<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 1998
REGISTRATION NO. 333-38405
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2 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>
<CAPTION>
DELAWARE 7374 88-0334342
<S> <C> <C>
(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.
JAMES T. SEERY, ESQ.
THOMAS E. WOLFE, 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>
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.005 par value(2).............................. $28,462,500 $5,692
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Common Stock, $.005 par value(3).............................. $7,815,720 $1,563
- ---------------------------------------------------------------------------------------------------
Common Stock, $.005 par value, underlying Representatives'
Warrants(4).................................................. $4,083,750 $817
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Total......................................................... $40,361,970 $8,072(5)
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</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 3,300,000 shares sold by the Company hereby and 495,000 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.
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<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
3,300,000 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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUBJECT TO COMPLETION, DATED , 1998
3,300,000 SHARES
[LOGO OF VIRTUAL MORTGAGE NETWORK]
COMMON STOCK
-----------
Virtual Mortgage Network, Inc. (the "Company" or "Virtual Mortgage") hereby
offers 3,300,000 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 $7.50
per share. For information regarding the factors considered in determining the
initial public offering price of the Common Stock, see "Underwriting." The
Company has applied to have the Common Stock approved for listing on the
American Stock Exchange (the "AMEX") under the symbol "VMX," 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, of which holders of 946,991 shares of Common Stock have executed
the Provisional Lock-up Agreement (as hereinafter defined) as of the date
hereof. See "Shares Eligible for Future Sale." Subject to such lock-up
arrangements and restrictions, the Registered Stockholders may offer and sell
such shares of Common Stock on the AMEX, 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 10 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>
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UNDERWRITING PROCEEDS
PRICE TO COMMISSIONS TO THE
PUBLIC AND DISCOUNTS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................. $ $ $
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Total(3).................................. $ $ $
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- --------------------------------------------------------------------------------
</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 330,000 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 $1,284,968,
and the Representatives' Expense Allowance.
(3) The Company has granted to the Underwriters a 45-day option to purchase up
to an aggregate of 495,000 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 March , 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, , 1998
1,042,096 SHARES
[LOGO OF VIRTUAL MORTGAGE NETWORK]
COMMON STOCK
------------
This Prospectus relates to 1,042,096 shares of Common Stock being sold by
certain Registered Stockholders, of which have executed the Provisional
Lock-up Agreement (as hereinafter defined). Subject to such lock-ups, as
applicable, the Registered Stockholders may offer and sell the shares of Common
Stock owned by them on the American Stock Exchange, 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 3,300,000 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
330,000 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 495,000 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. SEE "RISK FACTORS" BEGINNING ON
PAGE 10.
------------
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."
This document has been approved by Value Investing Partners (U.K.) Ltd,
regulated by the Securities and Futures Authority ("SFA"). The securities
described in this document are not available to persons in the United Kingdom
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.
2
<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 February 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, through the use of its LoanMaker System and
traditional distribution systems, operates both as a mortgage bank, offering
the loan products of lenders for which the Company is a delegated underwriter,
and as an independent mortgage broker. As a delegated underwriter, the Company
can 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 31, 1997, approximately 76 LoanMaker Systems had been installed
and 93 were on order to be installed in the first half of 1998 in selected real
estate offices. The Company had 64 LoanMaker Systems available as of
December 31, 1997, which are sufficient to meet installations scheduled through
March 1998. In addition, the Company is negotiating for up to an additional 250
installations at three other real estate brokerage companies.
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 and typically at a lower cost. 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 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.
In order to control more of the underwriting decisions and the processing and
closing of 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 Corporation ("Sutter Mortgage"), a
residential mortgage bank based in Walnut Creek, California in June 1997, began
integrating operations in September 1997
3
<PAGE>
and closed the acquisition (the "Acquisition") in December 1997. The Company
currently conducts all of its mortgage banking and brokering activities through
Sutter Mortgage. As a mortgage bank and delegated underwriter for 19 of the 29
lenders represented on the LoanMaker System as of December 31, 1997, Sutter
Mortgage makes many of the underwriting decisions, which enables the Company to
increase the speed of the loan approval process and the percentage of loans
that can be approved on-line within one to two hours. Sutter Mortgage acts as a
mortgage broker for the remaining 10 lenders.
The Company has a very limited operating history upon which an evaluation of
the Company and its prospects can be based. Since inception through September
30, 1997, the Company experienced aggregate losses of $16,475,000, all of which
were incurred in developing and marketing the LoanMaker System. 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 at least the next 12 months. See
"Risk Factors--Risks Related to the Company," "--History of Losses; Anticipated
Future Losses; Equity and Working Capital Deficits," "--Limited Revenues
Generated From LoanMaker System" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview."
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 bankers and brokers
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.
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 buyer's 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 licensed 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
or 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 beta testing of the "Paris"
technology in December 1997, intends to begin the desk-top roll-out in the near
future and intends to begin the roll-out of the laptop PC and Internet version
by June 1998. There can be no assurance, however, that this schedule will be
met.
4
<PAGE>
Marketing Strategy
The Company's principal marketing strategy is to deploy the LoanMaker System
in offices of the 200 largest real estate brokerage companies in the United
States, based on annual real estate sales volume. The Company installs the
LoanMaker System without cost to the real estate brokerage company and
generally pays the real estate brokerage company 0.25% of the face value of
each closed loan for settlement services performed by the real estate brokerage
company in connection with the mortgage loan. 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 has begun installing LoanMaker Systems in
offices of seven of the 200 largest real estate brokerage companies in the
U.S., having completed installations in 33 of 92 potential office sites. In
addition, the Company has signed letters of intent with three other such
companies and is negotiating with one additional such company. The Company has
used the 1997 edition of Real Facts, published by Real Trends-Dallas, Texas as
its basis for classifying the named companies among the 200 largest real estate
firms in the country.
As of December 31, 1997, the Company had installed LoanMaker System in 76
real estate offices serving 11 metropolitan areas in Arizona, California,
Florida, Louisiana, New Jersey, Oregon and Texas, with 93 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 some of 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 to begin in the first quarter of 1998. In addition, the Company is
negotiating to install up to 250 additional LoanMaker Systems, including in
certain offices of three other real estate companies: O'Conor, Piper & Flynn
(Maryland), Edina Realty (Minnesota) and Iowa Realty (Iowa).
To date, the Company has initiated efforts to negotiate for the installation
of LoanMaker Systems with 16 of the 200 largest real estate brokerage
companies. Seven negotiations were successful, three have resulted in letters
of intent, four are still in negotiation and two were unsuccessful. The Company
believes that it will be successful in entering into agreements with more real
estate brokerage companies in the top 200, but no assurance of this success can
be given.
Growth Strategy
The Company's strategy is to exploit its proprietary LoanMaker System to
establish itself as a leading low-cost loan origination transaction processor
serving the $785 billion one-to-four family residential mortgage industry in
the United States. The Company believes the transaction processing capabilities
of the LoanMaker System, which generate transaction fees generally between 1-1
1/2% of the face value of loans, will be the most significant contributor of
its future revenue growth. The Company's principal short-term focus is to:
. increase the number of installations with the Company's existing real
estate brokerage company relationships;
. establish relationships with more of the 200 largest real estate
brokerage companies;
. continue to increase consumer awareness and acceptance of the LoanMaker
System; and
. increase the volume of loans originated through the LoanMaker System.
5
<PAGE>
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 financial 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
February 1998. Unless otherwise noted, references herein to "Virtual Mortgage"
or the "Company" refer to Virtual Mortgage Network, Inc. and its wholly-owned
subsidiary, 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.
6
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock Offered by the Company................... 3,300,000 shares
Common Stock to be outstanding after the Offering(1).. 5,771,086 shares
Use of proceeds....................................... For purchase and roll-
out of LoanMaker
Systems, repayment of
outstanding debt,
including debt relating
to the Acquisition, new
product development and
general corporate
purposes, including
working capital and
capital expenditures.
Proposed American Stock Exchange symbol............... "VMX"
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 issued in private placements; (ii) 368,136
shares issued upon exercise of warrants at an exercise price of $.005 per
share; and (iii) 51,633 shares issued upon conversion of 207,000 shares of
Series A Preferred Stock, all of which occurred subsequent to September 30,
1997. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources." Excludes (i)
509,501 shares issuable upon conversion of 2,043,000 outstanding shares of
Series A Preferred Stock; (ii) 447,895 shares issuable upon conversion of
447,895 shares of Series B Preferred 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) 115,616 shares to be
issued upon the exchange of interest outstanding on certain debt, the
principal of which will be exchanged for Series B Preferred Stock upon the
effectiveness of the Offering (assuming a March 6, 1998 effective date);
(iv) 509,759 shares reserved for issuance pursuant to warrants with
exercise prices ranging from $4.89 to $7.88 per share; (v) 1,409,000 shares
reserved for issuance under the Company's stock option plans, of which
365,451 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; (vi) 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 (vii) 330,000 shares reserved for issuance pursuant to the
Representatives' Warrants.
7
<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.
VIRTUAL MORTGAGE
<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 $18,811
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 68,098
Lines of credit and
financing
arrangements........... -- -- -- 44,798 44,798
Notes payable and
related accrued
interest............... 250 3,742 6,757 10,171 --
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) (6,663) 18,075
</TABLE>
(footnotes on following page)
8
<PAGE>
SUTTER MORTGAGE
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDING
-------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
------ ------- ------- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues................ $5,749 $10,785 $ 5,305 $4,898 $7,479 $ 7,162
Operating expenses...... 5,058 9,344 7,202 5,287 8,000 8,743
------ ------- ------- ------ ------ -------
Income (loss) from
operations............. 691 1,441 (1,897) (389) (521) (1,581)
Net income (loss)....... 407 1,116 (1,594) (392) (523) (1,581)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
------ ------- ------ ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and Equivalents....... $660 $ 1,437 $466 $379 $266 $169
Mortgage loans held for
sale, current............. 8,953 34,585 9,248 34,321 23,642 44,685
Property and Equipment,
net....................... 327 739 705 459 431 476
Total assets .............. 10,471 38,614 11,158 35,600 24,568 45,565
Lines of credit and
financing arrangements.... 8,995 34,147 9,378 34,396 23,945 44,798
Total stockholders' equity
(deficit)................. 1,044 2,125 1,373 751 (268) (685)
</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 365,451 shares
are subject to outstanding options at February 1998 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; and (iii) adjustments for a note payable in the aggregate
principal amount of $1,300,000 issued at a discount of $350,000 and notes
payable in the aggregate principal amount of $450,000 issued subsequent to
September 30, 1997 with a fee of 35% on the outstanding principal on such
notes, 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 $5.7 million of debt and accrued interest, which includes
amounts due in connection with the Acquisition, and the exchange of $4.3
million in debt for Series B Preferred Stock.
9
<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 twelve 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, as of
December 31, 1997, had installed 76 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 installed and the number of loans made using
them. Various factors affect the Company's ability to increase the number of
LoanMaker Systems installed 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 real estate agents to recommend and sell the use of the system
to their clients. These
10
<PAGE>
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, factors outside the Company's control might
cause the proceeds not to be sufficient. Among these factors are a more rapid
growth of system installations than planned, which, if not effectively
managed, could utilize cash faster than planned and possibly direct resources
from producing loans to installing systems and training new personnel in order
to accelerate installations of LoanMaker Systems to meet the increased demand.
In addition, other factors outside the Company's control which could impact
cash available to fund operations are changes in interest rates and a
sustained drop in demand for real estate loans. See "Risk Factors--Changes in
Interest Rates" and "--Economic Slowdown." 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.
11
<PAGE>
The Company expects to experience significant fluctuations in future
quarterly operating results, which may be caused by many factors. A number of
the factors that can cause the Company's quarterly results to fluctuate are
described below:
Software Defects. The performance of the LoanMaker System is critical to the
Company's ability to earn revenues. Current and future LoanMaker Systems do
and will employ sophisticated computer software, and products and services
based on sophisticated software might contain undetected errors and fail when
introduced or when usage increases. Even though the current LoanMaker System
has been in commercial use for a period of time and the Company beta tests its
software before commercial introduction, there is the possibility that
software defects might exist and adversely affect software performance.
Sufficiently severe and sustained software defects could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Loan Product Pricing Competition. The Company's competitors might offer
lower priced mortgage loan products, leading to a decline in the Company's
market share and a decrease in the Company's revenues and margins, which could
have a material adverse effect on the Company's business, operating results
and financial condition.
Borrower Cancellations of Loans in Progress. When a potential borrower
applies for a loan through the LoanMaker System, the Company devotes time to
processing the application. If the potential borrower cancels the loan in
progress, the Company incurs a cost without earning any revenues. A potential
borrower might cancel for a number of reasons, including obtaining a more
attractive loan from a competitor or determining that he or she does not need
a loan. If the Company experiences a substantial volume of loan cancellations,
the cancellations could have a material adverse effect on the Company's
business, financial condition and results of operations.
Changes in Operating Expenses. The Company is primarily at risk for
increases in operating expenses in periods of low interest rates when demand
for mortgage loans is relatively high. During those periods, mortgage lenders,
including the Company, compete for a limited pool of qualified mortgage loan
personnel. Consequently, salary expense can increase and mortgage lenders are
at risk of losing personnel to competitors.
Delay in Installation of ISDN Telephone Lines. In planning the installation
of a LoanMaker System, the Company expects that an ISDN telephone line will be
installed within 30 days after an order is given. If the ISDN telephone line
is not installed within the expected time period, the installation of the
LoanMaker System will be delayed as will the receipt of revenues from that
system.
Due to the foregoing factors, the Company's results of operations for any
particular quarter might be below the expectations of public market analysts
and investors. In that event, the price of the Company's Common Stock could be
materially adversely affected.
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
12
<PAGE>
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 MATERIAL RELATIONSHIPS
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 who must
sign contracts to use the LoanMaker System and the lenders on the LoanMaker
System, all of which may terminate their relationship with the Company at any
time without penalty or any charge. Specifically, 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 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 revenues derived from the LoanMaker Systems and on the Company's business,
operating results and financial condition.
RELIANCE ON MATERIAL SUPPLIERS
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 December 31,
1997, the Company was past due on lease payments to Data General of
approximately $1,597,000. The Company and Data General have agreed to a
payment 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 64 LoanMaker Systems available for new
installations as of December 31, 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."
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, 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
13
<PAGE>
condition are dependent on general trends in the California economy and its
residential real estate market. Declines in the residential real estate market
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
adverse effect upon the Company's business, operating results and financial
condition. See "Management."
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 were removed as
of October 1997. Mr. Barron reached a settlement with the IRS in November 1997
14
<PAGE>
with respect to the tax assessment against him and paid the settlement amount.
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. All of Mr. Barron's shares of Common Stock are currently pledged to
secure such loans, subject to the Provisional Lock-up Agreement, and, once the
loans are paid in full, to secure certain indemnification obligations to the
Company relating to a threatened lawsuit involving the Company. See "Risks
Related to Certain Potential Litigation."
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, 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 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
15
<PAGE>
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.
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.
16
<PAGE>
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.
The mortgage origination business is highly competitive and, from time-to-
time in local markets, competitors may institute extremely competitive pricing
designed to expand market share. There can be no assurance that the Company
would be able to respond quickly enough to competitive pressures to prevent
erosion in its normal volume levels.
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."
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
17
<PAGE>
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 plans to begin installation of LoanMaker Systems employing its
"Paris" technology in the near future and to develop further enhancements and
revisions of the LoanMaker System software in the future. Even though the
Company beta tests its software, there is the possibility that software
defects might exist and adversely affect software performance upon commercial
deployment. If sufficiently severe and sustained, such defects could have a
material adverse effect on the Company.
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
18
<PAGE>
introduce new software or hardware changes and respond to industry changes on
a timely basis, its business, 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 Sutter Mortgage, 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.
The Company conducts all of its mortgage lending and brokerage activities
through Sutter Mortgage. Sutter Mortgage is currently licensed to originate
mortgage loans in Arizona, California, Florida, Idaho, New Jersey, Ohio,
Oregon, Utah and Virginia and has applied for a lender's license in Iowa and
Maryland. The Company believes that Sutter Mortgage is exempt from the lender
license requirements in Louisiana, Minnesota, Nevada, New Mexico and Texas.
Sutter Mortgage is currently licensed to broker mortgage loans in California,
Florida, Idaho, Oregon, New Jersey, Utah and Virginia. The Company believes
that Sutter Mortgage is exempt from the broker license requirements in
Arizona, Louisiana, Minnesota, Nevada and New Mexico.
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 voting 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 Arizona, Florida, New Jersey, Oregon and Virginia.
The loss of required licenses would have a material adverse effect on the
Company's business, operating results and financial condition.
19
<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 listing on the
AMEX. 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: (i)
5,771,086 shares of Common Stock (assuming no exercise of outstanding options
or warrants after December 31, 1997); (ii) 2,043,000 shares of Series A
Preferred Stock (which are convertible into 509,501 shares of Common Stock as
of December 31, 1997); (iii) 447,895 shares of Series B Preferred Stock (which
are initially convertible into 447,895 shares of Common Stock); (iv) 115,616
shares of Common Stock to be issued upon the exchange of interest outstanding
on certain debt upon the closing of the Offering assuming a March 6, 1998
effective date; (v) warrants to acquire 509,759 shares of Common Stock; (vi)
non-employee director and employee stock options to acquire 375,677 shares of
Common Stock; and (vii) employee stock options to acquire 552,800 shares of
Common Stock (such options to be granted concurrently with the closing of the
Offering).
Of the 5,771,086 shares of Common Stock: (i) 3,300,000 shares to be sold in
the Offering (3,795,000 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 ("Rule
144"), which shares will be subject to the resale limitations of Rule 144;
(ii) 1,042,096 shares will be registered concurrently with the Offering and
under the registration statement of which this Prospectus forms a part (of
which shares 946,991 are subject to an agreement with Barington Capital Group,
L.P. ("Barington") which prohibits the transfer or sale of any shares of
Common Stock and related securities of the Company for up to 24 months
following the effective date of the Offering (the "Provisional Lock-up
Agreement")); and (iii) 1,428,990 shares will be "Restricted Securities" as
that term is defined under Rule 144 (of which shares 1,234,706 are subject to
the Provisional Lock-up Agreement).
In addition, of the 2,511,248 shares of Common Stock issuable upon certain
events, 2,421,672 shares are subject to the Provisional Lock-up Agreement.
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. In the event Barington
releases all of the security holders from the Provisional Lock-up Agreement:
(i) 1,042,096 shares of Common Stock will be freely transferable immediately;
(ii) 3,011,761 shares of Common Stock (including shares of Common Stock
issuable upon the conversion of Preferred Stock, the exchange of accrued
interest and the exercise of warrants) will be
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<PAGE>
subject to the resale limitations of Rule 144; (iii) 10,225 shares of Common
Stock issuable upon the exercise of options granted outside of the 1995 Plan
and 1997 Plan will be subject to the resale limitations of Rule 144; and (iv)
all of the Common Stock issuable upon the exercise of options granted pursuant
to the Company's 1995 Plan and 1997 Plan will be subject to the resale
limitations of Rule 701 adopted under the Securities Act and may be subject to
volume limitations imposed by Rule 144.
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 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 $20,990,000 estimated net proceeds of the Offering, the Company
expects to devote approximately $4,204,000 to the repayment of indebtedness
and $10,759,000 to purposes specifically identified by the Company. See "Use
of Proceeds." The remaining $6,027,000 of the net proceeds the Company intends
to devote to working capital, including paying Data General approximately
$1,700,000 to reduce outstanding lease payment obligations. Other than the
payment to Data General, the Company 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 $5.56 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
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<PAGE>
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 and the right by a majority
of the holders of the Series A Preferred Stock to elect one director so long
as at least 1,500,000 shares of the Series A Preferred Stock remains
outstanding. 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. 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 Series A Preferred Stock
and Series B Preferred Stock accrue dividends of 10% and 9.9% annually,
respectively, commencing with the completion of the Offering. In addition, the
Company's Certificate of Incorporation precludes 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, if and when declared by the Company's Board
of Directors. See "Dividend Policy" and "Description of Capital Stock--
Preferred Stock."
