase Contract
or Investor Commitment.
B. Transmittal shall be in such form as shall be satisfactory to
Bank, including, without limitation, (a) Company's execution and delivery of a
Trust Receipt with appropriate insertions for any Mortgage Loan released to
Company, and (b) written
-4-
<PAGE>
notice to Bank from any officer of Company authorized to request a Revolving
Loan specified herein.
C. In the case of Mortgage Loans, the approved investor shall
immediately return all loan documents to Bank if payment is not made within
fifteen (15) days from the date of transmittal by Bank of Company, and Company
shall immediately return all loan documents to Bank if transmittal to an
approved investor is not completed within three (3) days from the date of
transmittal by Bank. Payments received from approved investors shall be applied
first to the satisfaction of Company's obligations under this Agreement, and
charges in connection therewith, and the remainder, if any, shall be paid to
Company.
2.9 Redemption of Collateral. So long as no Event of Default shall
------------------------
occur or exist, Company may redeem, free from any security interest of Bank, any
Mortgage Loan constituting Collateral and all related documents upon payment to
Bank of the principal amount of the Revolving Loan advanced therefor plus
interest accrued thereon.
2.10 Disbursement of Revolving Loans. Bank shall fund according to a
-------------------------------
funding schedule submitted by Company into a pre-designated funding account
maintained by Company at bank.
2.11 Holiday Payments. If any payment to be made by Company hereunder or
----------------
under the Revolving Note shall become due on a day other than a Business Day,
such payment shall be made on the next succeeding Business Day and such
extension of time shall be included in computing any interest in respect of such
payment.
Section 3. CONDITIONS OF LENDING
3.1 Conditions Precedent to Borrowing. Bank shall not be obligated to
---------------------------------
lend to Company and no Revolving Loan shall be made to Company under this
Agreement unless the following conditions precedent have been satisfied:
A. Company shall comply, and shall have complied, with all of the
covenants, representations and warranties under this Agreement and no Event of
Default shall have occurred and be continuing.
B. Company shall have validly executed and delivered to Bank in form
and substance satisfactory to Bank the following:
1. A corporate resolution of the Board of Directors of Company
authorizing the execution of this Agreement, the Revolving Note, and any and all
other documents related to this Agreement;
2. This Agreement duly executed;
3. The Revolving Note duly executed;
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4. A corporate resolution of the Board of Directors of
Guarantor authorizing the execution of the Continuing Guaranty;
5. The Continuing Guaranty duly executed;
6. Such other documents as Bank may reasonably request or as
otherwise specified herein in order to effect fully the purposes of this
Agreement.
3.2 Conditions Precedent to First Borrowing and Each Subsequent
-----------------------------------------------------------
Borrowing. The obligation of Bank to make each Revolving Loan hereunder is
- ---------
subject to the following conditions:
A. Each Mortgage Loan constituting Collateral is on completed,
improved, 1-4 family residential property in such jurisdictions as may be
approved by Bank; is secured by a first lien on said property; is a FNMA, FHLMC,
GNMA, or HUD Quality Mortgage and is qualified as a saleable loan directly under
Company's Seller/Servicer status with FNMA, FHLMC, GNMA, HUD, or institutional
investors designated and approved by Bank. There shall exist no default under
any assigned Mortgage Note or corresponding Mortgage Loan, and each Mortgage
Loan must be approved by Bank for use as Collateral hereunder;
B. Bank shall have received the following in form and substance
satisfactory to Bank:
1. Original Mortgage Note endorsed in blank by Company;
2. Assignment to Bank of the Deed of Trust. Such Assignment
shall be recorded at Bank's discretion;
3. Certified Copy of the Deed of Trust;
4. An appraisal of the property securing the corresponding
Mortgage Note; and
5. A funding schedule completed by Company.
6. Other documentation as Bank may reasonably require.
C. 1. All loans on leasehold interest must conform to FHLMC
guidelines.
2. For each jumbo loan, up to a maximum of $500,000 per loan, a
written approval of the specific loan by the investor and a maximum loan to
value rate of 80%.
Section 4. COMPANY'S REPRESENTATIONS AND WARRANTIES
Company makes the following representations and warranties which shall
be deemed to be continuing representations and warranties so long as any credit
hereunder shall be available and until payment in full of the Revolving Note:
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4.1 Existence and Rights. Company is a corporation duly organized and
--------------------
existing in good standing under the laws of the State of California without
limit as to the duration of its existence; Company has corporate powers and
adequate authority, rights and franchises to own its property and to carry on
its business as now conducted, and is duly qualified and in good standing in
each State in which the character of its business makes such qualification
necessary; Company has the corporate power and adequate authority to make and
carry out this Agreement and to issue the Revolving Note as herein provided;
and Company's chief executive office is located in the State of California.
4.2 Agreement and Revolving Note Authorized. The execution, delivery
---------------------------------------
and performance of this Agreement, and the execution and delivery of the
Revolving Note are duly authorized and do not require the consent or approval of
any governmental body or other regulatory authority; are not in contravention of
or conflict with any law or regulation or any term or provision of its Articles
of Incorporation or bylaws; and this Agreement is, and the Revolving Note when
delivered for value received will be, the valid, binding and legally enforceable
obligations of Company in accordance with their terms.
4.3 No Conflict. The execution, delivery and performance of this
-----------
Agreement and of the Revolving Note will not breach or constitute a default
under any agreement, indenture, undertaking or other instrument to which Company
is a party or by which it or any of its property may be bound or affected, and,
other than in favor of Bank, such execution, delivery and performance will not
result in the creation or imposition of (or the obligation to create or impose)
any lien, charge or encumbrance on, or security interest in, any of its property
pursuant to the provisions of any of the foregoing.
4.4 Litigation. There is no litigation or other proceeding pending or,
----------
to the knowledge of Company, threatened against or affecting it or its
properties which, if determined adversely to Company, would have a materially
adverse effect on the financial condition, properties or operations of Company,
and it is not in default with respect to any order, writ, injunction, decree or
demand of any court or other governmental or regulatory authority.
4.5 Financial Condition. The opening balance sheet of Company as of
-------------------
June 30, 1988, a copy of which has heretofore been delivered to Bank by
Company, and all other statements and data submitted in writing in connection
with the request for the credit granted by this Agreement are true and correct,
and said balance sheet truly represents the financial condition of Company as at
the date thereof, and have been
-7-
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prepared in accordance with generally accepted accounting principles on a basis
consistently maintained. Since said date there have been no changes in the
assets or liabilities or financial condition of Company other than changes in
the ordinary course of business, and no such changes have been materially
adverse changes. Company has no knowledge of any liabilities, contingent or
otherwise, at said date not reflected in said balance sheet, and Company has not
entered into any commitments or contracts which are not reflected in said
balance sheet, other than in the ordinary and normal course of its business,
which may have a materially adverse effect upon its financial condition,
operations or business as conducted.
4.6 Tax and Renegotiation. Company's federal income tax liability has
---------------------
been finally determined for all years to and including fiscal 1987, and Company
has no liability for renegotiation of profits; all applicable state franchise
and income taxes have been paid.
4.7 Regulations G, T, & U. Company is not engaged principally or as one
---------------------
of its important activities, in the business of extending credit for the purpose
of purchasing or carrying any margin stock (as defined within Regulations G, T,
& U of the Board of Governors of the Federal Reserve System), and not more than
twenty-five (25%) of the value of the Company's assets and other property
consists of such margin stock.
4.8 Other Regulations. Neither Company nor any affiliate thereof is
-----------------
subject to any statute or regulation restricting the ability of Company or any
affiliate thereof to incur indebtedness or encumber its respective properties.
4.9 Compliance With Real Estate Legislation. Any Mortgage Loan
---------------------------------------
constituting Collateral will have been made in compliance with the following
laws and any regulations promulgated thereunder, including the making of all
required disclosures correctly to all Persons entitled to receive them within
the time specified by such law or rules.
A. Real Estate Settlement Procedures Act of 1974;
B. Equal Credit Opportunity Act - Regulation B;
C. Truth In Lending Act - Regulation Z.
Further, Company is fully familiar with the requirements of the laws of the
applicable jurisdiction which assigned Mortgage Loans originate with regard to
fair lending practices, and all Mortgage Loans which are assigned to secure
Revolving Loans hereunder shall be made in strict compliance with the provisions
of any act, law or regulation which governs lending practices in the applicable
jurisdiction.
-8-
<PAGE>
4.10 FNMA, FHLMC, GNMA, or HUD Eligibility of Company. Company is an
------------------------------------------------
approved seller/servicer of Mortgage Notes to FNMA, FHLMC, GNMA, or HUD in the
FNMA, FHLMC, GNMA, or HUD regions in which it operates and meets all applicable
FNMA, FHLMC, GNMA, or HUD regulations so as to be able to originate, purchase,
and service Mortgage Notes sold to FNMA, FHLMC, GNMA, or HUD.
4.11 Title to Notes and Mortgages. At the time of their assignment to
----------------------------
Bank as Collateral, the Mortgage Notes and Deeds of Trust will be held by
Company as the true and lawful owner thereof, each Mortgage Note will evidence a
bona fide indebtedness incurred by the maker thereof in the amount of such
Mortgage Note, and each Deed of Trust will represent a valid first lien on the
property described therein. There are, or will be, no defenses, counterclaims,
or setoffs to the knowledge of Company which may be asserted against the
Mortgage Notes or the holder thereof. All financial information relating to the
Collateral, submitted by Company to Bank, whether previously or in the future,
is or will be true and correct.
4.12 Compliance with Commitments. Each Mortgage Loan assigned
----------------------------
hereunder will comply in all respects with underwriting standards of FNMA,
FHLMC, GNMA, HUD, or institutional investor designated and approved by Bank as
amended from time to time.
4.13 Loans in Special Flood Hazard Areas. Company will not make,
------------------------------------
increase, extend or renew any Mortgage Loan secured by real property located or
to be located in a Special Floor Hazard Area so designated by the Secretary of
Housing and Urban Development if said Mortgage Loan is to be assigned as
Collateral under this Agreement, unless the community in which such area is
situated is then participating in the National Flood Insurance Program, and the
property covered by the related Deed of Trust is insured under such program.
Section 5. BANK'S REPRESENTATIONS
5.1 Nonreliance. Bank is not relying on or looking to any capital
-----------
stock or other security (as defined in Regulation U of the Board of Governors of
the Federal Reserve System) now or hereafter owned by Company for the repayment
of the Revolving Loans.
5.2 Investment Intent. Bank is making the Revolving Loans and
-----------------
receiving the Revolving Note for its own account and not with a view to the
distribution thereof subject, nevertheless, to any requirement that its property
shall at all times be within its control, and subject further to Bank's right
(reserved hereby) to sell participations in the Revolving Note.
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<PAGE>
Section 6. COMPANY'S AFFIRMATIVE COVENANTS
Company covenants and agrees that, so long as any credit hereunder
shall be available and until payment in full of the Revolving Note, unless Bank
shall otherwise consent in writing, Company shall do all of the following:
6.1 Corporate Rights and Facilities. Maintain and preserve its
-------------------------------
corporate existence and all rights, privileges, franchises and other authority
adequate for the conduct of its business; maintain its properties, equipment and
facilities in good order and repair; conduct its business in an orderly manner
without voluntary interruption; and maintain its chief executive office in the
State of California.
6.2 Insurance. Maintain insurance with responsible insurance carriers
---------
against such risks and in such amounts as is customarily carried by similar
businesses, including, without limitation, errors and omissions, fire, public
liability, property damage, workers' compensation and interruption of business
insurance.
6.3 Taxes and Other Liabilities. Pay and discharge, before the same
---------------------------
become delinquent and before penalties accrue thereon, all taxes, assessments
and governmental charges upon or against it or any of its properties, and all
its other liabilities at any time existing, except to the extent and so long as:
A. The same are being contested in good faith and by appropriate
proceedings in such manner as not to cause any materially adverse effect upon
its financial condition or the loss of any rights of redemption from any sale
thereunder; and
B. It shall have set aside on its books reserves (segregated to the
extent required by generally accepted accounting principles) adequate with
respect thereto.
6.4 Other Taxes and Charges. Pay all governmental charges or taxes
-----------------------
(except income, franchise or other similar taxes) at any time payable or ruled
to be payable in respect of the existence, execution or delivery of this
Agreement or the existence or issuance of the Revolving Note by reason of any
existing or hereafter enacted federal or state statute.
6.5 Records and Report. Maintain a system of accounting in accordance
------------------
with generally accepted accounting principles on a basis consistently
maintained; permit representatives of Bank to have access to and to examine its
properties, books and records at all reasonable times; and furnish at Company's
expense to the Bank:
A. As soon as available, and in any event within 45 days after the
close of each quarter of the first three quarters of each fiscal year of
Company, commencing with the quarter ending September 30, 1988, a balance sheet,
profit and loss statement and reconciliation of capital accounts of Company as
at the close of such quarter and covering operations for the portion of
Company's fiscal year ending on the last day of
-10-
<PAGE>
such quarter, all in reasonable detail and stating in comparative form the
figures for the corresponding date and period in the previous fiscal year,
prepared in accordance with generally accepted accounting principles on a basis
consistently maintained by Company and certified by an appropriate officer of
Company, subject, however, to year-end audit adjustments;
B. As soon as available, and in any event within 90 days after the
close of each fiscal year respectively, a balance sheet, profit and loss
statement and reconciliation of capital accounts of Company as at the close of
and for such fiscal year, all in reasonable detail and stating in comparative
form the figures as at the close of and for the previous fiscal year, audited by
and with the unqualified opinion of certified public accountants satisfactory to
Bank;
C. Promptly after thereof by Company, copies of any detailed audit
reports submitted to Company by independent accountants in connection with each
annual or interim audit of the accounts of the Company made by such accountants.
D. Currently with delivery of the documents provided for in Section
6.5.B hereof, a certificate of the President and Executive Vice President of
Company, stating that Company has performed and observed each and every covenant
contained in this Agreement to be performed by it and that no Event of Default
has occurred and no condition then exists which constitutes an Event of Default
hereunder or would constitute such an Event of Default upon the giving of
notice, the lapse of time, or both, specified herein; or, if any such event has
occurred or any such condition exists, specifying the nature thereof; and
E. Such other information relating to the affairs of Company as Bank
may reasonably request from time to time.
6.6 Notice of Certain Events. Promptly notify Bank in writing of the
------------------------
occurrence of any (a) Event of Default hereunder or event which would become an
Event of Default hereunder upon giving of notice, the lapse of time, or both;
(b) event which entitles Bank to accelerate the maturity of any Mortgage Note;
(c) event which entitles Bank to receive the proceeds of any insurance policies
associated with any Mortgage Loan assigned hereunder; (d) event which entitles
Bank to receive any proceeds payable to Bank by the terms of the Deed of Trust
securing any Mortgage Note; (e) assignment, transfer, pledge or other
encumbrance of any shares of FNMA, FHLMC, GNMA, or HUD stock which Company owns
or may hereafter acquire and which are restricted from sale under any existing
or future Investor servicing agreement; (f) contemplated sale, assignment,
transfer, pledge or other encumbrance of twenty-five percent (25%) or more of
Company's affiliate (Western States Servicing Corp.) total Servicing Portfolio;
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<PAGE>
executive headquarters; (h) change in the name or trade name of Company; or (i)
event which entitles Bank to payment on demand of any Revolving Loan as set
forth in Section 2.5.1 hereof.
6.7 Bank Expenses. Pay all out-of-pocket expenses and processing fees
-------------
to the Bank in connection with the administration and enforcement of this
Agreement and the Revolving Loans and security therefor, or any waiver or
amendment of any provision hereof. Company agrees to indemnify Bank from and
hold it harmless against any transfer taxes, documentary taxes, assessments or
charges made by any governmental authority by reason of the execution, delivery
and performance of this Agreement, the Revolving Loans and security therefor.
The obligations of Company under this Section 6.7 shall survive payment of any
Revolving Loan and assignment of any rights hereunder.
6.8 Regulatory Compliance. Originate Mortgage Loans in compliance with
---------------------
all applicable federal, state and local laws and regulations, including without
limitation those specified in Section 4.9 hereof, and, at Bank's request provide
Bank with an opinion of counsel for Company with respect to the matters set
forth in Section 4.1, 4.2, 4.3, 4.7, 4.8, and 4.9 hereof and such other matters
as Bank shall reasonably request.
Section 7. COMPANY'S NEGATIVE COVENANTS
Company covenants and agrees that so long as any credit hereunder shall
be available and until payment in full of the Revolving Note, Company shall not
do any of the following without the written consent of Bank:
7.1 Type of Business. Make any substantial change in the present
----------------
character of its business.
7.2 Loans and Investments. Lend money or extend credit other than in
---------------------
the ordinary and normal course of its business as presently conducted; invest
other than in (a) direct obligations of the United States Government, (b)
interest bearing certificates of deposit issued by any commercial banking
institution or savings and loan association with total assets of not less than
One Hundred Fifty Million Dollars ($150,000,000.00) and organized under the laws
of the United States or any State thereof, (c) prime commercial paper rated
Prime 1 or higher by Moody, A-1 or higher by Standard and Poors, and F-1 or
higher by Fitch, (d) stock of FNMA, and (e) GNMA securities.
7.3 Sale of Business. Sell any assets except in the ordinary and
----------------
normal course of its business as now conducted; or sell, lease, assign, or
transfer any substantial part of its business or fixed assets, or twenty-five
percent (25%) or more of its affiliate's total Servicing Portfolio, or any
property or other assets necessary for the
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<PAGE>
continuance of its business as now conducted, including, without limitation, the
selling of any property or other asset accompanied by the leasing bank of the
same.
7.4 Regulations G, T, and U. Use the proceeds of the Revolving Loans,
-----------------------
directly or indirectly, to purchase or carry any margin stock (within the
meaning of Regulations G, T, and U of the Board of Governors of the Federal
Reserve System) or extend credit to others for the purpose of purchasing or
carrying, directly or indirectly, any margin stock.
7.5 Transfers, Encumbrances, and Subordination of Collateral.
--------------------------------------------------------
Transfer, further encumber or subordinate Company's interest in any of the
collateral, including without limitation the real property described in the
Deeds of Trust assigned hereunder.
7.6 Liens. Create, incur, assume, or permit to exist any lien,
-----
security interest; pledge, assignment, encumbrance or charge of any kind, except
in favor of Bank, of or on twenty-five percent (25%) or more of its total
Servicing Portfolio or any accounts maintained with Bank.
7.7 Other Borrowers. Incur any indebtedness, other than normal
---------------
accruals and operating expenses.
Section 8. EVENTS OF DEFAULT
8.1 Events of Default. Events of Default, as used herein, means any
-----------------
one or more of the following events:
A. Failure to Pay Note. Failure to pay any installment of principal
-------------------
of, or interest on, the Revolving Note when due or any other monetary
obligations as required hereunder.
B. Default in Other Agreements. Failure to pay, or any default on the
---------------------------
payment of, any principal of or any interest on any indebtedness of Company, or
any breach with respect to any term of any evidence of such indebtedness, or of
any loan agreement, mortgage, indenture or other agreement relating thereto,
whether or not waived by the note holder or obligee.
C. Breach of Covenant. Failure of Company to perform any other terms
------------------
or condition of this Agreement binding upon Company.
D. Breach of Representation or Warranty. Any of Company's
------------------------------------
representations or warranties made herein or any statement or certificate at any
time given in writing pursuant hereto or in connection herewith shall be false
or misleading in any material respect.
E. Bankruptcy or Insolvency. A court having jurisdiction shall enter
------------------------
a decree or order for relief in respect of the Company in an involuntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or
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<PAGE>
appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator
(or similar official) of the Company, or for any substantial part of its
properties, or ordering the winding up or liquidation of its affairs; or the
Company shall commence a voluntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or shall consent to
the entry of an order for relief in an involuntary case under any such law, or
shall consent to the appointment of or taking possession by a receiver,
liquidator, assignee, trustee, custodian, sequestrator (or similar official) of
the Company, or for any substantial part of its properties, or shall make any
general assignment for the benefit of creditors, or shall fail generally to pay
its debts as they become due or shall take any corporate action in furtherance
of any of the foregoing.
F. Judgments, Attachments. Any money judgment, writ or warrant of
----------------------
attachment, or similar process shall be entered or filed against Company or any
of its assets and shall remain unvacated, unbonded or unstayed for a period of
30 days or in any event later than five days prior to the date of any proposed
sale thereunder.
8.2 Remedies Upon Default.
---------------------
A. Upon the occurrence of an Event of Default, automatically upon the
happening of any Event of Default specified in Section 8.1.E hereof, and with
respect to the other Events of Default at its option, without demand,
presentment or notice, all of which hereby are expressly waived by Company, Bank
(or the holder of the Revolving Note) may exercise one or more of the following
remedies:
1. Terminate all credit hereunder and all obligations of Bank
to make any Revolving Loan hereunder.
2. Declare the Revolving Note to be immediately due and
payable, whereupon it shall be due and payable.
3. Notify all obligors on or under the Collateral that the same
has been assigned to Bank and that all payments thereon are to be made directly
to Bank or such other party as may be designated by Bank; settle, compromise, or
release, in whole or in part, any amounts owing on the Collateral or any portion
thereof by any obligor on terms acceptable to Bank; enforce payment and
prosecute any action or proceeding with respect to any and all Collateral;
extend the time of payment, make allowances and adjustments and issue credits in
Bank's name or in the name of the Company; where any such Collateral is in
default, foreclose on, and enforce security interests in, such Collateral by any
available judicial procedure or with judicial process and sell property acquired
as a result of such foreclosure; pay, purchase, contest, interplead or
compromise any encumbrance, charge or lien which in the judgment of Bank appears
to be prior or superior to Bank's interest.
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<PAGE>
4. Act as servicer of each item of collateral requiring
servicing and perform all obligations required in connection with FNMA, FHLMC,
GNMA, or HUD Commitments, or contract with a third party to so act or perform,
such third party's fees to be paid by Company.
5. Proceed in the foreclosure of Bank's security interest in
the Collateral in any manner permitted by law or provided for herein, and
exercise all rights and remedies under the Uniform Commercial Code including
selling the Collateral at public or private sale, without having the Collateral
at the place of sale, and upon terms and in such manner as Bank may determine,
and Bank may purchase same at any such sale. Bank may retain the Collateral in
full satisfaction of the indebtedness secured thereby.
6. Exercise any and all other rights and remedies of Bank as it
shall deem appropriate at law, in equity, or otherwise.
B. Upon any Event of Default hereunder and any default by any party
obligated under any of the Collateral, Bank may, but shall not be obligated to
(a) collect by legal proceedings all interest, principal payments and other sums
payable on account of such Collateral, (b) grant extensions of time, (c) make
any compromise or settlement it seems desirable with respect to such Collateral,
(d) waive or release security, (e) foreclose by any appropriate means any
Mortgage Loan which is in default, (f) pursue any other rights and remedies
available to Company, and/or (g) require Company to pursue, in its own name but
for the benefit of Bank, any one ore more of the remedies described in (a)
through (f) above.
If any Mortgage Loan shall be foreclosed pursuant to the preceding
sentence, such foreclosure may be by judicial or non-judicial sale, and Bank
shall be entitled to direct the order and manner of sale and cause the sale to
be made on any terms and conditions it deems appropriate and to apply all cash
proceeds of the sale (after deduction of expenses of sale) to the balance owing
on the Revolving Note. Without limiting the generality of the foregoing, Bank
may bid all or a portion of the indebtedness owing under the Mortgage Note and
may become the purchaser of and take title to the property securing the
Mortgage Loan. In such event, Company shall receive credit against the balance
owing on the Revolving Note only to the amount of the indebtedness bid by Bank,
and in connection with any such sale, Company hereby waives any defenses or
benefits that may be derived from California Code of Civil Procedure Sections
580 (a), 580 (d), or 726 or any similar laws of any other jurisdiction and all
suretyship defenses.
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<PAGE>
C. Bank shall have the right to enforce one or more remedies
hereunder successively or concurrently, and any such action shall not stop or
prevent Bank from pursuing any further remedy which it may have hereunder or by
law.
8.3 Application of Proceeds. Any money collected by Bank pursuant to
-----------------------
Section 8.2 hereof (whether by means of voluntary payment, foreclosure, or
otherwise) shall be promptly applied as follows unless otherwise required by
provision of applicable law:
A. First, to the payment of all expenses incurred by Bank under this
Agreement and in enforcing its rights hereunder, including without limitation
all costs and expenses of collection, attorneys' fees, court costs, and
foreclosure expenses.
B. Next, to the payment of all Revolving Loans due and unpaid by
Company to Bank (including interest accrued on the Revolving Note).
C. Next, to the payment of any other amounts owed by Company to Bank
under this Agreement.
D. Next, to Company.
It is expressly understood between the parties hereto that Bank's
ability to collect any deficiency on the Revolving Note shall in no way be
impaired by the above-referenced application of proceeds.
Section 9. MISCELLANEOUS
9.1 Survival of Warranties. All agreements, representations and
----------------------
warranties made herein shall survive the execution and delivery of this
Agreement, the making of the Revolving Loans hereunder and the execution and
delivery of the Revolving Note.
9.2 Failure of Indulgence Not Waiver. No failure or delay on the part
--------------------------------
of Bank or any holder of the Revolving Note in the exercise of any power, right
or privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privilege. All rights and
remedies existing under this Agreement and the Revolving Note are cumulative to,
and not exclusive of, any rights or remedies otherwise available.
9.3 Modification. This Agreement and the Revolving Note may not be
------------
amended, waived or modified in any manner without the written consent of Bank
and Company.
9.4 Notices. Except as otherwise expressly provided herein, any notice
-------
herein required or permitted to be given shall be in writing and may be
personally served or sent by United States mail and shall be deemed to have been
given when deposited in the United States mail, registered, with postage prepaid
and properly addressed. For
-16-
<PAGE>
the purposes hereof, the addresses of the parties hereto (until notice of a
change thereof served as provided in this Section 9.4) shall be as follows:
SUTTER MORTGAGE CORPORATION
710 South Broadway Suite 208
Walnut Creek, CA 94596
Attn: Arthur Sutter
IMPERIAL BANK
9920 South LaCienega Blvd., Suite 1001
Inglewood, California 90301
Attn: Paul Ng, Vice President
9.5 Separability. In case any provision in this Agreement or in the
------------
Revolving Note shall be invalid, illegal or unenforceable, such provision shall
be severable from the remainder of such contact and the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
9.6 Applicable Law. This Agreement, the Revolving Note, all documents
--------------
provided for herein and the rights and obligations of the parties thereto shall
be governed by the laws of the State of California. The Bank retains all of its
rights under federal law, including those relating to the charging of interest
rates.
9.7 Assignability. This Agreement is not assignable.
-------------
9.8 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
9.9 Section Headings. The various headings used in this Agreement are
----------------
inserted for convenience only and shall not affect the meaning or
interpretations of this Agreement or any provision hereof.
9.10 Further Assurances. At any time or from time to time upon the
------------------
request of Bank, Company will execute and deliver such further documents and do
such other acts and things as Bank may reasonably request in order to effect
fully the purposes of this Agreement and the Revolving Note and to provide for
the payment of the Revolving Loans and interest thereon in accordance with the
terms and this Agreement and the Revolving Note.
-17-
<PAGE>
9.11 Indemnity by Company.
--------------------
A. Company agrees to indemnify, save and hold harmless Bank and its
directors,officers, agents, and employees (collectively the 'indemnitees') from
and against:
1. any and all writs, subpoenas, claims, demands, actions, or
causes of action of any Person which may be served on or asserted against any
indemnitee if the writ, subpoena, claim, demand, action, or cause of action that
the Person has, serves on or asserts against the company or of any of its
officers or employees arises from the enforcement of this agreement; and
2. any and all liabilities, losses, costs, or expenses
(including without limitation reasonable attorneys' fees) that any indemnitee
suffers or incurs as a result of the service or assertion of any writ, subpoena,
claim, demand, action, or cause of action specified in Section 9.11.A.1.
B. Performance and/or payment of any obligation or liability of
Company to any indemnitee as provided for herein shall be and hereby is secured
by the Collateral.
9.12 Power of Attorney. Company does hereby make, constitute and
-----------------
appoint Bank its irrevocable, true and lawful attorney with the power to endorse
the name of company upon any checks or other evidence of payment that may come
into the possession of Bank, upon Mortgage Notes and deeds of Trust
constituting Collateral hereunder; to endorse the name of Company upon any
document or instrument relating to the Collateral, including, but not limited
to, deeds, trust deeds, subordinations, releases, reconveyances and modification
agreements; in its name or otherwise, to demand, sue for, collect and give
acquittances for, any and all moneys due or to become due upon the Collateral;
to compromise, prosecute or defend any action, claim or proceeding with respect
thereto; and to do any and all things necessary and proper to carry out the
purposes herein contemplated. Company further agrees, upon request of Bank, to
execute powers of attorney in recordable form and deliver same to Bank.
9.13 Termination. Either party may terminate this Agreement by giving
-----------
written notice to the other party at least 120 days in advance of such
termination date. In the event of any termination of this Agreement, either
automatically or by notice, the terms of this Agreement shall remain in full
force and effect until the Revolving Note and all other obligations to Bank
hereunder have been paid and/or performed in full.
-18-
<PAGE>
This Agreement is executed on behalf of the parties by duly authorized
representatives as of the date first above written.
BY:
______________________________________
Arthur Sutter, Chairman of the Board
IMPERIAL BANK
BY: /s/ PAUL S. NG
--------------------------------------
Paul S. Ng, Vice President
BY: /s/ CLINTON BLISS
--------------------------------------
Clinton Bliss, Senior Vice President
-19-
<PAGE>
This Agreement is executed on behalf of the parties by duly authorized
representatives as of the date first above written.
BY: /s/ ARTHUR SUTTER
------------------------------------
Arthur Sutter, Chairman of the Board
IMPERIAL BANK
BY:
____________________________________
Paul S. Ng, Vice President
BY:
____________________________________
Clinton Bliss, Senior Vice President
-19-
<PAGE>
EXHIBIT 10.43
IMPERIAL BANK
- --------------------------------------------------------------------------------
P.O. Box 92991 . Los Angeles, California 90009 . (213) 417-5600
9920 South La Cienega Boulevard . Inglewood, California 90301
September 26,1988
Mr. Arthur Sutter
Chairman
SUTTER MORTGAGE CORPORATION
710 S. Broadway, Suite 208
Walnut Creek, CA 94596
Re: $5,000,000 Mortgage Warehousing Line of Credit
Dear Mr. Sutter:
Imperial Bank is pleased to make available the following credit facility to you
under the amended terms and conditions set forth in this letter:
PURPOSE: To fund California first trust deed loans.
- --------
COLLATERAL: Unrecorded assignment of the secured notes and deeds of trust.
- ----------
AMOUNT: Five Million Dollars ($5,000,000).
- -------
RATE: One and one half percent (1 1/2%) in excess of Imperial Bank's
- -----
Prime Rate.
MATURITY: June 30, 1989.
- ---------
GUARANTORS: Arthur Sutter and Western States Servicing Corp. (Amended)
- -----------
TERMS: 1. Prior to funding under the line, a collateral loan package,
- ----- consisting of the following will be submitted to the Bank:
a) Original, signed Note endorsed in blank.
b) Original, unrecorded Corporate Assignment of Trust
Deed.
c) A certified copy of the Deed of Trust.
<PAGE>
Mr. Arthur Sutter
September 26, 1988
Page 2
d) An appraisal of the property securing the Note.
e) A copy of the preliminary title report.
f) A funding schedule completed by Company.
g) Other documentation as the Bank may reasonably require.
2. All loans will be warehoused for a maximum period of 120
days.
3. Each mortgage loan constituting collateral is on completed,
improved, 1-4 family residential property in California.
4. All loans on leasehold interests must conform to FHLMC
guidelines.
5. All loans will conform to FNMA, FHLMC, FHA, VA, or pre-
approved investor underwriting guidelines.
6. Each loan is to be covered by a firm take-out commitment
prior to funding with a copy of the commitment on file at
Bank.
COVENANTS & CONDITIONS:
- ----------------------
1. Western States Servicing Corp. will pledge 100% of servicing
rights to their guarantee.
2. The shareholders of Western States Servicing Corp. will
submit a letter acknowledging that 100% of the company's
servicing rights are pledged to WSS' guarantee. (new)
3. The company will submit to Bank within 20 days after the end
of each month a company prepared balance sheet and profit
and loss statement as of the close of business the previous
month.
4. The Company will submit to Bank within 45 days of the end of
each fiscal quarter a balance sheet, profit and loss
statement, and reconciliation of capital accounts of
Company.
<PAGE>
Mr. Arthur Sutter
September 26, 1988
Page 3
5. The Company will submit to Bank within 90 days after the
close of each fiscal year a balance sheet, profit and loss
statement, and reconciliation of capital accounts of Company
as of the close of the fiscal year.
The credit facility will be documented on Imperial Bank's standard loan
documentation with additional covenants and conditions of the line being covered
in the Revolving Credit and Collateral Loan Agreement. This proposal is
available for your acceptance by signing and returning the enclosed copy of this
letter.
Sincerely,
/s/ DINAH A. PANER /s/ CLINTON BLISS
Dinah A. Paner Clinton Bliss
Assistant Vice President Senior Vice President
ACCEPTED:
SUTTER MORTGAGE CORPORATION
BY: /s/ ARTHUR SUTTER
------------------------------------
Arthur Sutter, Chairman of the Board
<PAGE>
REGULATION Z - INDEMNITY AGREEMENT
----------------------------------
To: IMPERIAL BANK
The undersigned contemplates obtaining credit from your Bank from time to time,
such credit to be secured by notes, deeds of trust and other evidences of
indebtedness acquired by the undersigned in connection with its making of loans
and advances to others. Said loans made by the undersigned may be subject to the
Consumer Credit Protection Act and the rules and regulations issued in
connection therewith.
To induce your Bank to make loans and advances to the undersigned, the
undersigned represents to your Bank that the undersigned is fully familiar with
the requirements of said Consumer Credit Protection Act and Regulation Z of the
Federal Reserve Board promulgated thereunder and that all loans and advances
made by the undersigned which are evidenced by notes and other evidences of
indebtedness securing loans made by your Bank to the undersigned, shall be made
in strict compliance with the provisions of said Consumer Protection Act and
Regulation Z. In addition, the undersigned hereby indemnifies and saves your
Bank harmless from any and all liabilities, costs, damages and losses of any
kind whatsoever resulting from any violation by the undersigned or any of its
officers, employees or agents, or any provision of said Consumer Credit
Protection Act or rules and regulations promulgated thereunder, including said
Regulation Z.
Dated September 1, 1988
----------- --
SUTTER MORTGAGE CORPORATION
----------------------------------
BY: /s/ ARTHUR H. SUTTER
----------------------------------
Arthur H. Sutter Chairman
By________________________________
TITLE
By________________________________
TITLE
<PAGE>
EXHIBIT 10.44
[LOGO OF IMPERIAL BANK]
NOTE
$ 10,000,000.00 Oakland , California, November 30, 1996
On November 29, 1997, and as hereinafter provided, for value received, the
undersigned promises to pay to IMPERIAL BANK ("Bank"), a California banking
corporation, or order, at its Oakland Regional office, the principal sum
of $10,000,000.00 MAXIMUM or such sums up to the maximum if so stated, as the
Bank may now or hereafter advance to or for the benefit of the undersigned in
accordance with the terms hereof, together with interest from date of
disbursement or N/A, whichever is later, on the unpaid principal balance [_] at
the rate of % per year [X] at the rate of 0.750% per year in excess of
the rate of interest which Bank has announced as its prime lending rate (the
"Prime Rate"), which shall vary concurrently with any change in such Prime
Rate, or $ 250.00, whichever is greater. Interest shall be computed at
the above rate on the basis of the actual number of days during which the
principal balance is outstanding, divided by 360, which shall, for interest
computation purposes, be considered one year.
Interest shall be payable [X] monthly [_] quarterly [_] included with principal
[_] in addition to principal [_] , beginning December 30, 1996 , and if not so
paid shall become a part of the principal. All payments shall be applied first
to interest, and the remainder, if any, on principal. [_] (If checked),
Principal shall be payable in installments of $ , or more, each installment on
the day of each , beginning . Advances not to exceed any unpaid balance
owing at any one time equal to the maximum amount specified above, may be made
at the option of bank.
Any partial prepayment shall be applied to the installments, if any, in
inverse order of maturity. Should default be made in the payment of principal or
interest when due, or in the performance or observance, when due, of any item,
covenant or condition of any deed of trust, security agreement or other
agreement (including amendments or extensions thereof) securing or pertaining to
this note, at the option of the holder hereof and without notice or demand, the
entire balance of principal and accrued interest then remaining unpaid shall (a)
become immediately due and payable, and (b) thereafter bear interest, until paid
in full, at the increased rate of 5% per year in excess of the rate provided for
above, as it may vary from time to time.
Defaults shall include, but not be limited to, the failure of the maker(s) to
pay principal or interest when due; the filing as to each person obligated
hereon, whether as maker, co-maker, endorser or guarantor (individually or
collectively referred to as the "Obligor") of a voluntary or involuntary
petition under the provisions of the Federal Bankruptcy Act; the issuance of any
attachment or execution against any asset of any Obligor; the death of any
Obligor; or any deterioration of the financial condition of any Obligor which
results in the holder hereof considering itself, in good faith, insecure.
[X] If any installment payment or principal balance payment due hereunder is
delinquent twenty or more days, Obligor agrees to pay a late charge in the
amount of 5% of the payment so due and unpaid, in addition to the payment but
nothing in this paragraph is to be construed as any obligation on the part of
the holder of this note to accept payment of any installment past due or less
than the total unpaid principal balance after maturity.
If this note is not paid when due, each Obligor promises to pay all costs and
expenses of collection and reasonable attorney's fees incurred by the holder
hereof on account of such collection, plus interest at the rate applicable to
principal, whether or not suit is filed hereon. Each Obligor shall be jointly
and severally liable hereon and consents to renewals, replacements and
extensions of time for payment hereof, before, at, or after maturity; consents
to the acceptance, release or substitution of security for this note; and waives
demand and protest and the right to assert any statute of limitations. Any
married person who signs this note agrees that recourse may be had against
separate property for any obligations hereunder. The indebtedness evidenced
hereby shall be payable in lawful money of the United States. In any action
brought under or arising out of this note, each Obligor, including successor(s)
or assign(s) hereby consents to the application of California law, to the
jurisdiction of any competent court within the State of California, and to
service of process by any means authorized by California law
No single or partial exercise of any power hereunder, or under any deed of
trust, security agreement or other agreement in connection herewith shall
preclude other or further exercises thereof or the exercise of any other such
power. The holder hereof shall at all times have the right to proceed against
any portion of the security for this note in such order and in such manner as
such holder may consider appropriate, without waiving any rights with respect to
any of the security. Any delay or omission on the part of the holder hereof in
exercising any right hereunder, or under any deed of trust, security agreement
or other agreement, shall not operate as a waiver of such right, or of any other
right, under this note or any deed of trust, security agreement or other
agreement in connection herewith.
SUTTER MORTGAGE CORPORATION BY
_______________________________ ___________________________________
By
_______________________________ ___________________________________
_______________________________ ___________________________________
<PAGE>
EXHIBIT 10.44.1
[LETTERHEAD OF IMPERIAL BANK APPEARS HERE]
November 29, 1997
Mr. Arthur H. Sutter
Chairman
Sutter Mortgage Corporation
2140 North Broadway
Walnut Creek, CA 94596
Re: Loan #00718006937/3 $10,000,000.00 Mortgage Warehouse Line of Credit
Loan #00718006937/6 $150,000.00 Revolving Line of Credit
Dear Art:
Imperial Bank has approved an extension of your credit facilities shown above
("Loans") as evidenced by those certain notes dated November 30, 1996, in the
original principal amounts of $10,000,000.00 and $150,000.00, respectively,
executed by Sutter Mortgage Corporation in favor of Imperial Bank ("Notes"),
from their current maturity of November 29, 1997 to March 6, 1998.
Except as modified and extended hereby, all existing documentation, including
without limitation, the Notes, as amended hereby, executed by Sutter Mortgage
Corporation in connection with the Loans remains in full force and effect.
Sincerely,
/s/ Paul S. Ng
Paul S. Ng
Vice President
<PAGE>
EXHIBIT 10.44.2
[LETTERHEAD OF IMPERIAL BANK]
December 18, 1997
Mr. Ron Morck, President
Sutter Mortgage Corporation
P.O. Box 8163
Walnut Creek, CA 94596
Dear Ron:
Imperial Bank continues to provide Sutter Mortgage Corporation with a low eight
figure revolving mortgage warehouse line of credit. The Line currently matures
on March 6, 1998, and continues to be supported by certain collateral and by
guaranties. The Bank acknowledges the Company's anticipated change in ownership.
Imperial Bank has enjoyed a long term relationship with Sutter Mortgage
Corporation and looks forward to continuing our relationship in the years ahead.
If you should require any further information, please do not hesitate to call.
Sincerely,
/s/ Douglas Elefant
Douglas Elefant
Vice President
Commercial Lending
<PAGE>
EXHIBIT 10.45
[LOGO OF IMPERIAL BANK]
NOTE
$ 150,000.00 WALNUT CREEK, California, November 30, 1996
On November 29, 1997, and as hereinafter provided, for value received, the
undersigned promises to pay to IMPERIAL BANK ("Bank"), a California banking
corporation, or order, at its EAST BAY REGIONAL OFFICE office,
the principal sum of $ 150,000.00 or such sums up to the maximum if so stated,
as the Bank may now or hereafter advance to or for the benefit of the
undersigned in accordance with the terms hereof, together with interest from
date of disbursement or N/A, whichever is later, on the unpaid principal
balance [_] at the rate of % per year [X] at the rate of 1.500% per year in
excess of the rate of interest which Bank has announced as its prime lending
rate (the "Prime Rate"), which shall vary concurrently with any change in such
Prime Rate, or $250.00, whichever is greater. Interest shall be computed at the
above rate on the basis of the actual number of days during which the principal
balance is outstanding, divided by 360, which shall, for interest computation
purposes, be considered one year.
Interest shall be payable [X] monthly [_] quarterly [_] included with principal
[_] in addition to principal [_] beginning December 31, 1996 , and if
not so paid shall become a part of the principal. All payments shall be
applied first to any late charges owing, then to interest and the remainder,
if any, to principal. [_] (if checked), Principal shall be payable in
installments of $ or more, each installment on the day of each
, beginning Advances not to exceed any unpaid balance owing at any one
time equal to the maximum amount specified above, may be made at the option of
Bank.
Any partial prepayment shall be applied to the installments, if any, in
inverse order of maturity. Should default be made in the payment of principal or
interest when due, or in the performance or observance, when due, of any item,
covenant or condition of any deed of trust, security agreement or other
agreement (including amendments or extensions thereof) securing or pertaining to
this note, at the option of the holder hereof and without notice or demand, the
entire balance of principal and accrued interest then remaining unpaid shall (a)
become immediately due and payable, and (b) thereafter bear interest, until paid
in full, at the increased rate of 5% per year in excess of the rate provided for
above, as it may vary from time to time.
Defaults shall include, but not be limited to, the failure of the maker(s) to
pay principal or interest when due; the filing as to each person obligated
hereon, whether as maker, co-maker, endorser or guarantor (individually or
collectively referred to as the "Obligor") of a voluntary or involuntary
petition under the provisions of the Federal Bankruptcy Act; the issuance of any
attachment or execution against any asset of any Obligor; the death of any
Obligor; or any deterioration of the financial condition of any Obligor which
results in the holder hereof considering itself, in good faith, insecure.
If any installment payment, interest payment, principal payment or principal
balance payment due hereunder is delinquent ten or more days, Obligor agrees to
pay Bank a late charge in the amount of 5% of the payment so due and unpaid, in
addition to the payment; but nothing in this paragraph is to be construed as any
obligation on the part of the holder of this note to accept payment of any
payment past due or less than the total unpaid principal balance after maturity.
If this note is not paid when due, each Obligor promises to pay all costs and
expenses of collection and reasonable attorneys fees incurred by the holder
hereof on account of such collection, plus interest at the rate applicable to
principal, whether or not suit is filed hereon. Each Obligor shall be jointly
and severally liable hereon and consents to renewals, replacements and
extensions of time for payment hereof, before, at, or after maturity; consents
to the acceptance, release or substitution of security for this note; and waives
demand and protest and the right to assert any statute of limitations. Any
married person who signs this note agrees that recourse may be had against
separate property for any obligations hereunder. The indebtedness evidenced
hereby shall be payable in lawful money of the United States. In any action
brought under or arising out of this note, each Obligor, including successor(s)
or assign(s) hereby consents to the application of California law, to the
jurisdiction of any competent court within the State of California, and to
service of process by any means authorized by California law.
No single or partial exercise of any power hereunder, or under any deed of
trust, security agreement or other agreement in connection herewith shall
preclude other or further exercises thereof or the exercise of any other such
power. The holder hereof shall at all times have the right to proceed against
any portion of the security for this note in such order and in such manner as
such holder may consider appropriate, without waiving any rights with respect to
any of the security. Any delay or omission on the part of the holder hereof in
exercising any right hereunder, or under any deed of trust, security agreement
or other agreement, shall not operate as a waiver of such right, or of any other
right, under this note or any deed of trust, security agreement or other
agreement in connection herewith.