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<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 is 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."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of 3,300,000 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 $20,990,000
($24,331,000 if the Underwriters' over-allotment option is exercised in full).
The Company believes that the remaining proceeds from the Offering, after
repayment of debt and Acquisition debt and paying other obligations, 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 the net proceeds from the Offering approximately
as follows:
<TABLE>
<CAPTION>
APPROXIMATE
APPROXIMATE PERCENTAGE
DOLLAR OF NET
AMOUNT PROCEEDS
----------- -----------
<S> <C> <C>
Repayment of debt.................................. $ 4,204,000 20.0%
Sales and marketing................................ 4,075,000 19.4%
Purchase LoanMaker Systems and other capital
expenditures...................................... 3,150,000 15.0%
Product development................................ 2,000,000 9.5%
Retire Acquisition debt............................ 1,534,000 7.3%
Working capital, including a payment to Data
General........................................... 6,027,000 28.7%
----------- -----
$20,990,000 100.0%
=========== =====
</TABLE>
The Company intends to use approximately $4,204,000 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 that increases to 20% per annum if the Company fails to pay amounts due
on the maturity date which is the earlier of the consummation of the Offering
or February 24, 1998; (iv) $1,145,000 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"); (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; and (vi) six notes in the
aggregate principal amount of $800,000 that presently bear interest at 12% per
annum, mature at the closing of the Offering and require a fee of 35% of the
outstanding principal. 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, the $1,300,000 note and the six notes
aggregating $800,000 were used to fund the Company's operations and working
capital requirements. In addition, the Company is in negotiations with certain
potential investors to borrow an additional $750,000. The additional
indebtedness would bear interest at 12% per annum, mature at the closing of
the Offering and require a fee of 35% of the outstanding principal. The
proceeds from these additional borrowings would be used to fund the Company's
operations and working capital requirements. The effects of these $750,000 in
planned borrowings are not reflected in the use of proceeds.
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 Company intends to use approximately $3,150,000 to purchase capital
assets (including approximately $1,300,000 to acquire new LoanMaker System
hardware and $1,400,000 to replace LoanMaker System hardware currently
leased), fund facility improvements required to expand the Company's video-
conferencing centers (at a cost of approximately $250,000) and purchase an
upgraded communication system to enhance the operation of the Company's video-
conferencing centers (at a cost of approximately $200,000).
24
<PAGE>
The Company intends to use approximately $2,000,000 for product development,
primarily for staffing, Internet consulting services and test equipment.
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."
Approximately $6,027,000 of anticipated proceeds will be used for working
capital, including paying Data General approximately $1,700,000 to reduce
outstanding lease payment obligations. 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 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. 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 $3,341,000. The Company is
contractually obligated to use the proceeds of the over-allotment option to
redeem Series B Preferred Stock on a pro-rata basis subject to the approval of
the holders of the Series A Preferred Stock and any requests by them for the
Company to redeem their Series A Preferred Stock. If the over-allotment option
is exercised in full, the Company does not expect to have any proceeds for
purposes other than redeeming Preferred Stock.
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."
25
<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 $(9,782,000), or $(3.96) 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 447,895 shares of Series B Preferred Stock that will
be issued concurrently with the close of the Offering and which are
convertible into 447,895 shares of Common Stock at the discretion of the
Series B Preferred Stockholders. After giving effect to the sale by the
Company of the 3,300,000 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 $4,255,000 related to conversion of notes payable to Series B
Preferred Stock) would have been $11,208,000 or $1.94 per share of pro forma
Common Stock. This represents an immediate increase in net tangible book value
of $5.90 per share to existing stockholders and an immediate dilution of $5.56
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................................................... $(3.96)
Increase per share attributable to new investors............ $ 5.90
------
Pro forma net tangible book value per share after the
Offering..................................................... $1.94
-----
Dilution per share to new investors........................... $5.56
=====
</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 42.8% $ 8,245,447 25.0% $3.34
New investors............... 3,300,000 57.2% 24,750,000 75.0% $7.50
--------- ----- ----------- -----
Total..................... 5,771,086 100.0% $32,995,447 100.0%
========= ===== =========== =====
</TABLE>
As of the date hereof, there were 885,436 shares of Common Stock issuable
upon the exercise of options and warrants outstanding at a weighted average
exercise price of $5.97 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 $5.02. These exercises would increase the
number of shares held by existing stockholders to 3,356,522 shares, or 50.5%
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 49.5% 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 $13,530,539, or 35.4% of the total
consideration paid to the Company, and (iii) increase the average price per
share paid by existing stockholders to $4.04. See "Management--Director
Compensation" and "Stock Option Plans."
26
<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 a promissory note issued subsequent to September 30, 1997 with a
related discount of $350,000 and notes payable in the aggregate principal
amount of $450,000 issued subsequent to September 30, 1997 with a fee of 35%
on the outstanding principal on such notes; and (iii) the capitalization of
the combined companies as adjusted for the net proceeds from the sale of
3,300,000 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 and related accrued
interest............................. $ 6,757 $ 10,171 $ -- (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
-------- -------- --------
Redeemable Series B Preferred Stock,
$.001 par value, 0 shares issued and
outstanding, actual; 447,895 shares
issued and outstanding, as
adjusted(3) -- -- 4,255
Common stock, $.005 par value;
25,000,000 shares authorized,
1,668,074 shares issued and
outstanding, actual; 5,771,086 shares
issued and outstanding, as
adjusted(4).......................... 7 7 30
Additional paid-in capital............ 7,502 9,863 30,953
Deferred compensation................. (58) (58) (58)
Accumulated deficit................... (16,475) (16,475) (17,105)
-------- -------- --------
Total stockholders' (deficit) equity.. (9,024) (6,663) 18,075 (5)
-------- -------- --------
Total capitalization.................. $ (7,007) $ (4,970) $ 19,768
======== ======== ========
</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 and notes payable in
the aggregate principal amount of $450,000 issued subsequent to September
30, 1997 with a fee of 35% on the outstanding principal on such notes,
payable at the closing of the Offering. See "Use of Proceeds."
(2) Includes $20,990,000 to give effect to the net proceeds from the sale of
3,300,000 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 $4,255,000 of Bridge Notes to Series B Preferred
Stock, expense of a $350,000 discount on Bridge Notes, and $280,000 of
finance charges upon the closing of the Offering. Also reflects repayment
of Bridge Notes, other debt, and accrued interest totaling $4,048,000 and
reflects payments of $1,634,000 of remaining amounts due with respect to
the Acquisition, as noted above.
(4) Excludes 885,436 shares of Common Stock issuable upon exercise of stock
options and warrants at a weighted average price of $5.97 per share,
509,501 shares issuable upon the conversion of the Series A Preferred
Stock, 447,895 shares issuable upon the conversion of the Series B
Preferred Stock, and 77,867 shares issuable upon the conversion of accrued
interest (calculated through September 30, 1997) on Bridge Notes to Common
Stock, to be consummated at the effectiveness of the Offering.
(5) Assumes that the Underwriters' over-allotment option is not exercised. If
such option is exercised, the amount of outstanding Common Stock will
increase and the Company will be obligated to use the proceeds to redeem
Series A Preferred Stock and Series B Preferred Stock.
27
<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
ended 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.
<TABLE>
<S> <C> <C> <C> <C>
NINE-MONTHS
ENDED
SEPTEMBER 30,
----------------
<CAPTION>
PERIOD ENDED YEAR ENDED
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)
</TABLE>
VIRTUAL MORTGAGE
SUTTER MORTGAGE
<TABLE>
<CAPTION>
NINE-MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- ---------------
1992 1993 1994 1995 1996 1996 1997
------ ------- ------- ------ ------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues.............. $5,749 $10,785 5,305 $4,898 $ 7,479 $5,473 $ 7,162
Personnel expense..... 2,923 4,820 3,387 2,547 3,925 2,786 5,128
General and
administrative....... 1,257 2,874 2,716 1,735 2,492 1,719 2,461
Interest expense...... 848 1,650 899 1,005 1,583 1,258 1,154
------ ------- ------- ------ ------- ------ -------
Total operating
expenses............. 5,058 9,344 7,202 5,287 8,000 5,763 8,743
------ ------- ------- ------ ------- ------ -------
Income (loss) from
operations........... 691 1,441 (1,897) (389) (521) (290) (1,581)
Income tax expense
(benefit)............ 204 325 (303) 3 2 3 --
------ ------- ------- ------ ------- ------ -------
Net income (loss)..... $ 407 $ 1,116 $(1,594) $ (392) $ (523) $ (293) $(1,581)
====== ======= ======= ====== ======= ====== =======
BALANCE SHEET DATA (END
OF PERIOD):
Cash.................. $ 660 $ 1,437 $ 466 $ 379 $ 266 $ 169
Mortgage loans held
for sale............. 8,953 34,585 9,248 34,321 23,642 44,665
Total assets.......... 10,471 38,614 11,158 35,600 24,568 45,565
Lines of credit and
financing
arrangements......... 8,995 34,147 9,378 34,396 23,945 44,798
Stockholder's equity
(deficit)............ 1,044 2,125 1,373 751 (266) (685)
</TABLE>
28
<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 Virtual Mortgage 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.
29
<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.
30
<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 76 LoanMaker
System installations as of December 31, 1997 and had signed contracts to
install an additional 93 locations. In addition, the Company is negotiating
for up to an additional 250 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 19 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 is a mortgage broker for the
remaining 10 lenders. 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.
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The Company generates transaction revenues equal to 1.0% to 1.5% of the face
value of the loans closed from its LoanMaker System network. The real estate
broker generally receives .25% of the face value of each closed loan for
settlement services performed by the real estate broker in connection with the
mortgage loan, 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 31,
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. 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.
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
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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 31, 1997, 76 production
sites were installed and 93 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.
The Company has on lease from Data General 288 computers for LoanMaker
Systems deployment and support. At December 31, 1997, these systems were
utilized as follows: 76 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 64
systems available to meet scheduled
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installations through March 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 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
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$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.
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.
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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 Systems deployed in the field. As of December 31, 1997, the
Company was past due on lease payments to Data General of approximately
$1,597,000. 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
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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 February 1998, certain Phase I and Phase II Investors holding $4,255,000
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 447,895 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 March 6, 1998,
the accrued interest on those Phase I and Phase II Bridge Notes will be
$867,120, exchangeable for 115,616 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.
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 24, 1998 or the consummation of this Offering and
accrues interest at 15% per annum that increases to 20% per annum if the
Company fails to pay amounts due on the maturity date. The note is secured by
substantially all the assets of the Company and ranks pari passu with the
Phase I and Phase II Bridge Notes. The Company used the proceeds of the note
to pay a $50,000 loan commitment fee to the lender and to fund operations and
working capital requirements. 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 closing of the Offering. The proceeds of this note were used to fund the
Company's operations and working capital requirements.
In December 1997 and January 1998, the Company issued promissory notes in
the aggregate amount of $450,000 to five investors. The notes presently bear
interest at 12% per annum and mature on the earlier of the consummation of the
Offering or 90 days after the issuance of the respective notes (three notes
were issued on December 22, 1997, one note was issued on January 9, 1998 and
one note was issued on January 30, 1998). If maturity occurs due to the
Offering, the Company is obligated to pay an additional amount equal to 35% of
the principal amount.
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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 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. The Company
granted "piggyback" registration rights 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 $4,204,000 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. This amount includes a
$100,000 loan to the former shareholder of Sutter Mortgage. See "Sutter
Mortgage Acquisition."
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.
Other Uses of Proceeds
The Company intends to use approximately $3,150,000 of the Offering proceeds
to purchase capital assets (including approximately $1,300,000 to acquire new
LoanMaker System hardware and $1,400,000 to replace LoanMaker System hardware
currently leased), fund facility improvements required to expand the Company's
video-conferencing centers (at a cost of approximately $250,000) and purchase
an upgraded communication system to enhance the operation of the Company's
video-conferencing centers (at a cost of approximately $200,000). The Company
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 Company also intends to
use approximately $2,000,000 for product development. 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. The
Company intends to use approximately $6,027,000 of anticipated proceeds for
working capital purposes, including paying Data General approximately
$1,700,000 to reduce outstanding lease payment obligations.
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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. There can be no assurance that
additional sources of capital, if needed, will be available. In addition, the
Company is prohibited from issuing equity without the consent of Barington for
a period of 24 months from the effective date of the offering. See
"Underwriting."
39
<PAGE>
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 some 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, through the use of its LoanMaker System and
traditional distribution systems, operates both as a mortgage bank offering
the loan products of lenders for which the Company is a delegated underwriter
and as an independent mortgage broker. As a delegated underwriter, the Company
can quickly make an underwriting decision with respect to loans originated
using the LoanMaker System. All of the Company's mortgage banking and mortgage
brokering activities are conducted through its wholly-owned subsidiary, Sutter
Mortgage. 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 31, 1997, 76 LoanMaker Systems have been installed and 93 are on
order to be installed in the first half of 1998 in selected real estate
offices. The Company has begun installing LoanMaker Systems in offices of
seven of the 200 largest real estate brokerage companies in the United States
having completed installations in 33 of such companies' 92 offices. In
addition, the Company, has signed letter of intent with three other such
companies and is negotiating with one additional such company. The Company had
64 LoanMaker Systems available for new installations as of December 31, 1997.
Additionally, the Company is negotiating contracts for an additional 250
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 settlement services
performed in connection with the loan. Real estate agents may increase the
speed of closing each transaction and enhance client satisfaction.
In order to control more of the underwriting decisions, and the processing
and closing of 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 19 of the 29 lenders
represented on the LoanMaker System as of December 1997, Sutter Mortgage makes
many of the underwriting decisions, and processes and closes loans originated
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
offices of the 200 largest real estate brokerage companies in the United
States. The Company installs the LoanMaker System without cost to the real
estate brokerage company and generally pays the real estate brokerage company
.25% of the face value of each closed loan for settlement services performed
by the real estate brokerage company in connection with the mortgage loan.
This marketing approach is expected to enable the Company to leverage the real
estate
40
<PAGE>
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 seven of the 200
largest real estate brokerage companies in the U.S. and is negotiating with
one additional such company. Real estate brokerage companies receive
compensation from the Company in return for specific services performed on
behalf of the borrower and the Company in connection with the origination of
mortgage loans.
As of December 31, 1997, the Company had installed the LoanMaker System in
76 real estate offices serving 11 metropolitan areas in Arizona, California,
Florida, Louisiana, New Jersey, Oregon and Texas, with 93 systems on order
that the Company has not yet installed, and is negotiating contracts for an
additional 250 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 three other prominent real estate
companies, O'Conor, Piper & Flynn (Maryland), Edina Realty (Minnesota) and
Iowa Realty (Iowa). The Company derived approximately 20% and 17% of its
revenues from the LoanMaker Systems installed by Latter & Blum and Re/Max
South County, respectively.
To date, the Company has initiated efforts to negotiate for the installation
of LoanMaker Systems with 16 of the 200 largest real estate brokerage
companies. Seven negotiations were successful, three have resulted in letters
of intent, four are still in negotiation and two were unsuccessful. The
Company believes that it will be successful in entering into agreements with
more real estate brokerage companies in the top 200, but no assurance of this
success can be given.
GROWTH STRATEGY
The Company's objective is to exploit its proprietary LoanMaker System to
establish itself as a leading low-cost loan origination transaction processor
serving the $785 billion residential mortgage industry in the United States.
The Company believes the transaction processing capabilities of the LoanMaker
System, which generate transaction fees generally between 1-1 1/2% of the face
value of loans, will be the most significant contributor of future revenue
growth for its mortgage banking operations. The Company's principal short-term
focus is to:
. increase the number of installations with the Company's existing real
estate brokerage company relationships;
. establish relationships with more of the 200 largest real estate
brokerage companies;
. continue to increase consumer awareness and acceptance of the LoanMaker
System; and
. increase the volume of loans originated through 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.
41
<PAGE>
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 bankers and brokers 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, 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 the key to obtaining approval quickly because they
enable the Company to make the loan underwriting decisions, and process and
close 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 beta
testing of the "Paris" technology in December 1997, intends to begin the desk-
top roll-out in the near future and intends to begin the roll-out of the
laptop PC and Internet version by June 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 quickly
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.
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<PAGE>
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 as a delegated underwriter for the lenders it represents. As a mortgage
bank and delegated lender for 19 of the 29 lenders represented on the
LoanMaker System as of December 31, 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. In December 1997, Sutter
Mortgage acted as a delegated underwriter with respect to more than 90% of the
loan volume originated through the LoanMaker System. 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 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 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 advice possible and assisting borrowers in
choosing the loan best suited to their particular needs and qualifications.
Underwriters make credit decisions over a network fed by clean electronic
data, and Processing Teams execute paperwork and close and fund loans.
43
<PAGE>
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.
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 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.
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<PAGE>
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.
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 brokerage companies, Interealty, Intel and Data General.
Major Real Estate Firms
The real estate brokerage companies 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 brokerage companies to establish its presence in
the marketplace. While the real estate brokerage companies are not the end
users of the LoanMaker System, the Company believes the cooperation of real
estate brokerage companies 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 brokerage companies to place the LoanMaker System in their offices can
be withdrawn at any time without any charge or penalty to the real estate
brokerage company. As of December 31, 1997, the Company had installed the
LoanMaker System in 76 real estate offices serving eleven metropolitan areas
in Arizona, California, Florida, Louisiana, New Jersey and Oregon, with 93
systems on order that the Company has not yet installed, and is negotiating
contracts for an additional 250 systems.
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Several of the largest real estate brokerage companies in the U.S. have
installed the LoanMaker System in some of their offices, or have contracted
for installation including:
<TABLE>
<CAPTION>
TOTAL
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 three real estate brokerage companies:
<TABLE>
<CAPTION>
1996 SALES NATIONAL NO. OF
REAL ESTATE FIRM VOLUME RANK* OFFICES
---------------- -------------- -------- -------
<S> <C> <C> <C>
O'Conor, Piper & Flynn........................ $2,436,576,000 17th 48
Edina Realty.................................. 4,057,630,000 9th 60
Iowa Realty................................... 1,341,616,000 36th 22
</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 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(TM) 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
ProShare(TM). 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,
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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 December 31, 1997, the Company was past due on lease
payments to Data General of approximately $1,597,000. 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 payment is made. The Company had 64 LoanMaker
Systems available for new installations as of December 31, 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.
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 offices of some 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
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<PAGE>
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 31, 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>
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 bank and a mortgage broker, offering the loan products of
lenders for which the Company is a delegated underwriter and loan products of
other third-party lenders. All of the Company's mortgage banking and mortgage
brokering activities are conducted through its wholly-owned subsidiary, Sutter
Mortgage. Presently, in excess of 90% of the Company's loan volume is with the
lenders for which the Company serves as a delegated underwriter. A lender may
elect to terminate its participation in the LoanMaker System, or the Company's
status as its delegated underwriter, at any time, without any penalty or
charge to the lender.
With respect to each lender for which the Company is not a delegated
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.
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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 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
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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(TM)-based computers. For instance, the Conference Manager
was developed by and is the proprietary technology of the Company which is
protected under trade secret and copyright laws. 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 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(TM) video-conferencing
hardware and software that are available on the market. The Company has,
however, augmented the ProShare(TM) technology with its own software to add
scalability.
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 intends to begin the desk-top roll-out
in the near future and the roll-out of the laptop PC and Internet version by
June 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
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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."
MORTGAGE BANKING OPERATIONS
General
The Company's mortgage banking and brokering 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. In
addition to loans originated through the LoanMaker System, Sutter Mortgage
currently originates mortgage loans via wholesale, net branch and retail
distribution systems. In December 1997, approximately 20% and 80% of Sutter
Mortgage's revenues were derived from the LoanMaker System and traditional
distribution systems, respectively. 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
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("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 19 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.
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
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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
revenues from the sale of mortgage loans. The Company is approved to sell over
1,000 different mortgage loan products from 29 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 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 Company conducts all of its mortgage lending and brokerage
activities through its wholly-owned subsidiary, Sutter
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Mortgage. 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 Mortgage over loans offered by other participants in the Company's
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 and the form and amount of compensation that lenders can pay
the Company. 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 searches 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 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.
Sutter Mortgage is currently licensed to originate mortgage loans in
Arizona, California, Florida, Idaho, New Jersey, Ohio, Oregon, Utah and
Virginia and has applied for a lender's license in Iowa and Maryland. The
Company believes that Sutter Mortgage is exempt from the lender license
requirements in Louisiana, Minnesota, Nevada, New Mexico and Texas. Sutter
Mortgage is currently licensed to broker mortgage loans in California,
Florida, Idaho, Oregon, New Jersey, Utah and Virginia. The Company believes
Sutter Mortgage is exempt from the broker license requirements in Arizona,
Louisiana, Minnesota, New Mexico and Nevada.
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 voting 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.
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EMPLOYEES
As of December 31, 1997, the Company, including Sutter Mortgage, had 183
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 December 31, 1997, the Company leased approximately 8,600 square feet
of office space in Newport Beach, California. The lease expires in September
1998. The Company also leased 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 leased 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 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
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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.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers, directors and key employees of the Company as of
January 15, 1998 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
Randall C. Fowler.. 58 Director
John Wells......... 56 Director
Larry Wells........ 54 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.
The Representatives are entitled to appoint one member of the Company's
Board of Directors, which member may be a director, officer, employee or
affiliate of the Representatives. The Representatives do not presently intend
to appoint a member of the Company's Board of Directors. Additionally, so long
as at least 1,500,000 shares of the Series A Preferred Stock is outstanding,
the holders of a majority of the then outstanding shares of Series A Preferred
Stock shall be entitled to elect one member of the Company's Board of
Directors. As of January 1998, the holders of Series A Preferred Stock had not
exercised such right.
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
57
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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
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 led projects automating 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.
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.
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.
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
58
<PAGE>
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 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. Members of the Compensation Committee have engaged in certain
transactions with the Company. See "Certain Transactions."
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 also carries customary directors and officers
insurance for its directors and officers. 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."
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<PAGE>
EXECUTIVE COMPENSATION
The following table shows the compensation paid by the Company 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).
(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."
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<PAGE>
(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 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
options to purchase 409,000 shares of Common Stock, of which options to
purchase 365,422 shares have been issued. 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 options
terminate ten years from the date of grant and the exercise prices of options
range from $4.89 to $5.62, with options vesting (i) 25% after one year and
thereafter ratably on a monthly basis over a three year period, (ii) after one
month ratably on a monthly basis over a four year period, or (iii) 25%
immediately and thereafter ratably on a monthly basis over a three year
period.
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
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<PAGE>
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.
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
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<PAGE>
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 was
in office at the time the stockholders of the Company approve the 1997 Plan
was 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.
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.
OTHER OPTION AWARDS
In May 1997, the Company issued options to purchase 10,255 shares of Common
Stock to John Wells, one of the Company's directors. The exercise price is
$7.78 per share and vesting is 25% after one year and thereafter in equal
installments of 1/36th per month over a period of three 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.
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<PAGE>
CERTAIN TRANSACTIONS
Between March 1995 and June 1996, the Company issued certain promissory
notes and warrants to purchase Common Stock ("Warrants") to American Growth
Capital Fund I, L.P., a California limited partnership (the "Fund") and
beneficial owner of more than 5% of the Company's Common Stock, 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 permanent 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.
On March 31, 1996, the Company issued 20,450 Warrants to Randall C. Fowler,
a director of the Company and a member of the Company's Compensation
Committee, 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 2,744 shares of Common
Stock.
On July 5, 1996, the Company issued 20,450 Warrants to Larry Wells, a
director of the Company and a member of the Company's Compensation Committee,
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 $297,500 in principal amount of debt
(which includes (i) $50,000 in principal amount of debt held by Anacapa
Ventures Partners and (ii) $205,000 in principal amount of debt held
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<PAGE>
by Daystar Partners LP agreed to exchange the principal on such debt for
31,318 shares of Series B Preferred Stock and the interest on such debt for
8,855 shares of Common Stock.
John Wells, a director of the Company and a member of the Company's
Compensation Committee, had subscribed to acquire 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 $7.78 per share.
In December 1997, Mr. Wells, holding $15,000 in principal amount of debt
agreed to exchange the principal on such debt for 1,579 shares of Series B
Preferred Stock and the interest on such debt for 650 shares of Common Stock.
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 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 February 1998, Orin Kramer and Kramer Spellman, each of which
beneficially owns more than 5% of the Company's Common Stock and holds
$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 24,014 shares of Common
Stock.
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.
65
<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
December 31, 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>
Orin Kramer(5).......... 983,053 34.7% 16.0% -- 0%
Kramer Spellman(5)...... 957,620 33.9% 15.6% -- 0%
Michael A. Barron(6).... 263,294 10.6% 4.6% -- 0%
Dianne D. David(6)...... 216,644 8.3% 3.7% -- 0%
Larry Wells(7).......... 81,257 3.2% 1.4% -- 0%
Sandra S. Sawyer(8)..... 139,743 5.6% 2.4% -- 0%
John D. Murray(9)....... 44,369 1.8% * -- 0%
Robert Gottesman(10).... 53,477 2.1% * -- 0%
Randall C. Fowler(11)... 38,038 1.5% * -- 0%
Michael Balter(12)...... 6,391 * * -- 0%
John Wells(13).......... 3,269 * * -- 0%
Ronald Morck............ -- * * -- 0%
All directors and
executive officers as a
group(9 persons)....... 706,739 26.8% 11.7% -- 0%
Intel Corporation....... 124,695 4.8% 2.1% 500,000 22.2%
American Growth Capital
Fund I, L.P.(14)....... 194,276 7.5% 3.3% 350,000 15.6%
James M. Glockner....... 53,619 2.2% * 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 December 31, 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 5,771,086 shares consisting of (i)
the shares considered outstanding as set forth in note 2 above and
(ii) 3,300,000 shares of Common Stock to be issued in connection with the
Offering.
(4) Percentage calculation is based upon 2,043,000 shares of Series A
Preferred Stock.
(5) Includes: (i) 317,556 shares of Common Stock, 93,159 shares of Series B
Preferred Stock and 19,141 shares of Common Stock issued (assuming the
exchange of outstanding principal and interest on debt) and warrants to
acquire 195,903 shares of Common Stock owned by Boston Provident
Partners, L.P.; (ii) 34,561 shares of Common Stock and warrants to
acquire 14,811 shares of Common Stock owned by Pine Boston Partners,
L.P.; (iii) 35,924 shares of Common Stock and warrants to acquire 15,267
shares of Common Stock owned by International Charitable Interests II,
L.P.; (iv) 39,712 shares of Common Stock; 4,211 shares of Series B
Preferred Stock and 1,284 shares of Common Stock issued (assuming the
exchange of outstanding principal and interest on debt) and warrants to
acquire 19,816 shares of Common Stock owned by BP Institutional Partners,
L.P.; (v) 64,031 shares of Common Stock and warrants to acquire 27,343
shares of Common Stock owned by BP Overseas Partners, L.P.; and (vi)
41,694 shares of Common Stock; 7,895 shares of Series B Preferred Stock
and 2,424 shares of Common Stock issued (assuming the exchange of
outstanding principal and interest on debt) and warrants to acquire
22,887 shares of Common Stock owned by Maritime Global Subsidiary I, Ltd.
Mr. Kramer has 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 of December 31, 1997. The address for this individual is
4590 MacArthur Blvd., Suite 175, Newport Beach, CA 92660.
(7) Includes: (i) 21,580 shares of Series B Preferred Stock and 6,170 shares
of Common Stock issued (assuming the exchange of the outstanding
principal and interest on debt) and warrants to acquire 13,977 shares of
Common Stock owned by Daystar Partners, L.P.; (ii) 5,264 shares of Series
B Preferred Stock and 1,617 shares of Common Stock issued (assuming the
exchange of the outstanding principal and interest on debt) and warrants
to acquire 3,410 shares of Common Stock owned by Anacapa Ventures
Partners; (iii) 12,862 shares of Common Stock owned by Daystar Fund II;
and (iv) 4,474 shares of Series B Preferred Stock and 1,416 shares of
Common Stock issued (assuming the exchange of outstanding principal and
interest on debt) and warrants to acquire 7,589 shares of Common Stock
exercisable within 60 days. Mr. Wells has voting and dispositive power
over the above warrants and stock.
(8) Includes: (i) 5,113 shares of Common Stock and warrants to acquire 5,113
shares of 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 44,369 shares of Common Stock subject to options exercisable
within 60 days of December 31, 1997.
(10) Includes 45,399 shares of Common Stock subject to options exercisable
within 60 days of December 31, 1997.
(11) Includes 8,947 shares of Series B Preferred Stock and 2,386 shares of
Common Stock issued (assuming the exchange of the outstanding principal
and interest on debt) and warrants to acquire 5,796 shares of Common
Stock.
(12) Includes 6,391 shares of Common Stock subject to options exercisable
within 60 days of December 31, 1997.
(13) Includes warrants to acquire 1,023 shares of Common Stock 1,579 shares of
Series B Preferred Stock and 667 shares of Common Stock issued (assuming
the exchange of outstanding principal and interest on debt).
(14) Includes 350,000 shares of Series A Preferred Stock which is convertible
into 87,287 shares of Common Stock and warrants to acquire 55,921 shares
of Common Stock.
66
<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
American Stock Exchange 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 and assumes that the Registered Stockholders sell all
of the securities registered.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SHARES SHARES
COMMON STOCK BENEFICIALLY BENEFICIALLY
BENEFICIALLY COMMON STOCK OWNED AFTER OWNED AFTER
REGISTERED STOCKHOLDER OWNED(1) TO BE REGISTERED OFFERING OFFERING
---------------------- ------------ ---------------- ------------ ------------
<S> <C> <C> <C> <C>
Orin Kramer(2).......... 983,053 619,432 363,621 26.0
Kramer Spellman,
L.P.(2)................ 957,620 601,649 355,971 25.5
Moore Global Investments
Ltd.(3)................ 301,868 102,251 199,617 14.3
Robert Merrick.......... 105,268 88,913 16,355 1.2
Sundance Venture LP(4).. 122,525 40,900 81,625 5.8
Jeffrey Gendell(5)...... 99,327 34,084 65,243 4.7
Remy Trafelet........... 38,012 26,674 11,338 *
American Growth Fund I,
L.P.................... 194,276 20,451 173,825 12.5
Larry Wells(6).......... 81,257 20,283 60,974 4.3
Ronald Ruben............ 10,016 7,114 2,902 *
James Scibelli(7)....... 19,817 6,818 12,999 *
Sunshine Charitable
Trust.................. 6,817 6,817 -- --
Randall Fowler(8)....... 38,038 5,796 32,242 2.3
James Scullion(9)....... 11,777 3,922 7,855 *
Vance Driscoll(10)...... 10,090 3,410 6,680 *
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(11)........ 5,146 1,706 3,440 *
Steven Nemirov(12)...... 5,107 1,706 3,401 *
Joseph Bianco........... 1,705 1,705 -- --
Stanley Goldberg Revoca-
ble Trust.............. 1,364 1,364 -- --
John Wells(13).......... 3,269 1,023 2,246 *
</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) 317,556 shares of Common Stock, warrants to acquire 195,903
shares of Common Stock and 112,297 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)
34,561 shares of Common Stock and warrants to acquire 14,811 shares of
Common Stock owned by Pine Boston Partners, L.P.; (iii) 35,924 shares of
Common Stock and warrants to acquire 15,267 shares of Common Stock owned
by International Charitable Interests II, L.P.; (iv) 39,712 shares of
Common Stock, warrants to acquire 19,816 shares of Common Stock and 5,495
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) 64,031 shares of Common Stock and
warrants to acquire 27,343 shares of Common Stock owned by BP Overseas
Partners, L.P.; and (vi) 41,694 shares of Common Stock, warrants to
acquire 22,887 shares of Common Stock and 10,309 shares of Common Stock
66-1
<PAGE>
(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. Kramer has voting and dispositive power over the
above shares and warrants.
(3) Includes 199,617 shares of Common stock (resulting from the exchange of
certain debt and accrued interest for Series B Preferred Stock and Common
Stock).
(4) Includes 81,625 shares of Common Stock (resulting from the exchange of
certain debt and accrued interest for Series B Preferred Stock and Common
Stock).
(5) Includes 65,243 shares of Common Stock (resulting from the exchange of
certain debt and accrued interest for Series B Preferred Stock and Common
Stock).
(6) Includes: (i) warrants to acquire 13,977 shares of Common Stock and 27,675
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) warrants to acquire 3,410 shares of
Common Stock and 6,880 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) 12,862 shares of
Common Stock owned by Daystar Fund II, and (iv) warrants to acquire 2,898
shares of Common Stock and 5,964 shares of Common Stock (resulting from
the exchange of certain debt and accrued interest for Series B Preferred
Stock and Common Stock) and warrants to acquire 7,589 shares of Common
Stock owned by Mr. Wells. Mr. Wells has voting and dispositive power over
the above warrants and is a director of the Company.
(7) Includes 12,999 shares of Common Stock (resulting from the exchange of
certain debt and accrued interest for Series B Preferred Stock and Common
Stock).
(8) Includes 11,790 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.
(9) Includes 7,855 shares of Common Stock (resulting from the exchange of
certain debt and accrued interest for Series B Preferred Stock and Common
Stock).
(10) Includes 6,680 shares of Common Stock (resulting from the exchange of
certain debt and accrued interest for Series B Preferred Stock and Common
Stock).
(11) Includes 3,440 shares of Common Stock (resulting from the exchange of
certain debt and accrued interest for Series B Preferred Stock and Common
Stock).
(12) Includes 3,401 shares of Common Stock (resulting from the exchange of
certain debt and accrued interest for Series B Preferred Stock and Common
Stock).
(13) Includes 2,246 shares of Common Stock (resulting from the exchange of
certain debt and accrued interest for Series B Preferred Stock and Common
Stock) and warrants to acquire 1,023 shares of Common Stock. 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,
946,991 of which are subject to the terms of the 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 AMEX 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, 946,991 of such
shares are subject to the 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.
Except for Moore Global Investments, Jeffrey Gendell, James Scibelli, KSH
Investment Group, Inc., Ronald Krinick, Mid-Lakes P/S Trust, Alfred Abiouness,
Windy City, Inc., Alan Shapiro, Allenstown Investment Ltd. Corp., Paul and Judy
Berkman JTWROS, KAM Group, Inc., Linda Bassin, Ed S. Raskin TTEE, Harvey
Greenfield, M.D. Funding, Joseph Bianco and Stanley Goldberg TTEE, each of the
Registered Stockholders has agreed not to sell its Registered Shares except as
permitted by the terms of the Provisional Lock-up Agreement. See "Shares
Eligible for Future Sale."
66-2
<PAGE>
DESCRIPTION OF CAPITAL STOCK
REINCORPORATION
The Company's predecessor was incorporated in the State of Nevada on
December 31, 1992. In February 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,
67
<PAGE>
with each holder having, as of the closing of the Offering, .249 votes per
share of Series A Preferred Stock. So long as at least 1,500,000 shares of the
Series A Preferred Stock is outstanding, the holders of a majority of the then
outstanding shares of Series A Preferred Stock are entitled to elect one
member of the Company's Board of Directors.
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
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 447,895 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. After all amounts payable to holders of Series A Preferred
Stock have been paid, 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
liquidation 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 February 1998, certain Phase I and Phase II Investors holding
$4,255,000 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 447,895 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 March 6, 1998,
the accrued interest on those Phase I and Phase II Bridge Notes will be
$867,120, exchangeable for 115,616 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.
68
<PAGE>
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 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 Provisional
Lock-up Agreement not to sell shares of Common Stock or request registration
with respect thereto, except as permitted by the 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.
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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" 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
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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.
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 American Stock Exchange under the trading symbol "VMX."
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<PAGE>
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: (i)
5,771,086 shares of Common Stock (assuming no exercise of outstanding options
or warrants after December 31, 1997); (ii) 2,043,000 shares of Series A
Preferred Stock (which are convertible into 509,501 shares of Common Stock as
of December 31, 1997); (iii) 447,895 shares of Series B Preferred Stock (which
are initially convertible into 447,895 shares of Common Stock); (iv) 115,616
shares of Common Stock to be issued upon the exchange of interest outstanding
on certain debt upon the closing of the Offering assuming a March 6, 1998
effective date; (v) warrants to acquire 509,759 shares of Common Stock; (vi)
non-employee director and employee stock options to acquire 375,677 shares of
Common Stock; and (vii) employee stock options to acquire 552,800 shares of
Common Stock (such options to be granted concurrently with the closing of the
Offering).
Of the 5,771,086 shares of Common Stock: (i) 3,300,000 shares to be sold in
the Offering (3,795,000 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 ("Rule
144"), which shares will be subject to the resale limitations of Rule 144;
(ii) 1,042,096 shares will be registered concurrently with the Offering and
under the registration statement of which this Prospectus forms a part (of
which shares 946,991 are subject to the Provisional Lock-up Agreement and
95,105 will be freely transferable immediately); and (iii) 1,428,990 shares
will be "Restricted Securities" as that term is defined under Rule 144 (the
"Restricted Shares") and 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.
With respect to the 1,428,990 Restricted Shares, holders of 1,234,706 shares
are subject to the Provisional Lock-up Agreement and holders of the remaining
194,284 shares are not subject to the Provisional Lock-up Agreement and
therefore such shares will be eligible for resale upon the expiration of their
respective one year holding period under Rule 144.
In addition, the following shares of Common Stock issuable upon certain
events are subject to the Provisional Lock-up Agreement: (i) all 509,501
shares of Common Stock issuable upon the conversion of 2,043,000 shares of
Series A Preferred Stock; (ii) 384,747 of the 447,895 shares of Common Stock
issuable upon the conversion of 447,895 shares of Series B Preferred Stock;
(iii) 100,548 of the 115,616 shares of Common Stock issuable upon the exchange
of accrued interest on certain debt; (iv) 498,399 of the 509,759 shares of
Common Stock issuable upon the exercise of outstanding warrants; (v) all
375,677 shares of Common Stock issuable upon the exercise of outstanding non-
employee director and employee stock options; and (vi) all 552,800 shares of
Common Stock issuable upon the exercise of employee stock options that will be
granted concurrently with the closing of the Offering.
Under the terms of the Provisional Lock-up Agreement, holders of Common
Stock and related securities of the Company have agreed not to sell such
securities for up to 24 months following the effective date of the Offering,
without the consent of Barington, except that (i) the 24 month period shall be
reduced to 12 months, if the closing sale price of the Common Stock on the
AMEX 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, except as permitted under the
Stock Price Out to the Provisional Lock-up Agreement. See "Underwriting."
The Company is currently seeking to obtain Provisional Lock-up Agreements
from the remaining security holders, however there can be no assurance that
such Provisional Lock-up Agreements will be obtained. If Provisional Lock-up
Agreements are not obtained from such security holders, then the 283,894
shares of
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Common Stock that are not registered (including shares of Common Stock
issuable upon the conversion of Preferred Stock, the exchange of accrued
interest and the exercise of warrants) will be eligible for sale upon the
expiration of their respective one year holding period under Rule 144, and the
95,105 shares of Common Stock that are registered will be freely transferable
immediately.