SUTTER MORTGAGE CORPORATION BY
By
_______________________________ -----------------------------------
_______________________________ ___________________________________
_______________________________ ___________________________________
<PAGE>
EXHIBIT 10.45.1
[LETTER HEAD OF IMPERIAL BANK APPEARS HERE]
NOTE
$150,000.00 Oakland, California. July 1, 1996
On September 30, 1999, and as hereinafter provided, for value received, the
undersigned promises to pay to IMPERIAL BANK ("Bank"), a California banking
corporation, or order, at its OAKLAND REGIONAL office, the principal sum of
$150,000.00 of such sums up to the maximum if so stated, as the Bank may now or
hereafter advance to or for the benefit of the undersigned in accordance with
the terms hereof, together with interest from date of disbursement or N/A,
whichever is later, on the unpaid principal balance [_] at the rate of % per
year [X] at the rate of 1.500% per year in excess of the rate of interest which
Bank has announced as its prime lending rate (the "Prime Rate"), which shall
vary concurrently with any change in such Prime Rate, or $250.00, whichever is
greater. Interest shall be computed at the above rate on the basis of the actual
number of days during which the principal balance is outstanding, divided by
360, which shall, for interest computation purposes, be considered one year.
Interest shall be payable [X] monthly [_] quarterly [_] included with principal
[XX] in addition to principal [_] beginning July 30, 1996, and if not so paid
shall become a part of the principal. All payments shall be applied first to
interest, and the remainder, if any, on principal. [XX] (If checked), Principal
shall be payable in installments of $ *See below, or more, each installment on
the 30th day of each month, beginning October 30, 1996. Advances not to exceed
any unpaid balance owing at any one time equal to the maximum amount specified
above, may be made at the option of Bank.
Any partial prepayment shall be applied to the installments, if any, in
inverse order of maturity. Should default be made in the payment of principal or
interest when due, or in the performance or observance, when due, of any item,
covenant or condition of any deed of trust, security agreement or other
agreement (including amendments or extensions thereof) securing or pertaining to
this note, at the option of the holder hereof and without notice or demand, the
entire balance of principal and accrued interest then remaining unpaid shall (a)
become immediately due and payable, and (b) thereafter bear interest, until paid
in full, at the increased rate of 5% per year in excess of the rate provided for
above, as it may vary from time to time.
Defaults shall include, but not be limited to, the failure of the maker(s)
to pay principal or interest when due; the filing as to each person obligated
hereon, whether as maker, co-maker, endorser or guarantor (individually or
collectively referred to as the "Obligor") of a voluntary or involuntary
petition under the provisions of the Federal Bankruptcy Act; the issuance of any
attachment or execution against any asset of any Obligor; the death of any
Obligor; or any deterioration of the financial condition of any Obligor which
results in the holder hereof considering itself, in good faith, insecure.
[XX] If any installment payment or principal balance payment due hereunder is
delinquent ten or more days, Obligor agrees to pay a late charge in the amount
of 5% of the payment so due and unpaid, in addition to the payment; but nothing
in this paragraph is to be construed as any obligation on the part of the holder
of this note to accept payment of any installment past due or less than the
total unpaid principal balance after maturity.
If this note is not paid when due, each Obligor promises to pay all costs
and expenses of collection and reasonable attorney's fees incurred by the holder
hereof on account of such collection, plus interest at the rate applicable to
principal, whether or not suit is filed hereon. Each Obligor shall be jointly
and severally liable hereon and consents to renewals, replacements and
extensions of time for payment hereof, before, at, or after maturity; consents
to the acceptance, release or substitution of security for this note; and waives
demand and protest and the right to assert any statute of limitations. Any
married person who signs this note agrees that recourse may be had against
separate property for any obligations hereunder. The indebtedness evidenced
hereby shall be payable in lawful money of the United States, in any action
brought under or arising out of this note, each Obligor, including successor(s)
or assign(s) hereby consents to the application of California law, to the
jurisdiction of any competent court within the State of California, and to
service of process by any means authorized by California law.
No single or partial exercise of any power hereunder, or under any deed of
trust, security agreement or other agreement in connection herewith shall
preclude other or further exercises thereof or the exercise of any other such
power. The holder hereof shall at all times have the right to proceed against
any portion of the security for this note in such order and in such manner as
such holder may consider appropriate, without waiving any rights with respect to
any of the security. Any delay or omission on the part of the holder hereof in
exercising any right hereunder, or under any deed of trust, security agreement
or other agreement, shall not operate as a waiver of such right, or of any other
right, under this note or any deed of trust, security agreement or other
agreement in connection herewith.
*See attached Addendum
SUTTER MORTGAGE CORPORATION
____________________________________ ----------------------------------------
BY [SIGNATURE ILLEGIBLE]
____________________________________ ----------------------------------------
____________________________________ ________________________________________
<PAGE>
ADDENDUM TO NOTE
Advances under the Note shall be available through September 30, 1996. On
said date, the outstanding balance of the advances under the Note shall be
converted to an amortizing loan payable in 36 equal monthly payments of
principal plus accrued interest commencing October 30, 1996.
All principal and accrued but unpaid interest shall in any event be due and
payable on September 30, 1999.
SUTTER MORTGAGE CORPORATION
By: [SIGNATURE ELIGIBLE]
----------------------------
<PAGE>
EXHIBIT 10.46
IMPERIAL BANK
- --------------------------------------------------------------------------------
P.O. Box 92991 . Los Angeles, California 90009 . (310) 417-5600
9920 South La Cienega Blvd. . Inglewood, California 90301
February 10, 1997
Mr. Arthur H. Sutter
Chairman
Sutter Mortgage Corporation
2140 N. Broadway
Walnut Creek, California 94596
Re: Loan #00718006937/3 $10,000,000.00 Mortgage Warehouse Line of Credit
Dear Art:
This letter shall hereby amend the Commitment Letter ("Commitment Letter") and
Revolving Credit and Collateral Loan Agreement ("Loan Agreement"), dated
September 26,1988 and September 6,1988, respectively, executed by Sutter
Mortgage Corporation ("Borrower") and Imperial Bank ("Bank") in connection with
the above-referenced line of credit ("Line") as follows:
Additional Collateral: None
- ---------------------
Maximum Advance Rate: Ninety-eight percent (98%) of the face amount of a given
- --------------------
Mortgage Loan.
All other terms and conditions of the Line which are not inconsistent with the
amended terms contained herein shall remain in full force and effect as
presented in the Loan Agreement and Commitment Letter, along with any and all
subsequent amendments thereto.
Sincerely,
/s/ PAUL S. NG /s/ ARLENE GOULD
Paul S. Ng Arlene Gould
Vice President Regional Vice President
Accepted:
SUTTER MORTGAGE CORPORATION
By: /s/ RONALD MORCK
---------------------------
<PAGE>
EXHIBIT 10.47
IMPERIAL BANK
- --------------------------------------------------------------------------------
P.O. Box 92991 . Los Angeles, California 90009 . (310) 417-5600
9920 South La Cienega Blvd. . Inglewood California 90301
December 1,1996
Mr. Arthur H. Sutter
Chairman
Sutter Mortgage Corporation
2140 N. Broadway
Walnut Creek, California 94596
Re: Loan #00718006937/3 $10,000,000.00 Mortgage Warehouse Line of Credit
Loan #00718006937/6 $150,000.00 Revolving Line of Credit
Dear Art:
This letter shall hereby amend the Commitment Letter ("Commitment Letter") and
Revolving Credit and Collateral Loan Agreement ("Loan Agreement"), dated
September 26,1988 and September 6, 1988, respectively, executed by Sutter
Mortgage Corporation ("Borrower") and Imperial Bank ("Bank") in connection with
the above-referenced lines of credit ("Lines") as follows:
Maturity: November 29, 1997
- ---------
All other terms and conditions of the Lines which are not inconsistent with the
amended terms contained herein shall remain in full force and effect as
presented in the Loan Agreement and Commitment Letter, along with any and all
subsequent amendments thereto.
Sincerely,
/s/ PAUL S. NG /s/ ARLENE GOULD
Paul S. Ng Arlene Gould
Vice President Regional Vice President
Accepted:
SUTTER MORTGAGE CORPORATION
By: /s/ RONALD MORCK
---------------------------
Ronald Morck, President
<PAGE>
EXHIBIT 10.48
WHOLE LOAN PURCHASE AND SALE AGREEMENT
MORTGAGE LOAN PURCHASE AND SALE AGREEMENT
-----------------------------------------
between
[Sutter Mortgage Corp.]
---------------------
Seller
and
PRUDENTIAL SECURITIES REALTY FUNDING CORPORATION
Purchaser
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Section 1. Definitions................................................................. 1
Section 2. Procedures for Purchases of Mortgage Loans.................................. 8
Section 3. Sale of Mortgage Loans to Takeout Investor.................................. 9
Section 4. Completion Fee.............................................................. 12
Section 5. Servicing of the Mortgage Loans............................................. 13
Section 6. Trade Assignments........................................................... 14
Section 7. Transfers of Beneficial Interest in Mortgage Loans by Purchaser............. 15
Section 8. Record Title to Mortgage Loans; Intent of Parties; Security Interest........ 15
Section 9. Representations and Warranties.............................................. 16
Section 10. Covenants of Seller......................................................... 24
Section 11. Term........................................................................ 27
Section 12. Exclusive Benefit of Parties; Assignment.................................... 28
Section 13. Amendments; Waivers; Cumulative Rights...................................... 28
Section 14. Execution in Counterparts................................................... 28
Section 15. Effect of Invalidity of Provisions.......................................... 28
Section 16. Governing Law............................................................... 28
Section 17. Notices..................................................................... 28
Section 18. Entire Agreement............................................................ 29
Section 19. Costs of Enforcement........................................................ 29
Section 20. Consent to Service.......................................................... 29
Section 21. Submission to Jurisdiction.................................................. 29
Section 22. Jurisdiction Not Exclusive.................................................. 29
</TABLE>
(i)
<PAGE>
<TABLE>
<S> <C>
Section 23. Construction.................................................. 29
</TABLE>
EXHIBITS
Exhibit A Trust Receipt
Exhibit B-1 Warehouse Lender's Release
Exhibit B-2 Warehouse Lender's Wire Instructions
Exhibit C-1 Seller's Release
Exhibit C-2 Seller's Wire Instructions
Exhibit D-1 Trade Assignment
Exhibit D-2 Trade Assignment (Blanket)
Exhibit 1 to
Exhibit D-2 Withdrawal of Consent to Blanket Trade Assignment
Exhibit E Purchaser's Wire Instructions
Exhibit F Confirmation
Exhibit G Notice of Rejection of Trade Assignment
Exhibit H Settlement Modification Letter
Exhibit I Takeout Confirmation
(ii)
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EXHIBIT 10.48
MORTGAGE LOAN PURCHASE AND SALE AGREEMENT
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This Mortgage Loan Purchase and Sale Agreement ("Agreement"), dated as
of the date set forth on the cover page hereof, is by and between PRUDENTIAL
SECURITIES REALTY FUNDING CORPORATION ("Purchaser") and the Seller whose name is
set forth on the cover page hereof ("Seller").
PRELIMINARY STATEMENT
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Seller may, in its sole discretion, offer to sell to Purchaser from
time to time a l00% undivided ownership interest in certain Mortgage Loans, and
Purchaser, in its sole discretion, may agree to purchase such Mortgage Loans
from Seller in accordance with the terms and conditions set forth in this
Agreement. Seller, subject to the terms hereof, will cause each Mortgage Loan
to be purchased by Takeout Investor. During the period from the purchase of a
Mortgage Loan to the sale of the Mortgage Loan to Takeout Investor, Purchaser
expects to rely entirely upon Seller to service such Mortgage Loan.
The parties hereto hereby agree as follows:
Section 1. Definitions.
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Capitalized terms used but not defined herein shall have the meanings
set forth in the Custodial Agreement. As used in this Agreement, the following
terms shall have the following meanings:
"Act of Insolvency": With respect to Seller, (a) the
commencement by Seller as debtor of any case or proceeding under any
bankruptcy, insolvency, reorganization, liquidation, dissolution or
similar law, or Seller's seeking the appointment of a receiver,
trustee, custodian or similar official for Seller or any substantial
part of its property, or (b) the commencement of any such case or
proceeding against Seller, or another's seeking such appointment, or
the filing against Seller of an application for a protective decree
which (1) is consented to or not timely contested by Seller, (2)
results in the entry of an order for relief, such an appointment, the
issuance of such a protective decree or the entry of an order having a
similar effect, or (3) is not dismissed within thirty (30) days, (c)
the making by Seller of a general assignment for the benefit of
creditors, or (d) the admission in writing by Seller that Seller is
unable to pay its debts as they become due or the nonpayment generally
by Seller of its debts as they become due.
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"Assignee": As defined in Section 7.
"Business Day": Any day other than (a) a Saturday, Sunday or
other day on which banks located in The City of New York, New York are
authorized or obligated by law or executive order to be closed or (b)
any day on which Prudential Securities Realty Funding Corporation is
closed for business, provided that notice thereof shall have been
given not less than seven (7) calendar days prior to such day, and
provided further that such closing does not conflict with any business
between Seller and Purchaser scheduled for such date prior to the
giving of such notice.
"Collateral": As defined in Section 8(c).
"Commitment Amount": The aggregate outstanding principal amount
of Mortgage Loans to be purchased pursuant to a Takeout Commitment. If
the Commitment Amount is expressed as a fixed amount plus or minus a
percentage in the related Takeout Confirmation, then the amount
required to be delivered by Seller shall be the minimum amount of such
range and the amount required to be purchased by Takeout Investor
shall be the maximum amount of such range.
"Commitment Date": The date set forth in a Takeout Confirmation
as the commitment date.
"Commitment Guidelines": The guidelines, if any, issued by
Takeout Investor regarding the issuance of Takeout Commitments, as
amended from time to time by Takeout Investor.
"Commitment Number": With respect to a Takeout Commitment, the
number identified on the Takeout Confirmation as the commitment
number.
"Completion Fee": With respect to each Mortgage Loan Pool, an
amount equal to the Discount plus the Net Carry Adjustment, less any
reduction pursuant to Section 4(c), which amount shall be payable to
Seller by Purchaser as compensation to Seller for its services
hereunder in connection with the purchase of a Mortgage Loan Pool.
"Confirmation": A written confirmation of Purchaser's intent to
purchase a Mortgage Loan Pool,
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which written confirmation shall be substantially in the form attached
hereto as Exhibit F.
"Credit File": All Mortgage Loan papers and documents required
to be maintained pursuant to the Sale Agreement, and all other papers
and records of whatever kind or description whether developed or
originated by Seller or others, required to document or service the
Mortgage Loan provided, however, that such Mortgage Loan papers,
documents and records shall not include any Mortgage Loan papers,
documents or records which are contained in the Custodial File.
"Cure Date": With respect to a Mortgage Loan, the date occurring
20 Business Days after the Purchase Date.
"Custodial Account": As defined in Section 5(b).
"Custodial Agreement": The Custodial Agreement , dated as qf the
date set forth on the cover sheet thereof, among Seller, Purchaser and
Custodian.
"Custodial File": As defined in the Custodial Agreement.
"Custodian": The Custodian whose name is set forth on the cover
page of the Custodial Agreement and its permitted successors
thereunder.
"Cut-off Date": With respect to a Mortgage Loan, the last day of
a month on which the Settlement Date can.. occur if accrued interest
for such month is to be collected by Takeout Investor.
"Defective Mortgage Loan": With respect to any Mortgage Loan,
either (i) the Document File does not contain a document required to
be contained therein, (ii) any document within a Document File is, in
the judgment of Takeout Investor, defective or inaccurate in any
material respect, as determined upon evaluation of the Document File
against the requirements of the Sale Agreement or (iii) any document
in the Document File is not legal, valid and binding.
"Discount": With respect to Mortgage Loan Pool sold by Seller to
Purchaser, the amount set forth on the related Confirmation as the
Discount.
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"Document File": The Credit File and the Custodial File.
"Due Date": The day of the month on which the Monthly Payment is
due on a Mortgage Loan.
"Exhibit B-l Letter": As defined in Section 2 (a).
"Exhibit C-1 Letter": As defined in Section 2 (a).
"Expiration Date": With respect to any Takeout Commitment, the
expiration date thereof.
"FDIC": Federal Deposit Insurance Corporation or any successor
thereto.
"FHLMC": Federal Home Loan Mortgage Corporation or any successor
thereto.
"FNMA": Federal National Mortgage Association or any successor
thereto.
"Losses": Any and all losses, claims, damages, liabilities or
expenses (including reasonable attorneys' fees) incurred by any person
specified; provided, however, that "Losses" shall not include any
losses, claims, damages, liabilities or expenses which would have been
avoided had such person taken reasonable actions to mitigate such
losses, claims, damages, liabilities or expenses.
"Monthly Payment": The scheduled monthly payment of principal
and interest on a Mortgage Loan.
"Mortgage": The mortgage, deed of trust or other instrument
creating a first lien on an estate in fee simple in real property
securing a Mortgage Note.
"Mortgage Interest Rate": The annual rate of interest borne on a
Mortgage Note.
"Mortgage Loan": A conventional single family residential
mortgage loan which is subject to this Agreement, and which satisfies
the requirements of the Sale Agreement as the same may be modified
from time to time.
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"Mortgage Loan Pool": A group of Mortgage Loans purchased by
Purchaser hereunder and subject to a single Confirmation.
"Mortgage Note": The note or other evidence of the indebtedness
of a Mortgagor secured by a Mortgage.
"Mortgaged Property": The property subject to the lien of the
Mortgage securing a Mortgage Note.
"Mortgagor": The obligor on a Mortgage Note.
"NCUA": National Credit Union Administration, or any successor
thereto.
"Net Carry Adjustment": As defined in Section 4 (b).
"Notice of Rejection of Trade Assignment": With respect to any
Mortgage Loan that Purchaser elects not to purchase, a notification by
Purchaser to Takeout Investor in the form of Exhibit G.
"OTS": Office of Thrift Supervision or any successor thereto.
"Parent Company": A corporation or other entity owning at least
50% of the outstanding shares of voting stock of Seller.
"Pass-Through Rate": With respect to each Mortgage Loan Pool
purchased by Purchaser hereunder, the rate at which interest from the
Mortgage is passed through to Purchaser which initially shall be the
rate of interest specified in the related Confirmation as the Pass-
Through Rate, subject to adjustment in the manner agreed to by
Purchaser and Seller.
"Price Adjustment": With respect to a Takeout Commitment, the
incremental percentage by which the trade price is adjusted by
applying the appropriate formula set forth in a price adjustment
summary sheet when delivered by Purchaser to Seller which price
adjustment summary sheet may be amended from time to time by
Purchaser's delivery to Seller of a new price adjustment summary
sheet.
"Purchase Date": With respect to any Mortgage Loan Pool
purchased by Purchaser hereunder, the date of
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payment thereof by Purchaser to Seller of the Purchase Price.
"Purchase Price": With respect to each Mortgage Loan Pool
purchased by Purchaser hereunder, an amount equal to the Trade
Principal less an amount equal to the product of the Trade Principal
and the Discount.
"Purchaser": Prudential Securities Realty Funding Corporation
and its successors in interest, including, but not limited to, a party
to whom a Trust Receipt is assigned as provided hereunder and in the
Custodial Agreement.
"Purchaser's Wire Instructions": The wire instructions set forth
in a letter in the form of Exhibit E.
"RTC": Resolution Trust Corporation or any successor thereto.
"Sale Agreement": The agreement providing for the purchase by
Takeout Investor of Mortgage Loans from Seller.
"Seller": The Seller whose name is set forth on the cover page
hereof, and its permitted successors hereunder.
"Seller's Wire Instructions": The wire instructions set forth in
a letter in the form of Exhibit C-2.
"Settlement Date": With respect to any Mortgage Loan, the date
of payment thereof by Takeout Investor to Purchaser of the Takeout
Proceeds.
"Settlement Modification Letter": A letter in the form of
Exhibit H.
"Successor Servicer": An entity designated by Purchaser, in
conformity with Section 17, to replace Seller as issuer and servicer,
mortgagee or seller/servicer of the Mortgage Loans evidenced by a
Trust Receipt.
"Takeout Commitment": A commitment of Seller to sell one or more
Mortgage Loans to Takeout Investor and of
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Takeout Investor to purchase one or more Mortgage Loans from Seller.
"Takeout Confirmation": The written notification to Seller from
Takeout Investor containing all of the relevant details of the Takeout
Commitment, including but not limited to the information set forth in
Exhibit I, which notification may take the form of a trade
confirmation.
"Takeout Investor": An Agency or a Conduit, as applicable.
"Takeout Proceeds": With respect to any Mortgage Loan Pool, the
related Trade Principal plus accrued interest as calculated in
accordance with Section 3 (a) (2) , as amended by any related
Settlement Modification Letter accepted by Purchaser.
"Third Party Underwriter": Any third party, including but not
limited to a mortgage loan pool insurer, who underwrites the Mortgage
Loan(s) prior to the purchase by Purchaser of the related Mortgage
Loan Pool.
"Third Party Underwriter's Certificate": A certificate issued by
a Third Party Underwriter with respect to a Mortgage Loan, certifying
that such Mortgage Loan complies with its underwriting requirements.
"Trade Assignment": The assignment by Seller to Purchaser of
Seller's rights under a specific Takeout Commitment, in the form of
Exhibit D-l, or of Seller's rights under all Takeout Commitments, in
the form of Exhibit D-2.
"Trade Price": The trade price set forth on a Takeout Commitment
less any applicable Price Adj ustment.
"Trade Principal": With respect to any Mortgage Loan Pool, the
aggregate outstanding principal balance of such Mortgage Loan
multiplied by a percentage equal to the Trade Price.
"Warehouse Lender": Any lender providing financing to Seller for
the purpose of originating or purchasing
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Mortgage Loans which has a security interest in such Mortgage Loans as
collateral for the obligations of Seller to such lender.
"Warehouse Lender's Wire Instructions": The wire instructions set
forth in a letter in the form of Exhibit B-2.
Section 2. Procedures for Purchases of Mortgage Loans
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(a) Purchaser may, in its sole discretion, from time to time, purchase
one or more Mortgage Loan Pools from Seller. Prior to Purchaser's election to
purchase any Mortgage Loan Pool, Purchaser shall have received from Custodian
(i) an original Trust Receipt relating to all Mortgage Loans (including the
Mortgage Loan Pool being purchased) relating to Cash Window Transactions or
Conduit Transactions, as applicable, the original fully completed and
authenticated by Custodian and (ii) a copy of the Takeout Confirmation related
to the Mortgage Loan(s) in such Mortgage Loan Pool, together with a Trade
Assignment in the form of Exhibit D-l or Exhibit D-2, executed by Seller and
Takeout Investor and (iii) an original letter in the form of Exhibit B-l (an
"Exhibit B-l Letter") from the applicable Warehouse Lender (if any), or an
original letter in the form of Exhibit C-l (an "Exhibit C-l Letter") in the
event that there is no Warehouse Lender. Simultaneously with the payment by
Purchaser of the Purchase Price, in accordance with the Warehouse Lender's Wire
Instructions or Seller's Wire Instructions, as applicable, with respect to a
Mortgage Loan pool, Seller hereby conveys to Purchaser all of Seller's right,
title and interest in and to the related Mortgage Loan(s) free and clear of any
lien, claim or encumbrance. Notwithstanding the satisfaction by Seller of the
conditions specified in this Section 2(a), Purchaser is not obligated to
purchase any Mortgage Loans offered to it hereunder.
(b) If Purchaser elects to purchase any Mortgage Loan Pool, Purchaser
shall pay the amount of the Purchase Price for such Mortgage Loan Pool by wire
transfer of immediately available funds in accordance with the Warehouse
Lender's Wire Instructions or if there is no Warehouse Lender, Seller's Wire
Instructions. Upon such payment and not otherwise, Purchaser shall be deemed to
have accepted the related Trade Assignment. In the event that Purchaser rejects
a Mortgage Loan for purchase for any reason and/or does not transmit the
applicable Purchase Price, (i) the Trust Receipt delivered by Custodian to
Purchaser in anticipation of such purchase shall automatically be null and void
and the previously existing Trust Receipt for that type of transaction shall be
in full force and effect, (ii) Purchaser shall not
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consummate the transactions contemplated in the applicable Takeout Confirmation
and shall deliver to Takeout Investor (with a copy to Seller and Custodian) a
Notice of Rejection of Trade Assignment, provided, however, that failure of
Purchaser to give such notice shall not affect the rejection by Purchaser of the
Trade Assignment, and (iii) if Purchaser shall nevertheless receive any portion
of the related Takeout Proceeds, Purchaser shall promptly pay such Takeout
Proceeds to Seller in accordance with Seller's Wire Instructions.
(c) The terms and conditions of the purchase of each Mortgage Loan
Pool shall be as set forth in this Agreement.
Section 3. Sale of Mortgage Loans to Takeout Investor.
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(a) With respect to Mortgage Loan(s) that Purchaser has elected to
purchase, Purchaser may, at its option, either (i) instruct Custodian to deliver
to Takeout Investor, in accordance with Takeout Investor's instructions, the
Custodial File in respect of such Mortgage Loans, in the manner and at the time
set forth in the Custodial Agreement, or (ii) provide for the delivery of the
Custodial File through an escrow arrangement satisfactory to Purchaser and
Takeout Investor. Seller shall on or after the Purchase Date, but in no event
later than the related Expiration Date, promptly deliver to Takeout Investor the
related Credit File and thereafter any and all additional documents requested by
Takeout Investor to enable Takeout Investor to purchase such Mortgage Loan(s) on
or before the related Cure Date.
(b) Except when Purchaser has accepted a Settlement Modification
Letter, unless the Takeout Proceeds are received by Purchaser (in immediately
available funds in accordance with Purchaser's Wire Instructions) with respect
to the Mortgage Loans in a Mortgage Pool, on or before the related Cure Date,
the Completion Fee relating to such Mortgage Pool shall not be payable until the
earlier to occur of (1) the date of receipt by Purchaser of the Takeout Proceeds
and (2) the satisfaction by Seller of its obligations pursuant to the exercise
by Purchaser of any remedial election authorized by this Section 3. Upon
receipt by Purchaser, prior to the Cure Date, of a Settlement Modification
Letter, duly executed by Takeout Investor and Seller, Purchaser may, at its
election, agree to the postponement of the Settlement Date and such other
matters as are set forth in the Settlement Modification Letter. If Purchaser
elects to accept a Settlement Modification Letter, Purchaser shall, not later
than two (2) Business Days after receipt of such Settlement Modification Letter
execute the Settlement Modification Letter
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and send, via facsimile, copies of such fully executed Settlement Modification
Letter to Seller and Takeout Investor. Upon execution by Purchaser of a
Settlement Modification Letter, Purchaser shall recalculate the amount of the
Completion Fee, if any, due to Seller using the new terms included in the
Settlement Modification Letter and shall pay to Seller, not later than two (2)
Business Days after Purchaser's receipt of such Settlement Modification Letter,
the amount of such recalculated Completion Fee.
(C) (1) If a breach by Seller of this Agreement results in any
Mortgage Loan being a Defective Mortgage Loan at the time of the delivery of the
related Trust Receipt to Purchaser and in Purchaser's sole judgement the defects
in such Mortgage Loan will not be cured (or in fact are not cured) by Seller
prior to the Cure Date, Purchaser, at its election, may require that Seller,
upon receipt of notice from Purchaser of its exercise of such right, either (i)
immediately repurchase Purchaser's ownership interest in such Defective Mortgage
Loan by remitting to Purchaser (in immediately available funds in accordance
with Purchaser's Wire Instructions) the amount paid by Purchaser for such
Defective Mortgage Loan plus interest at the Pass-Through Rate on the principal
amount thereof from the date of Purchaser's purchase of the related Mortgage
Loan Pool to the date of such repurchase or (ii) deliver to Custodian a Mortgage
Loan in exchange for such Defective Mortgage Loan, which newly delivered
Mortgage Loan shall be in all respects acceptable to Purchaser in Purchaser's
reasonable discretion. If the aggregate principal balance of all Mortgage
Loan(s) that are accepted by Purchaser pursuant to clause (ii) of the
immediately preceding sentence is less than the aggregate principal balance of
all Defective Mortgage Loan(s) that are being replaced by such Mortgage Loan(s),
Seller shall remit with such Mortgage Loan to Purchaser an amount equal to the
difference between the aggregate principal balance of the new Mortgage Loan(s)
accepted by Purchaser and the aggregate principal balance of the Defective
Mortgage Loan(s) being replaced thereby.
(c) (2) If Seller fails to comply with its obligations in the manner
described in Section 3 (c) (1), not later than the third day after receipt by
Seller of notice from Purchaser, Seller's rights and obligations to service
Mortgage Loan(s) as provided in this Agreement, shall terminate. If an Act of
Insolvency occurs at any time, Seller's rights and obligations to service the
Mortgage Loan(s), as provided in this Agreement, shall terminate immediately,
without any notice or action by Purchaser. Upon any such termination, Purchaser
is hereby authorized and empowered as the exclusive agent for Seller to
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sell and transfer such rights to service the Mortgage Loan(s) for such price and
on such terms and conditions as Purchaser shall reasonably determine, and Seller
shall not otherwise attempt to sell or transfer such rights to service without
the prior consent of Purchaser. Seller shall perform all acts and take all
action so that the Mortgage Loan(s) and all files and documents relating to such
Mortgage Loan(s) held by Seller, together with all escrow amounts relating to
such Mortgage Loan(s), are delivered to Successor Servicer. To the extent that
the approval of any Third Party Underwriter or any other insurer or guarantor is
required for any such sale or transfer, Seller shall fully cooperate with
Purchaser to obtain such approval. Upon exercise by Purchaser of its remedies
under this Section 3(c) (2), Seller hereby authorizes Purchaser to receive all
amounts paid by any purchaser of such rights to service the Mortgage Loan(s) and
to remit such amounts to Seller subject to Purchaser's rights of set-off under
this Agreement. Upon exercise by Purchaser of its remedies under this Section
3(c) (2), Purchaser's obligation to pay and Seller's right to receive any
portion of the Completion Fee relating to such Mortgage Loan(s) shall
automatically be cancelled and become null and void, provided that such
cancellation shall in no way relieve Seller or otherwise affect the obligation
of Seller to indemnify and hold Purchaser harmless as specified in Section 3(e).
(d) Each Mortgage Loan required to be delivered to Successor Servicer
by Section 3(c) (2) shall be delivered free of any servicing rights in favor of
Seller and free of any title, interest, lien, encumbrance or claim of any kind
of Seller. Seller shall deliver or cause to be delivered all files and documents
relating to each Mortgage Loan held by Seller to Successor Servicer. Seller
shall promptly take such actions and furnish to Purchaser such documents that
Purchaser deems necessary or appropriate to enable Purchaser to cure any defect
in each such Mortgage Loan or to enforce such Mortgage Loans, as appropriate.
(e) Seller agrees to indemnify and hold Purchaser and its assigns
harmless from and against all Losses resulting from or relating to any breach or
failure to perform by Seller of any representation, warranty, covenant, term or
condition made or to be performed by Seller under this Agreement.
(f) No exercise by Purchaser of its rights under this Section 3 shall
relieve Seller of responsibility or liability for any breach of this Agreement.
(g) Seller hereby grants Purchaser a right of set-off against the
payment of any amounts that may be due and payable to
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Purchaser from Seller, such right to be upon any and all monies or other
property of Seller held or received by Purchaser, or due and owing from
Purchaser to Seller.
Section 4. Completion Fee.
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(a) With respect to each Mortgage Loan Pool that Purchaser elects to
purchase hereunder, Purchase shall pay to Seller a Completion Fee. The
Completion Fee shall be payable by Purchaser as provided in subsection (e)
below.
(b) For purposes of calculating that portion of the Completion Fee
composed of the "Net Carry Adjustment", the Net Carry Adjustment shall be an
amount (which may be a negative number) equal to (A) the product obtained by
multiplying the number of days in the period beginning on the Purchase Date to
but not including the Settlement Date and the difference between (i) the product
of the rate of interest to be borne by the related Mortgage Loans in the
Mortgage Pool and the aggregate principal amount of such Mortgage Loans and (ii)
the daily application of the applicable Pass-Through Rate to the Purchase Price
(B) divided by 360.
(c) If a Mortgage Loan Pool is purchased by Purchaser in the month
prior to the month in which the related Settlement Date occurs, (A) all interest
which accrues on the related Mortgage Loans, on and after the Purchase Date,
through the last day of the month prior to the month in which such Settlement
Date occurs, shall be paid to Purchaser by Seller, as servicer, on the related
Settlement Date and (B) all interest which accrues on the Mortgage Loans in such
Mortgage Loan Pool on and after the first day of the month in which such
Settlement Date occurs, through the day immediately prior to such Settlement
Date, will be paid to Purchaser by Takeout Investor on such Settlement Date
unless such Settlement Date occurs after the Cut-off Date of such month in which
event Seller, as servicer, shall pay such amount to Purchaser on such Settlement
Date. If a Mortgage Loan Pool is purchased by Purchaser in the same month in
which the related Settlement Date occurs, (A) all interest, if any, which
accrues on such Mortgage Loan(s) from the first day of such month to but not
including the related Purchase Date shall be paid by Purchaser to Seller on such
Settlement Date, and (B) all interest which accrues on such Mortgage Loan(s),
on and after the Purchase Date to but not including the Settlement Date will be
paid to Purchaser by Takeout Investor on the Settlement Date unless such
Settlement Date occurs after the Cut-off Date or in a month in which interest
has been prepaid by the Mortgagor in either of which events Seller, as servicer,
shall pay such amount to
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Purchaser on such Settlement Date. For purposes of this paragraph all interest
payments shall be deemed to accrue at the applicable rate set forth in the
related Takeout Commitment.
(d) It is understood by Seller and Purchaser that, if Seller requests
and Purchaser agrees to pay the Completion Fee prior to the Settlement Date, the
amount of such Completion Fee shall be adjusted as mutually agreed by Seller and
Purchaser.
(e) The Completion Fee relating to each Mortgage Loan Pool is payable
on the earlier to occur of (1) the date of receipt by Purchaser of the Trade
Price and (2) the satisfaction by Seller of its obligations pursuant to this
Agreement notwithstanding the exercise by Purchaser of any remedial election
authorized herein.
Section 5. Servicing of the Mortgage Loans.
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(a) Seller shall service and administer the Mortgage Loan(s) on behalf
of Purchaser in accordance with prudent mortgage loan servicing standards and
procedures generally accepted in the mortgage banking industry and in accordance
with the requirements of Takeout Investor, provided that Seller shall at all
times comply with applicable law, and the requirements of any applicable insurer
or guarantor including, without limitation, any Third Party Underwriter, so that
the insurance in respect of any Mortgage Loan is not voided or reduced. Seller
shall at all times maintain accurate and complete records of its servicing of
each Mortgage Loan, and Purchaser may, at any time during Seller's business
hours on reasonable notice, examine and make copies of such records. In
addition, if a Mortgage Loan is not purchased by Takeout Investor on or before
the Cure Date, Seller shall at Purchaser's request deliver to Purchaser
monthly reports regarding the status of such Mortgage Loan, which reports shall
include, but shall not be limited to, a description of each Mortgage Loan in
default for more than thirty (30) days, and such other circumstances with
respect to any Mortgage Loan (whether or not such Mortgage Loan is included in
the foregoing list) that could materially adversely affect any such Mortgage
Loan, Purchaser's ownership of any such Mortgage Loan or the collateral securing
any such Mortgage Loan. Seller shall deliver such a report to Purchaser every
thirty (30) days until (i) the purchase by Takeout Investor of such Mortgage
Loan pursuant to the related Takeout Commitment or (ii) the exercise by
Purchaser of any remedial election pursuant to Section 3.
(b) Within five (5) business days of notice from Purchaser, Seller
shall establish and maintain a separate
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custodial account (the "Custodial Account") entitled "[Name of Seller] , in
trust for Prudential Securities Realty Funding Corporation and its assignees
under the Mortgage Loan Purchase and Sale Agreement dated [the date of this
Agreement]" and shall promptly deposit into such account in the form received
with any necessary endorsements all collections received in respect of each
Mortgage Loan that are payable to Purchaser as the owner of each such Mortgage
Loan.
(c) Amounts deposited in the Custodial Account with respect to
any Mortgage Loan shall be held in trust for Purchaser as the owner of such
Mortgage Loan and shall be released only as follows:
(1) Except as otherwise provided in Section 5 (c) (2), following
receipt by Purchaser or its designee of the Takeout Proceeds for such
Mortgage Loan from Takeout Investor or Seller amounts deposited in the
Custodial Account shall be released in accordance with Section 3 (a)
(2). Notwithstanding the foregoing, all amounts deposited in the
Custodial Account shall be paid to Seller upon the purchase by Takeout
Investor of the related Mortgage Loan(s) from Purchaser if, and to the
extent that, the amounts due and payable to Purchaser hereunder have
been set-off against the Purchase Price for the related Mortgage Loan
Pool or the Completion Fee relating to the Mortgage Loan(s) in such
Mortgage Loan Pool. The amounts paid to Seller (if any) pursuant to
this Section 5(c) (1) shall constitute Seller's sole compensation for
servicing the Mortgage Loans as provided in this Section 5.
(2) If Successor Servicer takes delivery of such Mortgage Loan
(either under the circumstances set forth in Section 3 or otherwise),
all amounts deposited in the Custodial Account shall be paid to
Purchaser promptly upon such delivery.
(3) If a Mortgage Loan is not purchased by Takeout Investor on
or before the Cure Date, during the period thereafter that Seller
remains as servicer, all amounts deposited in the Custodial Account
shall be released only in accordance with a Purchaser's written
instructions.
Section 6. Trade Assignments. Seller hereby assigns to Purchaser,
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free of any security interest, lien, claim or encumbrance of any kind, Seller's
rights, under each Takeout
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Commitment as to which Takeout Investor has consented to assignment, to deliver
the Mortgage Loan(s) specified therein to the related Takeout Investor and to
receive the Takeout Proceeds therefor from such Takeout Investor. Purchaser
shall not be deemed to have accepted any Trade Assignment unless and until
it purchases the related Mortgage Loans, and nothing set forth herein shall be
deemed to impair Purchaser's right to reject any Mortgage Loan for any reason,
in its sole discretion.
Section 7. Transfers of Beneficial Interest in Mortgage Loans by
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Purchaser. Purchaser may, in its sole discretion, assign all of its right,
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title and interest in or grant a security interest in any Mortgage Loan sold by
Seller hereunder and all rights of Purchaser under this Agreement and the
Custodial Agreement, in respect of such Mortgage Loan to a tri-party custody and
clearing agent ("Assignee"), subject only to an obligation on the part of
Assignee to deliver each such Mortgage Loan to Takeout Investor pursuant to
Section 6 or to Purchaser to permit Purchaser or its designee to make delivery
thereof to a Takeout Investor pursuant to Section 6. It is anticipated that
such assignment to an Assignee will be made by Purchaser, and Seller hereby
irrevocably consents to such assignment.. No notice of such assignment shall be
given by Purchaser to Seller or Takeout Investor. Assignment by Purchaser of
the Mortgage Loans as provided in this Section 7 shall not release Purchaser
from its obligations otherwise under this Agreement .
Without limitation of the foregoing, an assignment of the Mortgage
Loans to an Assignee, as described in this Section 7, shall be effective upon
delivery to the Assignee of a duly executed and authenticated Trust Receipt.
Section 8. Record Title to Mortgage Loans; Intent of Parties;
--------------------------------------------------
Security Interest
- -----------------
(a) From and after the issuance and delivery of the related Trust
Receipt, and subject to the remedies of Purchaser in Section 3, Seller shall
remain the last named payee or endorsee of each Mortgage Note and the mortgagee
or assignee of record of each Mortgage in trust for the benefit of Purchaser,
for the sole purpose of facilitating the servicing of such Mortgage Loan.
(b) Seller shall maintain a complete set of books and records for
each Mortgage Loan which shall be clearly marked to reflect the ownership
interest in each Mortgage Loan of the holder of the related Trust Receipt.
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<PAGE>
(c) Purchaser and Seller confirm that the transactions contemplated
herein are intended to be sales of the Mortgage Loans by Seller to Purchaser
rather than borrowings secured by the Mortgage Loans. In the event, for any
reason, any transaction is construed by any court or regulatory authority as a
borrowing rather than as a sale, Seller and Purchaser intend that Purchaser or
its Assignee, as the case may be, shall have a perfected first priority security
interest in the Mortgage Loans, the Custodial Account, and all proceeds thereof,
the Takeout Commitments and the proceeds of any and all of the foregoing
(collectively, the "Collateral"), free and clear of adverse claims. In such
case, Seller shall be deemed to have hereby granted to Purchaser or Assignee, as
the case may be, a first priority security interest in and lien upon the
Collateral, free and clear of adverse claims. In such event, this Agreement
shall constitute a security agreement, the Custodian shall be deemed to be an
independent custodian for purposes of perfection of the security interest
granted to Purchaser or Assignee, as the case may be, and Purchaser or Assignee,
as the case may be, shall have all of the rights of a secured party under
applicable law.
Section 9. Representations and Warranties
------------------------------
(a) Seller hereby represents and warrants to Purchaser as of the date
hereof and as of the date of each issuance and delivery of a Trust Receipt that:
(i) Seller is duly organized, validly existing and in good
standing under the laws of the state of its organization and has all
licenses necessary to carry on its business as now being conducted and
is licensed, qualified and in good standing in the state where the
Mortgaged Property is located if the laws of such state require
licensing or qualification in order to conduct business of the type
conducted by Seller. Seller has all requisite power and authority
(including, if applicable, corporate power) to execute and deliver
this Agreement and to perform in accordance herewith; the execution,
delivery and performance of this Agreement (including all instruments
of transfer to be delivered pursuant to this Agreement) by Seller and
the consummation of the transactions contemplated hereby have been
duly and validly authorized; this Agreement evidences the valid,
binding and enforceable obligation of Seller; and all requisite action
(including, if applicable, corporate action) has been taken by Seller
to make this Agreement valid and binding upon Seller in accordance
with its terms;
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<PAGE>
(ii) No approval of the transactions contemplated by this
Agreement from the OTS, the NCUA, the FDIC or any similar federal or
state regulatory authority having jurisdiction over Seller is
required, or if required, such approval has been obtained. There are
no actions or proceedings pending or affecting Seller which would
adversely affect its ability to perform hereunder. The transfers,
assignments and conveyances provided for herein are not subject to the
bulk transfer or any similar statutory provisions in effect in any
applicable jurisdiction;
(iii) The consummation of the transactions contemplated by this
Agreement are in the ordinary course of business of Seller and will
not result in the breach of any term or provision of the charter or
by-laws of Seller or result in the breach of any term or provision of,
or conflict with or constitute a default under or result in the
acceleration of any obligation under, any agreement, indenture or loan
or credit agreement or other instrument to which Seller or its
property is subject, or result in the violation of any law, rule,
regulation, order, judgment or decree to which Seller or its property
is subject;
(iv) This Agreement, the Custodial Agreement and every document
to be executed by Seller pursuant to this Agreement is and will be
valid, binding and subsisting obligations of Seller, enforceable in
accordance with their respective terms. No consents or approvals are
required to be obtained by Seller or its Parent Company for the
execution, delivery and performance of this Agreement or the Custodial
Agreement by Seller;
(v) Seller has not sold, assigned, transferred, pledged or
hypothecated any interest in any Mortgage Loan sold hereunder to any
person other than Purchaser, and upon delivery of a related Trust
Receipt to Purchaser, Purchaser will be the sole owner thereof, free
and clear of any lien, claim or encumbrance; --and
(vi) All information relating to Seller that Seller has
delivered or caused to be delivered to Purchaser, including, but not
limited to, all documents related to this Agreement, the Custodial
Agreement or Seller's financial statements, does not contain any
untrue statement of a material fact or omit to state a
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<PAGE>
material fact necessary to make the statements made therein or herein
in light of the circumstances under which they were made, not
misleading.