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. In the event Barington
releases all of the security holders from the Provisional Lock-up Agreement:
(i) 1,042,096 shares of Common Stock will be freely transferable immediately;
(ii) 3,011,761 shares of Common Stock (including shares of Common Stock
issuable upon the conversion of Preferred Stock, the exchange of accrued
interest and the exercise of warrants) will be subject to the resale
limitations of Rule 144; (iii) 10,225 shares of Common Stock issuable upon the
exercise of options granted outside of the 1995 Plan and 1997 Plan will be
subject to the resale limitations of Rule 144; and (iv) all of the Common
Stock issuable upon the exercise of options granted pursuant to the Company's
1995 Plan and 1997 Plan will be subject to the resale limitations of Rule 701
adopted under the Securities Act and may be subject to volume limitations
imposed by Rule 144.
In addition, Intel, holding 500,000 shares of the outstanding shares of
Series A Preferred Stock convertible into 124,689 shares of Common Stock, has
agreed under the terms of a four-month lock-up agreement, not to sell such
stock for four months following the effective date of the Offering, without
the consent of Barington. Thereafter, Intel may sell or otherwise convey such
stock in private transactions, provided that any proposed transferee agrees to
be bound by the Provisional Lock-up Agreement.
Pursuant to the Registration Rights Agreement, holders of 51,125 shares of
Common Stock, 35,788 shares of Common Stock issuable upon the exercise of
warrants and 509,501 shares of Common Stock issuable upon conversion of
2,043,000 shares of Series A Preferred 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. Except for the four month lock-up entered into by Intel, all
of the Rights Holders have agreed under the Provisional Lock-up Agreement not
to sell shares of Common Stock or request registration with respect thereto,
except as permitted by the 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 57,711 shares immediately
after the Offering) or (ii) the average weekly trading volume of the Company's
Common Stock on the AMEX 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
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may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits
Affiliates to sell their Rule 701 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 375,677 shares of
Common Stock were outstanding (of which options to purchase 114,761 shares
were then exercisable), and all of the total shares issuable pursuant to these
exercisable options are subject to 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."
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 subject to the Provisional Lock-up
Agreement, 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."
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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............................................................... 3,300,000
=========
</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 495,000
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.
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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 Provisional
Lock-up Agreement. In addition, the officers, directors and stockholders of
the Company have agreed, under the terms of the 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 up to 24 months from the effective date of the Offering,
without the prior written consent of Barington. Under the terms of the
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 AMEX 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 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.
The Representatives are entitled to appoint one member of the Company's
Board of Directors, which member may be a director, officer, employee or
affiliate of the Representatives, and is also entitled to observer status at
any Board meeting held during the 24 months immediately following the date of
this Prospectus. The Representatives do 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 on the effective
date of this Offering 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.
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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.
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.
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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
February 11, 1998
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 with 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>
VIRTUAL MORTGAGE NETWORK, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
---------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END
PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
1997
Virtual Mortgage--
Allowance for doubtful
accounts............... $ 23 $-- $-- $-- $ 23
==== ==== ==== ==== ====
Sutter Mortgage--Reserve
for loan losses........ $695 $207 $-- $207 $695
==== ==== ==== ==== ====
FOR THE YEAR ENDED
DECEMBER 31, 1996
Virtual Mortgage--
Allowance for doubtful
accounts............... $-- $ 23 $-- $-- $ 23
==== ==== ==== ==== ====
Sutter Mortgage--Reserve
for loan losses........ $225 $470 $-- $-- $695
==== ==== ==== ==== ====
FOR THE YEAR ENDED
DECEMBER 31, 1995
Virtual Mortgage--
Allowance for doubtful
accounts............... $-- $-- $-- $-- $--
==== ==== ==== ==== ====
Sutter Mortgage--Reserve
for loan losses........ $ 50 $175 $-- $-- $225
==== ==== ==== ==== ====
FOR THE YEAR ENDED
DECEMBER 31, 1994
Sutter Mortgage--Reserve
for loan losses........ $-- $ 50 $-- $-- $ 50
==== ==== ==== ==== ====
</TABLE>
F-28
<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............................................................. 10
Sutter Mortgage Acquisition.............................................. 23
Use of Proceeds.......................................................... 24
Dividend Policy.......................................................... 25
Dilution................................................................. 26
Capitalization........................................................... 27
Selected Financial Information........................................... 28
Pro Forma Combined Financial Information................................. 29
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 31
Business................................................................. 40
Management............................................................... 57
Certain Transactions..................................................... 64
Principal Stockholders................................................... 66
Description of Capital Stock............................................. 67
Shares Eligible for Future Sale.......................................... 72
Underwriting............................................................. 75
Legal Matters............................................................ 77
Experts.................................................................. 77
Additional Information................................................... 77
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,300,000 SHARES
[LOGO OF VIRTUAL MORTGAGE NETWORK]
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............................................................. 10
Sutter Mortgage Acquisition.............................................. 23
Use of Proceeds.......................................................... 24
Dividend Policy.......................................................... 25
Dilution................................................................. 26
Capitalization........................................................... 27
Selected Financial Information........................................... 28
Pro Forma Combined Financial Information................................. 29
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 31
Business................................................................. 40
Management............................................................... 57
Certain Transactions..................................................... 64
Principal Stockholders................................................... 66
Registered Stockholders.................................................. 66-1
Plan of Distribution..................................................... 66-2
Description of Capital Stock............................................. 67
Shares Eligible for Future Sale.......................................... 72
Experts.................................................................. 77
Additional Information................................................... 77
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]
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 American Stock Exchange listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $ 8,584
NASD filing fee.................................................. 5,794
American Stock Exchange listing fee.............................. 17,500
Accounting fees and expenses..................................... 300,000
Legal fees and expenses.......................................... 682,500
Blue Sky qualification fees and expenses......................... 7,000
Printing and engraving expenses.................................. 200,000
Transfer agent and registrar fees................................ 3,000
Road Show expenses............................................... 40,000
Miscellaneous.................................................... 20,590
----------
Total........................................................ $1,284,968
==========
</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.
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
II-1
<PAGE>
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.
In October 1995, pursuant to the Company's 1995 Stock Option Plan, the
Company issued 147,241 options to purchase Common Stock to certain of the
Company's employees. The options terminate ten years from the date of grant
and the exercise price of the options is $4.89 per share, with options
vesting 25% after one year with the remainder vesting ratably thereafter on
a monthly basis over a three year period. The Company relied on the
exemption provided by Rule 701 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.
II-2
<PAGE>
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, 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.
In March 1996, pursuant to the Company's 1995 Stock Option Plan, the
Company issued 5,113 options to purchase Common Stock to one of the
Company's employees. The options terminate ten years from the date of grant
and the exercise price of the options is $4.89 per share, with options
vesting 25% after one year with the remainder vesting ratably thereafter on
a monthly basis over a three year period. The Company relied on the
exemption provided by Rule 701 of the Securities Act.
In May 1996, pursuant to the Company's 1995 Stock Option Plan, the
Company issued 61,350 options to purchase Common Stock to one of the
Company's employees. The options terminate ten years from the date of grant
and the exercise price of the options is $4.89 per share, with options
vesting 25% immediately with the remainder vesting ratably thereafter on a
monthly basis over a three year period. The Company relied on the exemption
provided by Rule 701 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.
In May 1997, the Company issued 10,225 options to purchase Common Stock
to one non-employee director of the Company. The options terminate ten
years from the date of grant and the exercise price of the options is $7.78
per share, with options vesting 25% after one year with the remainder
vesting ratably thereafter on a monthly basis over a three year period. 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.
II-3
<PAGE>
In August 1997, pursuant to the Company's 1995 Stock Option Plan, the
Company issued 189,167 options to purchase Common Stock to certain of the
Company's employees. The options terminate ten years from the date of grant
and the exercise price of the options is $5.62 per share, with options
vesting after one month ratably on a monthly basis over a four year period.
The Company relied on the exemption provided by Rule 701 of the Securities
Act.
In October 1997, the Company issued to the following stockholders the
following number of shares of Common Stock upon the conversion by such
stockholders of shares of Series A Preferred Stock of the Company: Michael
Baxter IRA (1,871), Rose Baxter (38), Josh Baxter (66), Lanny Baxter (54),
Donald B. Baxter (1,634), Clark W. Davis (2,494), Lindsay Jones (250),
Nannette B. Kearney (3,741), Duane L. Kropf (2,494), Leo W. Kwan, M.D. a
Medical Corporation Employees Retirement Trust (6,235), Gary A. Ludi
(2,744), John K. Mertz and Valerie J. Emery (4,988), Leslie Mitsuka
(3,118), David Payne (25), Brandi Rees (57), Anthony Sermon (6,235),
Anthony J. Sermon (12,470), Merrill Vandermeyden (375), Robert Walther and
Mary Jean Walther (250), and Carlye C. Wattis & Co. (2,494). 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 December 1997 and January 1998, the Company issued promissory notes in
the aggregate amount of $450,000 to five investors. The notes presently
bear interest at 12% per annum and mature on the earlier of the
consummation of the Offering or 90 days after the issuance of the
respective notes (three promissory notes were issued on December 22, 1997,
one note was issued on January 9, 1998 and one note was issued on January
30, 1998). The Company relied on the exemption provided by 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.
In February 1998, the Company issued a promissory note for $350,000 to
one investor in exchange for the cancellation of a $350,000 balance
remaining on an earlier promissory note issued to the same investor. The
new note bears interest at 12% per annum and matures on the earlier of the
consummation of the Offering or 90 days from the date of the note. The
Company relied on the exemption provided by Section 4(2) of the Securities
Act.
Concurrent with the closing of the Offering, the Company will issue
447,895 shares of Series B Preferred Stock in exchange for $4,255,000 in
the aggregate of outstanding principal on certain debt and 115,616 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.
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.
II-4
<PAGE>
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 Indemnity Agreement among the Registrant, Michael Barron, Camelot
Holdings, Inc. and Dianne David.**
10.2.1 Securities Pledge Agreement, dated December 1, 1997, between the
Registrant and Dianne David.**
10.2.2 Securities Pledge Agreement, dated December 1, 1997, between the
Registrant 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.**
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.**
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
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.***
10.18.1 Amendment to Series A Preferred Stock Purchase Agreement, dated May
19, 1995, by and between the Registrant and American Growth Fund I,
L.P.***
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.**
10.24.1 Form of First Amendment to Master Registration Rights Agreement.***
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 Registrant 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).***
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.33 Form of Note Extension Agreement.***
10.34 Form of Common Stock Purchase Warrant regarding Note Extension
Agreement.***
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 Letter Agreement, dated November 29, 1997, between Imperial Bank and
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, between First Collateral
and Sutter.**
10.50.2 Master Mortgage Loan Purchasing Agreement, dated August 26, 1993,
between First Collateral and Sutter.***
10.50.3 Continuing Guaranty (Personal), dated August 30, 1993, by Arthur H.
Sutter in favor of First Collateral.***
10.51 Servicing Agreement, dated October 7, 1992, between First Collateral
and Sutter.**
10.51.1 Servicing Agreement, dated August 26, 1993, between First Collateral
and Sutter.***
10.52 Security Agreement (Servicing), dated October 7, 1992, between First
Collateral and Sutter.**
10.52.1 Security Agreement (Servicing), dated August 26, 1993 between First
Collateral and Sutter.***
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
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 Registrant
and John D. Murray.**
10.58 Employment Agreement, dated November 1, 1997, between the Registrant
and Michael A. Barron.**
10.59 Bridge Loan and Security Agreement, dated December 19, 1997, between
the Registrant and Kay Capital Company.***
10.60 Note, dated December 19, 1997, by the Registrant in favor of Kay
Capital Company in the amount of $1,300,000.**
10.61 Common Stock Purchase Warrant, dated December 19, 1997, between the
Registrant and Kay Capital Company, for 100,000 shares.***
10.61.1 Letter Agreement, dated January 20, 1998, between the Registrant and
Kay Capital Company.***
10.62 Kruse Woods One Lease Agreement, dated November 26, 1996, by and
between WCB Fifteen Limited Partnership and the Registrant.***
10.63 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).***
10.64 Lease Agreement, dated November 21, 1996, by and between Striper
Partners IV, Ltd. and the Registrant.***
10.65 Form of Promissory Note.***
10.66 Form of Debt Exchange Letter Agreement.***
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.
II. Valuation and Qualifying Accounts. See page F-28.
Schedules omitted:
All other 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
II-8
<PAGE>
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.
(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-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Newport Beach, County of Orange, State of California, on the
day of February, 1998.
VIRTUAL MORTGAGE NETWORK, INC.
By: /s/ Michael A. Barron
______________________________
Michael A. Barron
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 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 February 11, 1998
____________________________________ Executive Officer (Principal
Michael A. Barron Executive Officer), and
Director
/s/ John D. Murray President, Chief Financial February 11, 1998
____________________________________ Officer (Principal Financial
John D. Murray and Accounting Officer),
Chief Operating Officer and
Director
/s/ Randall C. Fowler Director February 11, 1998
____________________________________
Randall C. Fowler
/s/ Larry Wells Director February 11, 1998
____________________________________
Larry Wells
/s/ John Wells Director February 11, 1998
____________________________________
John Wells
</TABLE>
II-10
<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>
ATTACHMENT I
VIRTUAL MORTGAGE NETWORK, INC.
LIST OF OFFICERS AND DIRECTORS SIGNING THE
INDEMNITY AGREEMENT
Ronald Morck
Dianne David
Michael Barron
Larry Wells
Randall Fowler
John Wells
Chuck Lamb
T. Michael Anderson
Lee W. Shorey
Michael Balter
John D. Murray
Robert Gottesman
Jayne Fielding
<PAGE>
EXHIBIT 10.6
SUBLEASE AGREEMENT
------------------
This SUBLEASE AGREEMENT ("Sublease") is made this 21st day of
March, 1995 by and between TIEMPO ESCROW II, a CALIFORNIA CORPORATION ("Tenant")
and TODAY INC., a CALIFORNIA CORPORATION, ("Subtenant").
RECITALS:
--------
A. KOLL CENTER NEWPORT, a California Limited Partnership
("Landlord"), as landlord, and Tenant, as tenant, executed a lease dated July
10, 1990 (the "Master Lease"), with regard to certain office space commonly
known as 4590 MacArthur Blvd., Suite 175, Newport Beach, California (the
"Premises). A copy of the Master Lease, including all amendments thereto, is
attached hereto as Exhibit "A".
-----------
B. Tenant desires to sublease to Subtenant a portion of the
Premises as depicted on Exhibit "B" attached hereto (the "Subleased Premises"),
-----------
and Subtenant desires to lease the Subleased Premises from Tenant.
THEREFORE, Tenant and Subtenant agree as follows:
1. Assumption.
----------
Subtenant hereby expressly assumes and agrees to perform and be bound by all
covenants, conditions and obligations binding upon Tenant and the Premises under
the Master Lease with regard to the Subleased Premises. This sublease is
expressly subject and subordinate to the Lease and all amendments thereto and
any mortgages or deeds of trust which encumber Landlord's interest in the
Premises.
2. Rent.
----
Subtenant will pay to Tenant as rent for the Subleased Premises. In advance on
the first day of each calendar month of the term of this Sublease, without
deduction, offset, prior notice or demand, in lawful money of the United States,
the sum of FOUR THOUSAND TWENTY FIVE-Dollars ($4,025.00). Receipt of __________
Dollars ($4,025.00) is hereby acknowledged by Tenant as rent for the first
month. Tenant will be responsible for the payment to Landlord of all Operating
Expenses and all other items of additional rent accruing under the Master Lease.
3. Term.
----
The term of this Sublease will be for a period of 28 months commencing on
4-1-95, and ending on 7-31, 1997 (but in no event later than the termination
date of the Master Lease).
4. Use.
---
Subtenant, will use the Subleased Premises for _________________, which is a
permitted use described. in the Master Lease, and Subtenant will otherwise use
the Subleased Premises in compliance with all of the terms of the Master Lease
and for no other purpose.
5. No Release.
----------
This Sublease will in no way release Tenant from any obligation or covenant of
Tenant as tenant under the Master Lease.
6. Security Deposit.
----------------
Subtenant will deposit with Tenant upon execution heron FOUR THOUSAND TWENTY
FIVE Dollars ($4,025.00) as security for Subtenant's faithful performance of
Subtenant's obligations hereunder. Tenant may deal with the Security Deposit in
accordance with the unmodified terms and provisions of the Master Lease which
relate to a security deposit.
7. Condition of Premises.
---------------------
Subtenant accepts the Subleased Premises in its condition existing as of the
date of the execution of this Sublease, subject to the Master Lease and all
applicable zoning, municipal, county and state laws, ordinances and regulations
governing and regulating the use of the Premises. Subtenant acknowledges that
neither Tenant nor Landlord nor any of their agents or employee have made any
representations or warranties as to the suitability of the Subleased Premises
for the Conduct of Subtenant's business.
8. Construction.
------------
The terms, conditions and respective obligations of tenant and Subtenant to each
other under this Sublease will be the terms, conditions and obligations
contained in the Master Lease, except for those provisions of the Master Lease
which are directly contradicted by the provisions of this Sublease, in which
event, the terms of this Sublease will control over the terms of the Master
Lease as between Tenant and Subtenant only. In all other respects, the terms of
the master Lease will control. Accordingly, for the purposes of this Sublease,
wherever in the Master Lease the term "Landlord" is used, it will be deemed to
mean the Tenant herein, and wherever in the Master Lease the term "Tenant" is
used, it will be deemed to mean the Subtenant herein.
9. Attornment.
----------
If tenant defaults in its obligations under the Master Lease or the Master Lease
terminates for any reason including, without limitation, a voluntary surrender
by Tenant or any reentry or repossession of the Premises by Landlord, Landlord
may terminate this Sublease or, at Landlord's option and
<PAGE>
without being obligated to do so, Landlord may require Subtenant to attorn to
Landlord and, in the event Landlord exercises such option, Subtenant does hereby
attorn to Landlord and agrees to perform its obligations under this Sublease
directly to Landlord, in which event Landlord will take over all right, title
and interest of Tenant under this Sublease from the time of the exercise of such
option through the expiration or earlier termination of the term of this
Sublease. In the event of any such assumption of this Sublease by Landlord and
attornment by Subtenant, Landlord will not (i) be liable for any prepaid rents
or security deposit paid by Subtenant to Tenant, (ii) be liable for any previous
acts, omissions or defaults of Tenant under this Sublease; (iii) be subject to
any defense or offset previously accrued in favor of Subtenant against Tenant;
or (iv) be bound by any modification of this Sublease made without Landlord's
written consent.
10. Parking. Provided Subtenant is not in default hereunder,
-------
and provided further that Tenant is not in default under the Master Lease,
Subtenant will have a license to use 15 of the reserved and ____ of the
--
unreserved parking spaces which Tenant is licensed to use, pursuant to and in
accordance with the terms of the Master Lease relative to parking; provided,
however, Subtenant will pay directly in Landlord or Landlord's parking operator
the monthly rental charges for such parking spaces at the rates set forth in the
Master Lease as a condition to Subtenant's continued use of such parking spaces.
LESSEE WILL PROVIDE CUSTOMER PARKING AND EMPLOYEE PARKING PER ITEM 5 OF THE
AMENDMENT NO. 1 TO OFFICE BUILDING LEASE.
11. Further Assignment. Subtenant will not further sublease
------------------
the Subleased Premises or any portion thereof or assign any of its rights or
delegate any of its duties under this Sublease, without first obtaining the
prior written consent of Tenant and Landlord.
12. Insurance. Subtenant will, during the entire term of
---------
this Sublease, carry all insurance policies required to be carried by Tenant
under the Master Lease in accordance with the terms of the Master Lease, but
where Tenant is required to be named as an additional insured, Landlord and its
mortgagees will also be named as additional insureds.
13. Rules. Attached hereto and incorporated herein as
-----
Exhibit "C" may be additional rules and regulations which will govern
- -----------
Subtenant's use of the Subleased Premises, parking areas and the remainder of
the Development of which the Subleased Premises are a part, and the term
"Landlord" as used in such rules and regulations shall be deemed to mean the
Tenant herein, and the term "Tenant" shall be deemed to mean the Subtenant
herein. To the extent such rules and regulations are inconsistent or conflict
with any rules and regulations attached to the Master Lease, the more
restrictive rules and regulations will prevail and control.
IN WITNESS WHEREOF, Tenant and Subtenant have executed this
Sublease as of the date first written above.
Tenant: Subtenant:
TIEMPO ESCROW II , TODAY INC. ,
- --------------------------------- ----------------------------------
a CALIFORNIA CORPORATION a CALIFORNIA CORPORATION
--------------------------------- ----------------------------------
By: By:
------------------------------- --------------------------------
Its: Its:
--------------------------- ----------------------------
GUARANTOR(S) OF THE MASTER LEASE: By:
--------------------------------
Its:
----------------------------
By:
--------------------------------
Its:
----------------------------
The undersigned Landlord under the Master Lease attached hereto as Exhibit "A"
hereby consents to the subletting of the Premises described herein on the terms
and conditions contained in this Sublease. This consent applies only to this
Sublease and is not to be deemed to be a consent to any other sublease or
assignment.
DATED: ,
---------------------------- -----------------------------------
a
----------------------------------
By:
--------------------------------
Its:
----------------------------
-2-
<PAGE>
CONSENT OF LANDLORD TO SUBLEASE
KOLL CENTER NEWPORT, a CALIFORNIA LIMITED PARTNERSHIP ("Landlord"), the
landlord under that certain lease ("Master Lease") dated 7-10-90, entered into
by and between Landlord and TIEMPO ESCROW II, a CALIFORNIA CORPORATION
("Tenant"), whereby Tenant, as the tenant, leased suite 175 in that certain
building located at 4590 Macarthur Blvd. in Newport Beach, California (the
"Premises"), hereby consents to the sublease ("Sublease") of the Premises by
Tenant to TODAY INC., a CALIFORNIA CORPORATION ("Subtenant"). Landlord's consent
is not intended, and shall not be construed (i) to modify or otherwise affect
any of the provisions of the Master Lease, or to release Tenant from any of its
obligations and duties under the Master Lease, (ii) as a waiver of any of
Landlord's rights under the Master Lease, (iii) as an authorization or a consent
by Landlord to any assignment of the interest of Tenant in the Master Lease or
to the further subleasing of the Premises, and (iv) as binding or obligating
Landlord in any manner whatsoever with respect to any of the covenants,
undertakings, representations, warranties or agreements contained in the
sublease agreement (the "Sublease Agreement"), if any, between Tenant and
Subtenant.
Notwithstanding the foregoing, it is a condition to Landlord's
consent to the Sublease that Subtenant's occupancy of the Premises and any
Sublease Agreement are subject to the following: (i) Subtenant's occupancy of
the Premises and any Sublease Agreement will be subject and subordinate to the
Master Lease and to all mortgages which are secured, in whole or in part, by the
Premises; (ii) Landlord may enforce the provisions of the Sublease Agreement, if
any, including collection of rent directly from Subtenant; (iii) in the event of
termination of the Master Lease for any reason whatsoever, including, without
limitation, a voluntary surrender by Tenant, or any default by Tenant, or in the
event of any re-entry or repossession of the Premises by Landlord. Landlord may,
at its option, either (a) terminate the Sublease Agreement and Subtenant's
occupancy of the Premises, or (b) take over all of the right, title and interest
of Tenant, as sublandlord, under the Sublease Agreement, in which case the
Subtenant will attorn to Landlord, but that nevertheless Landlord will not (1)
be liable for any previous act or omission of Tenant under the Sublease, (2) be
subject to any defense or offset previously accrued in favor of the Subtenant
against Tenant, or (3) be bound by any previous prepayment by Subtenant of more
than one month's rent.
This Consent of Landlord has been executed this ____ day of
_____________, 19___.
__________________________________
a_________________________________
By:_______________________________
Its:____________________________
The undersigned Tenant and Subtenant referred to hereinabove hereby acknowledge
and accept the conditions of Landlord's consent to the Sublease as described
hereinabove.
Tenant: Subtenant:
TIEMPO ESCROW II TODAY INC.
A CALIFORNIA CORPORATION A CALIFORNIA CORPORATION
By:___________________________ By:_____________________________
Its:________________________ Its:__________________________
<PAGE>
EXHIBIT 10.18
ADDENDUM
--------
TO
--
VIRTUAL REALTY NETWORK, INC.
----------------------------
SERIES A PREFERRED STOCK
------------------------
PURCHASE AGREEMENT
------------------
Dated May 19, 1995
THIS ADDENDUM to the Series A Preferred Stock Purchase Agreement, dated May 19,
1995, is hereby entered into by Virtual Realty Network, Inc. and American Growth
Fund I, ("American Growth") a California Limited Partnership, by American Growth
Capital Corporation, Managing General Partner, with offices at 17280 Newhope
Street, Ste. 1, Fountain Valley, California 92708, and the parties hereto agree
as follows:
1. American Growth desires to purchase 250,000 Series A Preferred Stock.
American Growth has received a copy of the Purchase Agreement, the Rights
Agreement (Exhibit E) and the Co-Sale and Right of First Refusal Agreement
(Exhibit F), including all of the Exhibits A-J thereto. American Growth has
read, understands and agrees to be bound by and purchase the Series A Preferred
Stock under the terms and conditions of those agreements, including those
exceptions to the Agreement (Exhibit C, attached thereto).
2. Virtual Realty agrees to sell 250,000 Shares under the terms and
conditions stated in the Series A Preferred Stock Purchase Agreement, dated May
19, 1995, to American Growth, which shall be evidenced by one share certificate
in that amount.
3. It is understood that all terms and conditions for the original
investment dated March 21, 1995, and the Amendment, dated March 31, 1995, remain
in place and are not superseded by this additional investment.
IN WITNESS THEREOF, the parties have executed this Addendum to the Series A
Preferred Agreement Purchase Agreement, dated May 19, 1995, this 14th day of
June, 1995.
VIRTUAL REALTY NETWORK, INC. AMERICAN GROWTH FUND I,
4590 MacArthur Blvd., Ste. 175 a California limited partnership
Newport Beach, CA 92660 By: American Growth Capital
Corp., Managing General Partner
By: /s/ Michael A. Barron By: /s/ Donna Snyder
----------------------------- --------------------------
MICHAEL A. BARRON, Pres. DONNA SNYDER, President
<PAGE>
EXHIBIT 10.18.1
AMENDMENT
---------
TO
--
VIRTUAL REALTY NETWORK, INC.
----------------------------
SERIES A PREFERRED STOCK
------------------------
PURCHASE AGREEMENT
------------------
DATED MAY 19, 1995
THIS AMENDMENT to the Series A Preferred Stock Purchase Agreement, dated
May 19, 1995, is hereby entered into by Virtual Realty Network, Inc. ("VRNi"),
Intel Corporation ("Intel"), and American Growth Fund I, ("American Growth") a
California Limited Partnership, by American Growth Capital Corporation, Managing
General Partner, and the parties hereto agree as follows:
1. American Growth has purchased 250,000 shares of Series A Preferred
Stock and Intel has purchased 500,000. American Growth has read, understood and
agreed to be bound by and has purchased their shares under the terms and
conditions of the Series A Preferred Stock Purchase Agreement. All parties
hereto have voted at a Shareholders Meeting, held on August ___, 1995, to
increase the number of Series A Preferred shares from 2,000,000 to 2,250,000
shares.
2. The parties agree to the following changes, corrections, additions
and/or deletions to the Series A Preferred Stock Purchase Agreement:
a) 3.2 Capitalization (b) Preferred Stock. The number of shares of
----------------
Preferred Stock ($.001 par value) has been increased from 2,000,000 to 2,250,000
Series A Preferred, of which 750,000 shares have been sold.
b) 3.2 Capitalization (c) Options, Warrants, Reserved Shares. The
-----------------------------------
Company has reserved 2,250,000 shares of its Common Stock for possible issuance
upon the conversion of the shares of Series A Preferred Stock to be issued
thereunder. (iii) there are only three (3) employee stock options of 50,000
shares each outstanding, as the contract with GaryLyn Edwards has been canceled.
c) 3.2 Capitalization (d) Outstanding Security Holders. Exhibit D is
-----------------------------
updated as attached.
d) 3.3 Subsidiaries. The Company has three (3) wholly owned
subsidiaries: Virtual Realty Applications Group, Inc., Virtual Realty Licensing
Co., Inc., and Virtual Realty MLS Co., Inc. The Company is not currently using
these corporations but plans to put various software, and business contracts
into them, as may be appropriate. All three corporations are Nevada
corporations.
e) Section 3.6 Liabilities - The Company originally had borrowed
$50,000.00 from Jeanne Garde, evidenced by a Promissory Note dated March 22,
1995,
1
<PAGE>
which loan was re-written on May 17, 1995 in the principal amount of $50,390.41,
a copy of which is attached as Exhibit G.
f) Section 3.7 Title to Properties and Assets. On March 22, 1995,
the Company entered into a Purchase Agreement with Jeanne Garde, James Meador,
and Gary Edwards, to purchase certain software and hardware, wherein the sellers
warranted that they had good and marketable title to all assets, free and clear
of all liens, claims, charges and encumbrances. This agreement was terminated in
the week of August 18, 1995, as the title to the software was in dispute and the
program was not operational. The hardware is being returned.
g) Section 3.8(b) Licenses; Other Agreements. The Company had
--------------------------
entered into an Agreement with MortgageFlex, dated April 21, 1995, for the
software development of the VRI "Loanmaker" mark and methodology. That agreement
has been terminated as the Mortgageflex software was not operational. The
Company negotiating a software development and software license agreement with
Dynatek, Inc., a Michigan corporation.
h) Section 3.8(c) No Infringement. On July 5, 1995, the Company
---------------
received a letter for Attorney Gerald L. Berlin stating that his client, Mr.
John R. Friedmann, was the owner of the service mark "VIRTUAL REALTY" and
demanded that the Company cease using the name. After the Company responded to
this letter, Mr. Friedmann changed law firms. The Company is negotiating with
the new attorney for a license/agreement to use the name in our company name.
The Company received a letter dated June 22, 1995, from Aegis Technologies,
enclosing a copy of their U.S. patent no. 5,231,571, issued July 27, 1993 with
claims directed to an interactive system for providing personal financial
services over a computer network. No claims of patent infringement were made,
only a request for questions or comments.
i) Section 3.10 Litigation. There is no litigation pending, but
there was a demand to cease using our name, as stated above in Section 3.8
(paragraph h) above).
j) Section 3.23 Stock Restriction Agreement. At present, the
founders, Michael A. Barron and Dianne D. David, have not signed any agreement
with the Company which restricts their stock ownership although they are
negotiating with the Company to do so.
k) Section 3.23 Use of Proceeds. The Company had previously agreed
to use the proceeds of its first sale of Series A shares to pay off the
outstanding debt owed to American Growth. The promissory note has been
negotiated, as shown in Exhibit G, which eliminated the need to payoff the note.
2
<PAGE>
l) 4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. The
Company is contemplating a Private Placement for the sale of 1,000,000 shares of
Series A Preferred to accredited investors who will be purchasing under
the terms and conditions of this Purchase Agreement, as amended herein.
m) Section 5.9(b) MortgageFlex and Software Today Licenses. The
------------------------------------------
Company had entered into an Agreement with Mortgage Flex, dated April 21, 1995,
for the software development of the VRI "Loanmaker" mark and methodology. That
agreement has been terminated as the Mortgageflex software was not operational.
On March 22, 1995, the Company entered into a Purchase Agreement with Jeanne
Garde, James Meador, and Gary Edwards, to purchase certain software and
hardware, wherein the sellers warranted that they had good and marketable title
to all assets, free and clear of all liens, claims, charges and encumbrances.
This agreement was terminated in the week of August 18, 1995, as the title to
the software as in dispute and the program was not operational. The hardware is
being returned.
n) Section 5.12 Minimum to Close. The number of shares of
Preferred Stock ($.001 par value) has been increased from 2,000,000 to 2,250,000
Series A Preferred, of which 750,000 shares have been sold. The Company is
contemplating a Private Placement for the sale of 1,000,000 shares of Series A
Preferred to accredited investors who will be purchasing under the terms and
conditions of this Purchase Agreement, as amended herein. The net proceeds to
the Company, after fees and costs, is estimated at $750,000.00. The balance of
the Series A Preferred of 500,000 shares is set aside for purchase by Intel.
o) Section 7.9 Finder's Fee. The Company is preparing to sell
1,000,000 shares of Series A Preferred in a Private Placement. Spectrum
Securities, Fountain Valley, CA will be paid 13.5% of amount raised for sales
commissions and marketing assistance fees and American Growth Capital
Corporation will be paid 11.5% of amount raised for Investment Banking Fees.
p) The Rights Agreement, dated May 19, 1995, attached as Exhibit E
of the Series A Preferred Stock Purchase Agreement, dated May 19, 1995, is
hereby amended as follows:
1. Paragraph 1.1.7 The term "Substantial Amount of Registrable
Securities" means at least sixty percent (60%) of the Registrable Securities
then outstanding that have not been resold to the public in a registered public
offering.
3
<PAGE>
IN WITNESS THEREOF, the parties have executed this Amendment to the Series
A Preferred Agreement Purchase Agreement, dated May 19, 1995, this 23rd day of
----
August, 1995.
VIRTUAL REALTY NETWORK, INC. AMERICAN GROWTH FUND I,
4590 MacArthur Blvd., Ste. 175 a California limited partnership
Newport Beach, CA 92660 By: American Growth Capital
Corp., Managing General Partner
By: By:
------------------------- -----------------------------
MICHAEL A. BARRON, Pres. DONNA SNYDER, President
INTEL CORPORATION
By: /s/ SALISH RISHI
-------------------------
4
<PAGE>
EXHIBIT 10.24.1
FIRST AMENDMENT TO MASTER REGISTRATION RIGHTS AGREEMENT
This FIRST AMENDMENT TO MASTER REGISTRATION RIGHTS AGREEMENT (this
"Agreement") is made and entered into as of October 26, 1997, by and among
Virtual Mortgage Network, Inc. (the "Company") and the investors (the
"Investors") whose names and addresses are set forth on the signature pages to
that certain Master Registration Rights Agreement, effective as of September 9,
1996, by and among the Company and the Investors (the "Master Registration
Rights Agreement"). Unless otherwise defined herein, all capitalized terms used
herein have the meanings given to such terms in the Master Registration Rights
Agreement.
WHEREAS, the Company is preparing to undertake an initial public
offering ("IPO") of common stock of the Company, or the common stock of any
entity into which the Company is merged in connection with the reincorporation
of the Company (any such common stock so offered being the "Common Stock"); and
WHEREAS, as a condition to the IPO, the underwriters of the IPO have
requested that the Company and the Investors enter into this Amendment in order
to provide an orderly market for the Common Stock after the IPO;
NOW, THEREFORE, in consideration of the execution of an underwriting
agreement by such underwriters and the Company, the public market for the Common
Stock that will be created by the IPO and the mutual covenants and agreements
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Company and the Investors
hereby agree as follows:
1. AMENDMENT TO MASTER REGISTRATION RIGHTS AGREEMENT. The Company
-------------------------------------------------
and the Investors hereby agree to amend and restate Section 13 of the Master
Registration Rights Agreement in its entirety to read as follows:
"13. "MARKET STAND-OFF" AGREEMENT.
----------------------------
(a) Proposed Public Offering. The Holders understand that
------------------------
various underwriters (the "UNDERWRITERS"), which may include Barington
Capital Group, L.P. and Value Investing Partners, Inc., propose to enter
into an Underwriting Agreement (the "UNDERWRITING AGREEMENT") with the
Company providing for the purchase by the Underwriters of shares (the
"SHARES") of Common Stock and that the Underwriters propose to offer the
Shares to the public. The Holders further understand that the proposed sale
of such Shares is the subject of a Registration Statement on Form S-1 which
has been filed with the Securities and Exchange Commission and which will
include a form of preliminary prospectus to be used in offering such Shares
to the public.
<PAGE>
The Holders hereby irrevocably agree that without the prior
written consent of Barington Capital Group, L.P., on behalf of the
Underwriters, or any other lead underwriter the Company elects to use in
lieu thereof ("BARINGTON"), which consent may be withheld in Barington's
sole discretion, the Holders will not offer to sell, contract to sell,
sell, distribute, grant any option to purchase, pledge, hypothecate, or
otherwise dispose of, directly or indirectly, any shares of Common Stock,
or any securities convertible into, or exercisable or exchangeable for,
shares of Common Stock, or any securities into which shares of the
Company's Common Stock are converted in connection with any reincorporation
merger or any securities convertible into or exerciseable or exchangeable
for any such securities, for a period of 24 months after the date of the
final prospectus relating to the offering of the Shares to the public by
the Underwriters ("FINAL PROSPECTUS") except for the exercise by the
Holders of outstanding options granted by the Company or pursuant to any
options granted or to be granted pursuant to employee stock option plans
(but not the sale, distribution, pledge, hypothecation or other disposition
of Common Stock received upon such exercise). After such period, any such
securities owned by a Holder may be sold without restriction hereunder,
subject to applicable securities laws and regulations. Notwithstanding the
foregoing, (i) each Holder may sell shares of any such securities
commencing 12 months after the date of the Final Prospectus in the event
the closing price of the Common Stock on NASDAQ 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 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, or (ii) each Holder may sell up
to 50% of any such securities commencing 18 months after the date of the
Final Prospectus, without regard to the market price of the Common Stock.
The Holders agree that, without the prior written consent of
Barington, they will not, during the period commencing on the date hereof
and ending 24 months after the date of the Final Prospectus, make any
demand for or exercise any right with respect to, the registration of any
shares of Common Stock or any security convertible into or exercisable or
exchangeable for Common Stock, or any securities into which shares of the
Company's Common Stock are converted in connection with any reincorporation
merger or any securities convertible into or exerciseable or exchangeable
for any such securities. It is understood that if the Underwriting
Agreement does not become effective prior to April 1, 1998, or if the
Underwriting Agreement (other than the provisions thereof which survive
termination) shall terminate or be terminated prior to payment for and
delivery of the Shares, the Holders' obligations under this Section 13(a)
shall terminate.
(b) Subsequent Offerings. The Holders hereby further agree that
--------------------
following the completion of the offering contemplated in Section 13(a) or
the termination of the restrictions under Section 13(a), the Holders shall
not, to the
2
<PAGE>
extent requested by the Company and an underwriter of Common Stock (or
other securities), sell or otherwise transfer or further dispose of any
shares of Common Stock, or any securities convertible into or exercisable
for, shares of Common Stock, or any securities into which shares of the
Company's Common Stock are converted in connection with any reincorporation
merger or any securities convertible into or exerciseable or exchangeable
for any such securities, in a market transaction during the 180-day period
following the effective date of a registration statement of the Company
filed under the Securities Act of 1933, as amended.
(c) Enforcement. In order to enforce the foregoing covenant,
-----------
the Company may impose stop-transfer instructions with respect to the
applicable securities of each Holder (and the shares or securities of every
other person subject to the foregoing restriction) until the end of such
24-month or 180-day period, as applicable."
2. APPROVAL.
--------
The undersigned approves the assignment of this Agreement by the
Company to a successor corporation by operation of law in connection with the
reincorporation of the Company in Delaware. The undersigned hereby approves the
Company's Registration Statement on Form S-1 in substantially the form filed by
the Company with the Securities and Exchange Commission on October 21, 1997 and
the registration of the shares of Common Stock thereunder.
3. EFFECT OF AMENDMENT.
-------------------
Except as amended pursuant to the terms of this Agreement, the terms
and conditions of the Master Registration Rights Agreement shall remain
unmodified and in full force and effect.