(b) Seller hereby represents, warrants and covenants to Purchaser
with respect to each Mortgage Loan as of the Purchase Date of such Mortgage Loan
that:
(i) The Mortgage Loan conforms in all respects to the
requirements of this Agreement, the Sale Agreement, the Commitment
Guidelines and the requirements of the related Third Party
Underwriter's Certificate;
(ii) Seller is the sole owner and holder of the Mortgage
Loan free and clear of any and all liens, pledges, charges or security
interests of any nature and has full right and authority, subject to no
interest or participation of, or agreement with, any other party, to
sell and assign the same pursuant to this Agreement;
(iii) No servicing agreement has been entered into with respect
to the Mortgage Loan, or any such servicing agreement has been
terminated and there are no restrictions, contractual or governmental,
which would impair the ability of Purchaser or Purchaser's designees
from servicing the Mortgage Loan;
(iv) The Mortgage is a valid and subsisting first lien on the
property therein described and the Mortgaged Property is free and clear
of all encumbrances and liens having priority over the first lien of
the Mortgage except for liens for real estate taxes and special
assessments not yet due and payable. Any pledge account, security
agreement, chattel mortgage or equivalent document related to, and
delivered to Purchaser with the Mortgage, establishes in Seller a valid
and subsisting first lien on the property described therein, and Seller
has full right to sell and assign the same to Purchaser;
(v) Neither Seller nor any prior holder of the Mortgage has
modified the Mortgage in any material respect; satisfied, canceled or
subordinated the Mortgage in whole or in part; released the Mortgaged
Property in whole or in part from the lien of the Mortgage; or executed
any instrument of release, cancellation, modification or satisfaction
unless such
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release, cancellation, modification or satisfaction does not adversely
affect the value of the Mortgage Loan and is contained in the related
Document File;
(vi) The Mortgage Loan is not in default, and all Monthly
Payments due prior to the Purchase Date and all taxes , governmental
assessments, insurance premiums, water, sewer and municipal charges,
leasehold payments or ground rents have been paid. Seller has not
advanced funds, or induced or solicited any advance of funds by a
party other than the Mortgagor directly or indirectly, for the payment
of any amount required by the Mortgage Loan. The collection practices
used by each entity which has serviced the Mortgage Loan have been in
all respects legal, proper, prudent, and customary in the mortgage
servicing business. With respect to escrow deposits and payments in
those instances where such were required, there exist no deficiencies
in connection therewith for which customary arrangements for repayment
thereof have not been made and no escrow deposits or payments or other
charges or payments have been capitalized under any Mortgage or the
related Mortgage Note;
(vii) There is no default, breach, violation or event of
acceleration existing under the Mortgage or the related Mortgage Note
and no .event which, with the passage of time or with notice and the
expiration of any grace of cure period, would constitute a default,
breach, violation or event of acceleration; and Seller has not waived
any default, breach, violation or event of acceleration;
(viii) The Mortgage Loan is not subject to any right of
rescission, set-off, counterclaim or defense, including the defense of
usury, nor will the operation of any of the terms of the Mortgage Note
or the Mortgage, or the exercise of any right thereunder, render
either the Mortgage Note or the Mortgage unenforceable, in whole or in
part, or subject to any right of rescission, set-off, counterclaim or
defense, including the defense of usury, and no such right of
rescission, set-off, counterclaim or defense has been asserted with
respect thereto;
(ix) The Mortgage Note and the related Mortgage are genuine and
each is the legal, valid and binding obligation of the maker thereof,
enforceable in
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accordance with its terms. All parties to the Mortgage Note and the
Mortgage had legal capacity to execute the Mortgage Note and the
Mortgage and each Mortgage Note and Mortgage have been duly and
properly executed by the Mortgagor;
(x) The Mortgage Loan meets, or is exempt from, applicable
state or federal laws, regulations and other requirements pertaining
to usury, and the Mortgage Loan is not usurious;
(xi) Any and all requirements of any federal, state or local
law including, without limitation, truth-in-lending, real estate
settlement procedures, consumer credit protection, equal credit
opportunity or disclosure laws applicable to the Mortgage Loan have
been complied with, and Seller shall deliver to Purchaser upon demand,
evidence of compliance with all such requirements;
(xii) Either: (i) Seller and every other holder of the Mortgage,
if any, were authorized to transact and do business in the
jurisdiction in which the Mortgaged Property is located at all times
when such party held the Mortgage; or (ii) the loan of mortgage funds,
the acquisition of the Mortgage (if Seller was not the original
lender) , the holding of the Mortgage and the transfer of the Mortgage
did not constitute the transaction of business or the doing of
business in such jurisdiction;
(xiii) The proceeds of the Mortgage Loan have been fully
disbursed, there is no requirement for future advances thereunder and
any and all requirements as to completion of any on site or off-site
improvements and as to disbursements of any escrow funds, therefore,
have been complied with. All costs, fees and expenses incurred in
making, closing or recording the Mortgage Loans were paid;
(xiv) The related Mortgage contains customary and enforceable
provisions such as to render the rights and remedies of the holder
thereof adequate for the realization against the Mortgaged Property of
the benefits of the security, including, (i) in the case of a Mortgage
designated as a deed of trust, by trustee's sale, and (ii) otherwise
by judicial foreclosure. There is no homestead or other exemption
available to
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<PAGE>
the Mortgagor which would interfere with the right to sell the
Mortgaged Property at a trustee's sale or the right to foreclose the
Mortgage;
(xv) The Mortgage Loan was originated free of any "original
issue discount" with respect to which the owner of the Mortgage Loan
could be deemed to have income pursuant to Sections 1271 et seq. of
-- ---
the Internal Revenue Code;
(xvi) Each Mortgage Loan was originated by an institution
described in Section 3 (a) (41) (A) (ii) of the Securities Exchange
Act of 1934, as amended;
(xvii) At origination, the Mortgaged Property was free and clear
of all mechanics' and materialmen's liens or liens in the nature
thereof which are or could be prior to the Mortgage lien, and no
rights are outstanding that under law could give rise to any such
lien;
(xviii) All of the improvements which are included for the
purpose of determining the appraised value of the Mortgaged Property
lie wholly within the boundaries and building restriction lines of
such property, and no improvements on adjoining properties encroach
upon the Mortgaged Property;
(xix) At origination, no improvement located on or being part
of the Mortgaged Property was in violation of any applicable zoning
law or regulation and all inspections, licenses and certificates
required to be made or issued with respect to all occupied portions of
the Mortgaged Property, and with respect to the use and occupancy of
the same, including but not limited to certificates of occupancy and
fire underwriting certificates, had been made or obtained from the
appropriate authorities and the Mortgaged Property was lawfully
occupied under applicable law. No improvement located on or being part
of the Mortgaged Property is in violation of any applicable zoning law
or regulation and all inspections, licenses and certificates required
to be made or issued with respect to the Mortgaged Property, and with
respect to the use and occupancy of the same, including but not
limited to certificates of occupancy and fire underwriting
certificates, have been made or obtained from the appropriate
authorities and
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<PAGE>
the Mortgaged Property is lawfully occupied under applicable law;
(xx) There is no proceeding pending for the total or partial
condemnation of the Mortgaged Property and said property is undamaged
by waste, fire, earthquake or earth movement, windstorm, flood,
tornado or other casualty;
(xxi) The Custodial File contains and the Credit File contains
or shall contain prior to the Cure Date each of the documents and
instruments specified to be included therein duly executed and in due
and proper form and each such document or instrument is either in form
acceptable to FNMA or is a FNMA/FHLMC uniform instrument. Each
Mortgage Note and Mortgage are on forms approved by FNMA with such
riders as have been approved by FNMA; Seller is currently in
possession of the Custodial File for each Mortgage Loan and is in
possession or shall be prior to the Expiration Date of the Credit File
for each Mortgage Loan and there are no custodial agreements in effect
adversely affecting the rights of Seller to make the deliveries
required within the required time. Seller shall not deliver a Credit
File to Takeout Investor prior to the related Commitment Date;
(xxii) Each Mortgage Loan is covered by a mortgage title
insurance policy acceptable to FNMA, issued by, and the valid and
binding obligation of, a title insurer acceptable to FNMA and
qualified to do business in the jurisdiction where the Mortgaged
Property is . located, insuring Seller, its successors and assigns, as
to the first priority lien of the Mortgage in the original principal
amount of the Mortgage Loan, Seller is the named insured and the sole
insured of such mortgage title insurance policy, the assignment to
Purchaser of Seller's interest in such mortgage title insurance policy
does not require the consent of or notification to the insurer, such
mortgage title insurance policy is in full force and effect and will
be in full force and effect and inure to the benefit of Purchaser upon
the consummation of the transactions contemplated by this Agreement
and no claims have been made under such mortgage title insurance
policy and no prior holder of the related Mortgage, including Seller,
has done, by act or omission, anything which would
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<PAGE>
impair the coverage of such mortgage title insurance policy;
(xxiii) All buildings upon the Mortgaged Property are insured
against loss by fire, hazards of extended coverage and such other
hazards as are customary in the area where the Mortgaged Property is
located, pursuant to fire and hazard insurance policies with extended
coverage or other insurance required by the Sale Agreement, in an
amount at least equal to the lesser of (i) the outstanding principal
balance of the Mortgage Loan or (ii) the maximum insurable value
(replacement cost without deduction for depreciation) of the
improvements constituting the Mortgaged Property. If applicable laws
limit the amount of such insurance to the replacement cost of the
improvements constituting the Mortgaged Property or to some other
amount, then such insurance is in an amount equal to the maximum
allowed by such laws. Such insurance amount is sufficient to prevent
the Mortgagor or the loss payee under the policy from becoming a co-
insurer. The insurer issuing such insurance is acceptable pursuant to
the Sale Agreement. All individual insurance policies contain a
standard mortgagee clause naming Seller, its successors and assigns,
as mortgagee and all premiums thereon have been paid. Each Mortgage
obligates the Mortgagor thereunder to maintain all such insurance at
Mortgagor's cost and expense, and upon the Mortgagor's failure to do
so, authorizes the holder of the Mortgage to obtain and maintain such
insurance at Mortgagor's cost and expense and to seek reimbursement
therefor from the Mortgagor. Any flood insurance required by
applicable law has been obtained;
(xxiv) The original principal amount of the related Mortgage
Note either (a) was not more than 80% of the lesser of (i) the
purchase price of the Mortgaged Property paid by the Mortgagor at the
origination of the Mortgage Loan and (ii) the appraised value of the
Mortgaged Property, such appraised value being, for the purposes
hereof, the amount set forth in an appraisal. made in connection with
the origination of such Mortgage Loan, or (b) is and will be insured
as to payment defaults by a policy of primary mortgage guaranty
insurance in accordance with the Sale Agreement and all provisions of
such primary mortgage guaranty insurance policy have been and are
being complied with, such policy is in full force and effect,
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<PAGE>
and all premiums due thereunder have been paid. Any Mortgage Loan
subject to any such policy of primary mortgage guaranty insurance
obligates the Mortgagor thereunder to maintain such insurance and pay
all premiums and charges in connection therewith. The original
principal amount of each Mortgage Note was not more than 95% of the
purchase price of the related Mortgaged Property paid by the Mortgagor
at the origination of the Mortgage Loan. No action, event or state of
facts exists or has existed which, because involving or arising from
any dishonest, fraudulent, criminal, negligent or knowingly wrongful
act, error or omission by the Mortgagor or the originator or servicer
of the Mortgage Loan, would result in the exclusion from, denial of,
or defense to coverage which otherwise would be provided by such
insurance;
(xxv) At the time that the related Mortgage Loan was made the
Mortgagor represented that the Mortgagor would occupy such Mortgaged
Property as Mortgagor's primary residence;
(xxvi) The Mortgaged Property consists of a single parcel of
real property; and
(xxvii) There are no circumstances or conditions with respect to
the Mortgage, the Mortgaged Property, the Mortgagor or the Mortgagor's
credit standing that can be reasonably expected to cause private
institutional investors to regard the Mortgage Loan as an unacceptable
investment, cause the Mortgage Loan to become delinquent or adversely
affect the value or marketability of the Mortgage Loan.
The representations and warranties of Seller in this Section 9 are unaffected by
and supersede any provision in any endorsement of any Mortgage Loan or in any
assignment with respect to such Mortgage Loan to the effect that such
endorsement or assignment is without recourse or without representation or
warranty.
Section 10. Covenants of Seller. Seller hereby D covenants and agrees
-------------------
with Purchaser as follows:
(a) Seller shall deliver to Purchaser:
(i) Within one hundred twenty (120) days after the end of each
fiscal year of Seller, consolidated balance sheets of Seller and its
consolidated subsidiaries and
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the related consolidated statements of income showing the financial
condition of Seller and its consolidated subsidiaries as of the close
of such fiscal year and the results of operations during such year,
and a consolidated statement of cash flows, as of the close of such
fiscal year, setting forth, in each case, in comparative form the
corresponding figures for the preceding year, all the foregoing
consolidated financial statements to be reported on by, and to carry
the report (acceptable in form and content to Purchaser) of an
independent public accountant of national standing acceptable to
Purchaser;
(ii) Within sixty (60) days after the end of each of the first
three fiscal quarters of each fiscal year of Seller, unaudited
consolidated balance sheets and consolidated statements of income, all
to be in a form acceptable to Purchaser, showing the financial
condition and results of operations of Seller and its consolidated
subsidiaries on a consolidated basis as of the end of each such
quarter and for the then elapsed portion of the fiscal year, setting
forth, in each case, in comparative form the corresponding figures for
the corresponding periods of the preceding fiscal year, certified by a
financial officer of Seller (acceptable to Purchaser) as presenting
fairly the financial position and results of operations of Seller and
its consolidated subsidiaries and as having been prepared in
accordance with generally accepted accounting principles consistently
applied, in each case, subject to normal year-end audit adjustments;
(iii) Promptly upon receipt thereof, a copy of each other report
submitted to Seller by its independent public accountants in
connection with any annual, interim or special audit of Seller;
(iv) Promptly upon becoming aware thereof, notice of (1) the
commencement of, or any determination in, any legal, judicial or
regulatory proceedings, (2) any dispute between Seller or its Parent
Company and any governmental or regulatory body, (3) any event or
condition, which, in any case of (1) or (2) if adversely determined,
would have a material adverse effect on (A) the validity or
enforceability of this Agreement, (B) the financial condition or
business operations of Seller, or (C) the ability of Seller to fulfill
its obligations under this Agreement or (4) any
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<PAGE>
material adverse change in the business, operations, prospects or
financial condition of Seller, including, without limitation, the
insolvency of Seller or its Parent Company;
(v) Promptly upon becoming available, copies of all financial
statements, reports, notices and proxy statements sent by its Parent
Company, Seller or any of Seller's consolidated subsidiaries in a
general mailing to their respective stockholders and of all reports
and other material (including copies of all registration statements
under the Securities Act of 1933, as amended) filed by any of them
with any securities exchange or with the Securities and Exchange
Commission or any governmental authority succeeding to any or all of
the functions of said Commission;
(vi) Promptly upon becoming available, copies of any press
releases issued by its Parent Company or Seller and copies of any
annual and quarterly financial reports and any reports on Form H-(b)12
which its Parent Company or Seller may be required to file with the
OTS or the RTC or comparable reports which a Parent Company or Seller
may be required to file with the FDIC or any other federal banking
agency containing such financial statements and other information
concerning such Parent Company's or Seller's business and affairs as
is required to be included in such reports in accordance with the
rules and regulations of the OTS, the RTC, the FDIC or such other
banking agency, as may be promulgated from time to time;
(vii) Such supplements to the aforementioned documents and such
other information regarding the operations, business, affairs and
financial condition of its Parent Company, Seller or any of Seller's
consolidated subsidiaries as Purchaser may request;
(viii) A copy of (1) the articles of incorporation of Seller and
any amendments thereto, certified by the Secretary of State of
Seller's state of incorporation, (2) a copy of Seller's by-laws,
together with any amendments thereto; (3) a copy of the resolutions
adopted by Seller's Board of Directors authorizing Seller to enter
into this Agreement and the Custodial Agreement and authorizing one or
more of Seller's officers to execute the documents related to this
Agreement and the Custodial Agreement, and (4) a
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<PAGE>
certificate of incumbency and signature of each officer of Seller
executing any document in connection with this Agreement;
(ix) Neither Seller nor any affiliate thereof will acquire at
any time any economic interest in or obligation with respect to any
Mortgage Loan;
(x) Under generally accepted accounting principles ("GAAP")
and for federal income tax purposes, Seller will report each sale of a
Mortgage Loan to the Purchaser hereunder as a sale of the ownership
interest in the Mortgage Loan. Seller has been advised by or has
confirmed with its independent public accountants that the foregoing
transactions will be so classified under GAAP;
(xi) The consideration received by Seller upon the sale of each
Mortgage Loan Pool will constitute reasonably equivalent value and
fair consideration for the ownership interest in the Mortgage Loans
included therein;
(xii) Seller will be solvent at all relevant times prior to, and
will not be rendered insolvent by, any sale of a Mortgage Loan to the
Purchaser; and
(xiii) Seller will not sell any Mortgage Loan to the Purchaser
with any intent to hinder, delay or defraud any of Seller's creditors.
(b) Seller shall comply, in all material respects, with all laws,
rules and regulations to which it is or may become subject.
(c) Seller shall, upon request of Purchaser, promptly execute and
deliver to Purchaser all such other and further documents and instruments of
transfer, conveyance and assignment, and shall take such other action as
Purchaser may require more effectively to transfer, convey, assign to and vest
in Purchaser and to put Purchaser in possession of the property to be
transferred, conveyed, assigned and delivered hereunder and otherwise to carry
out more effectively the intent of the provisions under this Agreement.
Section 11. Term. This Agreement shall continue in effect until
----
terminated as to future transactions by written instruction signed by either
Seller or Purchaser and delivered to
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<PAGE>
the other, provided that no termination will affect the obligations hereunder as
to any of the Mortgage Loans purchased hereunder .
Section 12. Exclusive Benefit of Parties; Assignment. This Agreement
----------------------------------------
is for the exclusive benefit of the parties hereto and their respective
successors and assigns and shall not be deemed to give any legal or equitable
right to any other person, including the Custodian. Except as provided in
Section 7, no rights or obligations created by this Agreement may be assigned by
any party hereto without the prior written consent of the other parties.
Section 13. Amendments; Waivers; Cumulative Rights. This Agreement
--------------------------------------
may be amended from time to time only by written agreement of Seller and
Purchaser.. Any forbearance, failure or delay by either party in exercising any
right, power or remedy hereunder shall not be deemed to be a waiver thereof, and
any single or partial exercise by Purchaser of any right, power or remedy
hereunder shall not preclude the further exercise thereof. Every right, power
and remedy of Purchaser shall continue in full force and effect until
specifically waived by Purchaser in writing. No right, power or remedy shall be
exclusive, and each such right, power or remedy shall be cumulative and in
addition to any other right, power or remedy, whether conferred hereby or
hereafter available at law or in equity or by statute or otherwise .
Section 14. Execution in Counterparts. This Agreement may be
-------------------------
executed in any number of counterparts, each of which shall be deemed an
original, but all of which shall constitute one and the same instrument.
Section 15. Effect of Invalidity of Provisions. In case any one or
----------------------------------
more of the provisions contained in this Agreement should be or become invalid,
illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein or therein shall in
no way be affected, prejudiced or disturbed thereby.
Section 16. Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of New York, without regard
to conflict of laws rules.
Section 17. Notices. Any notices, consents, elections, directions and
-------
other communications given under this Agreement shall be in writing and shall be
deemed to have been duly given when telecopied or delivered by overnight
courier,
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<PAGE>
personally delivered, or on the third day following the placing thereof in the
mail, first class postage prepaid, to the respective addresses set forth on the
cover page hereof for Seller and Purchaser, or to such other address as either
party shall give notice to the other party pursuant to this Section 17. Notices
to any Assignee shall be given to such address as Assignee shall provide to
Seller in writing.
Section 18. Entire Agreement. This Agreement and the Custodial
----------------
Agreement contain the entire agreement between the parties hereto with respect
to the subject matter hereof, and supersede all prior and contemporaneous
agreements between them, oral or written, of any nature whatsoever with respect
to the subject matter hereof.
Section 19. Costs of Enforcement. In addition to any other
--------------------
indemnity specified in this Agreement, in the event of a breach by Seller of
this Agreement, the Custodial Agreement or a Takeout Commitment, Seller agrees
to pay the reasonable attorneys' fees and expenses of Purchaser and/or Assignee
incurred as a consequence of such breach.
Section 20. Consent to Service. Each party irrevocably consents to
------------------
the service of process by registered or certified mail, postage prepaid, to it
at its address given in or pursuant to Section 17.
Section 21. Submission to Jurisdiction. With respect to any claim
--------------------------
arising out of this Agreement each party (a) irrevocably submits to the
nonexclusive jurisdiction of the courts of the State of New York and the United
States District Court located in the Borough of Manhattan in New York City, and
(b) irrevocably waives (i) any objection which it may have at any time to the
laying of venue of any suit, action or proceeding arising out of or relating
hereto brought in any such court, (ii) any claim that any such suit, action or
proceeding brought in any such court has been brought in any inconvenient forum
and (iii) the right to object, with respect to such claim suit, action or
proceeding brought in any such court, that such court does not have jurisdiction
over such party.
Section 22. Jurisdiction Not Exclusive. Nothing-herein will be
--------------------------
deemed to preclude either party hereto from bringing an action or proceeding in
respect of this Agreement in any jurisdiction other than as set forth in Section
21.
Section 23. Construction The headings in this Agreement are for
------------
convenience only and are not intended to
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<PAGE>
influence its construction. References to Sections, Exhibits and Annexes in this
Agreement are to the Sections of and Exhibits to this Agreement. The Exhibits
are part of this Agreement, and are incorporated herein by reference. The
singular includes the plural, the plural the singular, and the words "and" and
"or" are used in the conjunctive or disjunctive as the sense and circumstances
may require.
IN WITNESS WHEREOF, Purchaser and Seller have duly executed this
Agreement as of the date and year set forth on the cover page hereof.
PRUDENTIAL SECURITIES REALTY FUNDING CORPORATION
By
--------------------------------------
Name: Michael Pillar
Title: V.P.
SUTTER MORTGAGE CORP.
BY /s/ RONALD MORCK
--------------------------------------
Name: Ronald Morck
Title: President
Address (if different from cover page):
-30-
<PAGE>
EXHIBIT 10.49
Mark-To-Market Agreement [LOGO OF PRUDENTIAL SECURITIES]
- --------------------------------------------------------------------------------
In consideration of Prudential Securities Incorporated ("PSI") entering into
transactions and agreements with the undersigned and its affiliates
(collectively the "undersigned") including without limitation purchases or sales
of securities or whole loans, repurchase and reverse repurchase transactions,
dollar rolls, forward and when issued transactions, over-the-counter option
transactions (collectively "Transactions") the undersigned hereby agrees as
follows:
1) In the event the undersigned enters into forward or when issued
transactions, dollar rolls, over-the-counter options transactions with PSI
and the contract or commitment value reflects a loss or deficit to the
undersigned, at PSI's request, the undersigned agrees to deposit with PSI,
if demand is made on or before 10:00 a.m. New York City time, by 5:00 p.m.
New York City time on the day so made or, if demand is made after 10:00
a.m. New York City time, by 1:00 p.m New York City time on the next
business day, collateral in the form of cash, U.S. government or agency
securities or a letter of credit issued by a bank acceptable to PSI at
least equal to an amount sufficient to cover the deficit ("mark-to-market
payments").
2) In the event:
i) the undersigned fails to make a mark-to-market payment or any portion
thereof,
ii) the undersigned (or any receiver, trustee, conservator, or similar
official appointed for the undersigned or any of its property)
defaults under, or breaches, disaffirms or repudiates any agreement
or any transaction with PSI,
iii) the undersigned becomes insolvent or a debtor or files an application
under any bankruptcy, reorganization or similar law or regulations,
or
iv) a receiver, trustee, conservator or similar official is appointed for
the undersigned or any of its property
then PSI shall have, in addition to the rights and remedies as may be
provided by law, regulation or agreement, the right, with notice to the
undersigned, which may be given orally, to:
v) accelerate the maturity of any obligation or liability of the
undersigned to PSI and to immediately cancel, liquidate or terminate
any transaction and agreement between the undersigned and PSI,
vi) set off, net out and apply: (a) any account of, amount payable to,
property of or owing to or other claim of the undersigned against
PSI; against (b) any account of, amount payable to, property of or
owing to or other claim of PSI against the undersigned,
vii) realize upon all securities, monies or other property, and all
distributions thereon and proceeds thereof, whenever the same is held
or carried by or for PSI, including property held or carried in
accounts maintained by PSI (collectively the "Collateral").
3) This Mark-To-Market Agreement and the transactions referenced herein shall
be governed by and construed in accordance with the laws of the State of
New York without giving effect to the conflict of law principles thereof.
4) The undersigned represents and warrants to PSI that: (i) it is duly
authorized to execute and deliver this Agreement and to enter into the
transactions referenced herein, (ii) the person signing this Agreement on
behalf of the undersigned is authorized to do so, (iii) this Agreement
constitutes a legal, valid and binding agreement of the undersigned,
enforceable in accordance with its terms, (iv) it has obtained all
authorizations of any governmental body required in connection with this
Agreement and the transactions referenced herein and such authorizations
are in full force and effect and (v) the execution, delivery and
performance of this Agreement and the transactions referenced herein will
not violate any law, ordinance, charter, by-law or rule applicable to it
or any agreement by which it is bound or by which any of its assets are
affected.
5) The rights granted hereby to PSI are in addition to any rights, and
supersede any limitations on such rights that are inconsistent herewith,
that it may have under any existing or future agreements with the
undersigned. Without limiting the generality of the foregoing, nothing
herein shall be construed as a requirement that PSI cause collateral held
on account of a particular transaction to be attributed (in whole or in
part) to any other transaction in determining whether PSI is entitled to
make demand upon the undersigned for additional securities, monies or
other property under any such other transaction nor will PSI's failure to
demand mark-to-market payments constitute a waiver of PSI's right to do
so at a later date.
6) This Agreement may not be amended or modified except in a written
instrument executed by PSI and the undersigned. The rights and obligations
of the undersigned under this Agreement and under any transaction or
agreement (including any transaction between the parties) may not be
assigned without the prior written consent of PSI. Subject to the
foregoing, this Agreement shall be binding on the undersigned's direct and
indirect successors and assigns.
<PAGE>
7) The National Association of Securities Dealers, Inc. Rules of Fair
Practice require the inclusion of the following language where a
predispute arbitration clause appears:
. Arbitration is final and binding on the parties.
. The parties are waiving their right to seek remedies in court,
including the right to jury trial.
. Pre-arbitration discovery is generally more limited than and
different from court proceedings.
. The arbitrators' award is not required to include factual findings or
legal reasoning and any party's right to appeal or to seek
modification or rulings by the arbitrators is strictly limited.
. The panel of arbitrators will typically include a minority of
arbitrators who were or are affiliated with the securities industry.
Any controversy arising out of or relating to this Agreement, Transactions
thereunder, or the breach thereof, and whether executed or to be executed
within or outside of the United States, shall be settled by arbitration
before either the New York Stock Exchange, Inc. or the National
Association of Securities Dealers, Inc. or any other self-regulatory
organization of which PSI is a member, as the undersigned may elect and
under the then existing arbitration procedures of the forum the
undersigned has elected. If the undersigned does not make such election by
registered mail addressed to PSI at its main office within five (5) days
after demand by PSI that the undersigned make such election, then PSI may
make such election. Notice preliminary to, in conjunction with, or
incident to such arbitration proceeding, may be sent to the undersigned by
mail and personal service is hereby waived. Judgment upon any award
rendered by the arbitrators may be entered in any court having
jurisdiction thereof, without notice to the undersigned. No person shall
bring a putative or certified class action to arbitration, nor seek to
enforce any pre-dispute arbitration agreement against any person who has
initiated in court a putative class action; or who is a member of a
putative class who has not opted out of the class with respect to any
claims encompassed by the putative class action until: (i) the class
certification is denied; or (ii) the class is decertified; or (iii) the
customer is excluded from the class by the court. Such forbearance to
enforce an agreement to arbitrate shall not constitute a waiver of any
rights under this agreement except to the extent stated herein.
By signing this Agreement, the undersigned acknowledges receipt of a copy
of this Agreement. This Agreement contains a pre-dispute arbitration
clause at page 2 paragraph 7.
ACCEPTED AND AGREED TO:
Date: April 20, 1995
----------------------------------------------------
Company Name (print): Sutter Mortgage Corporation
------------------------------------
Authorized Signature: ____________________________________
Name (print): Ronald Morck
--------------------------------------------
Title (print): President
--------------------------------------------
<PAGE>
EXHIBIT 10.50
MASTER MORTGAGE LOAN PURCHASING AGREEMENT
THIS MASTER MORTGAGE LOAN PURCHASING AGREEMENT (the "Agreement") is made and
dated as of October 7, 1992, by and between FIRST COLLATERAL SERVICES, INC., a
corporation organized under the laws of California (the "Purchaser") and SUTTER
MORTGAGE CORPORATION, a corporation organized under the laws of California (the
"Originator"):
AGREEMENT
1. Loan Purchases
--------------
(a) Loan Purchase Limit. On the terms and subject to the conditions set
-------------------
forth herein, Purchaser agrees that it shall from time to time to the Maturity
Date (as that term and capitalized terms not otherwise defined herein are
defined in paragraph 9 below) purchase loans (the "Loan" or "Loans") from
Originator in principal amounts not to exceed, in the aggregate at any time held
by Purchaser, the lesser of:
(1) the Loan Purchase Limit; or
(2) the Loan Repurchasing Base.
(b) Procedure for Request and Purchase of Loans. The Originator shall on
-------------------------------------------
each proposed purchase date complete and deliver a Loan Purchase Request in the
form of Exhibit 1 hereto and accompanying required documents to Purchaser, as
defined in the Commitment Letter. It is expressly agreed that Purchaser may from
time to time purchase Loans hereunder by remitting funds in a manner and to a
beneficiary, specified by Originator, and who is acceptable to Purchaser in its
absolute discretion. Purchaser may reject and refuse to purchase any loan in its
sole discretion for any reason whatsoever. Originator hereby covenants and
agrees that Purchaser shall not be liable for transfer of funds to an incorrect
account number, street address, or beneficiary, supplied by Originator or other
party, or failure of transfer due to circumstances beyond the control of
Purchaser. Originator agrees to indemnify Purchaser and hold Purchaser harmless
from any claims or liabilities arising out of such mistake or error or failure
of transfer due to circumstances beyond the control of Purchaser.
(c) Book Account. The Purchaser shall maintain an account on its books of
------------
all Loans purchased from Originator and not yet resold called a Book Account.
Not more frequently than once each month, Purchaser shall deliver a monthly
statement of the Book Account to the Originator which monthly statement shall be
deemed conclusively correct and accepted by Originator unless the Originator
notifies Purchaser to the contrary within ten (10) business days following
delivery of such statement to the Originator.
(d) Loan Purchasing Fee. A Loan Purchasing Fee is due and payable upon
-------------------
receipt by Originator of the monthly statement delivered by Purchaser to the
Originator commencing upon receipt of the first such billing to and including
Maturity (whether at the stated Maturity Date, upon acceleration or otherwise).
Originator shall pay to Purchaser a Loan Purchasing Fee on Loans purchased
hereunder and held by Purchaser in warehouse from the date purchased to but not
including the day of payment in the amount billed by Purchaser to Originator
calculated on the principal amount of Loans purchased from Originator and held
by Purchaser in warehouse during the monthly computation period. The Loan
Purchasing Fee shall be calculated at the Prevailing Purchasing Fee Rate, but if
payment is not received by Purchaser on or before the 20th day of the month (or
if the 20th is a Saturday, Sunday or holiday, the next succeeding business day),
a Late Purchasing Fee will be charged from the 21st day of the month (or if the
21st is a Saturday, Sunday or holiday, the next succeeding business day) to but
not including the date of payment in the amount billed to Originator by
Purchaser. Receipt by the Originator of the monthly statement shall constitute
authorization to release funds from the segregated accounts required under 1 (f)
of this Agreement to pay towards the Loan Purchasing Fee.
(e) Take-Out Purchase. Originator shall provide to Purchaser at the time
-----------------
of each Loan purchase a Take-Out Purchase Commitment at a specified price and
from a Qualified Take-Out Purchaser. Originator may at any time before Purchaser
has resold the Loan repurchase any Loan at the Book Account amount or substitute
another Take-Out Purchaser to purchase the Loan at the Book Account amount. The
Originator shall receive the excess of any Take-Out Purchase Price received by
Purchaser in excess of the Book Account amount after subtraction of all
obligations due and outstanding from Originator to Purchaser. Originator shall
itself repurchase any Loan at the Book Account amount or pay any shortfall to
Purchaser if the Take-Out Purchaser falls to purchase the Loan by the date
specified in the original Loan Purchase Request. Originator shall itself, upon
the demand of Purchaser, immediately repurchase any Loan at the Book Account
amount if said Loan ceases at any time to qualify as an Eligible Mortgage Loan.
Purchaser shall deliver Loans to the Take-Out Purchaser, specified by
Originator, by a bailee letter in the form attached to this Agreement as Exhibit
2. Originator guarantees payment
<PAGE>
by the Take-Out Purchaser and agrees that delivery of Loans to the Take-Out
Purchaser under the bailee letter shall be at the risk of Originator and
Purchaser shall assume no liability for loss caused by late delivery of said
Loans. If for any reason the Take-Out Purchaser fails to remit all or part of
the Take-Out Purchase price to Purchaser when due under the bailee letter,
Originator shall forthwith remit the balance or all of the Book Account amount
to Purchaser and Purchaser shall assign its rights under the bailee letter to
Originator.
(f) Servicing of Loans. Originator agrees to act as agent and trustee for
------------------
Purchaser to collect, immediately segregate and deposit in trust accounts for
the benefit of Purchaser and Purchaser's principals, successors, heirs and
assigns all principal, interest, taxes and insurance payments due under Loans
sold to Purchaser and otherwise to service Loans sold to Purchaser in conformity
with all requirements of federal and state law and regulation and with sound
commercial practice. Originator shall have no power or authority to amend,
modify or waive any payments due or any terms and conditions of any Loans sold
to Purchaser. Originator shall upon demand from Purchaser at any time and no
less than monthly disburse to Purchaser, in aggregate, all interest and
principal in said segregated accounts, but disbursement will not be demanded if
the Loan Purchasing Fee is received, in full, as prescribed in (d) above.
Payments of taxes and interest fees in such trust accounts shall not be used to
pay the Loan Purchasing Fee. Originator is hereby authorized to deduct and to
pay itself at the end of each month after performance of servicing the servicing
fees fixed and agreed to by Purchaser in writing but shall have no rights to
offset or withhold any funds collected on Loans sold to Purchaser, nor to
disburse any funds from said segregated accounts to Originator for any purpose
(except for servicing fees as hereinabove provided) except by express, written
authority from Purchaser before each credit to Originator or disbursement to
Originator. Originator shall maintain fidelity bonds and policies of insurance
insuring itself, Purchaser and the principals, successors, heirs and assigns of
Purchaser against loss or damage from any breach of fidelity by Originator or
any officer, director, employee or agent of Originator, and against any loss or
damage from loss of destruction of documents, theft, misappropriation, or errors
or omissions. Purchaser reserves the right at any time, but in any event upon
default of Originator, to transfer the servicing of the Loans to any other
Person.
(g) Time and Place of Payments. All payments shall be made in lawful money
--------------------------
of the United States of America in immediately available funds. If any payment
required to be made by Originator hereunder becomes due and payable on a day
other than a business day, the due date thereof shall be extended to the next
succeeding business day and a Loan Purchasing Fee shall be payable at the
applicable rate during the extension. Payments required shall be made to
Purchaser at its principal office or such other office or depository as
Purchaser shall from time to time designate.
(h) Post-Maturity Fee. Any Obligations not paid when due (whether at the
-----------------
stated Maturity Date, upon acceleration or otherwise) shall incur a fee from the
date due until paid in full at a per annum rate equal to four percent (4%) above
the Reference Rate in lieu of the Loan Purchasing Fee.
(i) Fees. In addition to the Loan Purchasing Fee hereinabove provided,
----
Originator shall pay to Purchaser promptly all other Required Fees when due.
(j) Computation. All computations of fees and interest payable hereunder
-----------
shall be based upon a year of 360 days for the actual number of days elapsed.
2. Mark-To Market Requirement: Security: Guaranties: Additional Documents.
----------------------------------------------------------------------
(a) Mark-to-Market Requirement Purchaser shall calculate from time to time
--------------------------
the Warehouse Value of Eligible Mortgage Loans purchased from Originator and
held by Purchaser in warehouse. In addition to all other payment obligations of
the Originator hereunder, upon written demand of Purchaser from time to time the
Originator shall deposit with Purchaser as security for Originator's Obligations
cash (or other collateral satisfactory to Purchaser in the absolute discretion -
of Purchaser) in the amount by which the Book Account amount of the Eligible
Mortgage Loans purchased from Originator and held in warehouse exceeds the
Warehouse Value of said loans plus the Allowed Discrepancy. Notwithstanding the
foregoing, Originator may in the alternative to depositing such cash collateral
pledge to Purchaser additional Eligible Mortgage Loans in an amount sufficient
to bring the Warehouse Value of loans in the Loan Repurchasing Base up to the
Book Account amount of said loans.
(b) Security: Security Agreements: Guaranties. As additional support for
-----------------------------------------
the Obligations, Originator agrees to execute and deliver to Purchaser a
Security Agreement pursuant to which Originator shall grant to Purchaser a first
priority security interest in and lien upon all servicing rights in loans sold
by Originator to Purchaser and in any other Collateral required under this
Agreement or related documents and to cause to be executed and delivered to
Purchaser such additional Security Agreements, Guaranties, Uniform Commercial
Code Form I Financing Statements and other documents as Purchaser may require,
as more particularly set forth in the Commitment Letter (the "Additional
Collateral Documents").
<PAGE>
(c) Further Documents. Originator agrees to execute and deliver or cause
-----------------
to be executed and delivered to Purchaser from time to time such confirmatory or
supplementary forward purchase agreements, repurchase agreements, security
agreements, financing statements or other documents, instruments or agreements
as Purchaser may in its sole discretion request, which are in Purchaser's
judgment necessary or appropriate to obtain for Purchaser the benefit of the
Loans purchased, the Take-Out Purchase Commitment, the repurchase commitment or
other Obligations of Originator.
3. Conditions to Purchasing a Loan.
-------------------------------
(a) First Purchase. As conditions precedent to Purchaser's obligation to
--------------
purchase the first Loan hereunder:
(1) Originator shall have delivered to Purchaser in form and
substance satisfactory to Purchaser:
(ii) a duly executed copy of the Commitment Letter;
(iii) a duly executed copy of this Agreement;
(iii) a duly executed copy of the Additional Collateral Documents
and all other guaranties, security agreements, financing statements and other
documents, instruments and agreements, properly executed, deemed necessary or
appropriate by Purchaser, in its sole discretion, to vest title to the Loans and
all security for Loans in Purchaser free of all prior liens and encumbrances and
to create in Purchaser a perfected First security interest in and lien upon any
Collateral; and
(iv) such applications to enter into a Master Mortgage Loan
Purchasing Agreement, financial statements, corporate resolutions and
authorizations and such information regarding the Originator, any Guarantors and
its or their business, operations and conditions (financial and otherwise) as
Purchaser may request
(2) All acts, conditions and things (including without limitation the
obtaining of any necessary regulatory approvals and the making of any required
filings, recordings or registrations) required to be done and performed and to
have happened precedent to the execution, delivery and performance of the Loan
Purchasing Documents and to constitute the same legal, valid and binding
obligations, enforceable in accordance with their respective terms, shall have
been done and performed and shall have happened in due and strict compliance
with all applicable laws.
(3) All documentation in connection with the transactions
contemplated by the Loan Purchasing Documents, including without limitation
documentation for corporate and legal proceedings, shall be satisfactory in form
and substance to Purchaser and its counsel.
(b) All Loans. As conditions precedent to Purchaser's purchase of any Loan
---------
hereunder, including the first Loan, Originator shall have delivered to
Purchaser a Loan Purchase Request and any required documents and at and as of
the date of funding thereof:
(1) The representations and warranties of the Originator contained in
the Loan Purchasing Documents shall be true and complete in all material
respects,
(2) There shall not have occurred an Event of Default or Potential
Default, and
(3) Following the funding of the Loan purchase, the aggregate of
Loans held by Purchaser in warehouse shall not exceed the limitation of
Paragraph 1(a) above.
4. Representations and Warranties of Originator. As an inducement to Purchaser
--------------------------------------------
to enter into this Agreement and to purchase Loans as provided herein,
Originator represents and warrants to Purchaser that:
(a) Take-Out Purchase Commitment. Originator warrants that each Take-Out
----------------------------
Purchase Commitment is a bona fide current, unused and unexpired commitment made
by FNMA, FHLMC or a financial institution or investment banker acceptable to
Purchaser, under which said Person agrees, prior to or on the expiration
thereof, upon the satisfaction of certain terms and conditions therein, to
acquire such Loan, which commitment is not subject to any term or condition
which is not customary in commitments of like nature or which, in the reasonably
anticipated course of events, cannot be fully complied with prior to the
expiration thereof.
<PAGE>
(b) Financial Condition. The financial statements of the Originator,
-------------------
respectively dated the Statement Date and the Interim Date, copies of which have
heretofore been furnished to Purchaser, are complete and correct and present
fairly the consolidated and consolidating financial condition of the Originator
and its consolidated Subsidiaries at such dates and the consolidated and
consolidating results of their operations and changes in financial position for
the fiscal periods then ended. All such financial statements, including the
related schedules and notes thereto, have been prepared in accordance with GAAP.
Neither the Originator nor any of its consolidated Subsidiaries have any
material contingent obligation, contingent liability or liability for taxes,
long-term lease or unusual forward or long-term commitment which is material and
which is not reflected in such financial statements, including the notes related
thereto.
(c) No Change. Since the Statement Date there has been no material
---------
adverse change in the business, operations, assets or financial or other
condition of the Originator or of the Originator and its consolidated
Subsidiaries taken as a whole, or of the Originator's parent organization or of
Guarantors of the Originator.
(d) Corporate Existence: Compliance with Law. The Originator and each
----------------------------------------
Subsidiary:
(1) Is duly organized, validly existing and in good standing as a
corporation under the laws of the state of its incorporation and each
jurisdiction in which its ownership of property or conduct of business requires
such qualification;
(2) Has the corporate power and authority and the legal right to own
and operate its property and to conduct its business in the manner in which it
does and proposes so to do; and
(3) Is in compliance with all Requirements of Law.
(e) Corporate Power: Authorization: Enforceable Obligations. The
-------------------------------------------------------
Originator has the corporate power and authority and the legal right to make,
deliver and perform the Loan Purchasing Documents and to sell and perform
hereunder and has taken all necessary corporate action to authorize such selling
on the terms and conditions of this Agreement and to authorize the execution,
delivery and performance of the Loan Purchasing Documents. The Loan Purchasing
Documents have each been duly executed and delivered on behalf of the Originator
and constitute legal, valid and binding obligations of the Originator,
enforceable against the Originator in accordance with their respective terms.
(f) No Legal Bar. The execution, delivery and performance of the Loan
------------
Purchasing Documents, the selling hereunder and the use of the proceeds thereof,
will not violate any Requirement of Law or any Contractual Obligation of the
Originator.
(g) No Material Litigation. Except as disclosed by the Originator to
----------------------
Purchaser in writing prior to the date of the Commitment Letter, no litigation,
investigation or proceeding of or before any arbitrator or Governmental
Authority is pending or, to the knowledge of the Originator, threatened by or
against the Originator or any of its Subsidiaries or against any of the
Originator's or any such Subsidiary's properties or revenues which, if adversely
determined, could have a material adverse effect on the business, operations,
property or financial or other condition of the Originator or any Subsidiary.
(h) Taxes The Originator and each Subsidiary have filed or caused to be
-----
filed all tax returns that are required to be filed and have paid all taxes
shown to be due and payable on said returns or on any assessments made against
them or any of their property.
(i) Investment Company Act. The Originator is not an "investment company"
----------------------
or a company "controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
(j) Subsidiaries. The Originator has delivered to Purchaser an accurate
------------
and complete list of all existing Subsidiaries of the Originator, their
respective jurisdictions of incorporation, the percentage of their capital stock
owned by the Originator or other Subsidiaries; all of the issued and outstanding
shares of capital stock of the Subsidiaries have been duly authorized and issued
and are fully paid and nonassessable.
(k) Federal Reserve Board Regulations. Neither the Originator nor any of
---------------------------------
its Subsidiaries is engaged or will engage, principally or as one of its
important activities, in the business of extending credit for the purpose of
"purchasing" or "carrying" of any "margin stock" within the respective meanings
of such terms under Federal Reserve Board Regulation U. No part of the proceeds
of any loan purchase hereunder will he used for "purchasing" or "carrying"
"margin stock" as so defined or for any purpose which violates, or which would
be inconsistent with, the provisions of the Regulations of the Board of
Governors of the Federal Reserve System. If requested by Purchaser, the
Originator will furnish a statement in conformity with the requirements of
Federal Reserve Form U-l referred to in said Regulation. Originator also
warrants that
<PAGE>
no part of the proceeds of the borrowing hereunder will be used by it for any
purpose which violates, or which is inconsistent with, the provisions of
Regulation X of said Bond of Governors.
(l) ERISA. The Originator and each Subsidiary are in compliance in all
-----
material respects with the requirements of ERISA and no Reportable Event has
occurred under any Plan maintained by the Originator or any Subsidiary.
(m) Securities Acts. Originator has not issued any unregistered securities
---------------
in violation of the registration requirements of Section 5 of the Securities Act
of 1933, as amended, or any other law, and is not violating any rule, regulation
or requirement under the Securities Act of 1933, as amended, or the Securities
and Exchange Act of 1934, as amended. Originator is not required to qualify an
indenture under the Trust Indenture Act of 1939, as amended, in connection with
its execution and delivery of the Notes.
5. Affirmative Covenants. The Originator hereby covenants and agrees with
---------------------
Purchaser that, as long as any Obligations remain unpaid or Purchaser has any
obligation to purchase Loans hereunder, the Originator shall:
(a) Financial Statements. Furnish to Purchaser:
--------------------
(1) Within ninety (90) days after the last day of each fiscal year,
financial statements (consolidated and consolidating) showing the financial
position and results of operations of the Originator and its Subsidiaries for
the year ended on such date, audited by a firm of independent certified public
accountants of nationally recognized standing acceptable to Purchaser, including
a balance sheet and statement of income (consolidated and consolidating) which
has been subjected to the audit procedures applied in the examination of
Originator's consolidated financial statements. Such financial statements shall
be prepared in conformity with GAAP consistently applied, present fairly the
financial position of the Originator and its Subsidiaries and the results of
their operations as of the end of such period and for the period then ended, and
conform to the requirements of HUD Handbook lG 4000.3 REV, as amended from time
to time, which financial statements shall be accompanied by an unqualified
report of independent certified public accountants acceptable to Purchaser; and
(2) Within forty-five (45) days after the last day of each of the
Originator's four (4) fiscal quarters, consolidated financial statements showing
the consolidated financial position and results of operations of the Originator
and its Subsidiaries as of and for the period from the beginning of the current
fiscal year to such date, together with a certificate executed by the principal
financial officer or principal accounting officer or treasurer of Originator
certifying that, to the best of its knowledge, such financial statements were
prepared in conformity with GAAP consistently applied (subject to year-end audit
adjustments) and present fairly the financial position of the Originator and its
Subsidiaries, and the results of operations as of the end of such period and for
the period then ended.
(b) Certificates: Reports: Other Information. Furnish or cause to be
----------------------------------------
furnished to Purchaser:
(1) No later than forty-five (45) days after the last day of each of
the Originator's four fiscal quarters, an Equity Base Test Report as of the last
day of the immediately preceding fiscal quarter;
(2) No later than the tenth (10th) business day of each calendar
month and at such other times as Purchaser may reasonably request, a Loan
Repurchasing Base Certificate as of the last day of the immediately preceding
calendar month; and
(3) Promptly, such additional financial and other information,
including, without limitation, financial statements and/or personal income tax
returns of Guarantors, as Purchaser may from time to time reasonably request.