4. GOVERNING LAW.
-------------
This Agreement 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 Delaware applicable to
agreements made and to be performed wholly within the State of Delaware.
5. COUNTERPARTS.
------------
This Agreement may be executed in separate counterparts, each of which
shall be deemed to be an original, and when executed, separately or together,
shall constitute a single original instrument, effective in the same manner as
if the parties hereto had executed one and the same instrument.
3
<PAGE>
6. SEVERABILITY.
------------
The provisions of this Agreement are severable. The invalidity, in
whole or in part, of any provision of this Agreement shall not affect the
validity or enforceability of any other of its provisions. If one or more
provisions hereof shall be declared invalid or unenforceable, the remaining
provisions shall remain in full force and effect and shall be construed in the
broadest possible manner to effectuate the purposes hereof. The parties further
agree to replace such void or unenforceable provisions of this Agreement with
valid and enforceable provisions which will achieve, to the extent possible, the
economic, business and other purposes of the void or unenforceable provisions.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered as of the date first above written.
"COMPANY"
VIRTUAL MORTGAGE NETWORK, INC.,
By:_________________________________________
Name:__________________________________
Title:_________________________________
"INVESTOR"
BY: ________________________________________
Authorized Signatory:_______________________
Printed Name: ______________________________
Title (if applicable):______________________
Address (if different from Company records):
____________________________________________
____________________________________________
____________________________________________
4
<PAGE>
ATTACHMENT 1
VIRTUAL MORTGAGE NETWORK, INC.
LIST OF INVESTORS SIGNING THE FIRST AMENDMENT TO
MASTER REGISTRATION RIGHTS AGREEMENT
1. Ricardo Alberty
2. Richard P. Azwell
3. Robert L. & Mildred R. Baker, Trustees of the Baker Revocable Trust
4. Todd A. Baxter
5. Lanny Baxter
6. Rose Baxter
7. Donald B. Baxter
8. James I. Betson/Dorothy E. Betson
9. Albert E. Bonte, Trustee of the Mary-Lucille Bonte Trust
10. Michael Canepa
11. Thomas E. Chivers
12. Yong W. Chung, M.D., Yong W. Chung, M.D. Profit Sharing
13. Yong Wun Chung & Seung Ja Chung
14. Robert V. Dolan/Dolan Family Trust
15. Robert D. Currier and Annette L. Currier
16. Clark W. Davis
17. David H. Frederick, Trustee of the Frankenfield Trust U/A 2/26/87
18. David H. Frederick, Trustor and Trustee of the David H. Frederick Trust U/A
2/26/87
19. Lois I. Frost
20. Alfred B. Gibson
21. Robert R. Hayes & Jeane E. Hayes
22. Intel by Randy Tinsley - Asst. Treasurer and Salish Rishi
23. Lindsay P. Jones
24. Nannette B. Kearney
25. Duane L. Kropf
26. Leo W. Kwan, M.D., Leo W. Kwan, M.D, a Medical Corporation Employees
Retirement Trust
27. Sandra C. Larison, Trustee of the Larison Family Trust
28. Janis D. Liss, Trustee of the Liss Trust
29. Gary A. Ludi
30. Fred Martel, Trustee of the Martel Trust dated 10/6/89
31. John K. Mertz & Valerie I. Emery
32. Leslie Mitsuka
33. Viet Quoc Nguyen
34. David Payne
35. William F. Persons
36. Frank E. Raab & Sally H. Raab
37. DeWayne Reding
38. Brandi Rees
39. Hubert M. Reid
40. James S. Ro
41. Ted H. Rowcliffe
42. Robert C. Rupert, Trustee of the Rupert 1993 Family Trust
43. Gilbert Strange, Trustee of the Gilbert and Rosalinda Strange 1988 Living
Trust of 9/23/88
44. Merrill VanderMayden
<PAGE>
45. Jose L. Velazquez, M.D.
46. Jose David Velazquez
47. Mary Jean Walther and Robert Walther
48. Julie Walther-Vincent
49. Ann W. Cope, Partner of Carlye C. Wattis & Co.
50. Florence Singer Whalen
51. Ronald C. Bartholomew, Trustee of the Zogob Family Business Trust
<PAGE>
EXHIBIT 10.28.2
UNSECURED PROMISSORY NOTE
-------------------------
$1,534,000 Walnut Creek, California
December 19, 1997
1. Principal. FOR VALUE RECEIVED, the undersigned, Virtual Mortgage
---------
Network, Inc., a Nevada 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 91107, 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 Million Five Hundred Thirty Four Thousand
Dollars ($1,534,000.00) (the "Principal Sum") in accordance with the terms of
this Promissory Note (this "Note"). This Note is unsecured. 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 Sutter
Mortgage Corporation. 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 shall be due and payable on
----------------
the earlier of (a) the later of (i) the closing of the Offering or (ii) any
other financing transaction in which Maker 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 out of the cash proceeds to be received at the
closing of the Offering.
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 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 or the Pledge Agreement, with such failure or
breach continuing for a period of five (5) calendar days without being cured.
5. 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.
6. 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.
<PAGE>
7. 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.
8. 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.
9. 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.
10. 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.
11. 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.
12. 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.
13. 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.
2
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Note as of the
day and year first written above.
MAKER:
-----
VIRTUAL MORTGAGE NETWORK, INC.,
a Nevada corporation
By: /s/ John D. Murray
----------------------------------
Name: John D. Murray
-------------------------------
Title: President and
-------------------------------
Chief Financial Officer
-------------------------------
Acknowledged and Agreed:
/s/ Arthur H. Sutter
- ------------------------------
Arthur H. Sutter
3
<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>
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>
ATTACHMENT I
VIRTUAL MORTGAGE NETWORK, INC.
LIST OF INVESTORS AND NOTE AMOUNTS
<TABLE>
<CAPTION>
Investor Note Amount
-------- -----------
<S> <C>
American Growth Fund I, L.P. $300,000
Andrew Malik $25,000
Daystar Partners $75,000
Randall Fowler $50,000
Anacapa Ventures $50,000
BP Institutional Partners $40,000
Maritime Global $75,000
Boston Provident $385,000
St. James Capital $500,000
Sundance Venture $600,000
James Scullion $50,000
Vance Driscoll $50,000
Steve Nemirov $25,000
Robert Weiss $50,000
Moore Global Investments $1,000,000
Jeffrey Gendell $500,000
James Scibelli $100,000
Moore Global Investments $500,000
Daystar Partners $130,000
Boston Provident $500,000
</TABLE>
<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>
ATTACHMENT I
VIRTUAL MORTGAGE NETWORK, INC.
LIST OF INVESTORS AND NOTE AMOUNTS
<TABLE>
<CAPTION>
Investor Note Amount
-------- -----------
<S> <C>
American Growth Fund I, L.P. $300,000
Andrew Malik $25,000
Daystar Partners $75,000
Randall Fowler $50,000
Anacapa Ventures $50,000
BP Institutional Partners $40,000
Maritime Global $75,000
Boston Provident $385,000
St. James Capital $500,000
Sundance Venture $600,000
James Scullion $50,000
Vance Driscoll $50,000
Steve Nemirov $25,000
Robert Weiss $50,000
Moore Global Investments $1,000,000
Jeffrey Gendell $500,000
James Scibelli $100,000
Moore Global Investments $500,000
Daystar Partners $130,000
Boston Provident $500,000
</TABLE>
<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>
ATTACHMENT I
VIRTUAL MORTGAGE NETWORK, INC.
LIST OF INVESTORS AND NUMBER OF WARRANTS
<TABLE>
<CAPTION>
Investor Number of Warrants
-------- ------------------
<S> <C>
American Growth Fund I, L.P. 15,338
Andrew Malik 1,279
Daystar Partners 3,835
Randall Fowler 2,557
Anacapa Ventures 2,557
BP Institutional Partners 2,045
Maritime Global 3,835
Boston Provident 19,684
St. James Capital 25,563
Sundance Venture 30,675
James Scullion 2,557
Vance Driscoll 2,557
Steve Nemirov 1,279
Robert Weiss 2,557
Moore Global Investments 51,125
Jeffrey Gendell 25,563
James Scibelli 5,113
Moore Global Investments 25,563
Daystar Partners 6,647
Boston Provident 25,563
</TABLE>
<PAGE>
EXHIBIT 10.33
NOTE EXTENSION AGREEMENT
This Note Extension Agreement (this Agreement"), effective as of July
6, 1997, is entered into by and between Virtual Mortgage Network, Inc., a Nevada
corporation (the "Company") and ______________________________, a
______________________________ (the "Holder").
A. On ____________ ____, 199__, the Company executed a Promissory
Note (the "Note") in the amount of $_______________ in favor of Holder with a
maturity date of March 6, 1997 (the "Maturity Date") and issued a warrant to the
Holder to purchase ______________ shares of the Company's Common Stock, $.001
par value, at an exercise price of $.001 per share.
B. Pursuant to a Letter Agreement dated April 1, 1997, Holder agreed
to extend the Maturity Date to July 6, 1997.
C. The parties now desire to further extend the Maturity Date
pursuant to the terms of this Agreement.
In consideration of the mutual promises contained herein and intending
to be legally bound, the parties agree as follows:
1. Extension of Maturity Date. The Company and Holder hereby agree that the
--------------------------
Maturity Date of the Note shall be January 6, 1998.
2. Issuance of Warrants. The Company hereby agrees to execute in favor of
--------------------
Holder a Common Stock Purchase Warrant (the "Warrant"), a form of which is
attached hereto as Exhibit A, concurrent with the execution and delivery of this
---------
Agreement. The Warrant shall grant the Holder the right to purchase __________
shares of the Company's Common Stock, $.001 par value, at an exercise price of
$.001 per share and shall be dated of even date herewith.
3. Amendments. This Agreement may be amended only by agreement in writing by
----------
the parties.
4. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California, without regard to conflicts
of law doctrines.
5. Counterparts. This Agreement may be executed in counterparts, and each
------------
counterpart, when executed, shall have the efficacy of a signed original.
Photostatic copies of such signed counterparts may be used in lieu of the
originals for any purpose.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed as of the day and year first above written.
"COMPANY"
VIRTUAL MORTGAGE NETWORK, INC.
a Nevada corporation
______________________________________________
Name:_________________________________________
Title:________________________________________
"HOLDER"
______________________________________________
Name:_________________________________________
Title:________________________________________
2
<PAGE>
EXHIBIT A
FORM OF COMMON STOCK PURCHASE WARRANT
3
<PAGE>
ATTACHMENT I
VIRTUAL MORTGAGE NETWORK, INC.
LIST OF INVESTORS EXTENDING DEBT
Investor
--------
American Growth Fund I, L.P.
Andrew Malik
Daystar Partners
Randall Fowler
Anacapa Ventures
BP Institutional Partners
Maritime Global
Boston Provident
St. James Capital
Sundance Venture
James Scullion
Vance Driscoll
Steve Nemirov
Robert Weiss
Moore Global Investments
Jeffrey Gendell
James Scibelli
Moore Global Investments
Daystar Partners
Boston Provident
<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>
ATTACHMENT I
VIRTUAL MORTGAGE NETWORK, INC.
LIST OF INVESTORS AND NUMBER OF WARRANTS
<TABLE>
<CAPTION>
Investor Number of Warrants
-------- ------------------
<S> <C>
American Growth Fund I, L.P. 5,113
Andrew Malik 427
Daystar Partners 1,279
Randall Fowler 853
Anacapa Ventures 853
BP Institutional Partners 682
Maritime Global 1,279
Boston Provident 6,562
St. James Capital 8,521
Sundance Venture 10,225
James Scullion 853
Vance Driscoll 853
Steve Nemirov 427
Robert Weiss 853
Moore Global Investments 17,042
Jeffrey Gendell 8,521
James Scibelli 1,705
Moore Global Investments 8,521
Daystar Partners 2,216
Boston Provident 8,521
</TABLE>
<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 I
VIRTUAL MORTGAGE NETWORK, INC.
LIST OF INVESTORS AND NOTE AMOUNTS
<TABLE>
<CAPTION>
Investor Note Amount
-------- -----------
<S> <C>
KSH Investment Group, Inc. $50,000
Ronald Krinick $50,000
Sunshine Charitable Trust $100,000
Mid-Lakes P/S Trust $50,000
Alfred Albiouness $50,000
Windy City $50,000
Alan Shapiro $50,000
Allenstown Investment Ltd. Corp. $50,000
Paul and Judy Berkman JTWROS $50,000
KAM Group, Inc. $50,000
Linda Bassin $50,000
Ed S. Raskin TTEE $50,000
Stanley Goldberg TTEE $20,000
Harvey Greenfield $50,000
M.D. Funding $50,000
Joe Bianco $25,000
Larry Wells $42,500
Randall Fowler $35,000
James Scullion $7,500
John Wells $15,000
</TABLE>
<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>
ATTACHMENT I
VIRTUAL MORTGAGE NETWORK, INC.
LIST OF INVESTORS AND NOTE AMOUNTS
<TABLE>
<CAPTION>
Investor Note Amount
-------- -----------
<S> <C>
KSH Investment Group, Inc. $50,000
Ronald Krinick $50,000
Sunshine Charitable Trust $100,000
Mid-Lakes P/S Trust $50,000
Alfred Albiouness $50,000
Windy City $50,000
Alan Shapiro $50,000
Allenstown Investment Ltd. Corp. $50,000
Paul and Judy Berkman JTWROS $50,000
KAM Group, Inc. $50,000
Linda Bassin $50,000
Ed S. Raskin TTEE $50,000
Stanley Goldberg TTEE $20,000
Harvey Greenfield $50,000
M.D. Funding $50,000
Joe Bianco $25,000
Larry Wells $42,500
Randall Fowler $35,000
James Scullion $7,500
John Wells $15,000
</TABLE>
<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>
ATTACHMENT I
VIRTUAL MORTGAGE NETWORK, INC.
LIST OF INVESTORS AND NUMBER OF WARRANTS
<TABLE>
<CAPTION>
Investor Number of Warrants
-------- ------------------
<S> <C>
KSH Investment Group, Inc. 3,409
Ronald Krinick 3,409
Sunshine Charitable Trust 6,817
Mid-Lakes P/S Trust 3,409
Alfred Albiouness 3,409
Windy City 3,409
Alan Shapiro 3,409
Allenstown Investment Ltd. Corp. 3,409
Paul and Judy Berkman JTWROS 3,409
KAM Group, Inc. 3,409
Linda Bassin 3,409
Ed S. Raskin TTEE 3,409
Stanley Goldberg TTEE 1,364
Harvey Greenfield 3,409
M.D. Funding 3,409
Joe Bianco 1,705
Larry Wells 2,898
Randall Fowler 2,386
James Scullion 512
John Wells 1,023
</TABLE>
<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 /s/ RONALD MORCK
____________________________________ ----------------------------------------
____________________________________ ________________________________________
<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: /s/ RONALD MORCK
----------------------------
<PAGE>
EXHIBIT 10.50.2
MASTER MORTGAGE LOAN PURCHASING AGREEMENT
THIS MASTER MORTGAGE LOAN PURCHASING AGREEMENT (the "Agreement") is made
and dated as of August 26, 1993, 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 Warehouse Value.
(b) Procedure for Request and Purchase of Loans. The Originator shall
-------------------------------------------
before each proposed purchase date complete and deliver a Loan Purchase Request
in the form of Exhibit I hereto and accompanying required documents to
Purchaser, as defined in the Commitment Letter and certify that said Loan is an
Eligible Mortgage Loan. 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. The amount
advanced by Purchaser to purchase such loans shall be called the Book Account
Amount.
(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.
The obligation of Originator to resell or to repurchase the Loans shall be
evidenced by this account, and the outstanding amount shall be called the Book
Account Amount. Not more frequently than once each month, Purchaser shall
deliver a monthly statement of the Book Account containing the Book Account
Amount 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.
(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 Purchaser 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
1.
<PAGE>
Book Account Amount or pay any shortfall to Purchaser if the Take-Out Purchaser
fails 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 II. Originator guarantees payment 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 or any other
cause. 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 trust 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.
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 Prevailing Purchasing Fee Rate in lieu of the Prevailing Purchasing Fee
Rate.
(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.
(k) Fidelity Bonds and Insurance. Originator shall maintain fidelity bonds
----------------------------
and policies of insurance in form and substance satisfactory to Purchaser
insuring itself and Purchaser and the principals, successors, and heirs and
assigns of Purchaser, in the greater amount of $500,000 or that required by FNMA
in Section 1.01 of the FNMA Guaranteed Mortgage Backed Securities Sellers' and
Servicers' Guide 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.
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.
2.
<PAGE>
(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 1 Financing Statements and other documents as Purchaser may require,
as more particularly set forth in the Commitment Letter (the "Additional
Collateral Documents").
(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:
(i) a duly executed copy of the Commitment Letter;
(ii) 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;
(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:
(v) An irrevocable appointment of CT Corporation as Company's
agent for service of process as required under paragraph 8(f) of this Agreement.
(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 transaction 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 the Loan Purchase Request and the date of funding thereof Originator
represents and warrants that:
(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.
<PAGE>
(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.
(c) As conditions precedent to Purchaser's purchase of any loan hereunder,
including the first Loan, Originator shall deliver on or before the date of the
first Purchase and on a calendar quarterly basis thereafter a completed
certificate of compliance in form of Exhibit III hereto.
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. Each Take-Out Purchase Commitment is a
----------------------------
bona fide current, unused and unexpired commitment made by a Qualified Take-Out
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.
(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 under 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.
4.
<PAGE>
(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 Parents, Affiliates, and Subsidiaries of the
Originator, their respective jurisdictions of incorporation, the percentage of
their capital stock owned by the Originator or other Parents, Affiliates, or
Subsidiaries; all of the issued and outstanding shares of capital stock of the
Parents, Affiliates, and Subsidiaries have been duly authorized and issued and
are fully paid and non-assessable.
(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 be 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-1 referred to in said Regulation. Originator also
warrants that 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.
(n) Pension Liabilities. The Company has no existing or contingent
-------------------
liabilities for pensions or to the PBGC which are not reflected in full on the
Company's liabilities in the Financial Statement on the Statement Date and the
Interim Date.
5. Affirmative Covenants. The Originator hereby covenants and agrees with the
---------------------
Purchaser that, as long as any Obligations remain unpaid or Purchaser has any
obligation to purchase Loans hereunder, the Originator shall:
(a) Financial Statements.
--------------------
(1) Within ninety (90) days after the last day of each fiscal year,
Originator shall cause a firm of independent certified public accountants of
nationally recognized standing acceptable to Purchaser in its sole discretion to
forward directly to Purchaser financial statements (consolidated and
consolidating) showing the financial position of the Originator and its
Subsidiaries on such date and the related consolidated and consolidating
statements of operation, changes in stockholders' equity and cash flow for the
year ended on such date. Originator shall certify that the Originator has
responsibility for the preparation, integrity and reliability of the financial
statements and related financial information, that the financial statements were
prepared in accordance with GAAP and prevailing practices of the mortgage
banking industry and include necessary judgments and estimates by management.
The independent public accountants in their cover letter shall acknowledge that
they are forwarding the financial statements of Originator to Purchaser for the
benefit of Purchaser, its principals, successors and assigns. The independent
public accountants shall certify that they have audited the financial statements
in accordance with GAAS and shall express the opinion that the financial
statements present fairly in all material respects the consolidated and
consolidating position of the Originator and its subsidiaries as of the date of
the financial statement and the results of operations, cash flows and
consolidated and consolidating financial position of Originator in conformity to
GAAP.
(2) Within forty-five (45) days after the last day of each of the
Originator's four (4) fiscal quarters, Originator shall submit to Purchaser
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
5.
<PAGE>
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) Reports; Other Information. Furnish or cause to be furnished to
--------------------------
Purchaser:
(1) 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 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 Event of 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 Originator 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
Originator 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.
<PAGE>
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, a substantial portion 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, GNMA, FHLMC, 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.