(c) Payment of Obligations. Pay, discharge or otherwise satisfy at or
----------------------
before maturity or before they become delinquent, defaulted or accelerated, as
the case may be, all its Obligations, except Obligations being contested in good
faith and for which provision is made to the satisfaction of Purchaser for the
payment thereof in the event the Originator is found to be obligated to-pay such
Obligation and which Obligation is thereupon promptly paid by the Originator.
(d) Maintenance Of Existence. Maintain all rights, privileges, licenses,
------------------------
approvals and franchises necessary or desirable in the normal conduct of its
business, and comply with all Contractual Obligations and Requirements of Law.
(e) Inspection of Property: Books and Records: Discussions. Keep proper
------------------------------------------------------
books of record and account in which full, accurate and complete entries in
conformity with GAAP and all Requirements of Law shall be made of all dealings
and transactions in relation to its business and activities; and permit
representatives of Purchaser to visit and inspect any of its
<PAGE>
properties and examine and make abstracts from any of its books and records at
any reasonable time and as often as may reasonably be desired, and to discuss
the business, operations, properties and financial and other condition of the
Originator and its Subsidiaries, with its independent certified public
accountants and with the Guarantors.
(f) Notices. Promptly give notice to Purchaser of:
-------
(1) The occurrence of any Potential Default or Event of Default;
(2) Any litigation or proceeding affecting the Originator, any
Subsidiary or the Collateral which could have a material adverse effect on the
Collateral or the business, operations, property or financial or other condition
of the Originator or any Subsidiary; and
(3) A material adverse change in the business, operations, property
or financial or other condition of the Originator or any Subsidiary.
(g) Expenses. Pay all reasonable out-of-pocket expenses of Purchaser
--------
(including fees and disbursements to counsel) incident to the transactions
contemplated by the Loan Purchasing Documents including, but not limited to, any
amendments to or waivers of the provisions of the Loan Purchasing Documents, the
protection of the rights of Purchaser under the Loan Purchasing Documents, the
enforcement of payment of the Obligations, whether by judicial proceedings or
otherwise, including, without limitation, in connection with bankruptcy,
insolvency, liquidation, reorganization, moratorium or other proceedings
involving the Originator, and the reasonable fees and disbursements to counsel
of Purchaser in connection with the preparation of the Loan Purchasing
Documents. The Obligations of the Originator under this Paragraph 5(g) shall
survive payment of the Obligations.
(h) Loan Purchasing Documents. Comply with and observe all terms and
-------------------------
conditions of the Loan Purchasing Documents.
(i) Properties. The Company has good and marketable title to all of its
----------
properties and assets and, with the exception of properties acquired by
foreclosure or by deed in lieu of foreclosure, none of the assets of the Company
is subject to any mortgage, pledge, title retention lien, security interest or
encumbrance, except for those expressly permitted herein.
(j) Independence of Covenants. Give independent effect to all covenants
-------------------------
hereunder so that if a particular action or condition is not permitted by any of
such covenants, the fact that it would be permitted by an exception to, or be
otherwise within the limitations of another covenant shall not avoid the
occurrence of an Event of Default or Potential Default.
6. Negative Covenants. The Originator hereby agrees that, as long as any
------------------
Obligations remain unpaid or Purchaser has any obligation to purchase Loans
hereunder, the Originator shall not, directly or indirectly:
(a) Liens. Create, incur, assume or suffer to exist, any Lien upon the
-----
Loans or, except as disclosed to and approved by Purchaser in writing, upon any
servicing rights of the Originator or its rights to payment on account thereof.
(b) Fundamental Changes. Change the essential nature of its business from
-------------------
that conducted on the date of this Agreement, or enter into any transaction of
merger or consolidation or amalgamation, or liquidate, wind up or dissolve
itself (or suffer any liquidation or dissolution), convey, sell, lease, assign,
transfer or otherwise dispose of, in one transaction or a series of
transactions, all or substantially all of its business or assets or acquire by
purchase or otherwise all the business or assets of, or stock or other evidences
of beneficial ownership of, any Person, make any change in its present method of
conducting business, or make any change in its existing management structure.
(c) Sale of Assets. Convey, sell, lease, assign, transfer or otherwise
--------------
dispose of any of its assets (other than obsolete or worn out property), whether
now owned or hereafter acquired, other than in the ordinary course of business
as presently conducted; provided, however, that in no event shall the Originator
sell, transfer or otherwise dispose of any part of its servicing portfolio
without the prior written consent of Purchaser if the amount so sold, when
aggregated with all such transactions within the preceding twelve (12) month
period, equals fifteen percent (15%) or more in dollar amount of the
Originator's remaining servicing portfolio. In no event shall Originator allow
any agency such as FNMA or HUD, private investor, or any other party to seize or
take control of its servicing portfolio for breach of any servicing agreement
applicable to such servicing portfolio.
<PAGE>
(d) Dividends, Etc. Declare or pay any dividends, purchase or otherwise
--------------
acquire for value any of its capital stock now or hereafter outstanding, or make
any distribution of assets to its stockholders as such, or permit any of its
Subsidiaries to purchase or otherwise acquire for value stock of the Originator,
except that the Originator may
(1) Declare and deliver dividends and distributions payable in common
stock of the Originator,
(2) Purchase or otherwise acquire shares of its capital stock with
the proceeds received from the issue of new shares of its capital stock.
(e) Equity Base. Permit the Originator's Equity Base to be less than the
-----------
Minimum Permitted Equity Base at any time.
(f) Tangible Net Worth. Permit the Originator's Tangible Net Worth to be
------------------
less than the Minimum Permitted Tangible Net Worth at any time.
(g) Debt to Net Worth. Permit the ratio of the Originator's consolidated
-----------------
Debt to its Tangible Net Worth to exceed the Permitted Debt to Tangible Net
Worth Ratio at any time.
(h) Debt to Equity Base. Permit the ratio of the Originator's consolidated
-------------------
Debt to its Equity Base to exceed the Permitted Debt to Equity Base Ratio at any
time.
(i) Guaranties. Not guarantee, endorse, assume, become surety for,
----------
indemnify or otherwise in any way become or be responsible for the obligations
of any other Person except:
(a) endorsements of negotiable instruments for deposit or collection
in the ordinary course of business; and
(b) obligations incurred in connection with the sale of Loans owned
by Originator in the ordinary course of business of Originator.
(j) Leases. Not enter into or permit to exist any arrangement involving
------
the leasing from any leasor of real or personal property (or any interest
therein) except under:
(a) leases of automobiles, office furniture and equipment, and
computer and related equipment used in the ordinary course of business of
Originator; and
(b) leases of offices occupied by Originator.
(k) VA Guaranties and FHA Insurance. Not commit or suffer to be committed
------------------------------------
any act which would invalidate the guarantee of the Veterans Administration
("VA") or insurance by the Federal Housing Administration ("FHA") or cause any
impairment to the validity of or priority of the lien securing any Loan pledged
to the Purchasers hereunder, as applicable.
(1) Maintenance of Qualifications. Not commit or suffer to be committed
-----------------------------
any act which would adversely affect its eligibility participate as an FHA
approved mortgagee, as an approved lender under the VA guarantee program or as
an approved seller-servicer of mortgage notes to The Federal National Mortgage
Association ("FNMA") and to The Federal Home Loan Mortgage Corporation ("FHLMC")
in the FHLMC regions in which it operates, or its eligibility to issue Mortgage-
backed Securities or to service the mortgage pools formed with respect to
Mortgage-backed Securities, as applicable.
7. Events of Default. Upon the occurrence and continuance of any of the
-----------------
following events (an "Event of Default"):
(a) The Originator shall fail to pay any of the Obligations on the date
when due; or
(b) Any representation or warranty made by the Originator in any Loan
Purchasing Document or in connection with any Loan Purchasing Document shall be
inaccurate or incomplete in any respect on or as of the date made; or
(c) The Originator or any Subsidiary shall default in the observance or
performance of any other agreement contained in Paragraph 6 above; or
<PAGE>
(d) The Originator or any Subsidiary shall default in the observance or
performance of any other agreement contained in this Agreement and such default
shall continue unremedied for a period of thirty (30) days; or
(e) The Originator or any Subsidiary shall default in any payment of
principal of or interest on any Obligation or any other event shall occur, the
effect of which is to cause the maturity of such Obligation to be accelerated
prior to its stated maturity; or
(f) Bankruptcy, Insolvency or other Proceedings.
-------------------------------------------
(1) The Originator or any Subsidiary or any Guarantor shall commence
any case, proceeding or other action
(i) Under any existing or future law of any jurisdiction,
domestic or foreign, relating to bankruptcy, insolvency, reorganization or
relief of debtors, seeking to have an order for relief entered with respect to
it, or seeking to adjudicate it bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment, winding-up, liquidation, dissolution,
composition or other relief in respect to it or its debts, or
(ii) Seeking appointment of a receiver, trustee, custodian or
other similar official for it or for all or any substantial part of its assets,
or of its creditors; or
(2) The Originator or any Subsidiary or any Guarantor shall make a
general assignment for the benefit of its creditors; or
(3) There shall be commenced against the Originator or any Subsidiary
or any Guarantor any case, proceeding or other action of a nature referred to in
clause f (1) above which
(i) Results in the entry of an order for relief or any such
adjudication or appointment, or
(ii) Remains undismissed, undischarged or unbonded for a period
of sixty (60) days; or
(4) There shall be commenced against the Originator or any Subsidiary
or any Guarantor any case, proceeding or other action seeking similar issuance
of a warranty of attachment, execution, distraint or similar process against all
or any substantial part of its assets which results in the entry of an order for
any such relief which shall not have been vacated, discharged, or stayed or
bonded pending appeal within sixty (60) days from the entry thereof; or
(5) The Originator or any Subsidiary or any Guarantor shall take any
action in furtherance of, or indicating its consent to, approval of, or
acquiescence in, any of the acts set forth in clause f(1), f(2), f(3) or f(4)
above; or
(6) The Originator or any Subsidiary or any Guarantor shall generally
not, or shall be unable to, or shall admit in writing its inability to, pay its
debts as they become due; or
(g) Any person shall engage in any "prohibited transaction" (as defined in
Section 406 of ERISA or Section 4975 of the Internal Revenue Code) involving any
Plan, or
(1) Any "accumulated funding deficiency" (as defined in Section 302
of ERISA), whether or not waived, shall exist with respect to any Plan, or
(2) A Reportable Event shall occur with respect to, or proceedings
shall commence to have a trustee appointed, or a trustee shall be appointed, to
administer or to terminate any Single Employer Plan, which Reportable Event or
institution of proceedings is, in the reasonable opinion of Purchaser, likely to
result in the termination of such Plan for purposes of Title IV of ERISA, and,
in the case of a Reportable Event, the continuance of such Reportable Event
unremedied for ten (10) days after notice of such Reportable Event pursuant to
Section 4043(a), (c) or (d) of ERISA is given or the continuance of such
proceedings for ten (10) days after commencement thereof, as the case may be, or
(3) Any Single Employer Plan shall terminate for purposes of Title IV
of ERISA, or
(4) Any withdrawal liability to a Multiemployer Plan shall be
incurred by the Originator or any Commonly Controlled Entity, or
<PAGE>
(5) Any other event or condition shall occur or exist; and in each
case in clauses (1) through (6) above, such event or condition, together with
all other such events or conditions, if any, could subject the Originator or any
Subsidiary to any tax, penalty or other liabilities in the aggregate material in
relation to the business, operations, property or financial or other condition
of the Originator or any Subsidiary; or
(h) One or more judgments or decrees shall be entered against the
Originator or any Subsidiary involving claims not paid or not fully covered by
insurance and all such judgments or decrees shall not have been vacated,
discharged, or stayed or bonded pending appeal within sixty (60) days from entry
thereof; or
(i) Any of the Guarantors shall fail to perform any of its obligations
under its guaranty of the Obligations or shall notify Purchaser of its intention
to rescind, modify, terminate or revoke its guaranty with respect to future
transactions or otherwise; or
(j) Ten percent (10%) or more by number or dollar amount of Loans shall
cease to be Eligible Mortgage Loans during any consecutive sixty (60) day period
and shall not be replaced by additional Loans constituting Eligible Mortgage
Loans;
THEN, automatically upon the occurrence of an Event of Default under
Paragraphs 7(a) and 7(f) above, and, in all other cases, at the option of
Purchaser, Purchaser's obligation to purchase Loans hereunder shall terminate
and/or all Obligations shall become immediately due and payable.
8. Miscellaneous Provisions.
------------------------
(a) Independence of Parties. Nothing herein shall be deemed or construed
-----------------------
to create a partnership or joint venture between the parties hereto and each
party hereto is an independent contractor except insofar as Originator acts as
agent and trustee for Purchaser and the successors and assigns of Purchaser in
servicing Loans.
(b) Representations, Warranties. This Agreement, the Commitment Letter,
---------------------------
the Security Agreement, the Guaranties and other documents required herein merge
all previous negotiations and agreements, constitute the entire agreement
between the parties and may be amended or modified only by a writing duly signed
by Purchaser. Purchaser has made no representations, warranties or agreements,
written or oral, express or implied other than expressly set forth in the
documents described.
(c) Loan Purchases after Maturity Date. Originator acknowledges that all
----------------------------------
obligation of Purchaser to purchase loans from Originator shall without any
additional notice from Purchaser cease and terminate on the Maturity Date stated
in the Commitment Letter, and that said Maturity Date may be extended only by a
written extension duly signed by Purchaser in its absolute discretion and
without any obligation to extend the Maturity Date. If Purchaser buys Loans from
Originator after said Maturity Date without execution of any extension or new or
modified Agreement (in the absolute discretion of Purchaser and without any
obligation to purchase Loans after Maturity Date), Originator expressly agrees
that all terms and conditions of this Agreement shall apply to any such Loan
purchased by Purchaser, provided, however that Purchaser shall have the right at
any time and from time to time after Maturity Date to notify Originator that
Purchaser will discontinue purchasing Loans in any amount from Originator thirty
(30) days after delivery of written notice to Originator, or if notice of
termination is given by United States mail, thirty-five (35) days after mailing
(whichever date first occurs) and Originator acknowledges and agrees that
Purchaser may discontinue purchasing Loans in any amount from and after said 30
or 35 days.
(d) Rejection of Eligible Mortgage Loan. If Purchaser refuses to
-----------------------------------
purchase a Loan which is ultimately determined to be an Eligible Mortgage Loan,
Purchaser agrees to pay Originator damages at the rate of two percent per annum
times the unpaid principal amount of the Eligible Mortgage Loan from date of
rejection by Purchaser for a period of 90 days or until the date that the Loan
is sold or funded by a mortgage warehouse facility elsewhere, whichever date
first occurs. If Purchaser terminates the entire Agreement for Default and it is
later determined that no such Default in fact occurred, Purchaser shall pay
Originator damages at the rate of two percent per annum on any Eligible Mortgage
Loan from date it is offered to Purchaser until it is sold or warehoused by
Originator but for a period not exceeding 90 days from date of offer of said
Loan to Purchaser or the Expiration Date specified in the Commitment Letter,
whichever date first occurs. To induce Purchaser to enter into this Agreement,
Originator covenants and agrees that, in event of breach of this Agreement by
Purchaser, damages will be difficult to fix and shall be limited to the damages
calculated as specified in this paragraph, and that Purchaser and its principals
and assigns shall have no further or other liability to Originator for general,
special, consequential or punitive damages or otherwise.
<PAGE>
(e) Resolution of Disputes by Reference. The parties to this Agreement
-----------------------------------
convenant and agree that any dispute, whether in tort or contract or of any
other nature, arising out of or related to the Agreement or out of the
relationship between the parties to the Agreement shall be determined by a
reference pursuant to California Code of Civil Procedure (s)638 (1). The
reference shall be a general reference and the person appointed shall have the
power to enter all interlocutory and final orders (including orders to deliver
possession of collateral or funds) and to decide all issues of law and fact
without a jury. The referee shall be a retired California Superior Court Judge.
The referee shall be appointed on petition by any party to the Superior Court of
the State of California in and for Contra Costa County under California Code of
Civil Procedures (s)638. Discovery shall be allowed according to California Code
of Civil Procedure (s)(s)2016,et seq. Each party shall pay one half of the fees
of the referee so appointed, of the court reporter, and of the rental of hearing
room daily in advance. The party prevailing shall recover its entire costs and
attorney's fees. If neither party prevails in full, the person appointed referee
shall allocate the costs and attorney's fees of the parties in accordance with
his sound discretion. The parties agree that the proceedings will be conducted
in Contra Costa County, California, USA, and waive any objections to
jurisdiction and venue. The action may not be removed to the United States
District Court. An appeal from the orders or judgements entered by the person
appointed shall lie to the California Court of Appeal, as specified in Code of
Civil Procedure (s)645.
(f) Assignment. The Originator may not assign its rights or obligations
----------
under this Agreement without the prior written consent of Purchaser. Purchaser
is entering into this Agreement and the Loan Purchasing Documents as agent for
one or more principals. Originator acknowledges, consents and agrees that all
representations, convenants and warranties in this Agreement and the related
Loan Purchasing Documents shall inure to the benefit of Purchaser and each
principal for whom Purchaser acts as agent and the heirs, successors and assigns
of each such principal as its interest may appear from time to time and any and
all assignees, transferees or participants. Originator agrees to save
Purchaser and hold Purchaser harmless from any claim arising out of or related
in any way to this Agreement and the Loan Purchasing Documents by any such
principals, heirs, successors or assigns.
(g) Disclosure. The Originator consents and agrees that Purchaser may
----------
disclose to any other financial institution and to any prospective or actual
successors or assigns financial statements, Loan Purchase Requests, credit
reports, credit ratings and any and all other information in the possession of
or available to Purchaser relating to the Originator and that Purchaser shall
not be liable to Originator for any error, omission or inaccuracy in any of the
foregoing.
(h) Amendment. This Agreement may not be amended or in any manner modified
---------
by an oral agreement, whether or not such oral agreement is supported by a new
consideration. This Agreement may not be amended or in any manner modified
unless such amendment or modification is in writing and signed by Purchaser and
the Originator. This Agreement, The Security Agreement and all related Loan
Purchasing Documents are for the sole benefit of Purchaser and Originator and
may be amended, modified or cancelled at any time or from time to time without
consultation or consent of any other entity.
(i) Cumulative Rights: No Waiver. The rights, powers and remedies of
----------------------------
Purchaser hereunder are cumulative and in addition to all rights, powers and
remedies provided under any and all agreements between the Originator and
Purchaser relating hereto, at law, in equity or otherwise. Any delay or failure
by Purchaser to exercise any right, power or remedy shall not constitute a
waiver thereof by Purchaser, and no single or partial exercise by Purchaser of
any right, power or remedy shall preclude other or further exercise thereof or
any exercise of any other rights, powers or remedies.
(j) Entire Agreement. This Agreement and the documents and agreements
----------------
referred to herein embody the entire agreement and understanding between the
parties hereto and supersede all prior agreements and understandings relating to
the subject matter hereof and thereof.
(k) Survival. All representations, warranties, convenants and agreements
--------
herein contained on the part of the Originator shall survive the termination of
this Agreement and shall be effective until the Obligations are paid and
performed in full, or longer, as expressly provided herein.
(i) Notices. All notices given by either party to the other shall be in
-------
writing, delivered personally, by facsimile, or by depositing the same in the
United States mail, or by overnight delivery, certified, with postage prepaid,
addressed to the party at the address set forth in the Commitment Letter.
Either party may change the address to which notices are to be sent by notice of
such change to the other party given as provided herein.
(m) Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California without giving effect to its
choice of law provisions.
<PAGE>
(n) Independent Legal Advise: Originator. Originator represents, warrants
------------------------------------
and agrees that it has received independent legal advice from independent
counsel of its choice with respect to the advisability of making the agreements
provided for in this Agreement and the related Loan Purchasing Documents, and
with respect to the advisability of executing this Agreement and the Loan
Purchasing Documents. Originator has not relied upon any statement,
representation or promise of Purchaser (or of any officer, agent, employee,
representative, or attorney for such other party) in executing this Agreement or
the Loan Purchasing Documents, except as expressly stated in this Agreement.
(o) Section Titles. The section titles contained in this Agreement shall
--------------
be without substantive meaning or content of any kind whatsoever and shall not
govern the interpretation of any of the provisions of this Agreement.
(p) Reliance by Purchaser. All covenants, agreements, representations and
---------------------
warranties made herein by Originator shall, notwithstanding any investigation by
Purchaser, be deemed to be material to and to have relied upon by Purchaser and
shall survive the execution and delivery of the Agreement
(q) Counterparts: Effectiveness. This Agreement and any amendments,
---------------------------
waivers, consents, or supplements may be executed in any number of counterparts,
and by different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument. This Agreement shall
become effective upon the written or telephoned notification of such execution
and authorization of delivery thereof has been received by Purchaser.
9. Definitions. For purposes of this Agreement, the terms set forth below
-----------
shall have the following meanings:
"Acceptable Jurisdiction" shall have the meaning set forth in the
-----------------------
Commitment Letter.
"Additional Collateral Documents" "Additional Collateral Documents" shall
-------------------------------
consist of the Security Agreements, Guaranties, Uniform Commercial Code
Financing Statements, Assignments, Pledges and other instruments evidencing a
security interest in Purchaser which may be required by the Agreement,
Commitment Letter or related documents.
"Additional Purchase Facilities" shall mean, collectively and severally,
------------------------------
each and every purchase facility made available by Purchaser to and for the
account of the Originator the documentation for which recites that such purchase
facility is intended to be an Additional Purchase Facility hereunder.
"Agreement" shall mean this Agreement, as the same may be amended, extended
---------
or replaced from time to time, including the Commitment Letter.
"Allowed Discrepancy" shall have the meaning given to it in the Commitment
-------------------
Letter.
"Available Deposits" shall mean those net free collected balances in the
------------------
Originator's non-interest-bearing accounts and impound accounts maintained with
Purchaser, or with another financial institution acceptable to Purchaser and
under written agreement with Purchaser (computed after deduction of amounts
required to compensate Purchaser for services rendered and deduction of amounts
required by Purchaser to be maintained on deposit as reserves, determined in
accordance with Purchaser's standard system of analysis for similar accounts).
Purchaser reserves the right to cancel the availability of the benefits of
"Available Deposits" at any time in its sole discretion.
"Book Account Amount" shall have the meaning given to it in paragraph 1(c)
-------------------
of this Agreement.
"Collateral" shall have the meaning set forth in the Security Agreement.
----------
"Commitment Letter" shall mean any letter of most recent date from time to
-----------------
time addressed to the Originator and duly executed by Purchaser and the
Originator, referencing this Agreement and setting forth the specifics of
certain terms and provisions thereof.
"Commonly Controlled Entity" of a Person shall mean a Person, whether or
--------------------------
not incorporated, which is under common control with such Person within the
meaning of Section 414(c) of the Internal Revenue Code.
"Construction Mortgage Loan" shall mean a Loan the proceeds of which are
--------------------------
being advanced by Purchaser to enable the Obligor to construct or to cause to be
constructed improvements on the real property securing such Loan.
<PAGE>
"Contact Office" shall mean that office of Purchaser set forth in the
--------------
Commitment Letter.
"Contractual Obligation" as to any Person shall mean any provision of any
----------------------
security issued by such Person or of any agreement, instrument or undertaking to
which such Person is a party or by which it or any of its property is bound.
"Debt" of any Person shall mean
----
(a) Indebtedness for borrowed money or for the deferred purchase
price of property or services in respect of which such Person is liable,
contingently or otherwise, as obligor, guarantor or otherwise, or in respect of
which such Person otherwise assures a creditor against loss,
(b) Obligations under leases which shall have been or should be, in
accordance with generally accepted accounting principles, recorded as capital
leases in respect of which obligations such Person is liable, contingently or
otherwise, as obligor, guarantor or otherwise, or in respect of which
obligations such Person or entity otherwise assures a creditor against loss,
(c) Unfunded vested benefits under each Plan maintained for employees
of such Person, and
(d) All amounts in the Book Account plus outstanding Loan Purchasing
Fees.
"Document Certification Letter" shall mean a certification letter in form
-----------------------------
and substance acceptable to Purchaser.
"Draft Account" shall mean that account of the Originator described in the
-------------
Commitment Letter maintained in the Originator's name alone with the depository
institution designated by Purchaser from time to time.
"Eligible Mortgage-Backed Security" shall mean a Mortgage-Backed Security
---------------------------------
which, if guaranteed by any Person, conforms in all respects under the guaranty
thereof as to the timely payment of the principal and interest on such Mortgage-
Backed Security and as to which no proceeds have been paid under such guaranty,
or, if not subject to the guaranty of any Person, has never been delinquent as
to any payment of principal or interest thereunder.
"Eligible Mortgage Loan" shall mean a Loan with respect to which each of
----------------------
the following statements shall be accurate and complete (and the Originator by
including such Mortgage Loan in any computation of the Loan Repurchasing Base
shall be deemed to so represent and warrant to Purchaser at and as of the date
of such computation):
(a) Said Loan is a binding and valid obligation of the Obligor
thereon, in full force and effect and enforceable in accordance with its term,
(b) Said Loan is genuine, in all respects as appearing on its face or
as represented in the books and records of the Originator, and all information
set forth therein is true and correct,
(c) Said Loan is free of default of any party thereto (including the
Originator), counterclaims, offsets and defenses and from any rescission,
cancellation or avoidance, and all right thereof, whether by operation of law or
otherwise,
(d) No payment under said Loan is past due the payment due date set
forth in the underlying promissory note and deed of trust (or mortgage),
(e) Said Loan contains the entire agreement of the parties thereto
with respect to the subject matter thereof, has not been modified or amended in
any material respect and is free of concessions or understandings with the
Obligor thereon of any kind not expressed in writing therein, except to the
extent disclosed to the Purchaser, in writing,
(f). Said Loan has, in all respects as required by and in
accordance with all requirements of any federal, state or local law including,
without limitation, usury, truth-in-lending, real estate settlement procedures,
consumer credit protection, fair credit reporting, equal credit opportunity and
disclosure laws applicable in connection with the origination of each Loan been
complied with, and the consummation of the transaction contemplated by this
Agreement, including the receipt of interest by Purchaser, shall not result in a
violation of any such laws,
(g) All advance payments and other deposits on said Loan have been
paid in full, and no part of said sums have been loaned, directly or indirectly,
by the Originator to the Obligor, and other than as disclosed to Purchaser in
<PAGE>
writing there have been no prepayments on said Mortgage Loan, (except for loans
made in connection with buy-downs in the ordinary course of business),
(h) At all times said Loan (with the exception of the Property) will
be free and clear of all liens, encumbrances, charges, rights and interests of
any kind, except in favor of Purchaser, and except in the case of a Take-Out
Purchase Commitment in the ordinary course of business,
(i) The Property covered by said Loan is insured against loss or
damage by fire and all other hazards normally included within standard extended
coverage in accordance with the provisions of said Loan with the Originator
named as loss payee thereon,
(j) The Property covered by said Loan is free and clear of all liens,
encumbrances, charges, rights and interests of any kind except of the Originator
(which has assigned any and all such liens, encumbrances, charges, rights and
interests to Purchaser) or disclosed in a title policy, preliminary title report
or lot book guaranty delivered to Purchaser concurrently with the delivery of
the Loan or otherwise approved by Purchaser in writing,
(k) The Property covered by said Loan is located in an Acceptable
Jurisdiction,
(l) Unless otherwise provided in the Commitment Letter, said Loan is
covered by a Take-Out Purchase Commitment which is in full force and effect and
is in full compliance therewith,
(m) The date of the promissory note is no earlier than six months
prior to the date said Loan is first included in the Loan Repurchasing Base,
(n) Said Loan has not been included in the Loan Repurchasing Base for
a period of time in excess of the Permissible Warehouse Period,
(o) Said Loan conforms in all respects to the description of "Types
of Eligible Mortgage Loans" set forth in the Commitment Letter, and
(p) In the event the Loan is a Conventional Residential Mortgage
Loan, and the Loan-to-Value Ratio of said Loan is between ninety percent (90%)
and ninety-five percent (95%), between eight-five (85%) and ninety percent
(90%), or between eighty percent (80%) and eighty-five percent (85%), said Loan
is the subject of a mortgage guaranty insurance policy in favor of the Purchaser
covering not less than twenty-two percent (22%), seventeen percent (17%), or
twelve percent (12%), respectively, and no less than the amount required by the
Qualified Take-Out Purchaser, of the original principal of the underlying
promissory note .
(q) In the event the Loan is a Construction Mortgage Loan, the Loan-
to-Value Ratio thereof does not exceed seventy-five percent (75%).
(r) With respect to said Construction Mortgage Loan the Originator
holds in its files the following documents:
1. Plans and specifications approved by permanent lender or insurer.
2. Itemized cost breakdown of improvements.
3. Performance Bond and Assignment of Contract.
4. Construction Contract.
5. Regular site inspect reports.
6. Financial information on general contractor.
(s) Unless otherwise approved by Purchaser in writing, said
Construction Mortgage Loan is underwritten in conformity with FNMA or FHLMC
requirements.
(t) Said Loan is underwritten by the Originator to standards
acceptable to HUD, VA, FNMA, FHLMC, or Purchaser in its sole discretion.
(u) The Originator in determining the appraised fair market value of
said Loan is required to use state licensed appraisers acceptable to Purchaser.
Said appraiser shall have no interest, direct or indirect, in the mortgaged
property, or in any loan made on the security thereof, and said appraiser's
compensation shall not be affected by the approval or disapproval of the
mortgage loan.
<PAGE>
"Equity Base" shall mean at any date the sum of
-----------
(a) Tangible Net Worth, plus
(b) Three quarters of One percent [(0.75). (1%)] of the aggregate
outstanding principal balance of the Originator's mortgage loan servicing
portfolio (internally generated or acquired by purchase) which is not pledged as
security on any other debt or obligation.
"Equity Base Test Report" shall mean a report in form and substance
-----------------------
acceptable to Purchaser.
"Event of Default" shall have the meaning set forth in Paragraph 7 above.
----------------
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
-----
the same may from time to time be supplemented or amended.
"FHA" shall mean the Federal Housing Administration and any successor
---
agency.
"FHLMC" shall mean the Federal Home Loan Mortgage Corporation and any
-----
successor agency.
"FNMA shall mean the Federal National Mortgage Association and any
----
successor agency.
"Funding Account" shall mean the deposit account of the Originator
---------------
described in the Commitment Letter maintained in the Originator's name alone at
the Contact Office of Purchaser.
"GAAP" shall mean generally accepted accounting principles in the United
----
States of America in effect from time to time.
"GNMA" shall mean the Government National Mortgage Association and any
----
successor agency.
"Governmental Authority" shall mean any nation or government, any state or
----------------------
other political subdivision thereof, and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
"Guarantors" shall mean guarantors of the Obligations described more
----------
particularly in the Commitment Letter.
"Indebtedness" of any Person shall mean all items of indebtedness which, in
------------
accordance with generally accepted accounting principles and practices, would be
included in determining liabilities as shown on the liability side of a balance
sheet of such Person as of the date as of which indebtedness is to be
determined, including, without limitation, all obligations for money borrowed
and capitalized lease obligations, and shall also include all indebtedness and
liabilities of others assumed or guaranteed by such Person or in respect of
which such Person is secondarily or contingently liable (other than by
endorsement of instruments in the course of collection) whether by reason of any
agreement to acquire such indebtedness or to supply or advance sums or
otherwise.
"Interim Date" shall have the meaning set forth in the Commitment Letter.
------------
"Late Purchasing Fee" shall mean the outstanding Loan Purchasing Fee on the
-------------------
20th day of the month times the Late Purchasing Fee Rate.
"Late Purchasing Fee Rate" The Reference Rate plus the rate of four percent
------------------------
(4%) per year.
"Lien" shall mean any security interest, mortgage, pledge, lien, claim,
----
charge or encumbrance (including any conditional sale or other title retention
agreement), any lease in the nature thereof, and the filing of or agreement to
give any financing statement under the Uniform Commercial Code of any
jurisdiction.
"Loan" shall mean a real estate secured loan, made by the Originator to an
----
Obligor or acquired by the Originator, including, without limitation:
(a) A promissory note and related deed of trust (or mortgage) and/or
security agreements;
<PAGE>
(b) All guaranties and insurance policies, including, without
limitation, all mortgage and title insurance policies and all fire and extended
coverage insurance policies and rights of the Originator to return premiums or
payments with respect thereto;
(c) All right, title, and interest of the Originator in the Property
covered by said deed of trust (or mortgage); and
(d) The Take-Out Purchase Commitment, if any, related thereto.
"Loan Purchase Limit" The Loan Purchase Limit is the maximum aggregate
-------------------
principal specified in the Commitment Letter of Loans to be purchased from
Originator which Purchaser will hold in warehouse at any one time.
"Loan Purchase Request" shall mean a request in the form of Exhibit 1
---------------------
attached to this Agreement as such form may be amended from time to time by
Purchaser to a form and substance acceptable to Purchaser.
"Loan Purchasing Documents" shall mean this Agreement, the Commitment
-------------------------
Letter, the Security Agreement, the Additional Collateral Documents, and any
other documents, instrument or agreement executed by the Originator in
connection therewith.
"Loan Purchasing Fee" The Loan Purchasing Fee is the fee specified in the
-------------------
Commitment Letter to be charged by Purchaser to Originator from time to time for
purchasing Loans.
"Loan Repurchasing Base" shall mean at any date all Eligible Mortgage Loans
----------------------
delivered and held by Purchaser or any custodian appointed by Purchaser.
"Loan-to-Value Ratio" shall mean,
-------------------
(a) With respect to any Residential Mortgage Loan, the ratio of the
aggregate indebtedness secured by such Property (including the indebtedness
represented by such Residential Mortgage Loan) to the lesser of the appraised
fair market value or sales price of the subject Property at the date the loan
represented by such Residential Mortgage Loan was made, and
(b) With respect to any Construction Mortgage Loan, the ratio of the
aggregate indebtedness secured by such Property (including the indebtedness
represented by such Construction Mortgage Loan) to the projected appraised fair
market value of the subject property after completion of the improvements to be
constructed thereon with the proceeds of such Construction Mortgage Loan.
"Maturity Date" shall mean the date set forth in the Commitment Letter (as
-------------
such date may be expressly extended from time to time in writing by Purchaser).
"Minimum Permitted Equity Base" shall have the meaning set forth in the
-----------------------------
Commitment Letter.
"Minimum Permitted Tangible Net Worth" shall have the meaning set forth in
------------------------------------
the Commitment Letter.
"Mortgage-Backed Security" shall mean a pass-through mortgage- backed
------------------------
certificate, guaranteed by a governmental agency or other Person or otherwise
meeting the requirements of "Types of Eligible Collateral" set forth in the
Commitment Letter.
"Multiemployer Plan" as to any Person shall mean a Plan of such Person
------------------
which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA.
"Obligations" shall mean any and all debts, fees, obligations and
-----------
liabilities of the Originator to Purchaser (whether now existing or hereafter
arising, voluntary or involuntary, whether or not jointly owed with others,
direct or indirect, absolute or contingent, liquidated or unliquidated, and
whether or not from time to time decreased or extinguished and later increased,
created or incurred), arising out of or related to the Loan Purchasing
Documents.
"Obligor" shall mean the individual or individuals obligated to pay the
-------
indebtedness which is the subject of a Mortgage Loan.
<PAGE>
"PBGC" shall mean the Pension Benefit Guaranty Corporation established
----
pursuant to Subtitle A of Title IV of ERISA.
"Permissible Warehouse Period" shall mean for any Eligible Mortgage Loan
----------------------------
the earlier of the period of time set forth in the Commitment Letter or 10 days
following the expiration of the applicable Take-Out Purchase Commitment, if any.
"Permitted Debt to Tangible Net Worth Ratio" shall have the meaning set
------------------------------------------
forth in the Commitment Letter.
"Permitted Debt to Equity Base Ratio" shall have the meaning set forth in
-----------------------------------
the Commitment Letter.
"Person" shall mean any corporation, natural person, firm, joint venture,
------
partnership, trust, unincorporated organization, government or any department or
agency of any government.
"Plan" shall mean as to any Person, any pension plan that is covered by
----
Title IV of ERISA and in respect of which such Person is an "employer" as
defined in Section 3(5) of ERISA.
"Potential Default" shall mean an event which but for the lapse of time or
-----------------
the giving of notice, or both, would constitute an Event of Default.
"Prevailing Purchasing Fee Rate" The Prevailing Purchasing Fee Rate is the
------------------------------
rate specified in the Commitment Letter to be charged by Purchaser to Originator
for purchasing loans.
"Proceeds" shall mean whatever is receivable or received when a Loan or
--------
Collateral or proceeds is sold, collected, exchanged, or otherwise disposed of,
whether such disposition is voluntary or involuntary, and includes, without
limitation, all rights to payment, including return premiums, with respect to
any insurance relating thereto.
"Property" shall mean the real property, including the improvements
--------
thereon, and the personal property (tangible and intangible) which are
encumbered as collateral security for a Loan.
"Purchase Price" shall mean the original loan purchase price specified in
--------------
the Loan Purchase Request.
"Qualified Take-Out Purchaser" A Qualified Take-Out Purchaser is a
----------------------------
purchaser to be specified by Originator who is qualified under the terms and
conditions stated in the Commitment Letter or otherwise acceptable to Purchaser
in its absolute discretion.
"Reference Rate" shall mean the rate of interest announced publicly by
--------------
First Collateral Services, Inc. from time to time at its Walnut Creek,
California, Executive Offices.
"Reportable Event" shall mean a reportable event as defined in Title IV of
----------------
ERISA, except actions of general applicability by the Secretary of Labor under
Section 110 of ERISA.
"Required Fees" Required Fees are fees required to be paid by Originator
-------------
under the Master Mortgage Loan Purchasing Agreement or other agreement between
Originator and Purchaser.
"Requirements of Law" shall mean as to any Person the certificate of
-------------------
incorporation and by-laws or other organizational or governing documents of such
Person, and any law, treaty, rule or regulation, or a final and binding
determination of an arbitrator or a determination of a court or other
Governmental Authority, in each case applicable to or binding upon such Person
or any of its property or to which such Person or any of its property is
subject.
"Residential Mortgage Loan" shall mean a Loan the proceeds of which were
-------------------------
advanced to enable the Obligor (or its predecessor if the Loan has been assumed
by the present Obligor) to acquire a 1-4 unit family residence.
"Security Agreement" shall mean a security agreement in form and substance
------------------
acceptable to Purchaser.
"Single Employer Plan" shall mean as to any Person any Plan of such Person
--------------------
which is not a Multiemployer Plan.
"Statement Date" shall have the meaning set forth in the Commitment Letter.
--------------
<PAGE>
"Subsidiary" shall mean any corporation in which more than fifty percent
----------
(50%) of the stock which has, by the terms thereof, ordinary voting power to
elect the board of directors, managers or trustees of the corporation
(irrespective of whether or not at the time stock of any other class or classes
of such corporation shall have or might have voting power by reason of the
happening of any contingency) shall, at the time as of which any determination
is being made, be owned by the Originator, either directly or through
Subsidiaries.
"Take-Out Purchase Commitment" Originator shall provide Purchaser with a
----------------------------
valid and enforceable agreement from a Qualified Take-Out Purchaser acceptable
to Purchaser to purchase the Loan at a time and for a price acceptable to
Purchaser as specified in the Take-Out Purchase Commitment.
"Tangible Net Worth" shall mean the sum of the amounts set forth on the
------------------
consolidated balance sheet of the Originator, prepared in accordance with GAAP
as
(a) The par or stated value of all outstanding common stock and
preferred stock.
(b) Paid-in capital and retained earnings, less the sum of
(1) Goodwill, including any amounts (however designated on such
balance sheet) representing the cost of acquisitions of subsidiaries in excess
of underlying tangible assets.
(2) Patents, trademarks, copyrights, leasehold improvements not
recoverable at the expiration of a lease, and deferred charges (including, but
not limited to unamortized debt discount and expense, organizational expenses),
and
(3) Loans receivable by Originator from parents, affiliates,
subsidiaries, or Commonly Controlled Entities, or officers, directors, and
holders of stock in Originator, parents, affiliates or subsidiaries or other
Commonly Controlled Entities.
(4) Any amounts (however designated on the Consolidated Balance
Sheet of the Originator) allocated to the purchase of the Originator's servicing
portfolio or any part thereof, or any amounts (however designated on such
balance sheet) attributable to the capitalization of servicing fees in excess of
the cost of servicing.
"VA" shall mean the Veterans Administration and any successor agency.
--
"Warehouse" Loans in Warehouse consist of the aggregate principal amount of
---------
Loans purchased by Purchaser from Originator and held by Purchaser at any time
in portfolio, until said Loans are either sold or repurchased.
"Warehouse Value" Originator acknowledges that Loans are bought and sold in
---------------
various open markets and that prices for mortgage loans change from moment to
moment based upon the prevailing interest rate and other conditions. Originator
expressly agrees that the Warehouse Value is the fair market value of Loans in
Warehouse estimated by Purchaser in its reasonable discretion at any time and
from time to time based upon regular business reports from Telerate, Reuters or
other financial services. In the event of any difference of opinion regarding
Warehouse Value, Originator may request an appraisal of the Warehouse Value and
consents and agrees that the Warehouse Value may be fixed by any person or
institution named by Purchaser provided that such person is a bank, financial
institution or broker regularly dealing in the purchase and sale of mortgage
loans. Originator shall pay all fees and costs in connection with such appraisal
of Warehouse Value. Originator shall deposit with Purchaser the amount of any
cash or other security demanded by Purchaser based on Purchaser's estimate of
Warehouse Value pending completion of appraisement of the Warehouse Value by
such bank, financial institution or broker specified by Purchaser.
"Warehouse Value Certificate" shall mean a certificate by Originator in
---------------------------
form and substance acceptable to Purchaser warranting the Warehouse Value of
Loans in warehouse.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the day and year first above written.
ORIGINATOR: Sutter Mortgage Corporation,
a California corporation
By: /s/ RONALD MORCK
---------------------------
Ronald Morck
President
PURCHASER: FIRST COLLATERAL SERVICES, INC.
a California corporation
By: /s/ WILLIAN G. CELERI
---------------------------
Willian G. Celeri
Vice President
By: /s/ WILLEM RIDDER
---------------------------
Willem Ridder
Vice Chairman of
the Board
<PAGE>
EXHIBIT I
LOAN PURCHASE REQUEST
Company:
Street:
City/State:
To First Collateral Services, Inc.:
Our Loan Number ____________________
Mortgagor ____________________
Co-Mortgagor ____________________
Note Date ____________________ Note Amount _______________
Note Rate ____________________ Note Term Yrs. _______________
State Where Property Located ____________________
Acquisition Cost (Par less Pts.) ____________________
Commitment Price/Yield ____________________
The Take-Out Purchaser is:
Name __________________________________________
Address __________________________________________
__________________________________________
__________________________________________
Commitment No. ____________________
The Purchase Date is ____________________
Loan Description: Type of Program (FHA 203b, 245, etc.; VA; Conv.Fixed, ARM,
GPM, etc.)
FHA_________ VA__________ CONV_________ 2ND T/D________ OTHER________
We hereby request that you purchase the above described loan for the amount of
$________.
Of the above advance, please credit our account with $_____________. You are
authorized to pay check #_________ in the amount of $__________. You are
authorized to wire $___________ as per our wiring instructions.
<PAGE>
The following documents are enclosed:
ALL LOANS REQUIRE
<TABLE>
<CAPTION>
Check
<S> <C>
Original Mortgagor's note endorsed in blank and riders _________
Certified copy of Deed of Trust _________
Original Executed Assignment of D/T in favor of First Collateral Services, Inc. _________
Copy Preliminary Title Report _________
Copy Escrow instructions with Funding Statement _________
Copy Insured Closing Protection Letter (Loans closed outside Title Co.) _________
Copy Application - typed _________
Copy Investor Credit Package Approval/(Loans greater than $300,000.00) _________
Copy Credit report _________
Copy Appraisal _________
Copy Hazard Insurance Policy/Certificate _________
Copy Private Mortgage Insurance Certificate _________
Copy Underwriters approval _________
Copy Investor Commitment _________
Copy Funding Check/Wire instructions _________
IN ADDITION CONVENTIONAL LOANS REQUIRE
Copy Transmittal Summary - FNMA 1008 _________
IN ADDITION GOVERNMENT LOANS REQUIRE
Copy Mortgage credit analysis - HUD 92900- WS _________
Copy Request for insurance - HUD 54111 _________
Copy Direct Endorsement - HUD 54113 _________
Copy Certificate of Commitment - HUD 92900.4 _________
</TABLE>
We represent and warrant that we hold in our files all required disclosure
statements, verification of employment and settlement instructions (HUD I). The
original recorded Deed of Trust, Policy of Title Insurance, FHA, VA or PMI
certificate, Settlement Instructions (HUD I), Flood Insurance (if applicable),
Sales Contract, and Termite Report will be furnished to you within 60 days.
Very truly yours,
By: ____________________________
Title: ____________________________
Date: ____________________________
<PAGE>
EXHIBIT II
FIRST COLLATERAL SERVICES, INC.
1340 Treat Boulevard, Suite 480
Walnut Creek, CA 94596-7581
Date: Mortgage Company:
Investor:
Bailee Letter
First Collateral Services, Inc. hereby conditionally tenders to you as bailee
and agent for First Collateral the notes and related complete files for mortgage
loans on the following schedule:
You have the option to purchase the mortgage loans within 30 days from this date
on condition that you wire the proceeds of said purchase to:
First Collateral Services, Inc. #3685-7444
c/o Citibank, N.A.
ABA #021000089
Telegraphic Abbrv: Citibank NYC
Regarding: Paydown on
Reference: #
Upon receipt of proceeds by First Collateral we agree that the conditions of
delivery will have been satisfied and that you will be discharged of further
obligation to us as bailee and agent for First Collateral as to said notes.
First Collateral has purchased the mortgage loans from the mortgage company
named above and delivers the mortgage loans to you in bailment pursuant to a
forward purchase commitment to said mortgage company and at the instruction of
said mortgage company but does not assume or agree to perform any obligation to
you of said mortgage company.
Unless and until you buy and pay for each loan, First Collateral shall retain
full ownership thereof and you shall hold possession of each loan and the
documentation evidencing the same as agent and bailee for and on behalf of First
Collateral.
In the event any of these loans is unacceptable to you or if you fail to
complete purchase and payment within 30 days, you as bailee and agent must
return such mortgage loan and its file to First Collateral only at its Walnut
Creek address.
Sincerely,
First Collateral Services, Inc.
By: ____________________________________
Name: ____________________________________
Collateral Control Clerk
<PAGE>
SUTTER MORTGAGE CORPORATION
Addendum to UCC-l
SCHEDULE 1
COLLATERAL DESCRIPTION
The collateral shall consist of all now existing and hereafter arising rights to
servicing of Loans in Warehouse sold by Debtor to and held by Secured Party or
its Agent, and any and all residential and commercial loan servicing agreements
between Debtor and third party investors- relating to Loans in Warehouse (the
"Servicing Contracts") and all amendments and replacements to said Servicing
Contracts and all now existing and hereafter arising rights of Debtor to the
payment of money for servicing Loans sold to and held by Secured Party or under
the Servicing Contracts, whether such payments are on account of services
rendered by Debtor thereunder or otherwise, and including, without limitation,
all amounts payable to Debtor on account of the sale or other disposition of any
of said rights to servicing of Loans sold by Debtor to and held by Secured Party
and on account of Servicing Contracts and/or Debtor's rights thereunder, and all
products and proceeds of any of the above.
<PAGE>
EXHIBIT 10.50.1
[LETTERHEAD OF FIRST COLLATERAL SERVICES APPEARS HERE]
December 16, 1997
Via FAX and Airborne
Sutter Mortgage Corporation and Subsidiary
2140 North Broadway
Walnut Creek, California 94596
Attention: Ronald Morck, President
Re: Master Mortgage Loan Purchasing Agreement dated August 26, 1993 and
Commitment Letter dated July 11, 1994
Dear Ron:
This Amended Commitment Letter amends the Commitment Letter referred to
above, supplements the above-referenced Master Mortgage Loan Purchasing
Agreement (the "Agreement") and will confirm certain terms and conditions
of the purchasing arrangements between Sutter Mortgage Corporation and
Subsidiary and First Collateral Services ("Purchaser") set forth herein.
Capitalized terms are used herein with the same meaning as in the
Agreement.
Customer Number:
----------------
5975
Maturity Date:
--------------
March 31, 1998
Effective Date:
---------------
This document shall take full force and effect on January
1, 1998.
All other terms and conditions of the Master Mortgage Loan Purchasing
Agreement dated August 26, 1993 and Commitment Letters dated July 11,
1994 shall remain the same.
<PAGE>
Sutter Mortgage Corporation and Subsidiary
December 16, 1997
Page 2
If the above meets with your approval, please so indicate by executing and
returning this Commitment Letter to Purchaser by December 23, 1997. If this
Commitment Letter has not been returned by that date, the Commitment shall
expire. The enclosed copy of this letter is for Sutter's files.
Very truly yours,
ASSOCIATES COMMERCIAL CORP. dba
FIRST COLLATERAL SERVICES
a Delaware Corporation
By: /s/ Sarah E. Shaver
----------------------
Sarah E. Shaver,
Vice President
By: /s/ William Ridder
----------------------
William Ridder,
Senior Vice President
AGREED TO AND ACCEPTED this
17th day of December, 1997
Sutter Mortgage Corporation
a California corporation
By: /s/ Ronald Morck
------------------------
Ronald Morck,
President
<PAGE>
EXHIBIT 10.51
SERVICING AGREEMENT
This agreement for the servicing of Loans ("Servicing Agreement") is made and
dated as of October 7, 1992, between FIRST COLLATERAL SERVICES, INC.
("Purchaser") and SUTTER MORTGAGE CORPORATION ("Originator"). All capitalized
terms used in this Servicing Agreement not defined herein shall have the meaning
given to such term in the Master Mortgage Loan Purchasing Agreement and related
Loan Purchasing Documents entered into between the parties on the October 7,
1992.
1. Summary of Terms. In the event that the terms and provisions regarding the
----------------
servicing of the loans provided for in this Servicing Agreement conflict with or
inhibit the sale of the loans into the secondary market, as determined solely by
Purchaser, this Servicing Agreement shall be modified to facilitate such sale.
2. Representations and Warranties
------------------------------
(a) Originator represents and warrants to, and covenants with Purchaser,
that as of the Closing Date of each Mortgage Loan:
(1) Originator is duly organized, validly existing and in good
standing under the laws of California and is qualified to transact business in
and is in good standing under the laws of each state where mortgaged property is
located or is otherwise exempt under applicable law from such qualification or
is otherwise not required under applicable law to effect such qualification and
no demand for such qualification has been made upon Originator by any state
having jurisdiction and in any event, Originator is or will be in compliance
with the laws of any such state to the extent necessary to insure the
enforceability of each Mortgage Loan and the servicing of the Mortgage Loans in
accordance with the terms of this Servicing Agreement;
(2) Originator has the full power and authority to originate, to hold
each Mortgage Loan, to sell each Mortgage Loan, to execute, deliver and perform,
and to enter into and consummate, all transactions contemplated by this
Servicing Agreement. Originator has duly authorized the execution, delivery and
performance of this Servicing Agreement, has duly executed and delivered this
Servicing Agreement, and this Servicing Agreement constitutes a legal, valid and
binding obligation of Originator, enforceable against it in accordance with its
terms;
(3) Neither the execution and delivery of this Servicing Agreement,
the acquisition or origination of the Mortgage Loans by Originator, the
consummation of the transactions contemplated hereby, nor the fulfillment of or
compliance with the terms and conditions of this Servicing Agreement, will
conflict with or result in a breach of any of the terms, conditions or
provisions of Originator's charter or by-laws or any legal restriction or any
agreement or instrument to which the Originator is now a party or by which it is
bound, or constitute a default or result in an acceleration under any of the
foregoing, or result in the violation of any law, rule, regulation, order,
judgment or decree to which Originator or its property is subject;
(4) Originator does not believe, nor does it have any reason or cause
to believe, that it cannot perform each and every covenant contained in this
Servicing Agreement;
It is understood and agreed that the representations and warranties set forth in
this Servicing Agreement shall survive the sale of the Mortgage Loans and the
delivery of the loans to Purchaser. Upon discovery by either Originator or
Purchaser of breach of any of the foregoing representations and warranties which
materially and adversely affects the value of the Mortgage Loans or the
interest of Purchaser (or which materially and adversely affects the interests
of Purchaser in the related Mortgage Loan in the case of a representation and
warranty relating to a particular Mortgage Loan), the party discovering such
breach shall give prompt written notice to the other.
Originator shall indemnify Purchaser and hold it harmless against any loss,
damages, penalties, fines, forfeitures, legal fees and related costs, judgments
and other costs and expenses resulting from any claim, demand, defense or
assertion based on or grounded upon, or resulting from, a breach of Originator's
representations and warranties contained in this Servicing Agreement.
1
<PAGE>
3. Administration and Servicing of Loans in Warehouse
--------------------------------------------------
(a) Originator To Act as Servicer. Originator shall service and administer
-----------------------------
the Loans in Warehouse and shall have power and authority to do any and all
things in connection with such servicing and administration which Originator may
deem necessary or desirable and consistent with the terms of this Servicing
Agreement and the Master Mortgage Loan Purchasing Agreement excepting the
following:
(1) Originator may not waive, modify or vary any term of any Mortgage
Loan or consent to the postponement of strict compliance with any such term or
in any manner grant indulgence to the Mortgagor without the prior consent of
Purchaser.
(2) Originator may not permit any modification with respect to any
Mortgage Loan that would increase or decrease the Mortgage Interest Rate, defer
or forgive the payment of any principal or interest, reduce the outstanding
principal amount (except for actual payments of principal), or extend the final
maturity date of such Mortgage Loan.
Without limiting the generality of the above, Originator shall continue, and is
hereby authorized and empowered in accordance with this Servicing Agreement, to
execute and deliver on behalf of Purchaser, all instruments of satisfaction or
cancellation, or of partial or full release, discharge and all other comparable
instruments, with respect to the Mortgage Loan and with respect to the Mortgaged
Property. If reasonably required by Originator, Purchaser shall furnish
Originator with any powers of attorney and other documents necessary or
appropriate to enable Originator to carry out its servicing and administrative
duties under this Servicing Agreement.
In servicing and administering the Mortgage Loans, Originator shall employ
procedures (including the collection procedures) and exercise the same care that
it customarily employs and exercises in servicing and administering mortgage
loans for its own account giving due consideration to accepted mortgage
servicing practices of prudent lending institutions and the Purchaser's reliance
on Originator.
The Mortgage Loans may not be sub-serviced on behalf of Originator without
written permission from the Purchaser.
(b) Liquidation of Mortgage Loans. In the event that any payment due under
-----------------------------
any Mortgage Loan is not paid when the same becomes due and payable, or in the
event the Mortgagor fails to perform any other covenant or obligation under any
Mortgage Loan and such failure continues beyond any applicable grace period,
Originator shall take such action as it shall deem to be in the best interest of
Purchaser. In the event that any payment due under any Mortgage Loan remains
delinquent for a period of 60 days or more, Originator shall commence
foreclosure proceedings after written notification to Purchaser.
(c) Collection of Mortgage Loan Payments. Continuously from the date
------------------------------------
hereof until the principal and interest on all Mortgage Loans are paid in full,
Originator will proceed diligently to collect all payments due under each
Mortgage Loan when the same shall become due and payable and will take special
care in ascertaining and estimating annual ground rents, taxes, assessments,
water rates, fire and hazard insurance premiums, mortgage insurance premiums,
and all other charges that, as provided in the Mortgage, will become due and
payable to the end that the installments payable by the Mortgagors will be
sufficient to pay such charges as and when they become due and payable.
(d) Establishment of Certificate Accounts. Originator shall segregate and
-------------------------------------
hold all funds collected and received pursuant to each Mortgage Loan separate
and apart from any of its own funds and general assets and shall establish and
maintain one or more Trust Accounts, in the form of segregated time deposit or
demand accounts, titled "Sutter Mortgage Corporation, in trust for First
Collateral Services, Inc." Such Trust Accounts shall be established with a
commercial bank, a mutual savings and loan or a savings and loan association
whose accounts are insured by FDIC and are acceptable under the requirements of
FNMA. Originator shall cause to be deposited in the Trust Accounts on a daily
basis, and retain therein:
(1) all scheduled payments due,
(2) the portion of all Monthly Payments which represent interest on
the Mortgage Loans.
2
<PAGE>
(3) all proceeds from a Cash Liquidation,
(4) all proceeds received by the Originator under any title, hazard
or other insurance policy, and
(5) all awards or settlements in respect of condemnation proceedings
affecting the Mortgaged Property which are not released to the Mortgagor in
accordance with Originator's normal servicing procedures.
The foregoing requirements for deposit in the Trust Accounts shall be exclusive,
it being understood and agreed that, without limiting the generality of the
foregoing, payments in the nature of late payment charges and assumption fees,
to the extent permitted, need not be deposited by Originator into the Trust
Accounts.
(e) Permitted withdrawals from the Trust Accounts. Originator may, from
---------------------------------------------
time to time, withdraw funds from the Trust Accounts as specified in the Master
Mortgage Loan Purchasing Agreement.
(f) Establishment of Escrow Accounts: Deposits in Escrow Accounts.
-------------------------------------------------------------
Originator shall segregate and hold all funds collected and received pursuant to
each Mortgage Loan which constitute Escrow Payments separate and apart from any
of its own funds and general assets and shall establish and maintain one or more
Escrow Accounts, in the form of segregated time deposit or demand accounts,
titled "Sutter Mortgage Corporation, in trust for First Collateral Services,
Inc." The Escrow Accounts shall be established with a commercial bank, a mutual
savings and loan or a savings and loan association whose accounts are insured by
FDIC and are acceptable under the requirements of FNMA.
Originator shall deposit, or cause to be deposited, in the Escrow
Account on a daily basis, and retain therein:
(1) all Escrow payments collected on account of such Mortgage Loans
for the purpose of effecting timely payment of any such items as required under
the terms of this Servicing Agreement,
(2) all amounts representing proceeds of any hazard insurance policy
which are to be applied to the restoration or repair of any such Mortgaged
Property. Originator shall make withdrawals therefrom only to effect such
payments as are required under this Servicing Agreement, and for such other
purposes as shall be set forth. Originator shall pay, to the extent required by
law, interest on escrowed funds to the Mortgagor notwithstanding that the Escrow
Account is non-interest bearing or that interest paid thereon is insufficient
for such purposes.
(g) Permitted Withdrawals from Escrow Account. Withdrawals from the Escrow
-----------------------------------------
Account may be made by Originator to effect timely payments of ground rents,
taxes, assessments, water rates, mortgage insurance premiums, fire and hazard
insurance premiums or other items constituting Escrow Payments for the related
Mortgage.
(h) Payment of Taxes. Insurance and other Charges. With respect to each
---------------------------------------------
Mortgage Loan, Originator shall maintain accurate records reflecting the status
of ground rents, taxes, assessments, water rates and other charges which are or
may become a lien upon the Mortgaged Property and the status of primary mortgage
guaranty insurance premiums and fire and hazard insurance coverage and shall
obtain, from time to time, all bills for the payment of such charges (including
renewal premiums) and shall effect payment, thereof prior to the applicable
penalty or termination date and at a time appropriate for securing maximum
discounts allowable, employing for such purpose deposits of the Mortgagor in the
Escrow Account which shall have been estimated and accumulated by Originator in
amounts sufficient for such purposes, as allowed under the terms of.the
Mortgage. To the extent that a Mortgage does not provide for Escrow Payments,
Originator shall determine that any such payments are made by the Mortgagor at
the time they first become due. Originator assumes full responsibility for the
timely payment of all such bills and shall effect timely payments of all such
bills irrespective of each Mortgagor's faithful performance in the payment of
same or the making of the Escrow Payments and shall make advances from its own
funds to effect such payments.
(i) Maintenance of Hazard Insurance. Originator shall cause to be
-------------------------------
maintained for each Mortgage Loan fire and hazard insurance with extended
coverage as is customary in the area where the Mortgaged Property is located in
an amount which is equal to at least 100 percent of the maximum insurable value
of the improvements securing
3
<PAGE>
such Mortgaged Loan or the principal balance owing on such Mortgage loan,
whichever is the greater. If the Mortgaged Property is in an area identified in
the Federal Register by the Flood Emergency Management Agency as having special
flood hazards (and such flood insurance has been made available) Originator will
cause to be maintained a flood insurance policy meeting the requirements of the
current guidelines of the National Flood Insurance Protection Act which funds
are to be deposited in the Escrow Account. If the Mortgaged Property has been
identified by geological survey or indicated on the appraisal of the Mortgaged
Property as being located in a high earthquake area Originator will cause to be
maintained special earthquake insurance riders to the hazard policy. All such
policies shall be endorsed with standard mortgage language naming Purchaser as
mortgagee. Originator shall not interfere with the Mortgagor's freedom of choice
in selecting either his insurance carrier or agent, provided, however, that
Originator shall not accept any such insurance policies from insurance companies
unless such companies currently reflect a General Policy Rating of B+ or better
in Bests Key Rating Guide and are licensed to do business in the state wherein
the property subject to the policy is located.
(j) Fidelity Bond and Mortgage Impairment. Originator shall maintain, at
-------------------------------------
its own expense, a blanket fidelity bond, mortgage impairment and an errors and
omissions insurance policy, with broad coverage with responsible companies on
all officers, employees or other persons acting in any capacity with regard to
the Mortgage Loan who handle funds, money, documents and papers relating to the
Mortgage Loan. Any such fidelity bond and errors and omissions insurance shall
protect and insure Originator and Purchaser against losses, including forgery,
theft, embezzlement, fraud, errors and omissions and negligent acts of
Originator and of any such persons. No provision of this Section requiring such
fidelity bond and errors and omissions insurance shall diminish or relieve
Originator from its duties and obligations as set forth in this Servicing
Agreement. The minimum coverage under any such bond and insurance policy shall
be at least equal to the corresponding amounts required by FNMA in Section 1.01
of the FNMA Guaranteed Mortgage Backed Securities Sellers' and Servicers' Guide,
or by FHLMC in Section 6.402 or 6.403 of the FHLMC Sellers' and Servicers'
Guide. Upon request of Purchaser, Originator shall cause to be delivered to
Purchaser a certified true copy of such fidelity bond and insurance policy and a
statement from the surety and the insurer that such fidelity bond or insurance
policy shall in no event be terminated or materially modified without 30 days'
prior written notice to Purchaser.
(k) Notification of Adjustments. Originator shall make interest rate
---------------------------
adjustments and payment amount adjustments for each Mortgage Loan in compliance
with the requirements of the Mortgage and the Mortgage Note and applicable law
on each Adjustment Date which reflects the movement of the Indices. Originator
shall execute and deliver the notices required by the Mortgage and Mortgage Note
and applicable law regarding interest rate and payment amount adjustments. In
the event the relevant Mortgage Loan is in default, the notice shall reserve all
rights and remedies available to Purchaser. Originator shall also provide timely
notification to Purchaser of all applicable data and information regarding such
interest rate adjustments and methods of implementation of such interest rate
adjustments.
(l) Waiver of Defaults. Purchaser may waive any default by Originator in
------------------
the performance of its obligations hereunder and its consequences. Upon any such
waiver of a past default, such default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been remedied for every
purpose of this Servicing Agreement. No such waiver shall extend to any
subsequent or other default or impair any right consequent thereon except to the
extent expressly so waived.
(m) Termination. The respective obligations and responsibilities of
-----------
Originator shall terminate upon written notification by Purchaser in its sole
discretion.
(n) No Hypothecation. Originator may not sell, assign or transfer in any
----------------
way its right to receive a portion of the Servicing Fee as provided in this
Section without the prior written consent of Purchaser, except under a Qualified
Takeout Commitment.
(o) Successor to Originator. Upon the termination of Originator's
-----------------------
responsibilities and duties under this Servicing Agreement pursuant to any
Article or Section, Purchaser shall:
(1) succeed to and assume all of Originator's responsibilities,
rights, duties and obligations under this Servicing Agreement, or
(2) appoint a successor which shall succeed to all rights and assume
all of the responsibilities, duties and liabilities of Originator under this
Servicing Agreement. In the event that Originator's
4
<PAGE>
duties, responsibilities and liabilities under this Servicing Agreement should
be terminated pursuant to the aforementioned Article or Sections, Originator
shall discharge such duties and responsibilities during the period from the date
it acquires knowledge of such termination until the effective date thereof with
the same degree of diligence and prudence which it is obligated to exercise
under this Servicing Agreement, and shall take no action whatsoever that might
impair or prejudice the rights or financial condition of its successor. The
removal of Originator pursuant to the aforementioned Sections shall not become
effective until a successor shall be appointed pursuant to this Section and
shall in no event relieve Originator of the representations and warranties made
pursuant to Article III and the remedies available to Purchaser thereunder, it
being understood and agreed that the provisions of such Article III shall be
applicable to Originator notwithstanding any such resignation or termination of
Originator, or the termination of this Servicing Agreement.
Any termination or resignation of Originator or this Servicing Agreement shall
not affect any claims that Purchaser may have against Originator arising prior
to any such termination or resignation. Originator shall deliver in a timely
manner to the successor the funds in the Certificate Account and the Escrow
Account and any mortgage files and related documents and statements held by it
hereunder and Originator shall account for all funds. Originator shall execute
and deliver such instruments and do such other things all as may reasonably be
required to more fully and definitely vest and confirm in the successor all such
rights, powers, duties, responsibilities, obligations and liabilities of
Originator.
(p) Amendments. This Servicing Agreement may not be amended or in any
----------
manner modified by an oral agreement, whether or not such oral agreement is
supported by a new consideration. The Servicing Agreement may not be amended or
in any manner modified unless such amendment or modification is in writing and
signed by Purchaser and the Originator. This Servicing Agreement, the Master
Mortgage Loan Purchasing Agreement and all related loan purchasing documents are
for the sole benefit of Purchaser and Originator and may be amended, modified or
cancelled at any time or from time to time without consultation or consent of
any other entity.
(q) Recordation of Servicing Agreement. To the extent required by
----------------------------------
applicable law, this Servicing Agreement is subject to recordation in all
appropriate public offices for real property records in all the counties or
other comparable jurisdictions in which any of the properties subject to the
Mortgages are situated, and in any other appropriate public recording office or
elsewhere, such recordation to be effected by Originator at Originator's expense
on direction from Purchaser accompanied by an opinion of counsel to the effect
that such recordation materially and beneficially affect the interests of
Purchaser or is necessary for the administration or servicing of the Mortgage
Loans.
(r) Duration of Servicing Agreement. This Servicing Agreement shall
-------------------------------
continue in existence and effect until terminated as herein provided or upon
termination of the Master Mortgage Loan Purchasing Agreement.
(s) Governing Law. This Servicing Agreement shall be construed in
-------------
accordance with the laws of the State of California and the obligations, rights
and remedies of the parties hereunder shall be determined in accordance with
such laws.
(t) Notices. All notices given by either party to the other shall be in
-------
writing, delivered personally, by facsimile, or by depositing the same in the
United States mail, or overnight delivery, certified, with postage prepaid,
addressed to the party at the address set forth in the Commitment Letter. Either
party may change the address to which notices are to be sent by notice of such
change to the other party given as provided herein.
(u) Severability of Provisions. If any one or more of the covenants,
--------------------------
agreements, provisions or terms of this Servicing Agreement shall be for any
reason whatsoever held invalid, then such covenants, agreements, provisions or
terms shall be deemed severable from the remaining covenants, agreements,
provisions or terms of this Servicing Agreement and shall in no way affect the
validity or enforceability of the other provisions of this Servicing Agreement
(v) No Partnership. Nothing herein contained shall be deemed or construed
--------------
to create a co-partnership or joint venture between the parties hereto and the
services of Originator shall be rendered as an independent contractor and not as
agent for Purchaser.
5
<PAGE>
(w) Servicing Fee. The Servicing Fee is fifteen basis points netted from
-------------
the aggregate principal and interest, payable to Originator for the servicing of
Eligible Mortgage Loans as specified in the Master Mortgage Loan Purchasing
Agreement
IN WITNESS WHEREOF, Sutter Mortgage Corporation and First Collateral Services,
Inc. have caused their names to be signed hereto by their respective officers
thereunto duly authorized as of the day and year first above written.
ORIGINATOR: Sutter Mortgage Corporation,
a California Corporation
By: /s/ RONALD MORCK
-----------------------------------------
Ronald Morck
President
PURCHASER: FIRST COLLATERAL SERVICES, INC.,
a California corporation
By: /s/ WILLIAM G. CELERI
----------------------------------------
William G. Celeri
Vice President
By: /s/ WILLEM RIDDER
----------------------------------------
Willem Ridder
Vice Chairman of the Board
6
<PAGE>
EXHIBIT A
P&I ACCOUNT CERTIFICATION
Sutter Mortgage Corporation ("Originator") hereby certifies that it has
established the account described below as a Principal and Interest Account
pursuant to Section 4 (d) of the Servicing Agreement, dated as of___________,
1992.
Title of Account: "Sutter Mortgage Corporation, in trust for First Collateral
Services, Inc."
Account Number:_______________________
Name and address of office or branch at which Account is maintained:
Name: _________________________________
Address: _________________________________
_________________________________
_________________________________
Sutter Mortgage Corporation
("Originator")
___________________________________
Ronald Morck
President
7
<PAGE>
EXHIBIT A-1
P&I ACCOUNT LETTER AGREEMENT
Date: _____________________
TO: _______________________________
_______________________________
_______________________________
("The Depository")
As Servicer under a Servicing Agreement, dated as of_________________ 19__, we
hereby authorize and request you to establish an account, as a Principal and
Interest Account pursuant to Section 4 (d) of the Servicing Agreement, to be
designated as "Sutter Mortgage Corporation, in trust for First Collateral
Services, Inc." All deposits in the account shall be subject to withdrawal
therefrom by order signed by Originator. You may refuse any deposit which would
result in violation of the requirement that the account be fully insured as
described below. This letter is submitted to you in duplicate. Please execute
and return one original to us.
Sutter Mortgage Corporation
("Originator")
_____________________________________
Ronald Morck
President
The undersigned, as "Depository", hereby certifies that the above described
account has been established under Account number _________________________,
at the office of the depository indicated above, and agrees to honor withdrawals
on such account as provided above. The full amount deposited at any time in the
account will be insured by the Federal Deposit Insurance Corporation.
_____________________________________
(Name of Depository)
____________________________________
Name: ____________________________________
Title: ____________________________________
8
<PAGE>
EXHIBIT B
ESCROW ACCOUNT CERTIFICATION
Date: __________________________
Sutter Mortgage Corporation ("Originator") hereby certifies that it has
established the account described below as an Escrow Account pursuant to Section
4 (f) of the Servicing Agreement, dated as of____________________ 1992.
Title of Account: "Sutter Mortgage Corporation, in trust for First Collateral
Services, Inc."
Account Number:_______________________________
Name and address of office or branch at which Account is maintained:
Name: ____________________________________
Address: ____________________________________
____________________________________
____________________________________
Sutter Mortgage Corporation
("Originator")
_________________________________
Ronald Morck
President
9
<PAGE>
EXHIBIT B-1
ESCROW ACCOUNT LETTER AGREEMENT
Date:___________________________
TO: ___________________________
___________________________
___________________________
("The Depository")
As Servicer under a Servicing Agreement, dated as of ________________ , 1992, we
hereby authorize and request you to establish an account, as a Escrow Account
pursuant to Section 4 (f) of the Agreement, to be designated as "Sutter Mortgage
Corporation, in trust for First Collateral Services, Inc." All deposits in the
account shall be subject to withdrawal therefrom by order signed by Originator.
You may refuse any deposit which would result in violation of the requirement
that the account be fully insured as described below. This letter is submitted
to you in duplicate. Please execute and return one original to us.
Sutter Mortgage Corporation
("Originator")
___________________________________
Ronald Morck
President
The undersigned, as "Depository", hereby certifies that the above described
account has been established under Account number __________________________, at
the office of the depository indicated above, and agrees to honor withdrawals on
such account as provided above. The full amount deposited at any time in the
account will be insured by the Federal Deposit Insurance Corporation.
___________________________________
(Name of Depository)
___________________________________
Name: ___________________________________
Title: ___________________________________
10
<PAGE>
EXHIBIT 10.52
SECURITY AGREEMENT
(Servicing)
THIS SECURITY AGREEMENT (the "Security Agreement") is made and dated as of
October 7, 1992, by and between SUTTER MORTGAGE CORPORATION, a California
corporation ("Debtor"), located at 1556 Parkside Dr., Walnut Creek, CA 94596,
and FIRST COLLATERAL SERVICES, INC., a California Corporation ("Secured Party").
RECITALS
--------
A. Secured Party has agreed to purchase loans from Debtor on the terms
and subject to the conditions set forth in the Master Mortgage Loan Purchasing
Agreement, dated October 7, 1992, (as amended, extended and supplemented from
time to time, the "Purchase Agreement"). Capitalized terms used herein and not
otherwise defined shall have the same meaning as in the Purchase Agreement.
B. To induce Secured Party to enter into the Purchase Agreement and
purchase loans on the terms and conditions set forth therein, Debtor has agreed
to grant to Secured Party a security interest in and lien upon certain assets of
Debtor described more particularly herein.
NOW THEREFORE, in consideration of the above Recitals and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
AGREEMENT
---------
1. Grant of Security Interest. Debtor hereby pledges and grants to
--------------------------
Secured Party a security interest in all of its right, title, and interest in
the property described in Paragraph 2 below (collectively and severally, the
"Collateral"), to secure payment and performance of the obligations described in
Paragraph 3 below (collectively and severally, the "Obligations").
2. Collateral. The Collateral shall consist of all now existing and
----------
hereafter right, title and interest of Debtor in, under and to each item of
Collateral described on Schedule 1 attached hereto.
3. Obligations. The Obligations secured by this Security Agreement shall
-----------
consist of any and all debts, obligations and liabilities of Debtor to Secured
Party (whether now existing or hereafter arising, voluntary or involuntary,
whether or not jointly owed with others, direct or indirect, absolute or
contingent, liquidated or unliquidated, and whether or not from time to time
decreased or extinguished and later increased, created or incurred).
4. Release and Substitution of Collateral. Unless and until there shall
--------------------------------------
have occurred an Event of Default or Potential Default under the Credit
Agreement or Purchase Agreement, and provided that Collateral of comparable and
equal value is substituted by Debtor, upon the written request of Debtor,
Collateral may be released from the lien of Secured Party (or, if requested by
Debtor, Secured Party may execute and deliver to the Debtor a release, which may
be complete or partial, of its interest in said Collateral) and said Collateral
thereafter shall not be further subject to the restrictions of this Security
Agreement. Any release by Secured Party shall be without representation or
warranty by, and without recourse to, Secured Party.
5. Representations and Warranties. Debtor hereby represents and warrants
------------------------------
that:
(a) Debtor is the sole owner of the Collateral (or, in the case of
after-acquired Collateral, at the time the Debtor acquires rights in the
Collateral, will be the sole owner thereof);
(b) Except as for security interests in favor of Secured Party, or
otherwise consented to in writing by Secured Party, no Person has (or, in the
case of after-acquired Collateral, at the time Debtor acquires rights therein,
will have) any right, title, claim or interest (by way of security interest or
other lien or charge or otherwise) in, against or to the Collateral; and
(c) All information heretofore, herein or hereafter supplied to
Secured Party by or on behalf of Debtor with respect to the Collateral is
accurate and complete.
1
<PAGE>
6. Covenants of Debtor. Debtor hereby agrees:
-------------------
(a) To procure, execute and deliver from time-to-time any
endorsements, assignments, financing statements and other writings deemed
necessary or appropriate by Secured Party to perfect, maintain and protect its
security interest hereunder and the priority thereof and to deliver promptly to
Secured Party all originals of Collateral or proceeds consisting of chattel
paper or instruments;
(b) Not to surrender or lose possession of (other than to or with the
permission of Secured Party), sell, encumber, or otherwise dispose of or
transfer any Collateral or rights or interest therein;
(c) At all times upon the request of Secured Party, to account fully
for and promptly to deliver to Secured Party, in the form received, all
Collateral or proceeds received, endorsed to Secured Party as appropriate and
accompanied by such assignments and powers, duly executed, as Secured Party
shall request, and until so delivered all Collateral and proceeds shall be held
in trust for Secured Party, separate from all other property of Debtor and
identified as the property of Secured Party;
(d) At any reasonable time, upon demand by Secured Party, to exhibit
to and allow inspection by Secured Party (or Persons designated by Secured
Party) of the Collateral and the records concerning the Collateral;
(e) To keep the records concerning the Collateral at the locations
set forth in Paragraph 18 below and not to remove the records from such
location(s) without the prior written consent of Secured Party;
(f) At the request of Secured Party, to place on each of its records
pertaining to the Collateral a legend, in form and content satisfactory to
Secured Party, indicating that such Collateral has been assigned to Secured
Party;
(g) Not to modify, compromise, extend, rescind or cancel any
servicing contract pledged to Secured Party or consent to a postponement of
strict compliance on the part of any party thereto to any term of provisions
thereof;
(h) To do all acts that a prudent investor would deem necessary or
desirable to maintain, preserve and protect the Collateral;
(i) Not knowingly to use or permit any Collateral to be used
unlawfully or in violation of any provision of this Security Agreement or any
applicable statute, regulation or ordinance or any policy of insurance covering
the Collateral;
(j) To pay (or require to be paid) prior to their becoming delinquent
all taxes, assessments, insurance premiums, charges, encumbrances and liens now
or hereafter imposed upon or affecting any Collateral;
(k) To notify Secured Party before any such change shall occur of any
change in Debtor's name, identity or structure through merger, consolidations or
otherwise;
(1) To appear in and defend, at Debtor's cost and expense, any action
or proceeding which may affect its title to or Secured Party's interest in the
Collateral;
(m) To keep accurate and complete records of the Collateral and to
provide Secured Party with such records and such reports and information
relating to the Collateral as Secured Party may request from time-to-time;
(n) To comply with all laws, regulations and ordinances relating to
the Collateral;
(o) To give to Secured Party, within ten (10) days after knowledge or
notice thereof is obtained by Debtor, written notice of the termination of any
servicing contract pledged to Secured Party;
(p) To notify Secured Party promptly of any item of Collateral which
ceases to be an eligible servicing contract.
7. Fidelity Bond and Mortgage Impairment. Debtor shall maintain, at its
-------------------------------------
own expense, a blanket fidelity bond, mortgage impairment and an errors and
omissions insurance policy, with broad coverage with responsible companies on
all officers, employees or other persons acting in any capacity with regard to
the Loan who handle funds, money, documents and papers relating to the Loan. Any
such fidelity bond and errors and omissions insurance shall protect and insure
Debtor against losses, including forgery, theft, embezzlement, fraud, errors
and omissions and negligent acts of such persons. No
2
<PAGE>
provision of this Section requiring such fidelity bond and errors and omissions
insurance shall diminish or relieve Debtor from its duties and obligations as
set forth in this Servicing Agreement. The minimum coverage under any such bond
and insurance policy shall be at least equal to the corresponding amounts
required by FNMA in Section 1.01 of the FNMA Guaranteed Mortgage Backed
Securities Sellers' and Servicers' Guide, or by FHLMC in Section 6.402 or 6.403
of the FHLMC Sellers' and Services' Guide. Upon request of Secured Party, Debtor
shall cause to be delivered to Secured Party a certified true copy of such
fidelity bond and insurance policy and a statement from the surety and the
insurer that such fidelity bond or insurance policy shall in no event be
terminated or materially modified without 30 days' prior written notice to
Secured Party.
8. Collection of Collateral Payments.
---------------------------------
(a) Until there shall occur an Event of Default or Potential Default,
Debtor shall, at its sole cost and expense, endeavor to obtain payment, when due
and payable, of all sums due or to become due with respect to any Collateral
("Collateral Payments" or a "Collateral Payment"), including, without
limitation, the taking of such action with respect thereto as Secured Party may
request, or, in the absence of such request, as Debtor may reasonably deem
advisable; provided, however, that Debtor shall not, without the prior written
consent of Secured Party, grant or agree to any rebate, refund, compromise, or
extension with respect to any Collateral Payment or accept any prepayment on
account thereof. Thereafter, upon the request of Secured Party, Debtor will
notify and direct any party who is or might become obligated to make any
Collateral Payment, to make payment thereof to Secured Party (or to Debtor in
case of Secured Party) at such address as Secured Party may designate. Debtor
will reimburse Secured Party promptly upon demand for all out-of-pocket costs
and expenses, including reasonable attorneys' fees and litigation expenses,
incurred by Secured Party in seeking to collect any Collateral Payment.
(b) If there shall occur an Event of Default or Potential Default,
upon the request of Secured Party Debtor will, forthwith upon receipt, transmit
and deliver to Secured Party, in the form received, all cash, checks, drafts and
other instruments for the payment of money (properly endorsed where required so
that such items may be collected by Secured Party at any time as payment on
account of any Collateral Payment) and if such request shall be made, until
delivery to Secured Party, such items will be held in trust for Secured Party
and will not be commingled by Debtor with any of its other funds or property.
Thereafter, Secured Party is hereby authorized and empowered to endorse the name
of Debtor on any check, draft or other instrument for the payment of money
received by Secured Party on account on any Collateral Payment if Secured Party
believes such endorsement is necessary or desirable for purposes of collection.
(c) Debtor will indemnify and save harmless Secured Party from and
against all reasonable liabilities and expenses on account of any adverse claim
asserted against Secured Party relating to any moneys received by Secured Party
on account of any Collateral Payment. Such obligation of Debtor shall continue
in effect after and notwithstanding the discharge of the Obligations and the
release of the security interest granted in Paragraph 1 above.
9. Authorized Action by Secured Party. Debtor hereby irrevocably appoints
----------------------------------
Secured Party as its attorney-in-fact to do (but Secured Party shall not be
obligated to and shall incur no liability to Debtor or any third party for
failure so to do) at any one time and from time-to-time any act which Debtor is
obligated by this Security Agreement to do, and to exercise such rights and
powers as Debtor might exercise with respect to the Collateral, including
without limitation, the right to:
(a) Collect by legal proceedings or otherwise and endorse, receive
and receipt for all dividends, interest, payments, proceeds and other sums and
property now or hereafter payable on, or on account of, the Collateral;
(b) Enter into any extension, reorganization, deposit, merger,
consolidation or other agreement pertaining to, or deposit, surrender, accept,
hold or apply other property in exchange for the Collateral;
(c) Insure, process and preserve the Collateral;
(d) Transfer the Collateral to Secured Party's own or its nominee's
name, and
(e) Make any compromise or settlement, and take any other action in
deems advisable with respect to the Collateral.
It is further agreed and understood between the parties hereto that such care as
Secured Party gives to the safekeeping of its own property of like kind shall
constitute reasonable care of the Collateral when in Secured Party's possession,
or in the possession of Secured Party's custodian; provided, however, that
Secured Party shall not be required to make any presentment.
3
<PAGE>
demand or protest, or give any notice and need not take any action to preserve
any rights against any prior party or any other person in connection with the
obligations or with respect to the Collateral.
10. Notification of Obligors. Debtor agrees that Secured Party may at any
------------------------
time and from time-to-time, but shall not be obligated to, notify any Obligor on
any Collateral to make payment directly to Secured Party.
11. Default and Remedies. Upon the occurrence of an Event of Default,
--------------------
Secured Party may, at its option and without notice to or demand upon Debtor,
and in addition to all rights and remedies hereunder and under the Credit
Agreement or otherwise at law or in equity:
(a) Foreclose or otherwise enforce Secured Party's security interest
in the Collateral in any manner permitted by law or provided for in this
Security Agreement;
(b) Sell or otherwise dispose of the Collateral or any part thereof
at one or more public or private sales, whether or not such Collateral is
present at the place of sale, for cash or credit or future delivery, on such
terms and in such manner as Secured Party may determine;
(c) Require Debtor to assemble the Collateral and/or books and
records relating thereto and make such available to Secured Party at a place to
be designated by Secured Party;
(d) Enter onto property where any Collateral or books and records
relating thereto are located and take thereof with or without judicial process;
and
(e) Prior to the disposition of the Collateral, prepare it for
disposition in any manner and to the extent Secured Party deems appropriate;
provided, however, that Debtor shall be given ten (10) business days prior
notice of the time and place of any public sale or of the time after which any
private sale or other intended disposition is to be made, which notice Debtor on
its behalf hereby agrees shall be deemed reasonable notice thereof.
Upon any sale or other disposition pursuant to this Security Agreement, Secured
Party shall have the right to deliver, assign and transfer to the purchaser
thereof the Collateral or portion thereof so sold or disposed of. Each purchaser
at any such sale or other disposition shall hold the Collateral free from any
claim or right of whatever kind, including any equity or right of redemption of
Debtor, and Debtor specifically waives (to the extent permitted by law) all
rights of redemption, stay or appraisal which it has or may have under any rule
of law or statute now existing or hereafter adopted. Secured Party agrees that
upon payment in full of the Obligations, it will deliver any remaining
Collateral or Proceeds to the Person or entity entitled thereto and will
execute, deliver, and record all instruments necessary to release fully all
security interests held by the Secured Party in the Collateral or Proceeds.
12. Cumulative Rights. The right, powers, and remedies of Secured Party
-----------------
under this Security Agreement shall be in addition to all rights, powers and
remedies given to Secured Party by virtue of any statute or rule of law, the
Purchase Agreement, or any other agreement, all of which rights, powers and
remedies shall be cumulative and may be exercised successively or concurrently
without impairing Secured Party's security interest in the Collateral.
13. Waiver. Any waiver, forbearance, failure or delay by Secured Party in
------
exercising, or the exercise or beginning of exercise by Secured Party of, any
right, power or remedy, simultaneous or later, shall not preclude the further,
simultaneous or later exercise thereof' and every right, power or remedy of
Secured Party shall continue in full force and effect until such right, power or
remedy is specifically waived in a writing executed by Secured Party.
14. Binding Upon Successors. All rights of Secured Party under this
-----------------------
Security Agreement shall inure to the benefit of Secured Party and its
principals, beneficiaries, successors and assigns, and all obligations of Debtor
shall bind its successors and assigns.
15. Entire Agreement: Severability. This Security Agreement contains the
------------------------------
entire security agreement between Secured Party and Debtor. All other waivers by
Debtor provided for in this Security Agreement have been specifically
negotiated by the parties with full cognizance and understanding of their
rights. If any of the provisions of this Security Agreement shall be held
Invalid or unenforceable, this Security Agreement shall be construed as if not
containing these provisions, and the rights and obligations of the parties
hereto shall be construed and enforced accordingly.
4
<PAGE>
16. Choice of Law. This Security Agreement shall be construed in
-------------
accordance with and governed by the laws of the State of California and, where
applicable and except as otherwise defined herein, terms used herein shall have
the meaning given them in the California Uniform Commercial Code.
17. Amendment. This Security Agreement may not be amended or modified
---------
except by a writing signed by each of the parties hereto.
18. Place of Business: Records. Debtor represents and warrants that its
--------------------------
chief place of business is at its address set forth above, and that its books
and records concerning the Collateral are kept at its chief place of business.
19. Notice. Any written notice, consent or other communication provided
------
for in this Security Agreement shall be delivered or sent as provided in the
Purchase Agreement.
20. Custodial Arrangements. Secured Party may from time-to-time appoint a
----------------------
person or entity to act as agent and representative of Secured Party hereunder
and to hold possession of the Collateral (or a portion thereof) and to take
actions at the direction of Secured Party to the fullest extent and in such
manner and at such times as are permitted by Secured Party hereunder. Debtor
hereby consents to any and all such appointments and agrees to deliver
Collateral to such person or entity upon the direction of Secured Party. Debtor
further agrees that any such person or entity shall be exclusively the bailee
and agent of Secured Party, that receipt of Collateral by Secured Party's
Custodian shall be constructive receipt by Secured Party and shall perfect
Secured Party's security interest in the Collateral, and that Debtor shall not
have and shall not attempt to exercise any degree of control over such person or
entity or over any Collateral held at any time by such person or entity.
EXECUTED the date and year first above written.
Sutter Mortgage Corporation,
a California corporation
"Debtor"
By: /s/ RONALD MORCK
-----------------------------
Ronald Morck
President
First Collateral Services, Inc.
a California corporation
"Secured Party"
By: /s/ WILLIAM G. CELERI
-----------------------------
William G. Celeri
Vice President
By: /s/ WILLEM RIDDER
-----------------------------
Willem Ridder
Vice Chairman of the Board
5
<PAGE>
SCHEDULE I TO SECURITY AGREEMENT
(Servicing)
DEBTOR: SUTTER MORTGAGE CORPORATION
SECURED PARTY: FIRST COLLATERAL SERVICES, INC.
COLLATERAL DESCRIPTION
The collateral shall consist of all now existing and hereafter arising rights to
servicing of Loans in Warehouse sold by Debtor to and held by Secured Party or
its Agent, and any and all residential and commercial loan servicing agreements
between Debtor and third party investors relating to Loans in Warehouse (the
"Servicing Contracts") and all amendments and replacements to said Servicing
Contracts and all now existing and hereafter arising rights of Debtor to the
payment of money for servicing Loans sold to and held by Secured Party or under
the Servicing Contracts, whether such payments are on account of services
rendered by Debtor thereunder or otherwise, and including, without limitation,
all amounts payable to Debtor on account of the sale or other disposition of any
of said rights to servicing of Loans sold by Debtor to and held by Secured Party
and on account of Servicing Contracts and/or Debtor's rights thereunder, and all
products and proceeds of any of the above.
6
<PAGE>
EXHIBIT 10.53
BAILEE AGREEMENT AND AMENDMENT
TO PURCHASE CONTRACT
THIS BAILEE AGREEMENT AND AMENDMENT TO PURCHASE CONTRACT (the "Amendment")
by and among FIRST COLLATERAL SERVICES, INC., a California corporation ("First
Collateral"), SUTTER MORTGAGE CORPORATION, a California corporation ("Original
Seller"), and THE PRUDENTIAL HOME MORTGAGE COMPANY, INC., a New Jersey
corporation ("Buyer"), is dated as of January 6, 1993.