(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; and
(3) Declare or pay cash dividends to its stockholders and purchase or
otherwise acquire shares of its own outstanding capital stock for cash in excess
of the percentage of net income of the Originator and its Subsidiaries as set
forth in Commitment Letter and computed on a cumulative consolidated basis.
(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) Permitted Current Ratio. Permit the Originator's Permitted Current Ratio
-----------------------
to fall below the limit set in the Commitment Letter at any time.
(j) 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
7.
<PAGE>
(b) obligations incurred in connection with the sale of Loans owned
by Originator in the ordinary course of business of Originator.
(k) Leases. Not enter into or permit to exist any arrangement involving
------
the leasing from any Lessor 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.
(l) 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.
(m) 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 FNMA, GNMA, and to 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.
(n) Insurance. Allow the fidelity bonds and policies of insurance
---------
required under Paragraph 1(k) to lapse for non-payment of premiums or for any
other reason or fail to review such bonds or insurance.
7. Events of Default. Upon the occurrence of an Event of Default under
-----------------
Paragraphs 7(a) and 7(f) below 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. The following
events shall be "Events 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 Paragraphs 4,5, or 6 above; or
(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
(2) The Originator or any Subsidiary or any Guarantor shall make a
general assignment for the benefit of its creditors; or
8.
<PAGE>
(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) (1) 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
(2) Any "accumulated funding deficiency" (as defined in Section 302 of
ERISA), whether or not waived, shall exist with respect to any Plan, or
(3) 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
(4) Any Single Employer Plan shall terminate for purposes of Title IV
of ERISA, or
(5) Any withdrawal liability to a Multiemployer Plan shall be incurred
by the Originator or any Commonly Controlled Entity, or
(6) 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 fifteen (15) day
period and shall not be replaced by additional Loans constituting Eligible
Mortgage Loans.
(k) Any agency such as FNMA, GNMA, FHLMC, or HUD, or private investor, or
any other party shall seize or take control of Originator's servicing portfolio
for breach of any servicing agreement applicable to such servicing portfolio, or
for any other reason whatsoever.
9.
<PAGE>
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 turns out to be an Eligible Mortgage Loan, and all other conditions
of this Agreement are complied with, 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 or to the Maturity Date specified in the Commitment Letter,
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
times the unpaid principal amount of any Eligible Mortgage Loan from date it is
offered to Purchaser for a period not exceeding 90 days from date of offer of
said Loan to Purchaser or until it is sold or funded by a mortgage warehouse
facility elsewhere or to the Maturity 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.
(e) Resolution of Disputes by References. The parties to this Agreement
------------------------------------
covenant and agree that any dispute, whether in tort or contract or of any other
nature, arising out of or related to the Loan Documents, or their
interpretation, application or performance, or out of the relationship between
the parties shall be determined by a reference pursuant to California Code of
Civil Procedure (S)638(1). The reference shall be a general reference of all
issues of fact and law 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.
Until a referee has been appointed and has accepted the reference the Superior
Court shall have jurisdiction to appoint receivers, issue writs and grant any
other interim relief which may be necessary or proper. The referee shall be a
retired California Superior Court Judge selected by agreement of the parties or
if they fail to agree by the Superior Court of the State of California, Contra
Costa County upon application of either party with 24 hours notice in writing or
by telefax to the other party. 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 Stated District Court. An appeal from the orders or judgments entered by
the person appointed shall lie to the California Court of Appeal, as specified
in Code of Civil Procedure (S)645.
10.
<PAGE>
(f) Agent for Service of Process. Originator shall irrevocably appoint CT
----------------------------
Corporation System of 818 W. Seventh Street, Los Angeles, CA 90017 (or its
successor or assignee) as its agent for service of process to receive service of
all process, including without limitation thereto summons, complaints, writs,
injunctions, motions and orders, in connection with any dispute arising under
the Loan Documents or out of the relationship between the parties. Originator
shall bear the cost of such appointment and shall not rescind same while the
Loan Documents are in force and effect or any Obligations remain unpaid. This
Agreement, and the Loan Documents, are entered into by Purchaser in reliance
upon such irrevocable appointment.
(g) 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, covenants and warranties in this Agreement and the related Loan
Purchasing Documents shall inure to the benefit of Purchaser and each 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.
(h) 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. Originator agrees to hold Purchaser harmless and to defend and
indemnify Purchaser against any claims by or liabilities to Originator or to any
such financial institution or successor or assign of Purchaser arising out of or
related to any disclosure by Purchaser related to Originator and/or breach by
Originator of any representation or warranty, affirmative covenant, negative
covenant or other Event of Default or Potential Default, or other breach by
Originator of this Agreement or any related agreement.
(i) 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 canceled at any time or from time to
time without consultation or consent of any other entity.
(j) 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 other wise. 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.
(k) 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.
(l) Survival. All representations, warranties, covenants 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.
(m) 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.
(n) 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.
(o) Independent Legal Advice; 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
11.
<PAGE>
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.
(p) 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.
(q) 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.
(r) 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.
"Certificate of Compliance" shall mean a request in the form of Exhibit III
-------------------------
attached to this Agreement as such form may be amended from time to time by
Purchaser to a form and substance acceptable to Purchaser.
"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.
12.
<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.
"Current Assets" shall mean those assets set forth in the consolidated
--------------
balance sheet of the Originator, prepared in accordance with GAAP, as current
assets, defined as those assets that are now cash or will by their terms or
disposition be converted to cash within one year of the Statement Date or the
Interim Date.
"Current Liabilities" shall mean those liabilities set forth in the
-------------------
consolidated balance sheet of the Originator, prepared in accordance with GAAP,
as current liabilities, defined as those liabilities due upon demand or within
one year of the Statement Date or the Interim Date.
"Current Ratio" shall mean the sum of the amounts set forth in the
-------------
consolidated balance sheet of the Originator, prepared in accordance with GAAP,
on the Statement Date or the Interim Date as Current Assets, divided by the sum
of the amounts set forth as Current Liabilities.
"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 Warehouse Value 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),
13.
<PAGE>
(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 such 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
writing there have been no prepayments on said 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 Warehouse Value,
(n) Said Loan has not been included in the Warehouse Value 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 eighty-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.
14.
<PAGE>
(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 Qualified Take-Out Purchaser.
(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 Loan.
"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.
----------------
"Event of Potential Default" shall mean any event which with the passage of
--------------------------
time or the failure to cure shall become an Event of Default.
"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.
"GAAP" shall mean generally accepted accounting principles in the United
----
States of America in effect from time to time.
"GAAS" shall mean generally accepted auditing standards 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.
15.
<PAGE>
"Late Purchasing Fee Rate" The Reference Rate plus the rate of four percent
------------------------
(4%) per year.
"Libor" shall have the meaning given to the term in the Pricing Schedule
-----
attached to the Commitment Letter.
"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;
(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 I
---------------------
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-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.
16.
<PAGE>
"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.
"Parent" shall mean a person or entity which owns all or part of the stock
------
or equity interest in the Originator.
"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 Current 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.
"Permitted Debt to Tangible Net Worth 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.
17.
<PAGE>
"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.
--------------
"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; and
(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 Eligible
Mortgage 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
18.
<PAGE>
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.
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/ MICHAEL D. McAULEY for
----------------------------
WILLIAM G. CELERI
VICE PRESIDENT
BY: /s/ LYNDON C. MERKLE
----------------------------
LYNDON C. MERKLE
SENIOR VICE PRESIDENT & CFO
19.
<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 Purchase 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.
20.
<PAGE>
The following documents are enclosed:
ALL LOANS REQUIRE
<TABLE>
<S> <C>
Check
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 instructions 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 ADDITIONAL GOVERNMENT LOANS REQUIRE
Mortgage credit analysis - HUD 92900 - WS _____
Request for insurance - HUD 54111 _____
Direct Endorsement - HUD 54113 _____
Certificate of Commitment - HUD 92900.4 _____
</TABLE>
We represent and warrant that as of this date and the date of purchase the
representations and warranties in the Loan Purchasing Documents are true in all
material respects, that no Event of Default or Potential Default shall have
occurred, that the Warehouse Value does not exceed the limits in the Loan
Purchasing Documents, that the Loan is an Eligible Mortgage Loan and 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:
------------------------------------
21.
<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:
Citibank, N.A.
Telegraphic Abbrv: Citibank NYC
ABA #021000089
First Collateral Services, Inc.
Credit Acct# 3685-7444
Text Line One: Customer's Name & Acct #
Text Line Two:
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
22.
<PAGE>
EXHIBIT III
CERTIFICATE OF COMPLIANCE
(To be submitted Quarterly)
Originator SUTTER MORTGAGE CORPORATION certifies to PURCHASER FIRST
COLLATERAL SERVICES, INC. that it has conducted an investigation of its books
and records and that it is on the date of this Certificate and has been during
the last quarter in compliance with the following requirements of the Master
Mortgage Loan Purchasing Agreement (the "Agreement") dated AUGUST 26, 1993,
between Originator and Purchaser:
All affirmative and negative covenants contained in paragraphs 4, 5,
and 6 of the Agreement.
Originator specifically represents and warrants to Purchaser that it is
in compliance with the Agreement in that as of the date of this certificate:
1. Its Equity Base is _____________________________________.
2. Its Tangible Net Worth is ______________________________.
3. Its Debt to Net Worth ratio is _________________________.
4. Its Debt to Equity Base ratio is _______________________.
5. Its Current Ratio is ___________________________________.
6. It has maintained all qualifications and licenses as required by
Paragraph 6(m) of the Agreement; and
7. No Event of Default or Potential Default has occurred.
Dated: August 27, 1993
SUTTER MORTGAGE CORPORATION
By: Ronald Morck
_______________________
Name: Ronald Morck
Title: President
23.
<PAGE>
EXHIBIT 10.50.3
ORIGINATOR: SUTTER MORTGAGE CORPORATION
GUARANTOR: ARTHUR H. SUTTER
CONTINUING GUARANTY (PERSONAL)
TO: FIRST COLLATERAL SERVICES, INC.
(1) For valuable consideration, the undersigned (hereinafter called
"Guarantor") unconditionally guarantees and promises to pay FIRST COLLATERAL
SERVICES, INC., (hereinafter called "First Collateral"), or order, on demand,
in lawful money of the United States, any and all Obligations and/or
indebtedness of SUTTER MORTGAGE CORPORATION (hereinafter called "Originator") to
First Collateral. The word "indebtedness" is used herein in its most
comprehensive sense and includes any and all advances, debts, obligations and
liabilities of Originator or any one or more of them, heretofore, now, or
hereafter made, incurred or created, whether voluntary or involuntary and
however arising, whether direct or acquired by First Collateral by
assignment or succession, whether due or not due, absolute or contingent,
liquidated or unliquidated, determined or undetermined, and whether Originator
may be liable individually or jointly with others, or whether recovery upon such
indebtedness may be or hereafter becomes barred by any statute of limitations,
or whether such indebtedness may be or hereafter becomes otherwise
unenforceable. "Obligations" has the same meaning as in the Master Mortgage Loan
Purchasing Agreement dated AUGUST 26, 1993.
(2) The obligations hereunder are joint and several, and independent of
the obligations of Originator, and a separate action or actions may be brought
and prosecuted against Guarantor whether action is brought against Originator or
whether Originator be joined in any such action or actions; and Guarantor waives
the benefit of any statute of limitations affecting their liability hereunder or
the enforcement thereof.
(3) Guarantor authorizes First Collateral, without notice or demand and
without affecting its liability hereunder, from time to time to (a) renew,
compromise, extend, accelerate or otherwise change the time for payment of, or
otherwise change the terms of the indebtedness or obligation or any part
thereof, including increase or decrease of the rate of interest thereon; (b)
take and hold security for the payment of this guaranty or the indebtedness or
obligation guaranteed, and exchange, enforce, waive and release any such
security; (c) apply such security and direct the order or manner of sale thereof
as First Collateral in its discretion may determine; and (d) release or
substitute any one or more of the endorsers or guarantors. First Collateral may
without notice assign this guaranty in whole or in part.
(4) Guarantor waives any right to require First Collateral to (a) proceed
against Originator; (b) proceed against or exhaust any security held from
Originator; or (c) pursue any other remedy in First Collateral's power
whatsoever. Guarantor waives any defense arising by reason of any disability or
other defense of Originator or by reason of the cessation from any cause
whatsoever of the liability of Originator. Until all indebtedness of Originator
to First Collateral shall have been paid in full, even though such indebtedness
is in excess of Guarantor's liability hereunder, Guarantor shall have no right
of subrogation, and waive any right to enforce any remedy which First Collateral
now has or may hereafter have against Originator, and waive any benefit of, and
any right to participate in any security now or hereafter held by First
Collateral. First Collateral may foreclose, either by judicial foreclosure or by
exercise of power of sale, any deed of trust securing the indebtedness, and,
even though the foreclosure may destroy or diminish Guarantors' rights against
Originator, Guarantor shall be liable to First Collateral for any part of the
indebtedness remaining unpaid after the foreclosure. Guarantor waives all
presentments, demands for performance, notices of non-performance, protests,
notices of protest, notices of dishonor, and notices of acceptance of this
guaranty and of the existence, creation, or incurring of new or additional
indebtedness.
(5) In addition to all liens upon, and rights of setoff against the
moneys, securities or other property of Guarantor given to First Collateral by
law, First Collateral shall have a lien upon and a right of setoff against all
moneys, securities and other property of Guarantor now or hereafter in the
possession of or on deposit with First Collateral, whether held in a general or
special account or deposit, or for safekeeping or otherwise; and every such lien
and right of setoff may be exercised without demand upon or notice to Guarantor.
No lien or right of setoff shall be deemed to have been waived by any act or
conduct on the part of First Collateral, or by any neglect to
1.
<PAGE>
exercise such right of setoff or to enforce such lien, or by any delay in so
doing, and every right of setoff and lien shall continue in full force and
effect until such right of setoff or lien is specifically waived or released by
an instrument in writing executed by First Collateral.
(6) Any indebtedness of Originator now or hereafter held by Guarantor is
hereby subordinated to the indebtedness of Originator to First Collateral; and
such indebtedness of Originator to Guarantor if first Collateral so requests
shall be collected, enforced and received by Guarantor as trustees for First
Collateral and be paid over to First Collateral on account of the indebtedness
of Originator to First Collateral but without reducing or affecting in any
manner the liability of Guarantor under the provisions of this guaranty.
(7) Where any one or more of the Originator are corporations or
partnerships it is not necessary for First Collateral to inquire into the powers
of the Originator or of the officers, directors, partners or agents acting or
purporting to act on their behalf, and any indebtedness made or created in
reliance upon the professed exercise of such powers shall be guaranteed
hereunder.
(8) Guarantor agrees to pay reasonable attorneys' fees and all other costs
and expenses which may be incurred by First Collateral in the enforcement of
this Guaranty.
(9) Any married person who signs this guaranty hereby expressly agrees that
recourse may be had against such person's separate property for all obligations
under this guaranty.
(10) Where there is more than one Originator, or where more than one
Guarantor executes this guaranty, then all words used herein in the plural shall
be deemed to have been used in the singular where the context and construction
so require; and when there is more than one Originator named herein, or when
this guaranty is executed by more than one Guarantor, the words "Originator" and
"Guarantor" respectively shall mean all and any one or more of them.
(11) The parties to this Agreement covenant and agree that any dispute,
whether in tort or contract or of any other nature, arising out of or related to
this Agreement or to the Loan Documents, or their interpretation, application or
performance, or out of the relationship between the parties shall be determined
by a reference pursuant to California Code of Civil Procedure (S)638(1). The
reference shall be a general reference of all issues of fact and law 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. Until a referee has been
appointed and has accepted the reference the Superior Court shall have
jurisdiction to appoint receivers, issue writs and grant any other interim
relief which may be necessary or proper. The referee shall be a retired
California Superior Court Judge selected by agreement of the parties or if they
fail to agree by the Superior Court of the State of California, Contra Costa
County upon application of either party with 24 hours notice in writing or by
telefax to the other party. 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 judgments entered by
the person appointed shall lie to the California Court of Appeal, as specified
in Code of Civil Procedure (S)645.
(12) Guarantor shall irrevocably appoint CT Corporation System of 818 W.
Seventh Street, Los Angeles, CA 90017 (or its successor or assignee) as its
agent for service of process to receive service of all process, including
without limitation thereto summons, complaints, writs, injunctions, motions and
orders. In connection with any dispute arising under this Agreement and the Loan
Documents or out of the relationship between the parties. Guarantor shall bear
the cost of such appointment and shall not rescind same while this Agreement or
the Loan Documents are in force and effect or any Obligations remain unpaid.
This Agreement, and the Loan Documents, are entered into by Lender in reliance
upon such irrevocable appointment.
(13) This Agreement shall be governed by and construed according to the
laws of the State of California, without giving effect to its choice of law
provisions.
(14) Guarantor also hereby waives any claim, right or remedy which such
Guarantor may now have or hereafter acquire against the Originator that arises
hereunder and/or from the performance by any Guarantor hereunder
2.
<PAGE>
including, without limitation, any claim, remedy or right of subrogation,
reimbursement, exoneration, contribution, indemnification, or participation in
any claim, right or remedy of First Collateral against Originator or any
security which First Collateral now has or hereafter acquires, whether or not
such claim, right or remedy arises in equity, under contract, by statute, under
common law or otherwise.
Executed this 30th day of August, 1993.
____ ______ __
Witnessed:
/s/ Edie D'Arcy /s/ Arthur H. Sutter
______________________________ ______________________________
Witness Signature Guarantor Signature
Edie D'Arcy Arthur H. Sutter
______________________________ ______________________________
Print Name Print Name
1556 Parkside Dr. 1556 Parkside Dr.
______________________________ ______________________________
Address Address
Walnut Creek, CA 94596 Walnut Creek, CA 94596
______________________________ ______________________________
###-##-####
______________________________
Soc. Sec. No. or I.D. No.
3.
<PAGE>
EXHIBIT 10.51.1
SERVICING AGREEMENT
This agreement for the servicing of Loans ("Servicing Agreement") is made and
dated as of August 26, 1993, 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 August 26,
1993.
1. Option to Amend. Purchaser shall have the option at any time and from time
---------------
to time in its sole discretion to modify the terms of this Servicing Agreement
to facilitate the sale of the Loans into the secondary market and any such
modification shall be effective from the time of written notice to Originator.
2. Representations and Warranties
------------------------------
(a) Originator represents and warrants to, and covenants with Purchaser,
that as of the Closing Date of each 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 Loan and the servicing of the Loans in accordance with
the terms of this Servicing Agreement;
(2) Originator has the full power and authority to originate, to hold
each Loan, to sell each 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 Loans by Originator, the consummation of
the transactions contemplated hereby, nor the fulfilment 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 Loans and 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 Loans or the interest of Purchaser (or which
materially and adversely affects the interests of Purchaser in the related Loan
in the case of a representation and warranty relating to a particular 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.
3. Administration and Servicing of Loans in Warehouse
---------------------------------------------------
(a) Originator To Act as Servicer. Originator shall service and administer
-----------------------------
the Loans and shall have power and authority to do any and all things in
connection with such servicing and administration which Originator
1
<PAGE>
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 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 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 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 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 Loans, Originator shall employ procedures
(including the collection procedures) and exercise the same care that it
customarily employs and exercises in servicing and administering 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 Loans may not be sub-serviced on behalf of Originator without written
permission from the Purchaser.
(b) Liquidation of Loans. In the event that any payment due under any
--------------------
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 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 Loan remains delinquent for a period of 60
days or more, Originator shall commence foreclosure proceedings after written
notification to Purchaser:
(c) Collection of Loan Payments. Continuously from the date hereof
---------------------------
until the principal and interest on all Loans are paid in full, Originator will
proceed diligently to collect all payments due under each 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 Trust Accounts. Originator shall segregate and
--------------------------------
hold all funds collected and received pursuant to each Loan separate and apart
from any of its own funds and general assets and shall establish and maintain
one or more Trust Accounts. 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 Loans,
(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.