WHEREAS, Original Seller and Buyer have entered into: (i) a Purchase
Contract dated March 28, 1991 (the "Contract"); and (ii) one or more Commitment
Letters, as defined in the Contract (the Contract and any and all such
Commitment Letters being hereafter sometimes collectively called the
"Instruments"); and
WHEREAS, pursuant to the terms of the Instruments, Original Seller
agreed to sell and Buyer agreed to buy Mortgage Loans (as defined in the
Contract); and
WHEREAS, Original Seller previously indicated to Buyer that First
Collateral was to serve as a warehouse lender for Original Seller in connection
with certain Mortgage Loans pursuant to a traditional warehouse loan and
security agreement, whereby First Collateral would loan monies to Original
Seller to fund Mortgage Loans to be offered for sale to Buyer pursuant to the
Instruments; and
WHEREAS, due to certain regulatory concerns of First Collateral regarding
its authority to serve as a warehouse lender for Original Seller, First
Collateral and Original Seller have entered into a Master Mortgage Loan Purchase
Agreement (the "Master Agreement") dated October 7, 1992, between Original
--------- --
Seller and First Collateral, which provides for Original Seller to: (i) sell
such Mortgage Loans to First Collateral pending resale of such Mortgage Loans to
Buyer pursuant to the Instruments; and (ii) grant First Collateral an ownership
interest in the documents and materials (hereafter collectively called the
"Mortgage Documents") evidencing, securing and/or issued in connection with such
Mortgage Loans; and
WHEREAS, First Collateral has advised Buyer that First Collateral has
obtained any and all approvals, consents and authorizations from any and all
appropriate governmental or quasi-governmental agencies and instrumentalities
having or claiming jurisdiction over First Collateral and/or its corporate
parent, which approvals, consents and authorizations are necessary or
appropriate for the entering into, and performance of, this Amendment by First
Collateral and/or its corporate parent; and
WHEREAS, First Collateral has requested that Buyer act as First
Collateral's bailee with respect to such Mortgage Documents until either the
related Mortgage Loan is purchased by Buyer or the Mortgage Documents are
returned to First Collateral; and
<PAGE>
WHEREAS, Buyer wants to assure, among other concerns, that, upon its
payment of the Purchase Price (as defined in the Agreement), (i) Buyer will
acquire all right, title and interest in and to each such Mortgage Loan, which
such title shall be good and marketable and free and clear of any lien, pledge,
encumbrance, security interest or claim of any person whatsoever; (ii) each such
Mortgage Loan is not subject to any set-off, counterclaim or defense to payment;
and (iii) each of the Instruments is a legal, valid and binding obligation of
Original Seller, enforceable against Original Seller in accordance with its
terms, notwithstanding that Original Seller will purport to sell such Mortgage
Loans to First Collateral for resale to Buyer in accordance with the terms of
the Master Agreement; and
WHEREAS, Original Seller and First Collateral are willing to provide such
assurances to Buyer-in accordance with the terms of this Amendment.
NOW THEREFORE, in consideration of the agreements set forth herein, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, First Collateral, Original Seller and Buyer agree as
follows:
Section 1. Recitals. The foregoing recitals, as well as the Agreement,
--------
are incorporated into this Amendment by this reference and made part hereof, and
this Amendment is incorporated into the Agreement by reference and made a part
thereof.
Section 2. Defined Terms. Unless the context otherwise clearly requires,
-------------
all capitalized terms used in this Amendment shall have the meanings specified
in the Agreement.
Section 3. Definition of "Seller." From and after the date of this
----------------------
Amendment, in the event that Original Seller sells a Mortgage Loan to Buyer
pursuant to the Instruments, which Mortgage Loan Original Seller first purported
to sell to First Collateral pursuant to the Master Agreement, the definition of
"Seller," as used in the Instruments, shall be deemed to include both Original
Seller and First Collateral, as the context shall permit or require, but only
for the purpose set forth below in Section 4.
Section 4. Liability of Parties Comprising "Seller."
----------------------------------------
(a) The parties hereto acknowledge that the sole purpose for the
provisions of Section 3 of this Amendment is to assure Buyer that the purported
initial sale of Mortgage Loans by Buyer to First Collateral for resale to Buyer
is not intended to, and shall not, in any way, diminish, impair, or otherwise
limit, either generally, or in connection with any particular Mortgage Loan, (i)
any of the representations or warranties made by, or any of the liabilities,
duties and obligations of, Original Seller under the Instruments; or (ii) any of
the rights and remedies of Buyer against Original Seller under the Instruments.
Original Seller and First Collateral hereby expressly waive any and all claims,
counterclaims and defenses Seller may now or hereafter have to any of its
liabilities, duties or obligations under the Instruments, which claims,
counterclaims or
2
<PAGE>
defenses are or may be based, directly or indirectly, on any characterization
(by a court of competent jurisdiction or by any governmental or quasi-
governmental agency, body or regulator having jurisdiction or control over
Original Seller, First Collateral or any of their respective assets) of First
Collateral's interest in any Mortgage Loan as an ownership interest rather than
a security interest, following Buyer's payment of the Purchase Price as provided
herein. Original Seller and First Collateral hereby jointly and severally
indemnify Buyer and hold Buyer harmless from and against any and all losses,
claims, lawsuits, actions, judgments, damages, penalties, fines, forfeitures,
costs and expenses, including, without limitation, reasonable attorneys' fees
(all of the foregoing being hereafter collectively referred to herein as
"Losses"), resulting from: (1) any such characterization of First Collateral's
interest or other failure of the provisions of Sections 3 and 4 hereof to be
realized by Buyer; (2) a finding that any of First Collateral's representations
and warranties made herein were false in any material respect on the date when
made; or (3) First Collateral's failure to perform or observe in a timely manner
any agreement, covenant, obligation or duty hereunder.
(b) Except as is expressly set forth herein, nothing in this Amendment is
intended to: (i) create joint and several liability on the part of Original
Seller and First Collateral in connection with Mortgage Loans purchased by Buyer
pursuant to the Instruments; (ii) impose any covenants, agreements or
undertakings on First Collateral under the Instruments; or (iii) require First
Collateral to make any specific representations and warranties to Buyer under
the Instruments, except to the limited extent necessary to assure that First
Collateral's purported purchase and ownership of the Mortgage Loans pursuant to
the Master Agreement in no way defeats or impairs the purpose of this Amendment
as set forth in Section 4(a) above. In this regard, subject to Buyer's
obligations in this Amendment to act as bailee for and on behalf of First
Collateral, Buyer's acceptance of delivery of the Mortgage Loans from First
Collateral, in First Collateral's purported role as the purchaser thereof under
the Master Agreement, is solely at the request and for the benefit of Original
Seller, and without determining, acknowledging or expressing an opinion as to
whether any interest of First Collateral in such Mortgage Loans is a security
interest or an ownership interest.
Section 5. Notification and Acknowledgement of Interest. Notwithstanding
--------------------------------------------
any provision of any of the Instruments or any other document executed by Buyer
and Seller to the contrary, and provided that this Amendment remains in full
force and effect, Buyer agrees that the closing agent may forward the original
executed Mortgage Note directly from the Closing of the Mortgage Loan to First
Collateral. Absent Buyer's prior written consent (which consent may be given or
withheld in Buyer's sole discretion), any intervening endorsement from Original
Seller to First Collateral appearing on a Mortgage Note shall render such
Mortgage Note ineligible for purchase by Buyer pursuant to the Instruments.
First Collateral shall attach to each shipment of one or more Mortgage Notes a
cover letter, substantially in the form of Exhibit A attached hereto and
---------
incorporated herein by reference, that: (i) references this
3
<PAGE>
Amendment; and (ii) acknowledges that each related Mortgage Loan is subject to
First Collateral's claim of an interest. First Collateral, upon instruction
from Original Seller, shall promptly forward the Mortgage Note and any other
Mortgage Documents to Buyer at the address set forth in Section 13 below. Upon
receipt, Buyer shall sign and date such statement and shall mail or telecopy
it to First Collateral at the address or number set forth in Section 13 below.
Section 6. The Mortgage Loan File The Mortgage Loan File (as defined in
----------------------
the Agreement) shall not be deemed complete until the receipt of the original
executed Mortgage Note by Buyer, which Mortgage Note conforms to all of Buyers's
requirements, including, without limitation, those set forth in Section 5 above.
Section 7. Buyer as Bailee. Buyer will hold the Mortgage Documents, in
---------------
which First Collateral holds an interest, as bailee for the benefit of First
Collateral, until Buyer is released as set forth in Section 8 hereof. Prior to
such release, Buyer shall not deliver the Mortgage Documents to any third party
(other than a third party that is wholly-owned, directly or indirectly, by The
Prudential Insurance Company of America). Buyer shall act only as a bailee for
First Collateral and shall not be deemed to be a representative, trustee, or
fiduciary or otherwise an agent of or for First Collateral or Original Seller
with respect to the Mortgage Documents, and First Collateral and Original Seller
hereby jointly and severally indemnify Buyer against any and all Losses to Buyer
resulting from any characterization of Buyer's actions under this Section 7 as
anything other than the actions of a bailee. The standard of care to be
exercised by Buyer in holding the Mortgage Documents shall be the same degree of
care and skill as Buyer exercises when it holds Mortgage Loan documents on its
own behalf.
Section 8. Termination of Security Interest and Release of Bailee.
------------------------------------------------------
Buyer's status and obligations as bailee shall automatically terminate, without
further action by any party, upon the earliest to occur of: (i) payment of the
Purchase Price to First Collateral, as set forth in Section 9 hereof (the
"Purchase Date"); or (ii) return of the Mortgage Documents to First Collateral,
as set forth in Section 10 hereof. First Collateral agrees that all right,
title, and interest it may have in and to the Mortgage Documents and the related
Mortgage Loans purchased by Buyer are and shall be fully released effective as
of the Purchase Date, whereupon Buyer will have no further obligations to First
Collateral with respect to such Mortgage Documents or related Mortgage Loans.
4
<PAGE>
Section 9. Purchase Price. The "Purchase Price" means the price Buyer
--------------
agrees to pay to purchase a Mortgage Loan pursuant to the Instruments. Original
Seller agrees to provide First Collateral with copies of the Instruments
promptly upon First Collateral's request. First Collateral and Original Seller
acknowledge that the Purchase Price may be less than the full principal amount
of the Mortgage Note evidencing the Mortgage Loan, and that Original Seller may
have paid or advanced other funds to Buyer in connection with the Instruments,
which funds are not included in the Purchase Price. Buyer agrees that the
Purchase Price paid to First Collateral with respect to a particular Mortgage
Loan shall not be reduced due to adjustments relating to another Mortgage Loan.
For purposes of the Purchase Date set forth in Section 8 hereof, the Purchase
Price shall be deemed paid in full when First Collateral receives a federal wire
transfer in the amount of the Purchase Price sent to First Collateral c/o
Citibank, N.A., 111 Wall Street, New York, New York 10043, pursuant to the
following wire transfer instructions:
First Collateral Services, Inc. DDA #3685-7444
c/o Citibank, N.A.
ABA #021000089
Telegraphic Abbr: Citibank NYC
Text Line One: Paydown on Sutter Mortgage Corporation, #5975
---------------------------
Text Line Two: (References)
With respect to any Mortgage Loan for which Buyer has received a notification of
an interest held by First Collateral: (i) Buyer shall only wire payments to
First Collateral, as specified above; and (ii) no change in the above wire
transfer instructions shall be honored by Buyer unless provided in writing to
Buyer and signed by First Collateral. Buyer shall not be liable to First
Collateral or Original Seller for payments lost or delayed due to incorrect
wiring instructions provided by First Collateral. Buyer shall notify First
Collateral and Original Seller of the purchase of a Mortgage Loan by sending a
funding advice to First Collateral and Original Seller.
Section 10. Return of Mortgage Documents to First Collateral. Buyer will
------------------------------------------------
deliver the Mortgage Note and other Mortgage Documents in Buyer's possession to
First Collateral: (i) upon receipt by Buyer of First Collateral's written
request therefor (provided that such request is received by Buyer prior to
Buyer's payment of the Purchase Price); or (ii) promptly, in the event that
Buyer elects not to purchase the Mortgage Loan, or in the event that the
Mortgage Note (or any of the other Mortgage Documents) is defective and requires
correction. In the alternative, Buyer shall take such other action with respect
to the Mortgage Note and other Mortgage Documents as may be agreed upon in
writing between First Collateral and Buyer. Any delivery from Buyer to First
Collateral shall be made by express mail to the address of First Collateral set
forth in Section 13 hereof.
5
<PAGE>
Section 11. Representations and Warranties.
------------------------------
(a) As of the date of this Amendment and as of the date of delivery of
each Mortgage Loan to Buyer, Original Seller represents and warrants that the
Certification of Interest signed by a duly authorized representative of Original
Seller in the form set forth in Exhibit B attached to this Amendment and
---------
incorporated herein by reference, is true and accurate in all respects.
Original Seller covenants and agrees immediately to inform Buyer of any change
in the list of Banks included in such Certification of Interest, and further
covenants and agrees to execute a revised true and accurate Certification of
Interest to reflect any such change.
(b) As of the date of delivery of each Mortgage Loan to Buyer:
(i) First Collateral represents and warrants to Buyer that First
Collateral has not assigned, hypothecated, transferred, pledged,
or otherwise conveyed the Mortgage Documents to any other party,
or recorded its interest in the Mortgage Documents, or caused the
Mortgage Note to be endorsed in its favor, and during the period
that Buyer holds the Mortgage Documents as bailee, unless and
until the Mortgage Documents are returned by Buyer to First
Collateral, First Collateral will not assign, hypothecate,
pledge, transfer, or otherwise convey First Collateral's right,
title, or interest in such Mortgage Documents or record or file
its interest therein, or cause the Mortgage Note to be endorsed
in its favor; and
(ii) First Collateral certifies to Buyer that all original notes,
mortgages, and other original documents, instruments and
materials in First Collateral's possession relating to each such
Mortgage Loan (except for the Master Agreement between First
Collateral and Original Seller and any unrecorded assignments)
have been delivered to Buyer; and
(iii) First Collateral represents and warrants to Buyer that neither
First Collateral nor its agents have engaged in any act, or have
failed to engage in any act, that has the effect of impairing
either (x) the enforceability of any Mortgage Note or of any of
the other Mortgage Documents or (y) the absolute ownership
interest of Buyer in and to any Mortgage Loan upon Buyer's
payment of the Purchase Price as provided herein; and
(iv) First Collateral represents and warrants to Buyer that First
Collateral's execution and delivery of this Amendment have been:
(i) specifically approved by the Board of Directors of First
Collateral, and such approval is reflected in the minutes of the
meetings of such Board of Directors, or (ii) approved by an
6
<PAGE>
officer of First Collateral, who was duly authorized by the Board
of Directors to enter into such types of transaction and such
authorization is reflected in the minutes of the Board of
Directors' meetings; and this Amendment constitutes the "written
agreement" governing First Collateral's rights and obligations
with respect to Buyer resulting from its purported purchase of
Mortgage Loans from Original Seller pursuant to the Master
Agreement, and First Collateral shall continuously maintain all
components of such "written agreement" as an official record of
First Collateral or any successor thereof; and
(v) First Collateral represents and warrants to Buyer that First
Collateral's execution and delivery of this Amendment and the
Master Agreement does not violate any provision of law or
regulation, any order of any court or other agency or
instrumentality of government or other instrument to which First
Collateral is bound, and does not conflict with, result in a
breach of, or constitute (with due notice or lapse of time or
both) a default under any such agreement or other instrument.
(c) As of the date and time of payment to First Collateral of the Purchase
Price for a particular Mortgage Loan as set forth herein, First Collateral
represents and warrants that: (i) First Collateral has fully relinquished all
right, title, and interest it may have in and to such Mortgage Loan; (ii) all
notes, mortgages, and other original documents, instruments and materials that
have been delivered to Buyer pursuant to subparagraph 11(b) (ii) above have been
released to Buyer; and (iii) any unrecorded assignments in First Collateral's
possession relating to such Mortgage Loan are null and void.
Section 12. Remedies of Buyer. In the event that Original Seller or First
-----------------
Collateral is in breach of any of their respective representations, warranties,
covenants, or agreements under this Amendment, and in addition to any other
remedies Buyer may have hereunder, under the Instruments, under any other
document, at law, or in equity, Buyer shall be entitled, in its sole and
absolute discretion, to terminate this Amendment and/or to refuse to Fund any
Mortgage Loan in which First Collateral has or claims any interest whatsoever.
Section 13. Notices. All demands, notices and communications
-------
hereunder (except as may be otherwise expressly provided herein or in the
Instruments) shall be in writing and shall be personally delivered, telecopied,
or mailed (by registered or certified United States mail, postage prepaid), to
the addresses and/or telecopier numbers set forth below, or to such other
address
7
<PAGE>
and/or telecopier number as may be hereafter be furnished in writing by any
party hereto to the other parties hereto, and shall be deemed effective upon the
earlier of: (i) the date of delivery (if delivered personally or telecopied);
or (ii) three (3) Business Days after the date of mailing (if sent by registered
or certified mail).
Notices to Buyer should be sent to:
The Prudential Home Mortgage Company, Inc.
7485 New Horizon Way
Frederick, Maryland 21701
Telecopier Number: (301) 696-7105
Attention: Lender Express
with a copy to:
The Prudential Home Mortgage Company, Inc.
7485 New Horizon Way
Frederick, Maryland 21701
Telecopier Number: (301) 696-7635
Attention: Legal Department
Notices to Original Seller should be sent to:
Sutter Mortgage Corporation
----------------------------------------
1556 Parkside Drive
----------------------------------------
Walnut Creek CA 94596
----------------------------------------
Notices to First Collateral should be sent to:
First Collateral Services, Inc.
---------------------------------------
1340 Treat Boulevard, Suite 480
---------------------------------------
Walnut Creek, CA 94596
---------------------------------------
Section 14. Continuing Covenant. First Collateral shall execute and
-------------------
deliver, in form reasonably acceptable to Buyer, such statements, instruments,
certifications, notices, documents, or other papers, and take such other actions
requested by Buyer, as may be necessary or appropriate to establish, preserve,
maintain or otherwise protect Buyer's ownership interest in the Mortgage Loans
and/or to effectuate the purposes of this Amendment.
Section 15. Counterparts. This Amendment may be executed in any number of
------------
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties or signatories hereto may execute this
Amendment by signing any such counterpart.
Section 16. Entire Agreement. This Amendment is an integrated contract
----------------
and is the entire agreement between the parties hereto concerning the subject
matter hereof. This Amendment supersedes all prior and contemporaneous oral
discussions on the topics covered herein and may only be modified or amended in
writing duly signed by all parties hereto.
8
<PAGE>
Section 17. Ratification of the Agreement. Except as expressly amended
-----------------------------
hereby, the Agreement remains unchanged and in full force and effect in all
respects, and is hereby ratified and confirmed by the parties hereto.
IN WITNESS WHEREOF, each of the undersigned has caused this Amendment to be
duly executed and delivered by its duly authorized officers as of the day and
year first above written.
ORIGINAL SELLER:
ATTEST: SUTTER MORTGAGE CORPORATION
By: /s/ Gayle Ansell By: /s/ Ronald Morck
--------------------------------- ---------------------------------
Name: Gayle Ansell Name: Ronald Morck
-------------------------------- --------------------------------
Title: Controller Title: President
------------------------------ -------------------------------
BUYER:
ATTEST : THE PRUDENTIAL HOME MORTGAGE
COMPANY, INC.
By: /s/ April Goss By: /s/ Barbara L. Fisher
--------------------------------- ---------------------------------
Name: April Goss Name: Barbara L. Fisher
-------------------------------- --------------------------------
Title: Mgr. Contract Administration Title: Vice President
------------------------------- -------------------------------
FIRST COLLATERAL
ATTEST: FIRST COLLATERAL SERVICES, INC.
By: /s/ LeArla Torgerson By: /s/ Lyndon C. Merkle
---------------------------------- --------------------------------
Name: LeArla Torgerson Name: Lyndon C. Merkle
-------------------------------- -------------------------------
Title: Senior Vice President & CFO
Title: ______________________________ ------------------------------
cc: Anita Bradney
9
<PAGE>
Exhibit A
[LETTERHEAD OF FIRST COLLATERAL]
Date:
_____________________
The Prudential Home Mortgage Company, Inc.
7485 New Horizon Way
Frederick, Maryland 21701
Attention: Lender Express Dear
Dear______________________
Promissory Notes evidencing the below-listed loans are attached hereto and are
being delivered to The Prudential Home Mortgage Company, Inc. ("PHMC"), in
PHMC's capacity as bailee for First Collateral Services, Inc. ("First
Collateral"), pursuant to the Bailee Agreement and Amendment to Purchase
Contract (the "Bailee Agreement") dated January 6, 1993, among First Collateral,
SUTTER MORTGAGE CORPORATION, as Original Seller, and PHMC, as Buyer.
Loan # ____________________ Name : _________________________
Loan # ____________________ Name : _________________________
Loan # ____________________ Name : _________________________
Kindly send payments or return such Promissory Notes as specified in Sections 9
or 10, respectively, of the above-referenced Bailee Agreement.
Sincerely,
FIRST COLLATERAL SERVICES, INC.
By:_____________________________________
Name:___________________________________
Title:__________________________________
The undersigned hereby acknowledges receipt of this letter and the above-
referenced Promissory Notes, and that the undersigned will hold such Promissory
Notes as bailee on behalf of First Collateral Services, Inc., subject to First
Collateral Services, Inc.'s claim of an interest therein.
THE PRUDENTIAL HOME MORTGAGE COMPANY, INC.
By:_____________________________________
Name :__________________________________
Title:__________________________________
<PAGE>
Exhibit B
CERTIFICATION OF INTEREST
As of the date set forth below, the undersigned, a duly authorized
representative of SUTTER MORTGAGE CORPORATION ("seller"), in connection with
the sale of closed residential mortgage loans (the "Mortgage Loans") to the
Prudential Home Mortgage Company, Inc. ("Buyer") pursuant to the Purchase
Contract (the "Contract") dated as of March 28, 1991, between Buyer and Seller
and certain Commitment Letters between Buyer and Seller entered into from time
to time pursuant to the Contract, hereby certifies on behalf of Seller as
follows:
1. Each Mortgage Loan may, at any one time, be subject only to: (i) a
security interest held by one and only one of the following Warehouse lenders
(individually, a "Warehouse Lender" and collectively the "Warehouse Lenders"):
(LIST NAME(S) AND ADDRESS(ES) OF WAREHOUSE LENDERS)
Imperial Bank 1999 Harrison Street, Oakland, CA 94612
First Collateral Services, Inc. 1340 Treat Blvd. Suite 480, Walnut Creek, CA
94596
or (ii) a 100% participation interest held by Paine Webber Real Estate
Securities Inc., a Delaware corporation ("Paine Webber"), pursuant to that
certain Mortgage Loan Participation Agreement between Paine Webber and Seller
dated June 30, 1992; provided, however, that at no time shall any Mortgage Loan
be simultaneously subject to an interest under both subsections (i) and (ii)
----
immediately above.
2. No documents evidencing or property securing a Mortgage Loan will be
subjected to any interest in favor of more than one of the Warehouse Lenders at
any one time.
3. Seller will not cause any Mortgage Loan to be funded to borrower with
monies obtained from any lender other than one of the Warehouse Lenders.
4. The potential interests disclosed in section 1 above, if any, comprise
all security or other interests relating to or affecting any and all Mortgage
Loans, which interests are held by any party other than the Mortgagor (as
defined in the Contract), Seller or Buyer. If no Warehouse Lender is listed in
section 1 above, there are no such interests held by a Warehouse Lender.
<PAGE>
5. This Certification of Interest supersedes any other Certification,
Security interest Certification, Security Release Certification, or other
similar document provided by Seller to Buyer dated prior to the date hereof.
Seller :
WITNESS : SUTTER MORTGAGE CORPORATION
/s/ GAYLE ANSELL By: /s/ RONALD MORCK (SEAL)
- ------------------------- ---------------------------
Name: Ronald Morck
------------------------
Title: President
-----------------------
Date: 1-7-93
------------------------
<PAGE>
EXHIBIT 10.54
[LETTERHEAD OF FIRST COLLATERAL]
July 11, 1994
Ronald Morck
President
Sutter Mortgage Corporation and Subsidiary
1556 Parkside Drive
Walnut Creek, California 94596
Re: Master Mortgage Loan Purchasing Agreement
Dated: August 26,1993
Dear Ron:
This Commitment Letter constitutes the Commitment Letter referred to in and is a
supplement to the above-referenced Master Mortgage Loan Purchasing Agreement
(the "Agreement") and will confirm certain terms and conditions of the
purchasing arrangements between [Customer Name] ("Originator") and First
Collateral Services, Inc. ("Purchaser") set forth herein. Capitalized terms are
used herein with the same meaning as in the Agreement.
Loan Purchase Limit:
- -------------------
$10,000,000.
Additional Purchase Facility:
- ----------------------------
Allocation 01:
For purchasing:
1) FHA-insurable, VA-guarantee qualified and conventional
Conforming Residential Mortgage Loans; and
2) non-conforming Residential Mortgage Loans that meet applicable
acceptable investor guidelines, which shall not in any event
exceed $750,000 per mortgage.
Allocation 02:
For purchasing conventional Residential Mortgage Loans of a second
priority that meet applicable FHLMC, FNMA, or acceptable investor
guidelines (up to $1,000,000).
Allocation #03:
For repurchasing Residential Mortgage Loans (up to $500,000)
Allocation #04:
For purchasing Non-conforming 1-4 family Residential Mortgage Loans
that meet applicable acceptable investor and Purchaser guidelines for
"B" quality loans, which may be amended from time to time, which
shall not in any event exceed $500,000 per mortgage (up to
$2,000,000).
<PAGE>
Sutter Mortgage Corporation and Subsidiary
July 11, 1994
Page 2
Allocation 05:
For purchasing Equity Lines of Credit secured by second liens on
owner-occupied primary residences. (up to $1,000,000.)
Maturity Date:
- -------------
June 30, 1995
Effective Date:
- --------------
This document shall take full force and effect on August 1, 1994.
Prevailing Purchasing Fee Rate:
- ------------------------------
See attached pricing schedule.
Please Note: The Prevailing Purchasing Fee Rate may be modified at any time
as to existing and future Loans by Purchaser prior to the
Maturity Date based upon movements in the LIBOR Rate.
Required Fees:
- -------------
See attached pricing schedule.
Permissible Warehouse Period:
- ----------------------------
Allocation #01: 60 days
Allocation #02: 60 days
Allocation #03: 30 days
Allocation #04: 60 days
Allocation #05: 60 days
Guarantors:
- ----------
Arthur H. Sutter
Minimum Permitted Equity Base:
- ------------------------------
$4,100,000
Minimum Permitted Tangible Net Worth:
- ------------------------------------
$4,100,000
Minimum Permitted Current Ratio:
- -------------------------------
1.05
Permitted Debt to Tangible Net Worth Ratio:
- ------------------------------------------
15 to 1
<PAGE>
Sutter Mortgage Corporation and Subsidiary
July 11, 1994
Page 3
Permitted Debt to Equity Base Ratio:
- -----------------------------------
15 to 1
Types of Eligible Mortgage Loans:
- --------------------------------
1. Any Residential Mortgage Loan which is insurable by the FHA,
guaranteed by the VA or which is a Conventional mortgage loan which
Conforms in all respects (unless otherwise approved in writing by
Purchaser) with applicable requirements of FNMA, FHLMC or applicable
acceptable investors, and such loan is secured by a first or second
priority perfected lien on the subject Property.
2. For purchasing "B" grade loans, defined as, non-conforming 1-4 family
Residential Mortgage Loans acceptable to acceptable to investors and
Purchaser which meet the following criteria: 1) maximum loan to value
rate of 75%; 2) owner-occupied only; 3) a maximum loans amount of
$500,000; 4) a maximum debt ratio of 50%; 5) a mortgage credit history
which includes no more than four (4) 30-day or one (1) 60-day
delinquency during the past 12 months; 6) a consumer Credit history
which includes not more than four (4) 30-day delinquencies during the
past 12 months, or two (2) 60-day delinquencies during the past 12
months; and 7) no bankruptcy within the past 24 months.
Acceptable Jurisdictions:
- ------------------------
California, or as otherwise may from time to time be accepted by Purchaser
in its sole discretion.
Loan Purchasing Base:
- --------------------
(1) In the case of Residential Mortgage Loans to be submitted to FNMA or
FHLMC or other financial institutions for purchase under one or
more Take-Out Purchase Commitments, the lesser of 98% of the Take-Out
Purchase Commitment price, or 100% of the unpaid principal amount of
such Residential Mortgage Loan.
(2) In the case of non-conforming Residential Mortgage Loans that meet
applicable acceptable investor guidelines, which shall not in any
event exceed $750,000 per mortgage, the lesser of 98% of the Take-Out
Purchase Commitment price, or 100% of the unpaid principal amount of
such Residential Mortgage Loan.
(3) In the case of Residential Mortgage Loans held for assembly into a
package for inclusion in a pool underlying a Mortgage-Backed Security
subject to a Take-Out Purchase Commitment, or to be submitted to
FNMA or FHLMC or other financial institution or investment banker for
purchase under one or more Take-Out Purchase Commitments, the lesser
of 98% of the Take-Out Purchase Commitment price, or 100% of the
unpaid principal amount of such Residential Mortgage Loan.
(4) In the case of a repurchased loan, the lesser of 75% of (1) the unpaid
principal balance or (2) the current appraised value.
<PAGE>
Sutter Mortgage Corporation and Subsidiary
July 11, 1994
Page 4
(5) If a pledged CD is carried with Independence One Bank of California
with an interest rate of zero %, at an amount acceptable to First
Collateral ServiCes, Inc. and the CD is pledged as partial security
for the warehouse line, then funding Can be up to 100% of the note
amount of Allocations 01, 02, 04 and 05.
Allowed Discrepancy:
- -------------------
Fifty basis points (0.50%) on the aggregate dollar amount of Loans
outstanding.
Contact Office:
- --------------
First Collateral Services, Inc.
1340 Treat Blvd., Suite 480
Walnut Creek, CA 94596
attn. Compliance Dept.
Statement Date:
- --------------
December 31,1993
Interim Date:
- ------------
March 31, 1994
Addresses for Purpose of Notice:
- -------------------------------
Attention: Ronald Morck, President
Sutter Mortgage Corporation and Subsidiary
1556 Parkside Drive
Walnut Creek, California 94596
Attention: Sally Shaver
First Collateral Services, Inc. -
1340 Treat Blvd., Suite 480
Walnut Creek, CA 94596
Servicing Fee:
- -------------
Fifteen basis points (0.15%) on the unpaid principal balance on all
Eligible Mortgage Loans in the Loan Repurchasing Base to be deducted from
principal and interest collected pursuant to the Servicing Agreement.
Required Documents:
- ------------------
1. At time of purchase, the required documents are defined in Exhibit I.
2. Sixty days after the date of purchase, the required documents are
defined in Exhibit II.
3. At the time of purchase, a Document Certification is required from an
authorized officer. (Included in the Loan Purchase Request form.)
<PAGE>
Sutter Mortgage Corporation and Subsidiary
July 11, 1994
Page 5
Additional Conditions:
- ---------------------
1. All "B" grade Residential Mortgage Loans must have investor pre-
approval.
2. All Equity Lines of Credit loans must have investor pre-approval.
If the above meets with your approval, please so indicate by executing and
returning to Purchaser this Commitment Letter by July 20, 1994. If this
Commitment Letter has not been executed and returned to Purchaser by this date,
the Commitment shall expire. The enclosed Copy is for your files.
Very truly yours,
FIRST COLLATERAL SERVICES, INC.
By /s/ SARAH E. SHAVER
-----------------------------
Sarah E. Shaver
First Vice President
By /s/ WILLEM RIDDER
-----------------------------
Willem Ridder
Vice Chairman
AGREED TO AND ACCEPTED this
14 day of July, 1994.
- -- ---- ----
Sutter Mortgage Corporation and Subsidiary
a California corporation
By /s/ RONALD MORCK
-----------------------------------
Ronald Morck President
<PAGE>
Sutter Mortgage Corporation and Subsidiary
July 11, 1994
Page 6
ORIGINATOR: Sutter Mortgage Corporation and Subsidiary
PRICING SCHEDULE
Prevailing Purchasing Fee Rate:
- -------------------------------
Allocation 01:
-------------
LIBOR plus 250% per annum, fee payable monthly. LIBOR shall mean the
30-day U.S. Dollar London Interbank Offered Rate as reported daily by
Telerate. If deposit balance are maintained, then 100% of Available
Deposits may be borrowed back at 3.00% per annum, fee payable monthly.
Allocation 02.
-------------
LIBOR plus 3.25% per annum, fee payable monthly.
Allocation 03:
-------------
LIBOR plus 3.50% per annum, fee payable monthly.
Allocation 04:
-------------
LIBOR plus 3.25% per annum, fee payable monthly.
Allocation 05:
LIBOR plus 3.25% per annum, fee payable monthly.
Required Fees:
- -------------
Unused Purchase Limit. A commitment fee equal to 0.25% per annum on
---------------------
the average unused Purchase Limit if usage of the line falls below
50% of the Purchase Limit on an average basis, calculated monthly.
Said fee shall be payable monthly in arrears on the first business
day of each month.
Processing Fee. A processing fee of $15.00 per loan purchased under
--------------
Allocations 01, 02, and 04 and 05, payable monthly in arrears on the
first business day of each month.
A Processing fee of $25.00 per loan purchased under Allocation 03 for
Repurchases, fee payable monthly in arrears on the first business day
of each month.
Wire Transfer Fee. A fee will be charged for sending or receiving all
-----------------
wire transfers for purchase of any loan originated by Originator or an
account of Originator. The fee will be established by schedule
published by Purchaser from time to time.
Additional Fees. Such others fees, including but not limited to
---------------
messenger and overnight courier fees, charged or incurred by Purchaser
in the process of purchasing any loan from Originator.
<PAGE>
Sutter Mortgage Corporation and Subsidiary
July 11, 1994
Page 7
EXHIBIT I
ALL LOANS REQUIRE THE FOLLOWING DOCUMENTS:
Original Mortgagor's note endorsed in blank and riders
Certified copy of Deed of Trust
Executed Assignment of D/T in favor of First Collateral Services, Inc.
Copy Preliminary Title Report
Copy Escrow instruction with Funding Statement
Copy Insured Closing Protection Letter (Loans Closed outside Title Co.)
Application - typed
Copy Investor Credit Package Approval/(all non-conforming loans)
Copy Credit Report
Copy Appraisal
Copy Hazard Insurance Policy/Certificate
Copy Private Mortgage Insurance Certificate
Copy Underwriters approval
Copy Investor Commitment
Copy Funding Check/Wire Instructions
IN ADDITION CONVENTIONAL LOANS REQUIRE:
Copy Transmittal Summary - FNMA 1008
IN ADDITION GOVERNMENT LOANS REQUIRE:
Mortgage credit analysis - HUD 92900 - WS
Request for insurance - HUD 54111
Direct Endorsement - HUD 54113
Certificate of Commitment - HUD 92900.4
<PAGE>
Sutter Mortgage Corporation and Subsidiary
July 11, 1994
Page 8
EXHIBIT II
ALL LOANS REQUIRE The FOLLOWING DOCUMENTS AFTER 60 DAYS FROM DATE OF
PURCHASE:
Transmittal Letter Identifying Mortgage and Enclosures
Copy Settlement Instructions (HUD 1)
Copy Verification of Employment
Copy Sales Contract
Copy Certificate of Flood Insurance, as applicable
Copy Termite Report
Copy Mortgage Insurance Certificate
<PAGE>
[LETTERHEAD OF FIRST COLLATERAL]
EXHIBIT 10.55
March 21, 1997
Sutter Mortgage Corporation and Subsidiary
2140 North Broadway
Walnut Creek, California 94596
Attention: Ronald Morck, President
Re: Master Mortgage Loan Purchasing Agreement dated August 26, 1993 and
Commitment Letter dated July 11, 1994
Dear Ron;
This Amended Commitment Letter amends the Commitment Letter referred to above,
supplements the above-referenced Master Mortgage Loan Purchasing Agreement (the
"Agreement") and will confirm certain terms and conditions of the purchasing
arrangements between Sutter Mortgage Corporation and Subsidiary and First
Collateral Services ("Purchaser") set forth herein. Capitalized terms are used
herein with the same meaning as in the Agreement.
Maturity Date:
- --------------
June 30, 1997
Effective Date:
- ---------------
April 1, 1997
All other terms and conditions of the Master Mortgage Loan Purchasing Agreement
dated August 26, 1993 and Commitment Letters dated July 11, 1994 shall remain
the same.
<PAGE>
Sutter Mortgage Corporation and Subsidiary
December 26, 1996
Page 2
If the above meets with your approval, please so indicate by executing and
returning this Commitment Letter to Purchaser by March 31, 1997. If this
Commitment Letter has not been returned by that date, the Commitment shall
expire. The enclosed copy of this letter is for your files.
Very truly yours,
ASSOCIATES COMMERCIAL CORP. dba
FIRST COLLATERAL SERVICES
a Delaware Corporation
By: /s/ SARAH E. SHAVER
------------------------------
Sarah E. Shaver,
Vice President
By: /s/ LYNDON C. MERKLE
------------------------------
Lyndon C. Merkle,
Senior Vice President
AGREED TO AND ACCEPTED this
26 day of March, 1997
- -- -----
Sutter Mortgage Corporation
a California corporation
By: /s/ RONALD MORCK
---------------------------
Ronald Morck,
President
<PAGE>
EXHIBIT 10.57
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of
November 1, 1997 by and between Virtual Mortgage Network, Inc., a Nevada
corporation (the "Company") and John D. Murray ("Executive").
WITNESSETH:
WHEREAS, the Company and Executive desire to enter into this Agreement
to assure the Company of the continuing and exclusive service of Executive and
to set forth the terms and conditions of Executive's employment with the
Company.
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, the parties agree as follows:
1. Term. The Company agrees to employ Executive and Executive hereby
----
accepts such employment, in accordance with the terms of this Agreement,
commencing November 1, 1997 and ending September 1, 2000, unless this Agreement
is earlier terminated as provided herein.
2. Services and Exclusivity of Services. So long as this Agreement
------------------------------------
shall continue in effect, Executive shall devote Executive's full business time,
energy and ability to the business, affairs and interests of the Company and its
affiliates or subsidiaries ("Affiliates") and matters related thereto in order
to perform duties as assigned by the Chief Executive Officer ("CEO") or the
Board of Directors of the Company (the "Board"), shall use Executive's best
efforts and abilities to promote the Company's interests and shall perform the
services contemplated by this Agreement in accordance with policies established
by and under the direction of the CEO or the Board. Executive agrees to serve
without additional remuneration in such executive capacities for one or more
direct or indirect Affiliates of the Company as the CEO or the Board may from
time to time request, subject to appropriate authorization by the Affiliate or
Affiliates involved and any limitations under applicable law. Executive agrees
to faithfully and diligently promote the business, affairs and interests of the
Company and its Affiliates.
Without the prior express written authorization of the Board,
Executive shall not, directly or indirectly, during the term of this Agreement
engage in any activity competitive with or adverse to the Company's business,
whether alone, as a partner, officer, director, employee or significant investor
of or in any other entity. (An investment of greater than 5% of the outstanding
capital or equity securities of an entity shall be deemed significant for these
purposes.)
Executive represents to the Company that Executive has no other
outstanding commitments inconsistent with any of the terms of this Agreement or
the services to be rendered hereunder.
<PAGE>
3. Duties and Responsibilities. In addition to his duties as an
---------------------------
employee as discussed herein, Executive shall serve as President, Chief
Operating Officer and Chief Financial Officer of the Company for the duration of
this Agreement. Executive's duties as an Executive shall be overall
responsibility and authority concerning finance and operations. Furthermore,
Executive shall implement and continue to develop the business strategies of the
Company. In the performance of Executive's duties, Executive shall report
directly to the CEO and shall be subject to the direction of the CEO and to such
limits on Executive's authority as the CEO or the Board may from time to time
impose.
Executive agrees to observe and comply with the rules and regulations
of the Company as adopted by the CEO or the Board respecting the performance of
Executive's duties and agrees to carry out and perform orders, directions and
policies of the Company and its Board as they may be, from time to time, stated
either orally or in writing. The Company agrees that the duties which may be
assigned to Executive shall be usual and customary duties of the position(s) to
which Executive may from time to time be appointed or elected and shall not be
inconsistent with the provisions of the charter documents of the Company or
applicable law. Executive shall have such corporate power and authority as
shall reasonably be required to enable Executive to perform the duties required
in any office that may be held, subject to the limitations on such powers
imposed by the CEO or the Board.
4. Compensation.
------------
(a) Base Compensation.
-----------------
During the term of this Agreement, the Company agrees to pay Executive
a base salary at the rate of $180,000 per year from November 1, 1997
(subject to increases at the discretion of the Compensation Committee of
the Board, which shall be comprised of the outside non-management directors
of the Company), in each case payable in accordance with the Company
practices in effect from time to time (the "Base Salary").
(b) Bonuses.
-------
Executive shall be eligible for bonuses in accordance with any bonus
or other incentive compensation plans adopted by the Board by a majority
vote of the Company's outside directors ("General Bonuses").
(c) Additional Benefits: The Company agrees to provide the following
-------------------
"Additional Benefits" to Executive:
(i) Company-paid life insurance with a face value of at least
$1,000,000, which insurance shall be a "split dollar" whole life
policy under which the Company would be entitled to the return
(without interest) of its premiums upon Executive's death or
termination of employment, with the remaining portion of the policy to
be solely owned by Executive or his beneficiaries upon Executive's
death or termination of employment;
2
<PAGE>
(ii) medical plan coverage for Executive, his spouse and
dependents, if any, at the expense of the Company, with such coverage
(or comparable coverage) to continue following termination of
employment (other than for "Cause" or without "Good Reason" as each
term is defined in this Agreement) until Executive and spouse are
eligible for Medicare; and
(iii) all rights and benefits for which Executive is otherwise
eligible under any pension plan, profit-sharing plan, dental,
disability, or insurance plan or policy or other plan or benefit that
the Company or its Affiliates may provide for Executive or (provided
Executive is eligible to participate therein) for employees of the
Company generally, as from time to time in effect, during the term of
this Agreement.
(d) Stock Options Executive shall be eligible for stock option grants
-------------
under the Company's stock option plans as administered by the Board or the
Compensation Committee of the Board. Concurrently with the completion of the
Company's planned initial public offering of its Common Stock, the Company will
issue options to the Executive to bring his total shares (owned or options
awarded) to a total of 3.5% of the fully diluted shares of Common Stock
outstanding at such date. The option price shall be the same as the price per
share at the initial public offering.
(e) Perquisites Executive shall be entitled to four weeks paid
-----------
vacation, a monthly automobile allowance of $1,000 and other perquisites in
accordance with the plans, policies, programs and practices which are at least
as favorable as those in effect with respect to other peer employees of the
Company.
5. Termination. This Agreement and all obligations hereunder
-----------
(except the obligations contained in Sections 4(c), 8, 9, 10 and 11 (Additional
Benefits, Confidential Information, Non-Competition, No Solicitation of
Customers and Noninterference with Executives) which shall survive any
termination hereunder) shall terminate upon the earliest to occur of any of the
following:
(a) Expiration of Term. The expiration of the term provided for in
------------------
Section 1 or the voluntary termination by Executive or retirement from the
Company in accordance with the normal retirement policies of the Company.
(b) Death or Disability of Executive. The death or disability of
--------------------------------
Executive. For the purposes of this Agreement, disability shall mean the
absence of Executive performing Executive's duties with the Company on a
full-time basis for a period of six months, or for shorter periods
aggregating 60 or more business days in any twelve (12)-month period, as a
result of incapacity due to mental or physical illness which is determined
to be total and permanent by a physician selected by the Company or its
-------------------
insurers and acceptable to Executive or Executive's legal representative
(such agreement as to acceptability not to be withheld unreasonably). If
Executive shall become disabled, Executive's employment may be terminated
by written notice from the Company to Executive.
3
<PAGE>
(c) For Cause or Without Good Reason.
--------------------------------
The Company may terminate Executive's employment and all of
Executive's rights to receive Base Salary and Bonuses hereunder for Cause
or upon the resignation of Executive without Good Reason. For purposes of
this Agreement, the term "Cause" shall be limited to the willful commission
of a felony or other act of moral turpitude which directly and demonstrably
causes material, tangible harm to the Company, and "Good Reason" shall be
defined as (i) demotion of Executive from the position of Chairman and
President without the consent of Executive; (ii) any attempt to decrease
Executive's Base Salary or Bonuses; (iii) any breach of this Agreement by
the Company; or (iv) any requirement that Executive relocate to an office
more than 30 miles further from Executive's current home address than the
Company's current office.
Notwithstanding the foregoing, Executive shall not be terminated for
Cause pursuant to this Section 5(c) unless and until Executive has received
notice of a proposed termination for Cause and Executive has had an
opportunity to be heard before at least a majority of the members of the
Board. Executive shall be deemed to have had such an opportunity if given
written or telephonic notice at least 72 hours in advance of a meeting.
The initial determination that Cause or Good Reason exists shall be made by
the Board. Any dispute regarding such determination shall be resolved in
accordance with Section 20 of this Agreement.
(d) Without Cause or With Good Reason.
---------------------------------
Notwithstanding any other provision of this Section 5, the Board shall
have the right to terminate Executive's employment with the Company without
Cause, and Executive shall have the right to resign with Good Reason, at
any time. If the Company terminates Executive without Cause or Executive
terminates for Good Reason, then the Company shall, within 10 days of such
termination, make an immediate lump sum payment in the amount of (i) one
times the applicable Base Salary, net of applicable taxes, plus (ii) the
present value of Bonuses (based on the assumption that the Company would
achieve all performance targets for a 100% bonus), and the Company shall
provide the Additional Benefits provided for under Section 4(c) for the
remainder of the term, including the full vesting of Stock Options that
would have been earned during the succeeding twelve months of employment if
the Executive had not been terminated. The present value of the aggregate
unpaid Bonuses shall be determined under the then applicable federal rates
under the Internal Revenue Code. Further, if Executive is terminated
without Cause or resigns with Good Reason, all stock options held by
Executive shall become fully vested.
4
<PAGE>
6. Business Expenses.
-----------------
During the term of this Agreement, the Company shall reimburse
Executive promptly for business expenditures made and substantiated in
accordance with policies, practices and procedures established from time to time
by the Company generally with respect to other employees and incurred in the
pursuit and furtherance of the Company's business and good will. The Executive
shall be entitled to business class accommodations for all flights in excess of
four hours in duration.
7. Parachute Limitations.
---------------------
Notwithstanding any other provision of this Agreement or of any other
agreement, contract or understanding heretofore or hereafter entered into by
Executive with the Company or any Affiliate, except an agreement, contract or
understanding hereafter entered into that expressly modifies or excludes
application of this Section 7 (the "Other Agreements"), and notwithstanding any
formal or informal plan or other arrangement heretofore or hereafter adopted by
the Company or any Affiliate for the direct or indirect compensation of
Executive, whether or not such compensation is deferred, is in cash, or is in
the form of an option or other benefit to or for Executive (a "Benefit Plan"),
Executive shall not have any right to exercise an option or to receive any
payment or other benefit under this Agreement, any Other Agreement or any
Benefit Plan if such right to exercise, payment or benefit, taking into account
all other rights, payments, or benefits to or for Executive under this
Agreement, all Other Agreements and all Benefit Plans, would cause any right,
payment, or benefit to Executive under this Agreement to be considered a
"parachute payment" within the meaning of Section 280G(b)(2) of the Internal
Revenue Code as then in effect (a Parachute Payment"). In the event that the
receipt of any such right to exercise or any other payment or benefit under this
Agreement, any Other Agreement or any Benefit Plan would cause Executive to be
considered to have received a Parachute Payment under this Agreement, then
Executive shall have the right, in Executive's sole discretion, to designate
those rights, payments or benefits under this Agreement, any Other Agreements,
and/or any Benefit Plans, that should be reduced or eliminated so as to avoid
having the right, payment or benefit to Executive under this Agreement be deemed
to be a Parachute Payment.
8. Confidential Information.
------------------------
Executive acknowledges that the nature of Executive's engagement by
the Company is such that Executive shall have access to information of a
confidential and/or trade secret nature which has great value to the Company and
which constitutes a substantial basis and foundation upon which the business of
the Company is based. Such information includes financial, manufacturing and
marketing data, techniques, processes, formulas, developmental or experimental
work, work in process, methods, trade secrets (including, without limitation,
customer lists and lists of customer sources), or any other secret or
confidential information relating to the products, services, customers, sales or
business affairs of the Company or its Affiliates (the "Confidential
Information"). Executive shall keep all such Confidential Information in
confidence during the term of this Agreement and at any time thereafter and
shall not disclose any of such Confidential Information to any other person,
except to the extent such disclosure is (i) required by applicable law, (ii)
lawfully obtainable from other sources, or (iii)
5
<PAGE>
authorized in writing by the Company. Upon termination of Executive's employment
with the Company, Executive shall deliver to the Company all documents, records,
notebooks, work papers, and all similar material containing any of the foregoing
information, whether prepared by Executive, the Company or anyone else.
9. Non-Competition.
---------------
In order to protect the Confidential Information, Executive agrees
that during the term of Executive's employment, and for a period of one year
thereafter, Executive shall not, directly or indirectly, whether as an owner,
partner, shareholder, agent, employee, creditor or otherwise, promote,
participate or engage in any activity or other business competitive with the
Company's business or the business of any present Affiliate of the Company in
Orange or Los Angeles Counties if such activity or other business involves any
use by Executive of any of the Confidential Information. The Company shall
notify Executive of any perceived violation of this Section 9, and Executive
shall have 30 days to cure such violation.
10. Non-Solicitation of Customers.
-----------------------------
Executive agrees that for a period of one year after the termination
of employment with the Company, Executive will not, on behalf of Executive or on
behalf of any other individual, association or entity, call on any of the
customers of the Company or any Affiliate of the Company for the purpose of
soliciting or inducing any of such customers to acquire (or providing to any of
such customers) any product or service provided by the Company or any Affiliate
of the Company, nor will Executive in any way, directly or indirectly, as agent
or otherwise, in any other manner solicit, influence or encourage such customers
to take away or to divert or direct their business to Executive or any other
person or entity by or with which Executive is employed, associated, affiliated
or otherwise related if such business is competitive with the Company.
11. Noninterference with Executives.
-------------------------------
In order to protect the Confidential Information, Executive agrees
that during the term hereof and for a period of one year thereafter, Executive
will not, directly or indirectly, induce or entice any employee of the Company
or its Affiliates to leave such employment or cause anyone else to leave such
employment.
6
<PAGE>
12. Indemnity.
---------
To the fullest extent permitted by applicable law and the bylaws of
the Company, as from time to time in effect, the Company shall indemnify
Executive and hold Executive harmless for any acts or decisions made in good
faith while performing services for the Company, and the Company shall use its
best efforts to obtain coverage for Executive (provided the same may be obtained
at reasonable cost) under any liability insurance policy or policies now in
force or hereafter obtained during the term of this Agreement that cover other
officers of the Company having comparable or lesser status and responsibility.
The Company will pay and, subject to any legal limitations, advance all
expenses, including reasonable attorneys' fees and costs of court approved
settlements, actually and necessarily incurred by Executive in connection with
the defense of any action, suit or proceeding and in connection with any appeal
thereon, which has been brought against Executive by reason of Executive's
service as an officer or agent of the Company or of any Affiliate of the
Company.
13. Severability.
------------
If any provision of this Agreement is held to be unenforceable for any
reason, it shall be adjusted rather than voided, if possible, to achieve the
intent of the parties to the extent possible. In any event, all other
provisions of this Agreement shall be deemed valid and enforceable to the extent
possible.
14. Succession.
----------
This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns and any such successor or assignee shall
be deemed substituted for the Company under the terms of this Agreement for all
purposes. As used herein, "successor" and "assignee" shall include any person,
firm, corporation or other business entity which at any time, whether by
purchase, merger or otherwise, directly or indirectly acquires the stock of the
Company or to which the Company assigns this Agreement by operation of law or
otherwise. The obligations and duties of Executive hereunder are personal and
otherwise not assignable. Executive's obligations and representations under
this Agreement will survive the termination of Executive's employment,
regardless of the manner of such termination.
7
<PAGE>
15. Notices.
-------
Any notice or other communication provided for in this Agreement shall
be in writing and sent if to the Company to its office at:
4590 MacArthur Boulevard
Suite 175
Newport Beach, CA 92660
Attention: President
Fax: (714) 252-0797
or at such other address as the Company may from time to time in writing
designate, and if to Executive at such address as Executive may from time to
time in writing designate. Each such notice or other communication shall be
effective (i) if given by telecommunication, when transmitted to the applicable
number so specified in (or pursuant to) this Section 16 and a verification of
receipt is received, (ii) if given by mail, three days after such communication
is deposited in the mails with first class postage prepaid, addressed as
aforesaid or (iii) if given by any other means, when actually delivered at such
address.
16. Entire Agreement.
----------------
This Agreement contains the entire agreement of the parties relating
to the subject matter hereof and supersedes any prior agreements, undertakings,
commitments and practices relating to Executive's employment by the Company.
17. Amendments.
----------
No amendment or modification of the terms of this Agreement shall be
valid unless made in writing and duly executed by both parties.
18. Waiver.
------
No failure on the part of any party to exercise or delay in exercising
any right hereunder shall be deemed a waiver thereof or of any other right, nor
shall any single or partial exercise preclude any further or other exercise of
such right or any other right.
19. Governing Law.
-------------
This Agreement, and the legal relations between the parties, shall be
governed by and construed in accordance with the laws of the State of California
without regard to conflicts of law doctrines, and any court action arising out
of this Agreement shall be brought in any court of competent jurisdiction within
the State of California, County of Orange.
20. Arbitration.
-----------
Executive may, if he desires, submit any claim for payment under this
Agreement
8
<PAGE>
or any dispute regarding the interpretation of this Agreement to arbitration.
This right to select arbitration shall be solely that of Executive, and
Executive may decide whether or not to arbitrate in his discretion. The "right
to select arbitration" does not impose on Executive a requirement to submit a
dispute for arbitration. Executive may, in lieu of arbitration, bring an action
in appropriate civil court. Executive retains the right to select arbitration,
even if a civil action (including, without limitation, an action for declaratory
relief) is brought by the Company prior to the commencement of arbitration. If
arbitration is selected by Executive after a civil action concerning Executive's
dispute has been brought by a person other than Executive, the Company and
Executive shall take such actions as are necessary or appropriate, including
dismissal of the civil action, so that the arbitration can be timely heard. Once
arbitration is commenced, it may not be discontinued without the unanimous
consent of all parties to the arbitration.
Any claim for arbitration may be submitted as follows: If Executive
disagrees with an interpretation of this Agreement by the Company, or disagrees
with the calculation of his benefits under this Agreement, such claim may be
filed in writing with an arbitrator of Executive's choice who is selected by the
method described in the next four sentences. The first step of the selection
shall consist of Executive submitting in writing a list of five potential
arbitrators to the Company. Each of the five arbitrators must be either (1) a
member of the National Academy of Arbitrators located in the state of
Executive's principal residence or (2) a retired California Superior Court or
Appellate Court judge. Within one week after receipt of the list, the Company
shall select one of the five arbitrators as the arbitrator of the dispute in
question. If the Company fails to select an arbitrator in a timely manner,
Executive then shall designate one of the five arbitrators as the arbitrator of
the dispute in question.
The arbitration hearing shall be held within seven days (or as soon
thereafter as possible) after the selection of the arbitrator. No continuance
of said hearing shall be allowed without the mutual consent of Executive and the
Company. Absence from or nonparticipation at the hearing by any party shall not
prevent the issuance of an award. Hearing procedures that will expedite the
hearing may be ordered at the arbitrator's discretion, and the arbitrator may
close the hearing in his sole discretion when he decides he has heard sufficient
evidence to justify issuance of an award.
The arbitrator's award shall be rendered as expeditiously as possible
and in no event later than one week after the close of the hearing. In the
event the arbitrator finds that Executive is entitled to the benefits he
claimed, the arbitrator shall order the Company to pay such benefits, in the
amounts and at such time as the arbitrator determines. The award of the
arbitrator shall be final and binding on the parties. The Company shall
thereupon pay Executive immediately the amount that the arbitrator
orders to be paid in the manner described in the award. The award may be
enforced in any appropriate court as soon as possible after its rendition. If
any action is brought to confirm the award, no appeal shall be taken by any
party from any decision rendered in such action.
If the arbitrator determines either that Executive is entitled to the
claimed benefits or that the claim by Executive was made in good faith, the
arbitrator shall direct the Company to pay to Executive, and the Company agrees
to pay to Executive in accordance with such order, an amount equal to
Executive's expenses in pursuing the claim, including attorneys' fees.
9
<PAGE>
21. Withholding.
-----------
All compensation payable hereunder, including salary and other
benefits, shall be subject to applicable taxes, withholding and other required,
normal or elected employee deductions.
22. Counterparts.
------------
This Agreement and any amendment hereto may be executed in one or more
counterparts. All of such counterparts shall constitute one and the same
agreement and shall become effective when a copy signed by each party has been
delivered to the other party.
23. Headings.
--------
Section and other headings contained in this Agreement are for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
24. Representation By Counsel; Interpretation.
-----------------------------------------
The Company and Executive each acknowledge that each party to this
Agreement has been represented by counsel in connection with this Agreement and
the matters contemplated by this Agreement. Accordingly, any rule of law,
including but not limited to Section 1654 of the California Civil Code, or any
legal decision that would require interpretation of any claimed ambiguities in
this Agreement against the party that drafted it has no application and is
expressly waived. The provisions of this Agreement shall be interpreted in a
reasonable manner to effect the intent of the parties.
25. Right to Purchase Additional Securities.
---------------------------------------
(a) First Refusal Right. If the Company proposes to issue (a
--------------------
"Proposed Issuance") Additional Securities (as defined below), the Company
shall offer such Additional Securities to Executive, and Executive shall
have the right (a "First Refusal Right") to purchase all or any portion of
his Pro Rata Share (as defined below) of such Additional Securities, upon
the terms of the Proposed Issuance. The Company shall give Executive
written notice of the Proposed Issuance stating the material terms thereof,
including the type of Additional Securities involved, the proposed purchase
price therefor and the anticipated closing date of such issuance (the
"Company Notice"). If Executive desires to exercise his First Refusal
Right, Executive shall, within 20 days of receipt of the Company Notice,
deliver to the Company written notice stating the portion of Executive's
Pro Rata Share of such Additional Securities that he is willing to purchase
(a "Response Notice"). Executive's Response Notice shall be deemed to
constitute his irrevocable agreement to purchase the specified portion of
his Pro Rata Share of the Additional Securities upon the terms of the
Proposed Issuance described in the Company Notice, on the later of (i) the
closing date specified in the Company Notice or (ii) the closing date of
the Proposed Issuance if other persons are purchasing Additional
10
<PAGE>
Securities. The Company shall have 90 days from the date of the Company
Notice to consummate such Proposed Issuance with respect to the Additional
Securities which are not being purchased by Executive at a price and upon
terms that are not materially less favorable to the Company than the price
and terms specified in the Company Notice, and such price and terms shall
be made available to Executive if Executive has elected to purchase
Additional Securities. If the Company proposes to issue Additional
Securities after such 90-day period, or at a price and upon terms which are
materially less favorable to the Company than those specified in the
Company Notice, it must again comply with the procedures set forth in this
section.
(b) Termination. The rights provided to Executive under this Section
-----------
25 shall not be assignable by Executive and shall terminate upon the
earlier of (i) the termination of this Agreement or (ii) the consummation
of the initial public offering of the Company's Common Stock.
(c) Definitions.
-----------
(i) "Additional Securities" means (x) all securities of the
Company which possess general voting power to elect members of the
Board of Directors of the Company ("Voting Securities"), (y) all
rights, options or warrants to purchase Voting Securities or
securities described in the following clause and (z) all other
securities of any type whatsoever that are, or may become, convertible
into or exchangeable for, or that entitle the holder to purchase,
Voting Securities (such securities described in clauses (x), (y) and
(z) referred to collectively as "Securities"). "Additional
Securities" does not include (A) all shares of stock of the Company
issued and outstanding on the date hereof (appropriately adjusted in
the future to reflect any subsequent stock dividends, stock splits,
reverse stock splits or similar transactions), (B) any Securities
issued on a proportional basis to all of the holders of the Company's
Common Stock, (C) any Securities issued or issuable or reissued or
reissuable to any employee, consultant or independent member of the
Board of the Company or any subsidiary of the Company pursuant to any
employee benefit plan, arrangement or agreement approved by the Board,
(D) any Securities issued or issuable in connection with an
underwritten public offering of Voting Securities, (E) any Securities
issued or issuable in connection with the acquisition by the Company
of any business, business assets or Securities from any person, (F)
any Securities issued to any financing source for the Company or any
subsidiary of the Company in connection with such financing or (G) any
Securities that are issued or issuable upon the exercise of rights,
options or warrants to purchase Securities or upon the conversion or
exchange of Securities convertible into or exchangeable for Securities
where Executive received (or was not required to receive) a Company
Notice pursuant to this Agreement.
(ii) "Pro Rata Share" means the fraction (y) the numerator of
which is the total number of shares of Voting Securities then held by
Executive and (z) the denominator of which is the total number of
shares of Voting Securities then
11
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
THE COMPANY
Virtual Mortgage Network, Inc.
/s/ Michael A. Barron
_______________________________
Michael A. Barron
_______________________________
Its Chief Executive Officer
___________________________
EXECUTIVE
/s/ John D. Murray
-------------------------------
By John D. Murray
_______________________________
_______________________________
_______________________________
[address]
12
<PAGE>
EXHIBIT 10.58
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of
November 1, 1997 by and between Virtual Mortgage Network, Inc., a Nevada
corporation (the "Company") and Michael A. Barron ("Executive").
WITNESSETH:
WHEREAS, the Company and Executive desire to enter into this Agreement
to assure the Company of the continuing and exclusive service of Executive and
to set forth the terms and conditions of Executive's employment with the
Company.
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, the parties agree as follows:
1. Term. The Company agrees to employ Executive and Executive hereby
----
accepts such employment, in accordance with the terms of this Agreement,
commencing November 1, 1997 and ending September 1, 2000, unless this Agreement
is earlier terminated as provided herein.
2. Services and Exclusivity of Services. So long as this Agreement
------------------------------------
shall continue in effect, Executive shall devote Executive's full business time,
energy and ability to the business, affairs and interests of the Company and its
affiliates or subsidiaries ("Affiliates") and matters related thereto in order
to perform duties as assigned by the Board of Directors of the Company (the
"Board"), shall use Executive's best efforts and abilities to promote the
Company's interests and shall perform the services contemplated by this
Agreement in accordance with policies established by and under the direction of
the Board. Executive agrees to serve without additional remuneration in such
executive capacities for one or more direct or indirect Affiliates of the
Company as the Board may from time to time request, subject to appropriate
authorization by the Affiliate or Affiliates involved and any limitations under
applicable law. Executive agrees to faithfully and diligently promote the
business, affairs and interests of the Company and its Affiliates.
Without the prior express written authorization of the Board,
Executive shall not, directly or indirectly, during the term of this Agreement
engage in any activity competitive with or adverse to the Company's business,
whether alone, as a partner, officer, director, employee or significant investor
of or in any other entity. (An investment of greater than 5% of the outstanding
capital or equity securities of an entity shall be deemed significant for these
purposes.)
Executive represents to the Company that Executive has no other
outstanding commitments inconsistent with any of the terms of this Agreement or
the services to be rendered hereunder.
<PAGE>
3. Duties and Responsibilities. In addition to his duties as an
---------------------------
employee as discussed herein, Executive shall serve as Chairman of the Board and
Chief Executive Officer of the Company for the duration of this Agreement.
Executive's duties as an Executive shall be overall responsibility and authority
concerning the development and management of the Company. Furthermore, Executive
shall implement and continue to develop the business strategies of the Company.
In the performance of Executive's duties, Executive shall report directly to the
Board and shall be subject to the direction of the Board and to such limits on
Executive's authority as the Board may from time to time impose.
Executive agrees to observe and comply with the rules and regulations
of the Company as adopted by the Board respecting the performance of Executive's
duties and agrees to carry out and perform orders, directions and policies of
the Company and its Board as they may be, from time to time, stated either
orally or in writing. The Company agrees that the duties which may be assigned
to Executive shall be usual and customary duties of the position(s) to which
Executive may from time to time be appointed or elected and shall not be
inconsistent with the provisions of the charter documents of the Company or
applicable law. Executive shall have such corporate power and authority as
shall reasonably be required to enable Executive to perform the duties required
in any office that may be held, subject to the limitations on such powers
imposed by the Board.
4. Compensation.
------------
(a) Base Compensation.
-----------------
During the term of this Agreement, the Company agrees to pay Executive
a base salary at the rate of $180,000 per year from November 1, 1997
(subject to increases at the discretion of the Compensation Committee of
the Board, which shall be comprised of the outside non-management directors
of the Company), in each case payable in accordance with the Company
practices in effect from time to time (the "Base Salary").
(b) Bonuses.
-------
Executive shall be eligible for bonuses in accordance with any bonus
or other incentive compensation plans adopted by the Board by a majority
vote of the Company's outside directors ("General Bonuses").
(c) Additional Benefits: The Company agrees to provide the following
-------------------
"Additional Benefits" to Executive:
(i) Company-paid life insurance with a face value of at least
$1,000,000, which insurance shall be a "split dollar" whole life
policy under which the Company would be entitled to the return
(without interest) of its
2
<PAGE>
premiums upon Executive's death or termination of employment, with the
remaining portion of the policy to be solely owned by Executive or his
beneficiaries upon Executive's death or termination of employment;
(ii) medical plan coverage for Executive, his spouse and
dependents, if any, at the expense of the Company, with such coverage
(or comparable coverage) to continue following termination of
employment (other than for "Cause" or without "Good Reason" as each
term is defined in this Agreement) until Executive and spouse are
eligible for Medicare; and
(iii) all rights and benefits for which Executive is otherwise
eligible under any pension plan, profit-sharing plan, dental,
disability, or insurance plan or policy or other plan or benefit that
the Company or its Affiliates may provide for Executive or (provided
Executive is eligible to participate therein) for employees of the
Company generally, as from time to time in effect, during the term of
this Agreement.
(d) Stock Options: Executive shall be eligible for stock option
-------------
grants under the Company's stock option plans as administered by the Board
or the Compensation Committee of the Board. Concurrently with the
completion of the Company's planned initial public offering of its Common
Stock, the Company will issue options to the Executive to bring his total
shares (owned or options awarded) to a total of 7.5% of the fully diluted
shares of Common Stock outstanding at such date. The option price shall be
the same as the price per share at the initial public offering.
(e) Perquisites: Executive shall be entitled to four weeks paid
-----------
vacation, a monthly automobile allowance of $1,000 and other perquisites in
accordance with the plans, policies, programs and practices which are at
least as favorable as those in effect with respect to other peer employees
of the Company.
5. Termination. This Agreement and all obligations hereunder
-----------
(except the obligations contained in Sections 4(c), 8, 9, 10 and 11 (Additional
Benefits, Confidential Information, Non-Competition, No Solicitation of
Customers and Noninterference with Executives) which shall survive any
termination hereunder) shall terminate upon the earliest to occur of any of the
following:
(a) Expiration of Term. The expiration of the term provided for in
------------------
Section 1 or the voluntary termination by Executive or retirement from the
Company in accordance with the normal retirement policies of the Company.
3
<PAGE>
(b) Death or Disability of Executive. The death or disability of
--------------------------------
Executive. For the purposes of this Agreement, disability shall mean the
absence of Executive performing Executive's duties with the Company on a
full-time basis for a period of six months, or for shorter periods
aggregating 60 or more business days in any twelve (12)-month period, as a
result of incapacity due to mental or physical illness which is determined
to be total and permanent by a physician selected by the Company or its
-------------------
insurers and acceptable to Executive or Executive's legal representative
(such agreement as to acceptability not to be withheld unreasonably). If
Executive shall become disabled, Executive's employment may be terminated
by written notice from the Company to Executive.
(c) For Cause or Without Good Reason.
--------------------------------
The Company may terminate Executive's employment and all of
Executive's rights to receive Base Salary and Bonuses hereunder for Cause
or upon the resignation of Executive without Good Reason. For purposes of
this Agreement, the term "Cause" shall be limited to the willful commission
of a felony or other act of moral turpitude which directly and demonstrably
causes material, tangible harm to the Company, and "Good Reason" shall be
defined as (i) demotion of Executive from the position of Chairman and
President without the consent of Executive; (ii) any attempt to decrease
Executive's Base Salary or Bonuses; (iii) any breach of this Agreement by
the Company; or (iv) any requirement that Executive relocate to an office
more than 30 miles further from Executive's current home address than the
Company's current office.
Notwithstanding the foregoing, Executive shall not be terminated for
Cause pursuant to this Section 5(c) unless and until Executive has received
notice of a proposed termination for Cause and Executive has had an
opportunity to be heard before at least a majority of the members of the
Board. Executive shall be deemed to have had such an opportunity if given
written or telephonic notice at least 72 hours in advance of a meeting.
The initial determination that Cause or Good Reason exists shall be made by
the Board. Any dispute regarding such determination shall be resolved in
accordance with Section 20 of this Agreement.
(d) Without Cause or With Good Reason.
---------------------------------
Notwithstanding any other provision of this Section 5, the Board shall
have the right to terminate Executive's employment with the Company without
Cause, and Executive shall have the right to resign with Good Reason, at
any time. If the Company terminates Executive without Cause or Executive
terminates for Good Reason, then the Company shall, within 10 days of such
termination, make an immediate lump sum payment in the amount of (i) one
times the applicable Base Salary, net of applicable taxes, plus (ii) the
present value of Bonuses (based on the assumption that the Company would
achieve all performance targets for a 100% bonus), and the Company shall
provide the Additional Benefits provided
4
<PAGE>
for under Section 4(c) for the remainder of the term, including the full
vesting of Stock Options that would have been earned during the succeeding
twelve months of employment if the Executive had not been terminated. The
present value of the aggregate unpaid Bonuses shall be determined under the
then applicable federal rates under the Internal Revenue Code. Further, if
Executive is terminated without Cause or resigns with Good Reason, all
stock options held by Executive shall become fully vested.
6. Business Expenses.
-----------------
During the term of this Agreement, the Company shall reimburse
Executive promptly for business expenditures made and substantiated in
accordance with policies, practices and procedures established from time to time
by the Company generally with respect to other employees and incurred in the
pursuit and furtherance of the Company's business and good will. The Executive
shall be entitled to business class accommodations for all flights in excess of
four hours in duration.
7. Parachute Limitations.
---------------------
Notwithstanding any other provision of this Agreement or of any other
agreement, contract or understanding heretofore or hereafter entered into by
Executive with the Company or any Affiliate, except an agreement, contract or
understanding hereafter entered into that expressly modifies or excludes
application of this Section 7 (the "Other Agreements"), and notwithstanding any
formal or informal plan or other arrangement heretofore or hereafter adopted by
the Company or any Affiliate for the direct or indirect compensation of
Executive, whether or not such compensation is deferred, is in cash, or is in
the form of an option or other benefit to or for Executive (a "Benefit Plan"),
Executive shall not have any right to exercise an option or to receive any
payment or other benefit under this Agreement, any Other Agreement or any
Benefit Plan if such right to exercise, payment or benefit, taking into account
all other rights, payments, or benefits to or for Executive under this
Agreement, all Other Agreements and all Benefit Plans, would cause any right,
payment, or benefit to Executive under this Agreement to be considered a
"parachute payment" within the meaning of Section 280G(b)(2) of the Internal
Revenue Code as then in effect (a "Parachute Payment"). In the event that the
receipt of any such right to exercise or any other payment or benefit under this
Agreement, any Other Agreement or any Benefit Plan would cause Executive to be
considered to have received a Parachute Payment under this Agreement, then
Executive shall have the right, in Executive's sole discretion, to designate
those rights, payments or benefits under this Agreement, any Other Agreements,
and/or any Benefit Plans, that should be reduced or eliminated so as to avoid
having the right, payment or benefit to Executive under this Agreement be deemed
to be a Parachute Payment.
5
<PAGE>
8. Confidential Information.
------------------------
Executive acknowledges that the nature of Executive's engagement by
the Company is such that Executive shall have access to information of a
confidential and/or trade secret nature which has great value to the Company and
which constitutes a substantial basis and foundation upon which the business of
the Company is based. Such information includes financial, manufacturing and
marketing data, techniques, processes, formulas, developmental or experimental
work, work in process, methods, trade secrets (including, without limitation,
customer lists and lists of customer sources), or any other secret or
confidential information relating to the products, services, customers, sales or
business affairs of the Company or its Affiliates (the "Confidential
Information"). Executive shall keep all such Confidential Information in
confidence during the term of this Agreement and at any time thereafter and
shall not disclose any of such Confidential Information to any other person,
except to the extent such disclosure is (i) required by applicable law, (ii)
lawfully obtainable from other sources, or (iii) authorized in writing by the
Company. Upon termination of Executive's employment with the Company, Executive
shall deliver to the Company all documents, records, notebooks, work papers, and
all similar material containing any of the foregoing information, whether
prepared by Executive, the Company or anyone else.
9. Non-Competition.
---------------
In order to protect the Confidential Information, Executive agrees
that during the term of Executive's employment, and for a period of one year
thereafter, Executive shall not, directly or indirectly, whether as an owner,
partner, shareholder, agent, employee, creditor or otherwise, promote,
participate or engage in any activity or other business competitive with the
Company's business or the business of any present Affiliate of the Company in
Orange or Los Angeles Counties if such activity or other business involves any
use by Executive of any of the Confidential Information. The Company shall
notify Executive of any perceived violation of this Section 9, and Executive
shall have 30 days to cure such violation.
10. Non-Solicitation of Customers.
-----------------------------
Executive agrees that for a period of one year after the termination
of employment with the Company, Executive will not, on behalf of Executive or on
behalf of any other individual, association or entity, call on any of the
customers of the Company or any Affiliate of the Company for the purpose of
soliciting or inducing any of such customers to acquire (or providing to any of
such customers) any product or service provided by the Company or any Affiliate
of the Company, nor will Executive in any way, directly or indirectly, as agent
or otherwise, in any other manner solicit, influence or encourage such customers
to take away or to divert or direct their business to Executive or any other
person or entity by or with which Executive is employed, associated, affiliated
or otherwise related if such business is competitive with the Company.
6
<PAGE>
11. Noninterference with Executives.
-------------------------------
In order to protect the Confidential Information, Executive agrees
that during the term hereof and for a period of one year thereafter, Executive
will not, directly or indirectly, induce or entice any employee of the Company
or its Affiliates to leave such employment or cause anyone else to leave such
employment.
12. Indemnity.
---------
To the fullest extent permitted by applicable law and the bylaws of
the Company, as from time to time in effect, the Company shall indemnify
Executive and hold Executive harmless for any acts or decisions made in good
faith while performing services for the Company, and the Company shall use its
best efforts to obtain coverage for Executive (provided the same may be obtained
at reasonable cost) under any liability insurance policy or policies now in
force or hereafter obtained during the term of this Agreement that cover other
officers of the Company having comparable or lesser status and responsibility.
The Company will pay and, subject to any legal limitations, advance all
expenses, including reasonable attorneys' fees and costs of court approved
settlements, actually and necessarily incurred by Executive in connection with
the defense of any action, suit or proceeding and in connection with any appeal
thereon, which has been brought against Executive by reason of Executive's
service as an officer or agent of the Company or of any Affiliate of the
Company.
13. Severability.
------------
If any provision of this Agreement is held to be unenforceable for any
reason, it shall be adjusted rather than voided, if possible, to achieve the
intent of the parties to the extent possible. In any event, all other
provisions of this Agreement shall be deemed valid and enforceable to the extent
possible.
14. Succession.
----------
This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns and any such successor or assignee shall
be deemed substituted for the Company under the terms of this Agreement for all
purposes. As used herein, "successor" and "assignee" shall include any person,
firm, corporation or other business entity which at any time, whether by
purchase, merger or otherwise, directly or indirectly acquires the stock of the
Company or to which the Company assigns this Agreement by operation of law or
otherwise. The obligations and duties of Executive hereunder are personal and
otherwise not assignable. Executive's obligations and representations under
this Agreement will survive the termination of Executive's employment,
regardless of the manner of such termination.
7
<PAGE>
15. Notices.
-------
Any notice or other communication provided for in this Agreement shall
be in writing and sent if to the Company to its office at:
4590 MacArthur Boulevard
Suite 175
Newport Beach, CA 92660
Attention: President
Fax: (714) 252-0797
or at such other address as the Company may from time to time in writing
designate, and if to Executive at such address as Executive may from time to
time in writing designate. Each such notice or other communication shall be
effective (i) if given by telecommunication, when transmitted to the applicable
number so specified in (or pursuant to) this Section 16 and a verification of
receipt is received, (ii) if given by mail, three days after such communication
is deposited in the mails with first class postage prepaid, addressed as
aforesaid or (iii) if given by any other means, when actually delivered at such
address.
16. Entire Agreement.
----------------
This Agreement contains the entire agreement of the parties relating
to the subject matter hereof and supersedes any prior agreements, undertakings,
commitments and practices relating to Executive's employment by the Company.
17. Amendments.
----------
No amendment or modification of the terms of this Agreement shall be
valid unless made in writing and duly executed by both parties.
18. Waiver.
------
No failure on the part of any party to exercise or delay in exercising
any right hereunder shall be deemed a waiver thereof or of any other right, nor
shall any single or partial exercise preclude any further or other exercise of
such right or any other right.
19. Governing Law.
-------------
This Agreement, and the legal relations between the parties, shall be
governed by and construed in accordance with the laws of the State of California
without regard to conflicts of law doctrines, and any court action arising out
of this Agreement shall be brought in any court of competent jurisdiction within
the State of California, County of Orange.
8
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20. Arbitration.
-----------
Executive may, if he desires, submit any claim for payment under this
Agreement or any dispute regarding the interpretation of this Agreement to
arbitration. This right to select arbitration shall be solely that of
Executive, and Executive may decide whether or not to arbitrate in his
discretion. The "right to select arbitration" does not impose on Executive a
requirement to submit a dispute for arbitration. Executive may, in lieu of
arbitration, bring an action in appropriate civil court. Executive retains the
right to select arbitration, even if a civil action (including, without
limitation, an action for declaratory relief) is brought by the Company prior to
the commencement of arbitration. If arbitration is selected by Executive after
a civil action concerning Executive's dispute has been brought by a person other
than Executive, the Company and Executive shall take such actions as are
necessary or appropriate, including dismissal of the civil action, so that the
arbitration can be timely heard. Once arbitration is commenced, it may not be
discontinued without the unanimous consent of all parties to the arbitration.
Any claim for arbitration may be submitted as follows: If Executive
disagrees with an interpretation of this Agreement by the Company, or disagrees
with the calculation of his benefits under this Agreement, such claim may be
filed in writing with an arbitrator of Executive's choice who is selected by the
method described in the next four sentences. The first step of the selection
shall consist of Executive submitting in writing a list of five potential
arbitrators to the Company. Each of the five arbitrators must be either (1) a
member of the National Academy of Arbitrators located in the state of
Executive's principal residence or (2) a retired California Superior Court or
Appellate Court judge. Within one week after receipt of the list, the Company
shall select one of the five arbitrators as the arbitrator of the dispute in
question. If the Company fails to select an arbitrator in a timely manner,
Executive then shall designate one of the five arbitrators as the arbitrator of
the dispute in question.
The arbitration hearing shall be held within seven days (or as soon
thereafter as possible) after the selection of the arbitrator. No continuance
of said hearing shall be allowed without the mutual consent of Executive and the
Company. Absence from or nonparticipation at the hearing by any party shall not
prevent the issuance of an award. Hearing procedures that will expedite the
hearing may be ordered at the arbitrator's discretion, and the arbitrator may
close the hearing in his sole discretion when he decides he has heard sufficient
evidence to justify issuance of an award.
The arbitrator's award shall be rendered as expeditiously as possible
and in no event later than one week after the close of the hearing. In the
event the arbitrator finds that Executive is entitled to the benefits he
claimed, the arbitrator shall order the Company to pay such benefits, in the
amounts and at such time as the arbitrator determines. The award of the
arbitrator shall be final and binding on the parties. The Company shall
thereupon pay Executive immediately the amount that the arbitrator
9
<PAGE>
orders to be paid in the manner described in the award. The award may be
enforced in any appropriate court as soon as possible after its rendition. If
any action is brought to confirm the award, no appeal shall be taken by any
party from any decision rendered in such action.
If the arbitrator determines either that Executive is entitled to the
claimed benefits or that the claim by Executive was made in good faith, the
arbitrator shall direct the Company to pay to Executive, and the Company agrees
to pay to Executive in accordance with such order, an amount equal to
Executive's expenses in pursuing the claim, including attorneys' fees.
21. Withholding.
-----------
All compensation payable hereunder, including salary and other
benefits, shall be subject to applicable taxes, withholding and other required,
normal or elected employee deductions.
22. Counterparts.
------------
This Agreement and any amendment hereto may be executed in one or more
counterparts. All of such counterparts shall constitute one and the same
agreement and shall become effective when a copy signed by each party has been
delivered to the other party.
23. Headings.
--------
Section and other headings contained in this Agreement are for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
24. Representation By Counsel; Interpretation.
-----------------------------------------
The Company and Executive each acknowledge that each party to this
Agreement has been represented by counsel in connection with this Agreement and
the matters contemplated by this Agreement. Accordingly, any rule of law,
including but not limited to Section 1654 of the California Civil Code, or any
legal decision that would require interpretation of any claimed ambiguities in
this Agreement against the party that drafted it has no application and is
expressly waived. The provisions of this Agreement shall be interpreted in a
reasonable manner to effect the intent of the parties.
25. Right to Purchase Additional Securities.
---------------------------------------
(a) First Refusal Right. If the Company proposes to issue (a
--------------------
"Proposed Issuance") Additional Securities (as defined below), the Company
shall offer such
10
<PAGE>
Additional Securities to Executive, and Executive shall have the right (a
"First Refusal Right") to purchase all or any portion of his Pro Rata Share
(as defined below) of such Additional Securities, upon the terms of the
Proposed Issuance. The Company shall give Executive written notice of the
Proposed Issuance stating the material terms thereof, including the type of
Additional Securities involved, the proposed purchase price therefor and
the anticipated closing date of such issuance (the "Company Notice"). If
Executive desires to exercise his First Refusal Right, Executive shall,
within 20 days of receipt of the Company Notice, deliver to the Company
written notice stating the portion of Executive's Pro Rata Share of such
Additional Securities that he is willing to purchase (a "Response Notice").
Executive's Response Notice shall be deemed to constitute his irrevocable
agreement to purchase the specified portion of his Pro Rata Share of the
Additional Securities upon the terms of the Proposed Issuance described in
the Company Notice, on the later of (i) the closing date specified in the
Company Notice or (ii) the closing date of the Proposed Issuance if other
persons are purchasing Additional Securities. The Company shall have 90
days from the date of the Company Notice to consummate such Proposed
Issuance with respect to the Additional Securities which are not being
purchased by Executive at a price and upon terms that are not materially
less favorable to the Company than the price and terms specified in the
Company Notice, and such price and terms shall be made available to
Executive if Executive has elected to purchase Additional Securities. If
the Company proposes to issue Additional Securities after such 90-day
period, or at a price and upon terms which are materially less favorable to
the Company than those specified in the Company Notice, it must again
comply with the procedures set forth in this section.
(b) Termination. The rights provided to Executive under this Section
-----------
25 shall not be assignable by Executive and shall terminate upon the
earlier of (i) the termination of this Agreement or (ii) the consummation
of the initial public offering of the Company's Common Stock.
(c) Definitions.
-----------
(i) "Additional Securities" means (x) all securities of the
Company which possess general voting power to elect members of the
Board of Directors of the Company ("Voting Securities"), (y) all
rights, options or warrants to purchase Voting Securities or
securities described in the following clause and (z) all other
securities of any type whatsoever that are, or may become, convertible
into or exchangeable for, or that entitle the holder to purchase,
Voting Securities (such securities described in clauses (x), (y) and
(z) referred to collectively as "Securities"). "Additional
Securities" does not include (A) all shares of stock of the Company
issued and outstanding on the date hereof (appropriately adjusted in
the future to reflect any subsequent stock dividends, stock splits,
reverse stock splits or similar transactions), (B) any Securities
issued on a proportional basis to
11
<PAGE>
all of the holders of the Company's Common Stock, (C) any Securities
issued or issuable or reissued or reissuable to any employee,
consultant or independent member of the Board of the Company or any
subsidiary of the Company pursuant to any employee benefit plan,
arrangement or agreement approved by the Board, (D) any Securities
issued or issuable in connection with an underwritten public offering
of Voting Securities, (E) any Securities issued or issuable in
connection with the acquisition by the Company of any business,
business assets or Securities from any person, (F) any Securities
issued to any financing source for the Company or any subsidiary of
the Company in connection with such financing or (G) any Securities
that are issued or issuable upon the exercise of rights, options or
warrants to purchase Securities or upon the conversion or exchange of
Securities convertible into or exchangeable for Securities where
Executive received (or was not required to receive) a Company Notice
pursuant to this Agreement.
(ii) "Pro Rata Share" means the fraction (y) the numerator of
which is the total number of shares of Voting Securities then held by
Executive and (z) the denominator of which is the total number of
shares of Voting Securities then outstanding.
12
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
THE COMPANY
Virtual Mortgage Network, Inc.
/s/ JOHN D. MURRAY
-------------------------------
By John D. Murray
Its President & CFO
EXECUTIVE
/s/ MICHAEL A. BARRON
-------------------------------
Michael A. Barron
3 Suprema Drive
-------------------------------
Newport Coast, CA
-------------------------------
92657
-------------------------------
[address]
13
<PAGE>
EXHIBIT 10.59
BRIDGE LOAN AND SECURITY AGREEMENT
BY AND BETWEEN
VIRTUAL MORTGAGE NETWORK, INC.,
a Nevada corporation AND
KAY CAPITAL GROUP
This BRIDGE LOAN AND SECURITY AGREEMENT (the "Agreement") is made this 19th day
of December, 1997, by and between Kay Capital Group (the "Investor" or "Secured
Party") and Virtual Mortgage Network, Inc., a Nevada corporation ("Company",
"Debtor", "Borrower" or "VMN"). The Investor and VMN are referred to
collectively herein as the "Parties."
In consideration of the mutual covenants, agreements, representations,
and warranties contained in this agreement, the Parties agree as follows:
1. Loan Amount.
-----------
The Investor agrees to loan, on December 19, 1997, to the Company the
aggregate principal amount of $1,300,000 (the "Loan"). The Loan will be made for
the purpose of paying normal and reasonable operating expenses and obtaining and
paying for professional services in connection with the offering of securities
of VMN.
2. Promissory Note.
---------------
In consideration thereof, VMN will issue, cause to be executed and
delivered to the Investor, upon the execution hereof, a promissory note in the
principal amount equal to the amount of the Loan, upon the terms and conditions
specified herein, and in the form set forth in Exhibit A, hereto (the "Note").
The Note is one of several notes of the Company sold to investors (collectively,
the "Investors") that collectively aggregate $5,500,000 (the "Notes") and are
equally secured by the security interest (i) granted by Section 8.1 of this
Agreement and Section 8.1 of the Company's other Bridge Loan and Security
Agreements, pursuant to which the Notes were issued or are to be issued and,
(ii) granted to American Growth Fund I, L.P. ("AGF") to secure up to $500,000 in
notes of the Company payable to AGF.
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<PAGE>
3. Warrants of the Company.
-----------------------
VMN agrees to issue, convey and transfer, and cause to be issued,
conveyed and transferred to the Investor, Common Stock Purchase Warrants to
purchase shares of Company Common Stock. The number of whole shares of Company
Common Stock subject to the Warrants accompanying an Investor's Note will be
determined by using conventional rounding and by dividing the principal amount
of the Note by (i) if the IPO occurs prior to March 6, 1997, the IPO price or
(ii) if the IPO does not occur prior to March 6, 1997, $4.00 per share. The
exercise price of the Warrants is $0.001 per share of Common Stock, except that
this price is adjustable in certain circumstances as set forth in the Warrant
Agreement. A registration right is also included in the Warrant Agreement
(Exhibit B hereto).
4. Periodic Finance Charges.
------------------------
The unpaid principal under the Note shall bear interest at a rate of
twelve percent (12%) per annum simple interest. Upon the Company's failure to
pay amounts due on the Maturity Date (as such term is defined in the Note), the
interest rate on the Note shall increase to fifteen percent (15%) per annum, as
set forth in the Note.
5. Payments.
--------
5.1 VMN shall make payments of principal and accrued interest on the
Note to Investor upon the closing of a public offering of securities by VMN, as
set forth in the Note.
5.2 Except as otherwise set forth in the Note, the unpaid principal
under the Note plus all accrued but unpaid interest thereon shall be payable
upon the Maturity Date. If the Company has not repaid the principal amount
together with interest by the Maturity Date, the Company then agrees to repay
the principal amount together with accrued interest under the Note in equal
monthly payments of principal and interest at fifteen percent (15%) per annum
over a twelve (12) month period. The first installment of such payments of
principal and interest shall be due on April 6, 1997.
VMN may, from time to time, in it sole discretion, make one or more
periodic payments to the Investor. Such payments shall be credited to VMN's
account on the date that such payment is placed in the United States mail, first
class postage prepaid, by VMN. Such payments shall be applied first to accrued
and unpaid interest, and then to the principal amount then outstanding.
2
<PAGE>
6. Default Provisions.
------------------
The occurrence and continuance of one or more of the following events
shall constitute an event of default of this entire Agreement:
6.1 The nonpayment of any principal or interest by VMN on this loan
within five business days of when the same shall have become due and payable.
6.2 The entry of a decree or order by a court having appropriate
jurisdiction adjudging VMN bankrupt or insolvent, or approving as properly filed
a petition seeking reorganization, arrangement, adjustment or composition of or
in respect of VMN under the federal Bankruptcy Act or any other applicable
federal or state law, or appointing a receiver, liquidator, assignee or trustee
of VMN, or any substantial part of its property, or of the Collateral, as
defined in Section 8, or ordering the winding up or liquidation of its affairs,
and the continuance of any such decree or order unstayed and in effect for a
period of sixty (60) consecutive days.
6.3 The institution by VMN of proceedings to be adjudicated a
bankrupt or insolvent, or the consent by it to the institution of bankruptcy or
insolvency proceedings against it, or the filing by it of a petition or answer
or consent seeking reorganization or relief under the federal Bankruptcy Act or
any other applicable federal or state law, or the consent by it to the filing of
any such petition or to the appointment of a receiver, liquidator, assignee or
trustee of the Company, or of any substantial part of its property, or if the
Collateral, as defined in Section 8, shall become subject to the jurisdiction of
a federal bankruptcy court or similar state court, or if VMN shall make an
assignment for the benefit of its creditors, or if there is a receivership,
execution or other material judicial seizure, or if VMN shall fail to pay its
debts generally as they become due, or the taking of corporate action by VMN in
furtherance of any such action.
6.4 Default in the obligation of VMN for borrowed money, other than
this Loan, which shall continue for a period of sixty (60) days, or any event
that results in acceleration of the maturity of any material indebtedness of VMN
under any note, indenture, contract, or agreement.
6.5 VMN's failure to comply with any material term, obligation,
covenant or condition contained in this Agreement, the Note or the Warrant
Agreement after the expiration of all applicable cure periods.
6.6 Any warranty, covenant, or representation made to the Investor by
VMN under this Agreement, the Note or the Warrant
3
<PAGE>
Agreement proves to have been false in any material respect when made or
furnished.
6.7 Any material levy, seizure, attachment, lien, or encumbrance of
or on the Collateral, other than those existing as of the date hereof, which is
not discharged by VMN within 30 days.
6.8 Any sale, transfer, or disposition of any material interest in
the Collateral, other than in the ordinary course of business, without the
written consent of the Investor.
6.9 Any default that results in acceleration of the maturity of any
indebtedness of VMN in the outstanding principal amount of $50,000 or more,
under any note, indenture, contract or agreement.
7. Acceleration.
------------
At the option of the Investor, and without demand or notice, all
principal and any unpaid interest shall become immediately due and payable upon
a default as set forth in Section 6 above. Any reasonable attorneys' fees and
other expenses incurred by the Investor in connection with VMN's bankruptcy or
any of the other events described in Section 6 shall be additional indebtedness
of VMN secured by this Agreement.
8. Security Agreement.
------------------
8.1 Grant of Security Interest.
--------------------------
VMN, in consideration of the indebtedness described in this
Agreement, hereby grants, conveys, and assigns to the Investors, collectively,
for security, all of VMN's existing and future right, title and interest in the
property listed in Section 8.2 of this Agreement. This security interest is
granted to the Investors, collectively, to secure (a) the payment of the
indebtedness evidenced by the Notes, including all renewals, extensions, and
modification thereof; (b) the payment, performance and observance of all
warranties, obligations, covenants and agreements to be paid, performed or
observed under this Agreement; and the payment of all other sums, with interest
thereon, advanced under the terms of this Agreement.
8.2 Property.
--------
The property subject to the security interest (the "Collateral")
is as follows:
8.2.1 Equipment.
---------
4
<PAGE>
All equipment of VMN, other than the equipment and related
software licenses and other tangible and intangible property leased by VMN from
Data General Corporation or its assignee.
8.2.2 Accounts Receivable.
-------------------
All of VMN's accounts, chattel paper, contract rights,
commissions, warehouse receipts, bills of lading, delivery orders, drafts,
acceptances, notes, securities and other instruments; documents; and all other
forms of receivables, and all guaranties and securities therefor.
8.2.3 Inventory and Other Tangible Personal Property.
----------------------------------------------
All of VMN's inventory, including all goods, merchandise,
materials, raw materials, work in progress, finished goods, now owned or
hereinafter acquired and held for sale or lease or furnished or to be furnished
under contracts or service agreements or to be used or consumed in VMN's
business and all other tangible personal property of VMN, except as excluded in
8.2.1.
8.2.4 General Intangibles.
-------------------
All "general intangibles" (as defined in the Uniform
Commercial Code in effect in the State of California), including, without
limitation, (i) all right, title and interest of VMN in and to all agreements,
leases and contracts to which VMN is or may become a party, (ii) all obligations
or indebtedness owing to VMN from whatever source arising, (iii) all tax
refunds, (iv) all intellectual property, including, without limitation, all
copyrights, copyright applications, copyright licenses, patents, patent
applications, patent licenses, trademarks, trademark applications and trademark
licenses, (v) all computer software, source code, object code, manuals and
instructions, together with all diskettes, tape and any other physical
representation or eminent thereof and (vi) all trade secrets and other
confidential information relating to the business of VMN.
8.2.5 After-Acquired Property.
-----------------------
All property of the types described in Sections 8.2.1 -
8.2.4, or similar thereto, that at any time hereafter may be acquired by VMN or
any subsidiary of VMN, including, but not limited to, all accessions, parts,
additions, and replacements.
8.2.6 Proceeds.
--------
5
<PAGE>
All proceeds of the sale or other disposition of any of the
Collateral described or referred to in Sections 8.2.1 - 8.2.5. Sale or
disposition of Collateral is prohibited except as provided herein.
8.3 Covenants of VMN.
----------------
VMN agrees and covenants as follows:
8.3.1 Payment of Principal and Interest.
---------------------------------
VMN shall promptly pay when due the principal of and
interest on the indebtedness evidenced by the Notes, any prepayment and late
charges provided in the Notes, and all other sums secured by this Agreement and
the Notes.
8.3.2 Corporate Existence.
-------------------
VMN is a corporation duly organized and existing under the
laws of the State of Nevada and is duly qualified in every other state in which
it is doing business, except where the failure to be so qualified would not have
a material adverse effect on VMN.
8.3.3 Corporate Authority.
-------------------
The execution, delivery, and performance of this
Agreement, and the execution and payment of the Notes are within VMN's corporate
powers, have been duly authorized, and are not in contravention of law or the
terms of VMN's articles of incorporation and bylaws, or of any indenture,
agreement, or undertaking to which VMN is a party or by which it is bound.
8.3.4 Ownership of Collateral.
-----------------------
Except for the security interests in the Collateral
referred to in Section 2 and this Section 8, VMN (a) has good, legal and
marketable title to, or a valid leasehold interest in, all of the Collateral and
(b) such Collateral is not subject to any liens or encumbrances, and VMN will
defend the Collateral against the claims and demands of all other persons at any
time claiming the same or any interest therein.
8.3.5 Issuance of Shares.
------------------
That the shares of common stock contemplated to be issued
hereby (upon exercise of the Warrants) will be, when issued in accordance with
the terms of the Warrants, duly authorized, fully paid and non-assessable.
8.4 Removal of Collateral Prohibited.
--------------------------------
6
<PAGE>
VMN shall not remove the Collateral from its premises, other than
in the ordinary course of business, without the written consent of the Investor.
8.5 Taxes and Assessments.
---------------------
VMN will pay or cause to be paid promptly when due all taxes and
assessments on the Collateral. VMN may, however, withhold payment of any tax
assessment or claim if a good faith dispute exists as to the obligation to pay.
8.6 Insurance.
---------
VMN shall have and maintain, or cause to be maintained, insurance
at all times with respect to all Collateral except accounts receivable, against
such risks, and in such form, for such periods, and written by such companies as
may be satisfactory to the Investor. All policies of insurance shall have
endorsed a loss payable clause acceptable to the Investor or such other
endorsements as the Investor may from time to time request, and VMN will
promptly provide the Investor upon request with the original policies or
certificates of such insurance. VMN shall promptly notify the Investor of any
loss or damage that may occur to the Collateral. The Investor is hereby
authorized to make proof of loss if it is not made promptly by VMN. All proceeds
of any insurance on the Collateral shall be held by the Investor as a part of
the Collateral. Such proceeds shall be paid out from time to time upon order of
VMN for the purpose of paying the reasonable cost of repairing or restoring the
property damaged. Any proceeds that have not been so paid out within 120 days
following their receipt by the Investor shall be applied to the prepayment of
principal on the Notes according to the terms hereof. In the event of failure to
provide insurance as herein provided, Investor may, at its option, provide such
insurance at VMN's expense.
8.7 Protection of the Investor's Security.
-------------------------------------
If VMN fails to perform the covenants and agreements contained or
incorporated in this Agreement, or if any action or proceeding is commenced
which affects the Collateral or title thereto or the interest of the Investor
therein, including, but not limited to eminent domain, insolvency, code
enforcement, or arrangements or proceedings involving a bankrupt or decedent,
then the Investor may make such appearance, disburse such sums, and take such
action as the Investor deems necessary, in its sole discretion, to protect the
Investor's interest, including but not limited to (i) disbursement of reasonable
attorney's fees, (ii) entry upon VMN's property to make repairs to the
Collateral, and (iii) procurement of satisfactory insurance. Any amounts
disbursed by the Investor pursuant to this Section, with interest thereon, shall
become additional indebtedness of VMN secured by
7
<PAGE>
this Agreement. Unless VMN and the Investor agree to other terms of payment,
such amounts shall be immediately due and payable and shall bear interest from
the date of disbursement at the default rate stated in the Note unless
collection from VMN of interest at such rate would be contrary to applicable
law, in which event such amounts shall bear interest at the highest rate which
may be collected from VMN under applicable law. Nothing contained in this
Section shall require the Investor to incur any expense or take any action.
8.8 Inspection.
----------
The Investor may make or cause to be made reasonable entries upon
and inspections of VMN's premises to inspect the Collateral.
8.9 VMN and Lien Not Released.
-------------------------
From time to time, the Investor may, at the Investor's option,
without giving notice to or obtaining the consent of VMN or its successors or
assigns or of any other lienholder or guarantors, without liability on the
Investor's part, and notwithstanding VMN's breach of any covenant or agreement
of VMN in this Agreement, extend the time for payment of said indebtedness or
any part thereof, reduce the payments thereon, release anyone liable on any of
said indebtedness, accept a renewal note or notes therefor, modify the terms and
the time of payment of said indebtedness, release from the lien of this
Agreement any part of the Collateral, take or release other or additional
security, reconvey any part of the Collateral, consent to any plan of the
Collateral, join in any extension or subordination agreement, and agree in
writing with VMN to modify the rate of interest or period of amortization of the
Note or change the amount of any installments payable thereunder. Any actions
taken by the Investor pursuant to the terms of this Section shall not affect the
obligation of VMN or VMN successors or assigns to pay the sums secured by this
Agreement and to observe the covenants of VMN contained herein, shall not affect
the guaranty of any person, corporation, partnership, or other entity for
payment of the indebtedness secured hereby, and shall not affect the lien or
priority of lien hereof on the Collateral. VMN shall pay the Investor a
reasonable service charge, together with such reasonable attorneys' fees as may
be incurred at the Investor's option for any such action if taken at VMN's
request.
8.10 Forbearance by the Investor Not a Waiver.
----------------------------------------
Any forbearance by the Investor in exercising any right or remedy
hereunder, or otherwise afforded by applicable law, shall not be a waiver of or
preclude the exercise of any right or remedy. The acceptance by the Investor of
payment of any sum secured by this Agreement after the due date of such
8
<PAGE>
payment shall not be a waiver of the Investor's right to either require prompt
payment when due of all other sums so secured or to declare a default for
failure to make prompt payment. The procurement of insurance or the payment of
taxes, rents or other liens or charges by the Investor shall not be a waiver of
the Investor's right to accelerate the maturity of the indebtedness secured by
this Agreement, nor shall the Investor's receipt of any awards, proceeds or
damages as provided in this Agreement operate to cure or waive VMN default in
payment of sums secured by this Agreement.
8.11 Uniform Commercial Code Security Agreement.
------------------------------------------
This Agreement is intended to be a security agreement pursuant to
the Uniform Commercial Code for any of the items specified above as part of the
Collateral which, under applicable law, may be subject to a security interest
pursuant to the Uniform Commercial Code, and VMN hereby grants the Investors,
collectively, a security interest in said items. VMN agrees to execute and file
financing statements, as well as extensions, renewals and amendments thereof,
and reproductions of this Agreement, and do whatever may be necessary under the
applicable Uniform Commercial Code in the state where the Collateral is located,
to perfect and continue the Investors' interest in the Collateral, all at VMN's
expense. The parties agree that such financing statements, extensions and
renewals may be filed in the name of the Investor and all other holders of the
Notes and AGF, collectively. VMN also agrees that the Investor may file on
behalf of the Investors any appropriate document in the appropriate index as a
financing statement for any of the items specified above as part of the
Collateral. VMN shall pay all costs of filing such financing statements and any
extensions, renewals, amendments, and releases thereof, and shall pay all
reasonable costs and expenses of any record searches for financing statements
the Investor may reasonably require. Without the prior written consent of the
Investor, VMN shall not create or allow to be created, pursuant to the Uniform
Commercial Code, any other security interest in the Collateral (other than AGF),
including replacements and additions thereto. Upon the occurrence of an event of
default, Investor shall have the remedies of a secured party under the Uniform
Commercial Code and, at the Investor's option, may also invoke the other
remedies provided in this Agreement as to such items. In exercising any of said
remedies, the Investor may proceed against the items of real property and any
items of personal property specified above as part of the Collateral separately
or together and in any order whatsoever, without in any way affecting the
availability of the Investor's remedies under the Uniform Commercial Code or of
the other remedies provided in this Agreement.
8.12 Rights of the Investor.
----------------------
9
<PAGE>
8.12.1 Upon the occurrence and continuance of an event of
default the Investor may require VMN to assemble the Collateral and make it
available to the Investor at the place to be designated by the Investor which is
reasonably convenient to both parties. The Investor may sell all or any part of
the Collateral as reasonably necessary to satisfy VMN's obligations hereunder to
Investor, as a whole or in parcels wither by public auction, private sale, or
any other reasonable method of disposition. Nothing in this Section 8.12.1 shall
be construed to limit any other of Investor's rights in connection with any and
all of the Collateral as provided herein. The Investor may bid at any public
sale on all or any portion of the Collateral. Unless the Collateral is
perishable or threatens to rapidly decline in value or is of the type
customarily sold on a recognized market, the Investor shall give VMN reasonable
notice of the time and place of any public sale, or of the time after which any
private sale or other disposition of the Collateral is to be made, and notice
given at least 10 days before the time of the sale or other disposition shall be
conclusively presumed to be reasonable. A public sale in the following fashion
shall be conclusively presumed to be reasonable:
8.12.2 Notice shall be given at least 10 days before the date of sale
by mail to VMN and publication once in a newspaper of general circulation
published in the county in which the sale is to be held;
8.12.3 The sale shall be held in a county in which the Collateral or
any part is located or in a county in which VMN has a place of business;
8.12.4 Payment shall be in cash or by certified check immediately
following the close of the sale;
8.12.5 The sale shall be by auction, but it need not be by a
professional auctioneer; and
8.12.6 The Collateral may be sold as is and without any preparation
for sale.
8.13 Obligation to Sell Collateral.
-----------------------------
Notwithstanding any provision of this Agreement, Investor shall be
under no obligation to offer to sell the Collateral. In the event any Investor
offers to sell the Collateral, there will be no obligation to consummate a sale
of the Collateral if, in Investor's reasonable business judgment, none of the
offers received by it reasonably approximates the fair value of the Collateral.
In the event the Investor elects not to sell the Collateral, Investor may elect
to follow the procedures set forth in the Uniform Commercial Code for retaining
the Collateral in satisfaction of VMN's obligation, subject to
10
<PAGE>
VMN's rights under such procedures.
8.14 Receiver.
--------
In addition to the rights under this Agreement, upon the occurrence
and continuance of an event of default by VMN, the Investor shall be entitled to
the appointment of a receiver for the Collateral as a matter of right whether or
not the apparent value of the Collateral exceeds the outstanding principal
amount of the Note.
8.15 Waiver of Marshaling.
--------------------
Notwithstanding the existence of any other security interest in the
Collateral held by the Investor or by any other party, the Investor shall have
the right to determine the order in which any or all of the Collateral shall be
subjected to the remedies provided by this Agreement. The Investor shall have
the right to determine the order in which any or all portions of the
indebtedness secured by this Agreement are satisfied from the proceeds realized
upon the exercise of the remedies provided in this Agreement. VMN, any party
who consents to this Agreement, and any party who now or hereafter acquires a
security interest in the Collateral and who has actual or constructive notice of
this Agreement, hereby waive any and all rights to require the marshaling of
assets in connection with the exercise of any of the remedies permitted by
applicable law or by this Agreement.
9. Remedies Cumulative.
-------------------
Each remedy provided in this Agreement is distinct and cumulative to
all other rights or remedies under this Agreement or afforded by law or equity,
and may be exercised concurrently, independently, or successively, in any order.
10. Waiver of Statute of Limitations.
--------------------------------
VMN hereby waives the right to assert any statute of limitations as a
bar to the enforcement of this Agreement or to any action brought to enforce the
Note or any other obligation secured by this Agreement.
11. Notices and Delivery.
--------------------
Any notices permitted or required under this Agreement shall be deemed
given upon the date of personal delivery or 72 hours after deposit in the United
States mail, postage fully prepaid, return receipt requested, addressed as
follows:
11
<PAGE>
VMN:
4950 MacArthur Boulevard, Suite 175
Newport Beach, California 92660
Attention: Chief Financial Officer
With a copy to:
O'Melveny & Myers
610 Newport Center Drive, Suite 1700
Newport Beach, California 92660
Attention: David A. Krinsky, Esq.
The Investor:
_________________________________
_________________________________
_________________________________
_________________________________
Attention: _____________________
or at any other address as any party may, from time to time, designate by notice
given in compliance with this Section. Any deliveries required under this
Agreement must be made by personal delivery at the applicable address listed
above.
12. Indemnification.
---------------
12.1 General.
-------
Each party at fault hereto agrees to indemnify, reimburse, and hold
harmless the other party, (the "indemnitee") from and against all claims,
damages, losses, liabilities, demands, suits, judgments, causes of action, civil
and criminal proceedings, penalties, fines, and other sanctions, and any
reasonable attorney fees and other reasonable costs and expenses, arising or
imposed on such other party (collectively "claims"), relating to or arising in
any manner out of:
12.1.1 this Agreement, the Note or the Warrant Agreement, or
the breach of any representation, warranty, or covenant made by the party at
fault under this Agreement, the Note or the Warrant Agreement; or
12.1.2 any issuance, offering, or sale of securities of VMN; or
12.1.3 any transaction, approval, or document contemplated by
the Agreement.
The parties hereto intend that this Agreement shall
12
<PAGE>
provide for indemnification in excess of that expressly provided for by statute,
including but not limited to, any indemnification provided by VMN's articles of
incorporation, its bylaws, a vote of its shareholders or disinterested
directors, or applicable law.
12.2 Definitions.
-----------
12.2.1 Expenses. For purposes of Section 12, the term
"expenses" shall mean (i) any expense, liability, or loss, including reasonable
attorney fees, judgments, fines, ERISA excise taxes and penalties, and amounts
paid or to be paid in settlement; (ii) any interest, assessments, or other
charges imposed on any of the items in part (i) of this subsection; and (iii)
any federal, state, local, or foreign taxes imposed as a result of the actual or
deemed receipt of any payments under this Agreement paid or incurred in
connection with investigating, defending, being a witness in, participating in
(including on appeal), or preparing for any of the foregoing in any proceeding
relating to any indemnifiable event.
12.3 Mandatory Indemnification. Notwithstanding any other provision
-------------------------
of this Agreement, to the extent that the indemnitee has been successful on the
merits in defense of any proceeding relating in whole or in part to an
indemnifiable event or in defense of any issue or matter in such proceeding, the
indemnitee shall be indemnified against all reasonable expenses incurred in
connection with such whole or part, as the case may be.
12.4 Partial Indemnification. If the indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by a party for a portion of
expenses, but not for the total amount of expenses, that party shall indemnify
the indemnitee for the portion to which the indemnitee is entitled.
12.5 Indemnification Payment. The indemnitee shall receive
-----------------------
indemnification of expenses in accordance with this Agreement as soon as
practicable after the indemnitee has made written demand for indemnification.
If the indemnitee has not received full indemnification within 30 days after
making a demand in accordance with the terms hereof, the indemnitee shall have
the right to enforce its indemnification rights under this Agreement by
commencing arbitration per the terms of this Agreement seeking an initial
determination. The parties hereby consent to service of process and to appear
in any such proceeding. The remedy provided for in this Section shall be in
addition to any other remedies available to the indemnitee in law or equity.
12.6 Consent. A party shall not settle any proceeding in any manner
-------
that would impose any penalty or limitation on the
13
<PAGE>
indemnitee without the indemnitee's written consent. Neither party will
unreasonably withhold their consent to any proposed settlement. A party at fault
shall not be liable to indemnify the indemnitee under this Agreement with regard
to any judicial award if the party at fault was not given a reasonable and
timely opportunity, at its expense, to participate in the defense of such
action; however, the party's liability under this Agreement shall not be excused
if participation in the proceeding by the party was barred by this Agreement.
12.7 Defense. In the event of any controversy or claim arising out of
-------
this Agreement or the breach of the Agreement for which indemnification is
available, the indemnitee may tender a defense to the party at fault, who hereby
agrees to promptly evaluate such defense. If the party at fault agrees to
defend against such controversy or claim, the indemnitee shall notify the party
at fault within thirty (30) days of the indemnitee's receipt of any written
instrument or pleading relating to any such controversy or claim arising out of
this Agreement or the breach of this Agreement. If timely acceptance of tender
is not forthcoming, the indemnitee may, at the expense of the party at fault,
retain its own counsel and the party at fault is not released of its obligations
to otherwise indemnify the indemnitee.
13. Investor's Representations and Warranties.
-----------------------------------------
13.1 Accredited Investor. The Investor represents and warrants that
-------------------
he or she is an Accredited Investor as that term is defined in Rule 501(a) of
Regulation D as promulgated by the Securities and Exchange Commission under the
Securities Act of 1933 (the "1933 Act") and is willing and able to bear the
economic risk of an investment herein. The Investor has adequate means of
providing for current needs and current contingencies, has no need for liquidity
in the investment, and is able to bear the economic risk of an investment in the
Company of the size contemplated.
13.2 Acquired for Investment. The Investor represents and warrants
-----------------------
that the Notes and Warrants are being acquired by the Investor in good faith for
investment and not with a view to or for sale in connection with any
distribution. The Investor understands and agrees that he/she must hold the
Notes and Warrants (or shares if the Warrants are exercised) indefinitely unless
they are subsequently registered under the 1933 Act or an exemption from
registration is available.
14. Entire Agreement.
----------------
This Agreement, the Note, and the Warrant, and all exhibits and
attachments thereto, contains the entire understanding between and among the
Parties and supersedes any
14
<PAGE>
prior understandings and agreements among them respecting the subject matter of
this Agreement.
15. Survival of Specific Obligations.
--------------------------------
The rights and obligations created by Section 12 with respect to the
duties to indemnify shall survive termination of this Agreement and will
continue into perpetuity.
16. Agreement Binding.
-----------------
This Agreement shall be binding upon the heirs, executors,
administrators, successors and assigns of the Parties hereto.
17. Amendment and Modification.
--------------------------
Subject to applicable law, this Agreement may be amended, modified, or
supplemented only by a written agreement signed by the Parties, including an
extension of the maturity date for the Note.
18. Attorney Fees.
-------------
In the event arbitration is brought by any party under this Agreement
to enforce any of its terms, it is agreed that the prevailing party shall be
entitled to reasonable attorney fees to be fixed by the arbiter(s).
19. Arbitration.
-----------
If at any time during the term of this Agreement any dispute,
difference, or disagreement shall arise upon or in respect of the Agreement, and
the meaning and construction hereof, every such dispute, difference, and
disagreement shall be referred to a single arbiter agreed upon by the Parties,
or if no single arbiter can be agreed upon, an arbiter or arbiters shall be
selected in accordance with the rules of the American Arbitration Association
and such dispute, difference, or disagreement shall be settled by binding
arbitration ion accordance with the then prevailing commercial rules of the
American Arbitration Association, and judgment upon the award rendered by the
arbiter may be entered in any court having jurisdiction thereof. The parties
hereto each jointly and severally waive any and all rights to appeal the
judgement or award of such arbiter(s).
20. Law Governing.
-------------
This Agreement shall be governed by and construed in accordance with
the laws of the State of California, except to the extent of Nevada statutory
law related to the set-up and
15
<PAGE>
EXHIBIT 10.60
PROMISSORY NOTE
---------------
Dated as of
December 19, 1997
Amount: $1,300,000
FOR VALUE RECEIVED, the undersigned Virtual Mortgage Network, Inc., a
Delaware Corporation, ("Maker"), promises to pay to the order of Kay Capital
Company, ("Lender"), the principal sum of $1,300,000, together with interest on
the unpaid principal balance no later than the earlier of: 1) February 14, 1998
(the "Maturity Date"); or 2) the completion of the Maker's Initial Public
Offering ("IPO").
1. Interest Rate.
-------------
The unpaid principal under this Promissory Note shall bear interest at a
rate of fifteen percent (15%) per annum simple interest. Upon the Maker's
failure to pay amounts due on the Maturity Date, the interest rate on this
Note shall increase to twenty percent (20%) per annum.
2. Computation.
-----------
Interest chargeable hereunder shall be calculated from the date hereof, and
if increased to 20% pursuant to Section 1, from the Maturity Date, on the
basis of a three hundred sixty (360) day year for the actual number of days
elapsed. Interest not paid when due shall be added to the unpaid principal
balance and shall thereafter bear interest at the same rate as principal.
All payments (including prepayments) hereunder are to be applied first to
the payment of accrued interest and the balance remaining applied to the
payment of principal.
3. Payments.
--------
Except as otherwise set forth herein, the unpaid principal under this
Promissory Note plus all accrued but unpaid interest thereon shall be
payable upon the earlier of: 1) the Maturity Date; or 2) the Maker's Initial
Public Offering. If the Maker has not repaid the principal amount together
with interest on the Maturity Date pursuant to Section 1 above, the Maker
then agrees to immediately repay the principal amount plus accrued interest
and a Late Fee Penalty of $600,000.
<PAGE>
In addition, the Lender shall be entitled to a $50,000 Commitment Fee, to be
paid by the Maker immediately upon execution of this Promissory Note and the
Maker will also issue to the Lender, immediately upon execution of this
Promissory Note, a warrant to purchase 100,000 shares of the Maker's Common
Stock at an exercise price per share equal to 105% of the Maker's IPO price,
exercisable for five years from the effective date of the IPO but not
exercisable during the first six months immediately following the effective date
of the IPO.
4. Additional Indebtedness.
-----------------------
The Company shall not obtain more than $500,000 of any additional Indebtedness
prior to the IPO without the Lender's approval.
5. Intercreditor Agreement.
-----------------------
The Lender shall be made a party to the Intercreditor Agreement on an equal
basis with the existing bridge debt lenders with the exception that the existing
bridge debt lenders have already agreed in writing that in the event of a
default and/or bankruptcy proceeding on behalf of the Maker, the Lender shall be
entitled to a majority of the representatives on any Creditors Committee, and/or
comparable entity, formed to represent the lenders' interests, including
Chairman of the Creditors' Committee.
6. Security Interest.
-----------------
Within ten (10) days of the execution of this Promissory Note, the Maker will
provide the Lender with an executed security agreement having the same terms and
conditions as the security agreement previously provided to the existing bridge
debt lenders. Failure to provide such security agreement within ten (10) days of
the execution of this Promissory Note shall constitute a default event under the
terms of this Promissory Note as defined in Section 11 below.
7. Binding Effect.
--------------
The execution, delivery, and performance by the Company of this Agreement and
the consummation of the transactions provided for herein have been duly
authorized by all necessary corporate action on the part of the Company, and
this Agreement is a legal, valid, and binding obligation of the Company,
enforceable against the Company in accordance with its terms.
<PAGE>
8. Voluntary Prepayment.
--------------------
The Maker may, at any time, prepay the unpaid principal amount evidenced by this
Promissory Note, in whole or in part, without penalty or premium, prior to the
Maturity Date, by paying to the lender in cash or by wire transfer or
immediately available federal funds, the amount of such prepayment. If any such
prepayment is less than the full repayment, then such prepayment shall be
applied first to the payment of accrued interest and the balance remaining
applied to the payment of principal.
9. Lawful Money; Designated Places of Payment.
------------------------------------------
All principal and interest due hereunder is payable in lawful money of the
United States of America, in immediately available funds, at Lender's designated
address not later than 6:00 PM, Pacific time, on the day of payment.
10. Waivers.
-------
Except as set forth elsewhere herein, Maker, for itself and its legal
representatives, successors, and assigns, expressly waives presentment, protest,
demand, notice of dishonor, notice of nonpayment, notice of maturity, notice of
protest, notice of intent to accelerate, notice of acceleration, presentment for
the purpose of accelerating maturity, and diligence in collection.
11. Default.
-------
Maker will be in default if any of the following occurs: a) Maker fails to make
payments when due; b) Maker breaks any promise made herein to Lender, or Maker
fails to perform at the time and strictly in the manner provided in this Note;
c) any representation or statement made or furnished to Lender by Maker is false
or misleading in any material respect; d) Maker becomes insolvent, a receiver is
appointed for any part of Maker's property, Maker makes an assignment for the
benefit of creditors, or any proceeding is commenced either by Maker or against
Maker under any bankruptcy or insolvency laws; and/or e) any creditor tries to
take any of Maker's property on or in which Lender has a lien or security
interest. It is expressly agreed that, upon the occurrence of an event of
default, as defined herein, the unpaid principal balance of this promissory
note, together with interest accrued thereon and the Late Fee Penalty, if
applicable, shall be due and payable without presentment, demand, protest, or
notice of protest, all of which are hereby expressly waived by the Maker.
<PAGE>
18. Transferability.
---------------
The Lender has the right to transfer, assign, or otherwise convey, the
right to principal and interest under this Promissory Note, as well as
the warrants being issued, by simply notifying the Maker of such transfer,
assignment, or conveyance. The Lender will provide the Maker with the
identity and address of the new owner and its interest in the Promissory
Note (and/or warrants) for the purpose of the Maker fulfilling its
obligations to the new owner of the Promissory Note (and/or warrants).
Made and Executed at Newport Beach, California
Virtual Mortgage Network, Inc.
(A Delaware Corporation)
By: /s/ MICHAEL A. BARRON
--------------------------
Name: Michael A. Barron
------------------------
Title: CEO
-----------------------
WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGEMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT
FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR
RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT,
OR ANY OTHER CAUSE.
<PAGE>
EXHIBIT 10.61
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE BEEN ACQUIRED FOR INVESTMENT FOR
THE HOLDER'S OWN ACCOUNT AND NOT WITH A VIEW TO OR FOR SALE IN CONNECTION WITH
ANY DISTRIBUTION OF THE SECURITIES. THE SECURITIES HAVE NOT BEEN REGISTERED OR
QUALIFIED UNDER THE SECURITIES ACT OF 1933 ("SECURITIES ACT") OR UNDER ANY
APPLICABLE STATE SECURITIES LAWS ("BLUE SKY LAWS"). AN OFFER TO SELL OR
TRANSFER OR THE SALE OR TRANSFER OF THESE SECURITIES IS UNLAWFUL UNLESS MADE
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR PERMIT, AS APPLICABLE, UNDER
THE SECURITIES ACT OR APPLICABLE BLUE SKY LAWS OR UNLESS AN EXEMPTION FROM
REGISTRATION AND/OR QUALIFICATION UNDER THE SECURITIES ACT AND APPLICABLE BLUE
SKY LAWS IS AVAILABLE AND AN OPINION OF COUNSEL OR OTHER EVIDENCE REASONABLY
SATISFACTORY TO THE COMPANY IS PROVIDED TO THE COMPANY TO THE EFFECT THAT SUCH
REGISTRATION OR QUALIFICATION IS NOT REQUIRED UNDER THE SECURITIES ACT AND
APPLICABLE BLUE SKY LAWS.
Warrant No. 96-809
COMMON STOCK PURCHASE WARRANT
December 19, 1997
THIS CERTIFIES THAT, for value received, Kay Capital Group
("Warrantholder") is entitled to subscribe for and purchase from Virtual
Mortgage Network, Inc. (the "Company"), 100,000 shares of the Company's Common
Stock, $.001 par value (the "Warrant Stock") at the Exercise Price (as hereafter
determined under Section 4) at any time from the date six months after the
closing of the Company's initial public offering ("IPO") to and including the
Expiration Date (as defined below), subject to the terms and conditions stated
herein. For purposes of this Warrant, the term "Expiration Date" shall mean five
years from the date hereof.
1. Exercise of Warrant.
-------------------
(a) The rights represented by this Warrant may be exercised, in whole
or in part (subject to the minimum exercise limitation set forth in this Section
1), by the holder hereof at any time six months after the closing of the
Company's IPO to and including the Expiration Date. This Warrant may be
exercised by the surrender of this Warrant and delivery of an executed
Subscription Agreement in the form attached hereto as Exhibit A to the Company
at its principal executive office, or such other place as the Company shall
designate in writing, accompanied by payment for the Warrant Stock so subscribed
for in cash or certified bank or cashier's checks. In the event of a partial
exercise of this Warrant, a substitute Warrant representing the number of shares
of Warrant Stock which were not acquired upon the exercise of the Warrant shall
be issued to the holder of this Warrant. No exercise of this Warrant may be made
for less than
<PAGE>
one-third of the number of shares of Warrant Stock initially subject to this
Warrant.
(b) Notwithstanding the provisions of Section 1(a) requiring payment by
cash or check, the Warrantholder may elect to make payment of the exercise
price, or any portion thereof, by delivering for cancellation securities of the
Company (including the unexercised portion of this Warrant) outstanding prior to
the exercise of this Warrant, with such securities to be credited toward such
exercise price at the fair market value (as determined below) of the securities,
in which event the certificates evidencing the securities delivered shall
accompany the notice of exercise and shall be duly endorsed or accompanied by
duly executed stock powers to transfer the same to the Company; provided,
however, that such payment in securities instead of cash or check shall not be
effective and shall be rejected by the Company if the Company is then prohibited
by applicable law from purchasing or acquiring the tendered securities.
If the Company rejects the payment in securities, the tendered notice of
exercise shall not be effective hereunder unless promptly after being notified
of such rejection the Warrantholder pays the purchase price in cash. For
purposes of this Section 1(b), the fair market value of securities delivered
upon exercise of the Warrant shall (i) if "publicly traded" (as defined below),
be valued at the average of the closing prices for the securities for the 30-day
period immediately preceding the delivery to the Company of the certificate(s)
evidencing such securities or (ii) if not publicly traded, be valued in good
faith by the Board of Directors of the Company; provided, however, that if in
the good faith judgement of the Warrantholder the valuation established by the
Board of Directors under this clause (ii) does not reasonably reflect the fair
market value of the securities to be delivered in exercise of this Warrant, then
the determination of fair market value shall be made by an independent appraiser
or investment banking institution mutually acceptable to the Company and to the
Warrantholder (or, if such selection cannot be made by the Company and the
Warrantholder, by an independent appraiser or investment banking firm selected
by the American Arbitration Association in accordance with its rules), with the
fees and expenses of such independent appraiser or investment banking
institution to be paid by the Warrantholder. For purposes of the preceding
sentence, the "closing prices" shall mean the closing prices of securities of
the class and series of securities delivered as reported with respect to the
market (or the composite of the markets, if more than one) in which such
securities are then traded, or if no such closing prices are reported, the
lowest independent offer quotation reported therefor in Level 2 of NASDAQ for
trading days during the applicable 30-day averaging period. "Publicly traded"
means a security which is listed or admitted to unlisted trading privileges on a
national securities exchange or as to which sales
2
<PAGE>
or bid and offer quotations are reported in the automated quotation system
("NASDAQ") operated by the National Association of Securities Dealers, Inc.
2. Investment Representation. The holder by accepting this Warrant
-------------------------
represents that the Warrant is acquired for the holder's own account for
investment purposes and not with a view to any offering or distribution and that
the holder has no present intention of selling or otherwise disposing of the
Warrant or the Warrant Stock in violation of applicable securities laws. Upon
exercise, the holder will confirm, in respect of securities obtained upon such
exercise, that the holder is acquiring such securities for the holder's own
account and not with a view to any offering or distribution in violation of
applicable securities laws. The holder acknowledges that the certificate(s)
representing the Warrant Stock issued upon exercise of this Warrant shall be
endorsed with the legend set forth on this Warrant and all other legends, if
any, required by applicable federal, state and foreign securities laws to be
placed on the certificate(s).
3. Validity of Warrant Stock. The Company warrants and agrees that all
-------------------------
shares of Warrant Stock which may be issued upon the exercise of this Warrant
will, upon issuance, be validly issued, fully paid and nonassessable and free
from all taxes, liens and charges with respect to the issue thereof. The
Company further warrants and agrees that during the period within which this
Warrant may be exercised, the Company will at all times have authorized and
reserved a sufficient number of shares of Warrant Stock to provide for the
exercise of this Warrant.
4. Exercise Price; Number of Warrant Shares.
----------------------------------------
(a) The Exercise Price per share of Warrant Stock shall initially be
one hundred five percent (105%) of the IPO price per share of Common Stock.
(b) Upon occurrence of any of the following, the Exercise Price and the
number of shares of Warrant Stock to be issued upon exercise of this Warrant
shall be adjusted as follows:
(i) If at any time after the date hereof the number of shares of
Common Stock outstanding is increased by a stock dividend payable in shares
of Common Stock or by a subdivision or split-up of shares of Common Stock,
then, on the record date of such stock dividend, subdivision, or split-up,
the Exercise Price shall be appropriately decreased and the number of
shares of Warrant Stock issuable on exercise of this Warrant shall be
appropriately increased in proportion to such increase of outstanding
shares.
3
<PAGE>
(ii) If at any time after the date hereof the number of shares
of Common Stock outstanding is decreased by a combination of the
outstanding shares of Common Stock, then, on the effective date of such
combination, the Exercise Price shall be appropriately increased and the
number of shares of Warrant Stock issuable on exercise of this Warrant
shall be appropriately decreased in proportion to such decrease in
outstanding shares.
(c) All calculations under this Section 4 shall be made to the
nearest cent or to the nearest whole share, as the case may be. No fractional
shares of Warrant Stock shall be issued upon exercise of this Warrant. Any
fractional shares of Warrant Stock which might otherwise be issued upon exercise
of this Warrant shall be rounded to the nearest whole share (with one-half
rounded up).
(d) If the Exercise Price shall be adjusted, the Company shall
prepare and mail to the holder hereof a certificate setting forth the event
requiring the adjustment, the amount of the adjustment, the method by which the
adjustment was calculated, and (after giving effect to the adjustment) the
Exercise Price.
(e) A calculation of any adjustment under this Section 4 evidenced by
a certificate of any firm of independent certified public accountants of
recognized standing selected by the Company and satisfactory to the holder
hereof (which may be the firm of independent certified public accountants
regularly employed by the Company) shall be presumed a correct calculation of
the adjustment for purposes of this Section 4. The foregoing presumption shall
constitute a rebuttable presumption, with the party disputing the calculation
bearing the burden of proving the incorrectness of the calculation.
5. Notice of Certain Events. If at any time:
------------------------
(a) The Company shall declare any dividend upon the Common Stock,
whether payable in cash, property or capital stock, or make any distribution to
the holders of Common Stock;
(b) There shall be any recapitalization or reclassification of the
capital stock of the Company, or consolidation or merger of the Company with
another corporation;
(c) There shall be a voluntary or involuntary dissolution, liquidation
or winding up of the Company; or
(d) The Company shall propose to enter into a Terminating Transaction
not covered by the preceding paragraphs (a) through (c),
4
<PAGE>
then, in each such case, the Company shall give to the holder of this Warrant at
the holder's address registered on the books of the Company, not less than 20
days' prior written notice of the proposed event, by first class certified mail,
postage prepaid and return receipt requested, of (x) the date on which the books
of the Company shall close or a record shall be taken for purposes of
ascertaining which stockholders will be entitled to vote on such
reclassification, reorganization, consolidation, merger, dissolution,
liquidation or winding up, as the case may be; (y) the date on which the vote
shall be taken concerning such reclassification, reorganization, consolidation,
merger, dissolution, liquidation or winding up, as the case may be; and (z) the
date on which such dividend or distribution is to be paid or such
reclassification, reorganization, consolidation, merger, dissolution,
liquidation or winding up, as the case may be, is to be effective. Such notice
shall also specify the date as of which the record holders of capital stock of
the Company shall participate in said dividend or distribution or shall be
entitled to exchange their shares of capital stock for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, dissolution, liquidation or winding up, as the case may be.
For purposes of this Section 5, the term "Terminating Transaction"
shall mean any one of the following events: (a) the dissolution or liquidation
of the Company; (b) a reorganization, merger, or consolidation of the Company
with one or more entities, as a result of which the Company goes out of
existence or becomes a subsidiary of another entity (which shall be deemed to
have occurred if another entity, group of entities or persons acting in concert
shall own, directly or indirectly, more than 50% of the aggregate voting power
of all outstanding equity securities of the Company); or (c) a sale of all or
substantially all of the Company's assets.
6. Transfer of Warrant.
-------------------
(a) Subject to Section 6(b) below, the holder of this Warrant agrees
to give the Company not less than 30 days' prior written notice before
transferring this Warrant. The foregoing notice shall describe the manner of
any proposed transfer of this Warrant or any interest therein and the
consideration to be received by the holder. The Company shall have a right of
first refusal (for 30 days after receipt of the holder's notice) to purchase
this Warrant at the same price and on the same terms offered by a third party if
this Warrant is proposed to be transferred.
(b) Notwithstanding the Company's right of first refusal set forth in
Section 6(a), this Warrant, in whole or in part, may be freely and successively
assigned, held in trust or otherwise transferred to or in favor of any
Warrantholder Associate (as hereinafter defined). Each assignment of this
5
<PAGE>
Warrant shall be deemed a partitioned right which is separately enforceable by
the assignee, transferee or other beneficiary. Each assignee, transferee or
other beneficiary shall be entitled to the full benefit of the Warrant assigned,
subject to any conditions to which the Warrant is subject and provided always
that such assignee, transferee or other beneficiary shall carry out all the
obligations, liabilities and responsibilities of the holder of the Warrant
hereunder. No company or other entity may enjoy the benefit of any Warrant
after the company or entity has first ceased to be a Warrantholder Associate.
For purposes of this Section 6(b), a "Warrantholder Associate" means any person
controlling, controlled by, or under common control with the initial
Warrantholder.
(c) No transfer or assignment of this Warrant shall be made without
compliance with the provisions of Section 2 and the legend set forth on the
first page of this Warrant.
(d) Notwithstanding the provisions of Section 6(b) above, this
Warrant may not be assigned, held in trust, or otherwise transferred to any
Warrantholder Associate in amounts of less than one-third of the number of
shares subject to this Warrant.
7. No Stockholder Rights. This Warrant shall not entitle the holder
---------------------
hereof to any voting rights or other rights as a stockholder of the Company, or
to any other rights whatsoever except the rights herein expressed, and no cash
dividend paid out of earnings or surplus or interest shall be payable or accrue
in respect of this Warrant or the interest represented hereby or the shares
which may be subscribed for and purchased hereunder until and unless and except
to the extent that the rights represented by this Warrant shall be exercised.
8. Miscellaneous Matters.
---------------------
(a) As used herein, the term "Warrant Stock" shall mean the Company's
presently authorized Common Stock par value $.001, and stock of any other series
or class into which such presently authorized Common Stock may hereafter have
been converted or changed pursuant to any recapitalization or change in such
Common Stock.
(b) As used herein, the word "person" shall mean an individual or
entity.
(c) This Warrant and the name and address of the holder will be
registered in a Warrant Register that is kept at the principal office of the
Company, and the Company may treat the holder so registered as the owner of this
Warrant for all purposes.
6
<PAGE>
(d) This Warrant shall be governed by and interpreted in accordance
with the internal laws, and not the law of conflicts, of the State of
California.
7
<PAGE>
IN WITNESS WHEREOF, the Company and the Warrantholder have executed
this Warrant effective as of the date first written above.
COMPANY
VIRTUAL MORTGAGE NETWORK, INC.
a Nevada corporation
By: /s/ Michael Barron
-------------------------------
Name: Michael Barron
------------------------
Title: CEO
------------------------
WARRANTHOLDER
By:
-------------------------------
Name:
-------------------------
Title:
------------------------
8
<PAGE>
EXHIBIT A
SUBSCRIPTION AGREEMENT
___________________, 19___
To: Virtual Mortgage Network, Inc.
The undersigned, pursuant to the provisions set forth in Warrant No.
96-__, hereby agrees to subscribe for and purchase _____________ shares of the
Warrant Stock covered by such Warrant, and makes payment herewith in full for
such Warrant Stock at the Exercise Price.
Signature: ________________________
Printed Name
and Title: ________________________
Address: __________________________
__________________________
__________________________
A-1
<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED ____________________________ hereby sells, assigns
and transfers all of the rights of the undersigned under Warrant No. 96-__, with
respect to the number of shares of Warrant Stock covered thereby set forth below
unto:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
- ---------------- ----------------------- --------
-----------------------
Dated: ____________________, 19__
Signature:
----------------------------
Printed Name
and Title:
-----------------------------
Address:
------------------------------
------------------------------
------------------------------
A-2
<PAGE>
EXHIBIT 11.1
VIRTUAL MORTGAGE NETWORK INC.
STATEMENT OF COMPUTATION OF PRO FORMA EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Nine Months Ended
December 31, 1996 September 30, 1996 September 30, 1997
----------------- ------------------ ------------------
<S> <C> <C> <C>
Average common shares outstanding............ 666,709 588,787 1,214,601
Common and common equivalent shares
(including the effect of the automatic
conversion of warrants) issued during
the twelve month period prior to the
initial public offering at prices below
the assumed public offering price (using
the treasury stock method and assumed
initial public offering price) in accordance
with Staff Accounting Bulletin No. 83....... 358,545 358,545 249,388
----------- ----------- -----------
Shares used in pro forma per share
calculations................................ 1,025,254 947,332 1,463,989
=========== =========== ===========
NET LOSS..................................... $(6,980,748) $(4,205,561) $(7,949,669)
Pro forma net loss per share................. $ (6.81) $ (4.44) $ (5.43)
=========== =========== ===========
</TABLE>
<PAGE>
EXHIBIT 21.1
------------
Subsidiaries of the Registrant
Sutter Mortgage Corporation, a California corporation, is the only
subsidiary of the Registrant.
Sutter Mortgage Corporation does business under the following names:
1. Virtual Mortgage Transaction Network
2. Parkside Financial
3. N. California Mortgage & Loan
4. All Cal Mortgage
5. Broadway Financial
6. Meyerson Residential
7. Virtual Mortgage Services
8. Sutter West Mortgage
9. Vendl Financial
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made part of this
registration statement.
ARTHUR ANDERSEN LLP
-------------------
Orange County, California
December 30, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1996 AND AS OF
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 SEP-30-1997
<CASH> 39 97
<SECURITIES> 0 0
<RECEIVABLES> 0 500
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 309 1,383
<PP&E> 612 773
<DEPRECIATION> 156 353
<TOTAL-ASSETS> 780 1,830
<CURRENT-LIABILITIES> 5,324 8,817
<BONDS> 0 0
2,017 2,017
0 0
<COMMON> 3 7
<OTHER-SE> (6,563) (9,030)
<TOTAL-LIABILITY-AND-EQUITY> 780 1,830
<SALES> 123 689
<TOTAL-REVENUES> 123 689
<CGS> 0 0
<TOTAL-COSTS> 6,453 6,711
<OTHER-EXPENSES> (44) 46
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 696 1,882
<INCOME-PRETAX> (6,981) (7,950)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (6,981) (7,950)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,981) (7,950)
<EPS-PRIMARY> (6.81) (5.43)
<EPS-DILUTED> (6.81) (5.43)
</TABLE>