2.
<PAGE>
(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 Loan which constitute Escrow Payments separate and apart from any of its
own funds and general assets and shall establish and maintain in trust one or
more Escrow Accounts, in the form of segregated time deposit or demand accounts.
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 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
---------------------------------------------
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 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 such Loan or the principal balance owing on such 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 on 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 a
Loan who handle funds, money, documents and papers relating to a Loan. Any such
fidelity bond and errors and omissions
3.
<PAGE>
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 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 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 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 Trust 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) Resolution of Disputes by Reference. The parties to this Agreement
-----------------------------------
covenant and agree that any dispute, whether in tort or contract or of any other
nature, arising out of or related to the Loan Documents, this
4.
<PAGE>
Agreement, or their interpretation, application or performance, or out of the
relationship between the parties shall be determined by a reference pursuant to
California Code of Civil Procedure (S)638(1). The reference shall be a general
reference of all issues of fact and law 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. Until a referee has been appointed and has accepted the
reference the Superior Court shall have jurisdiction to appoint receivers, issue
writs and grant any other interim relief which may be necessary or proper. The
referee shall be a retired California Superior Court Judge selected by agreement
of the parties or if they fail to agree by the Superior Court of the State of
California, Contra Costa County upon application of either party with 24 hours
notice in writing or by telefax to the other party. Discovery shall be allowed
according to California Code of Civil Procedure (S)(S)20l6, 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 judgments entered by the person appointed shall lie to the California
Court of Appeal, as specified in Code of Civil Procedure (S)645.
(q) Agent for Service of Process. Originator shall irrevocably appoint CT
----------------------------
Corporation System of 818 W. Seventh Street, Los Angeles, CA 90017 (or its
successor or assignee) as its agent for service of process to receive service of
all process, including without limitation thereto summons, complaints, writs,
injunctions, motions and orders, in connection with any dispute arising under
the Loan Documents or this Agreement, or out of the relationship between the
parties. Originator shall bear the cost of such appointment and shall not
rescind same while the Loan Documents or this Agreement are in force and effect
or any Obligations remain unpaid. This Agreement, and the Loan Documents, are
entered into by Purchaser in reliance upon such irrevocable appointment.
(r) 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
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.
(s) 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 Loans.
(t) Duration of Servicing Agreement. This Servicing Agreement shall
-------------------------------
continue in existence and effect until terminated as herein provided or upon
termination of the Master Loan Purchasing Agreement.
(u) Governing Law. This Servicing Agreement shall be construed in
-------------
accordance with the laws of the State of California, without giving effect to
its choice of law provisions, and the obligations, rights and remedies of the
parties hereunder shall be determined in accordance with such laws.
(v) 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.
(w) 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.
(x) 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>
(y) Servicing Fee. The Servicing Fee is fifteen basis points netted from
-------------
the aggregate principal and interest, payable to Originator for the servicing of
Eligible Loans as specified in the Master Loan Purchasing Agreement.
4. Irrevocable Power of Attorney
-----------------------------
Originator grants to Purchaser an Irrevocable Power of Attorney in form
attached hereto as Exhibit A. Such Power of Attorney shall be irrevocable and
the execution of such Irrevocable Power of Attorney is an express condition of
Purchaser's agreement to enter into this Servicing Agreement. The Irrevocable
Power of Attorney shall grant to Purchaser the right and power in its absolute
discretion to perform any act to be performed by Originator under this Servicing
Agreement, but shall not require Purchaser to perform any act at all. Purchaser
may exercise the power granted to it under the Irrevocable Power of Attorney
whether or not this Servicing Agreement is terminated, and the exercise of such
Irrevocable Power of Attorney shall not operate to terminate this Servicing
Agreement or any Obligations of Originator hereunder, except in the absolute
discretion of Purchaser expressed in writing. Originator shall indemnify and
hold harmless Purchaser from all claims of any party, whether by Originator, its
successors and assigns, or any third party, and any third party which acts in
reliance upon this Irrevocable Power of Attorney.
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/ Michael D. McAuley for
------------------------------
William G. Celeri
Vice President
By: /s/ Lyndon C. Merkle
------------------------------
Lyndon C. Merkle
Senior Vice President & CFO
6.
<PAGE>
EXHIBIT 10.52.1
SECURITY AGREEMENT
(Servicing)
THIS SECURITY AGREEMENT (the "Security Agreement") is made and dated as of
August 26, 1993, 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 August 26, 1993, (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 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
1.
<PAGE>
(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.
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 20 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;
(l) 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 possession, operation, maintenance and control of 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.
2.
<PAGE>
7. Fidelity Bond and Mortgage Impairment Insurance. Debtor shall
-----------------------------------------------
maintain, at its own expense, a blanket fidelity bond, mortgage impairment and
an errors and omissions insurance policy, with loss payable to Secured Party,
and with broad coverage with responsible companies on all officers, employees or
other persons who handle funds, money, documents and papers relating to
servicing contracts. Any such fidelity bond and errors and omissions insurance
shall protect and insure Debtor and Secured Party against losses, including
forgery, theft, embezzlement, fraud, errors and omissions and negligent acts of
such persons. No 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 Security Agreement. The minimum coverage
under any such bond and insurance policy shall be at least equal to the greater
of $500,000.00 or the 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 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. Debtor shall give Secured Party written
evidence of renewal of such insurance policy thirty days in advance of the
expiration date of such policy.
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. After an Event of Default or Potential Default, upon the
request of Secured Party, Debtor will, or Secured Party in its absolute
discretion may, 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 care 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 of 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
3.
<PAGE>
(e) Make any compromise or settlement, and take any other action it
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, 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. Resolution of Disputes by Reference. The parties to this Agreement
-----------------------------------
covenant and agree that any dispute, whether in tort or contract or of any other
nature, arising out of or related to the Loan Documents, or this Agreement, or
their interpretation, application or performance, or out of the relationship
between the parties shall be determined by a reference pursuant to California
Code of Civil Procedure (S)638(1). The reference shall be a general reference
of all issues of fact and law 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
4.
<PAGE>
without a jury. Until a referee has been appointed and has accepted the
reference the Superior Court shall have jurisdiction to appoint receivers, issue
writs and grant any other interim relief which may be necessary or proper. The
referee shall be a retired California Superior Court Judge selected by agreement
of the parties or if they fail to agree by the Superior Court of the State of
California, Contra Costa County upon application of either party with 24 hours
notice in writing or by telefax to the other party. 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 judgments entered by the person appointed shall lie to the California
Court of Appeal, as specified in Code of Civil Procedure (S)645.
15. Agent for Service of Process. Company shall irrevocably appoint CT
----------------------------
Corporation System of 818 W. Seventh Street, Los Angeles, CA 90017 (or its
successor or assignee) as its agent for service of process to receive service of
all process, including without limitation thereto summons, complaints, writs,
injunctions, motions and orders, in connection with any dispute arising under
the Loan Documents, or this Agreement, or out of the relationship between the
parties. Company shall bear the cost of such appointment and shall not rescind
same while the Loan Documents or this Agreement are in force and effect or any
Obligations remain unpaid. This Agreement, and the Loan Documents, are entered
into by Lender in reliance upon such irrevocable appointment.
16. 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.
17. 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.
18. Choice of Law. This Security Agreement shall be construed in
-------------
accordance with and governed by the laws of the State of California without
giving effect to its choice of law provisions, and, where applicable and except
as otherwise defined herein, terms used herein shall have the meaning given them
in the California Commercial Code.
19. Amendment. This Security Agreement may not be amended or modified
---------
except by a writing signed by each of the parties hereto.
20. 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.
21. 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.
22. 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.
5.
<PAGE>
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/ Michael D. McAuley for
---------------------------
William G. Celeri
Vice President
By: /s/ Lyndon C. Merkle
-------------------------
Lyndon C. Merkle
Senior Vice President & CFO
6.
<PAGE>
SCHEDULE 1
TO
SECURITY AGREEMENT
(SERVICING)
COLLATERAL DESCRIPTION
DEBTOR: SUTTER MORTGAGE CORPORATION
SECURED PARTY: FIRST COLLATERAL SERVICES, INC.
The Collateral shall consist of all now existing and hereafter arising rights
of Debtor to servicing of Loans sold by Debtor to and held by Secured Party or
its agent, (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 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 Servicing
Contracts and Debtor's rights thereunder, and all products and proceeds of any
of the above.
7.
<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.
1
<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 in 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.
"INVESTOR"
KAY CAPITAL COMPANY
_____________________________________
Dated: December 19, 199_ By: /s/ MATTHEW CRAWFORD
_________________________________
Name: Matthew Crawford
_______________________________
Title: President
______________________________
VIRTUAL MORTGAGE NETWORK, INC.,
a Nevada corporation
/s/ JOHN D. MURRAY
Dated: December 19, 1997 By:_________________________________
John D. Murray
Name:_______________________________
President CFO
Title:______________________________
15
<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 Company
("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: /s/ Matthew Crawford
-------------------------------
Name: Matthew Crawford
------------------------
Title: President
------------------------
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 10.61.1
January 20, 1998
Virtual Mortgage Network, Inc.
4590 MacArthur Boulevard, Suite 175
Newport Beach, California 92660
Attention: Michael Barron, Chairman & CEO
Gentlemen:
The purpose of this letter is to confirm our understanding that the warrants
we have been issued in connection with our loan to Virtual Mortgage Network,
Inc. will not be exercisable until six months after the closing of the IPO
(rather than the effectiveness of the Registration Statement), including the
exercise, if any, of the "green shoe".
AGREED TO AND CONFIRMED
KAY CAPITAL COMPANY
By: /s/ EDWARD F. CRAWFORD
------------------------
Edward F. Crawford
<PAGE>
EXHIBIT 10.62
----------------------------------
KRUSE WOODS ONE
LEASE AGREEMENT
----------------------------------
by and between
WCB FIFTEEN LIMITED PARTNERSHIP,
a Delaware limited partnership
("Landlord")
and
VIRTUAL MORTGAGE NETWORK,
a Nevada corporation
("Tenant")
November 26, 1996
<PAGE>
BASIC LEASE INFORMATION
-----------------------
The following Basic Lease Information is hereby incorporated into and
made a part of the Lease between Landlord and Tenant to which it is attached.
Each reference in the Lease to any of the Basic Lease Information shall mean the
respective information set forth below, and such information shall be deemed
incorporated as a part of the terms provided under the particular Lease Section
pertaining to such information. In the event of any conflict between any Basic
Lease Information and the Lease, the former shall control.
1. Building: KRUSE WOODS ONE
========
2. Landlord: WCB FIFTEEN LIMITED PARTNERSHIP,
========
a Delaware limited partnership
3. Landlord's Address for Giving of Notices and Payment of Rent:
============================================================
TRANSWESTERN PROPERTY COMPANY
5285 S.W. Meadows Road, Suite 370
Lake Oswego, OR 97035
4. Tenant: VIRTUAL MORTGAGE NETWORK,
======
a Nevada corporation,
5285 S.W. Meadows Road
Lake Oswego, OR 97035
5. Premises: The floor area on the third floor of the Building
========
consisting of approximately 1,283 rentable square feet as outlined on
the floor plan of the Building attached hereto as Exhibit B. (Section
1.2; Exhibit B)
6. Parking Allowance: Three (3) spaces per 1,000 sq.ft. rented in the
=================
surface lot and one (1) space per 1,000 sq.ft. rented in the Building
parking garage. (Section 14.6)
7. Use of Premises: Offices for the following type of business: Mortgage
===============
lending. (Section 2)
8. Lease Document Issuance and Reference Date: November 23, 1996,
==========================================
9. Construction Information Submittal Date: Tenant shall provide
=======================================
Landlord's office planner with all of the construction information
requested by Landlord's office planner no later than December 10 1996,
in accordance with Exhibit C of this Lease. (Exhibit C, Section 5.1)
10. Construction Document Approval Date: Landlord's office planner shall
===================================
deliver the Construction Document Package (see Exhibit C, Section 5.1)
to Tenant for approval within ten (10) working days after Landlord's
office planner has received all of the construction information from
Tenant in accordance with Exhibit C, Section 5.2, of this Lease.
Tenant shall approve the Construction Document Package within three
(3) working days after Landlord's office planner has delivered it to
Tenant. (Exhibit C, Section 5.2)
11. Commencement Date: January 15, 1997 or such earlier or later date as
=================
provided in Section 30 of the Lease Agreement. (Section 1.3)
12. Expiration Date: The day prior to the third year anniversary of the
===============
actual Commencement Date after any adjustment pursuant to Section 30
of the Lease Agreement. (Section 1.3)
BASIC LEASE INFORMATION
<PAGE>
13. Rent:
----
Months Monthly Base Rent Amount
------ ------------------------
1-36 $ 2,245.25
The months referred to above are the full calender months after any
first partial month of the Lease Term. The monthly Base Rent rate for
any such partial month shall be the same as the rate specified for the
first full calendar month when Base Rent is payable. Tenant has
deposited Two Thousand Forty-Five and 25/100ths ($2,245.25) to be
applied against the first month's Rent. (Section 1.4)
14. Tenant's Percentage of Operating Expenses: 1.1% based on a total
-----------------------------------------
Building rentable area of 115,000 square feet. (Section 5.2)
15. Base Year for Adjustments to Operating Expenses: The 1997 Calendar
-----------------------------------------------
Year. (Section 5.2)
16. Security Deposit: Two Thousand Forty-Five and 25/100ths ($2,245.25).
----------------
(Section 6)
17. Brokers: Cushman & Wakefield of Oregon, Inc.
-------
LANDLORD TENANT
- -------- ------
WCB FIFTEEN LIMITED PARTNERSHIP, VIRTUAL MORTGAGE NETWORK,
a Delaware limited partnership a nevada corporation
By: WCB Fifteen Inc.,
a Delaware corporation,
the General Partner
By: /s/ Jim Edwards By: /s/ John D. Murray
--------------------------------- -----------------------------
Jim Edwards Title: President
Vice President ----------------------------
Date: Dec 16, 1996
Date: Dec 16, 1996 ----------------------------
-------------------------------
BASIC LEASE INFORMATION
<PAGE>
LEASE AGREEMENT
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
BASIC LEASE INFORMATION.................................................... 1
SECTION 1. DEMISE AND RENT............................................. 1
1.1 Demise.................................................... 1
1.2 Premises.................................................. 1
1.3 Commencement and Expiration Dates......................... 1
1.4 Rent...................................................... 1
1.5 Late Charge............................................... 1
1.6 Confidentiality........................................... 1
SECTION 2. USE......................................................... 2
SECTION 3. TENANT'S ACCEPTANCE AND MAINTENANCE OF PREMISES.............. 2
SECTION 4. OPERATING EXPENSES AND TAXES................................ 2
4.1 Operating Expenses........................................ 2
4.2 Exclusions From Operating Expenses........................ 3
4.3 Taxes..................................................... 3
SECTION 5. PAYMENT OF OPERATING EXPENSES............................... 3
5.1 Operating Year............................................ 3
5.2 Tenant's Pro Rata Share................................... 3
5.3 Written Statement of Estimate............................. 4
5.4 Final Written Statement................................... 4
5.5 Tenant Examination........................................ 4
5.6 Disputes.................................................. 4
5.7 Payment................................................... 5
5.8 No Reduction in Amount of Base Rent....................... 5
SECTION 6. SECURITY.................................................... 5
6.1 Security Deposit.......................................... 5
6.2 Disposition of Security Deposit........................... 5
SECTION 7. SUBORDINATION, NOTICE TO SUPERIOR LESSORS AND MORTGAGEES.... 5
7.1 Subordination............................................. 5
7.2 Notice.................................................... 6
7.3 Attornment................................................ 6
SECTION 8. QUIET ENJOYMENT............................................. 6
SECTION 9. ASSIGNMENT AND SUBLETTING................................... 6
9.1 Generally................................................. 6
9.2 Conditions of Landlord's Consent.......................... 7
SECTION 10. INSURANCE................................................... 7
10.1 Waiver of Right of Recovery............................... 7
10.2 Public Liability Insurance................................ 7
10.3 Acceptable Insurance Companies............................ 7
10.4 Increase in Coverage...................................... 7
SECTION 11. RULES AND REGULATIONS....................................... 7
SECTION 12. ALTERATIONS................................................. 8
12.1 Requirements.............................................. 8
12.2 Indemnification of Landlord............................... 8
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
SECTION 13. LANDLORD'S AND TENANT'S PROPERTY............................ 8
13.1 Landlord's Property....................................... 8
13.2 Tenant's Property......................................... 8
13.3 Abandonment............................................... 8
SECTION 14. SERVICES AND UTILITIES...................................... 9
14.1 Building Maintenance...................................... 9
14.2 Utilities................................................. 9
14.3 Excess Usage.............................................. 9
14.4 Disclaimer................................................ 9
14.5 Use of Common Areas and Facilities........................ 9
14.6 Parking Facilities........................................ 10
14.7 Signage................................................... 10
14.8 Mailbox................................................... 10
SECTION 15. ACCESS AND NAME............................................. 10
SECTION 16. NOTICE OF OCCURRENCES....................................... 10
SECTION 17. NONLIABILITY AND INDEMNIFICATION............................ 10
17.1 Waiver.................................................... 10
17.2 Indemnification........................................... 11
17.3 Duty to Defend............................................ 11
SECTION 18. DAMAGE OR DESTRUCTION....................................... 11
18.l Casualty.................................................. 11
18.2 Condemnation.............................................. 11
SECTION 19. SURRENDER AND HOLDING OVER.................................. 12
19.1 General................................................... 12
19.2 Surrender................................................. 12
19.3 Holding Over with Consent................................. 12
19.4 Holding Over Without Consent.............................. 12
SECTION 20. EVENTS OF DEFAULT........................................... 12
20.1 Events of Default......................................... 12
20.2 Limitation of Tenant Right to Notice...................... 13
SECTION 21. REMEDIES UPON DEFAULT....................................... 13
21.1 Remedies.................................................. 13
21.2 Cumulative Remedies....................................... 13
21.3 Termination............................................... 14
21.4 Interest on Damages....................................... 14
SECTION 22. SERVICES IN THE EVENT OF DEFAULT............................ 14
SECTION 23. NO WAIVERS OF PERFORMANCE................................... 14
SECTION 24. CURING TENANT'S DEFAULTS.................................... 14
SECTION 25. BROKER...................................................... 14
SECTION 26. NOTICES..................................................... 15
SECTION 27. ESTOPPEL CERTIFICATES....................................... 15
SECTION 28. MEMORANDUM OF LEASE......................................... 15
SECTION 29. RELOCATION OF PREMISES...................................... 15
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
SECTION 30. ADJUSTMENT OF COMMENCEMENT AND EXPIRATION DATES............. 16
30.1 Commencement Date......................................... 16
30.2 Tenant Obligations........................................ 16
30.3 Tenant Termination Rights................................. 16
30.4 Expiration Date........................................... 16
30.5 Early Occupancy........................................... 16
SECTION 31. MISCELLANEOUS............................................... 16
31.1 Merger.................................................... 16
31.2 Modifications............................................. 16
31.3 Successors and Assigns.................................... 17
31.4 Nonrecourse Lease......................................... 17
31.5 Force Majeure............................................. 17
31.6 Definitions............................................... 17
31.7 Effect of Expiration...................................... 18
31.8 Modifications for Superior Mortgagee...................... 18
31.9 Excavation................................................ 18
31.10 Union Contracts........................................... 18
31.11 Prorations................................................ 18
31.12 Governing Law............................................. 18
31.13 Light Air and View........................................ 18
31.14 Tenant Representations.................................... 18
31.15 Defined Terms............................................. 19
31.16 Counterparts.............................................. 19
31.17 Costs and Attorney Fees................................... 19
</TABLE>
EXHIBIT A - Legal Description for Land
EXHIBIT B - Floor Plan for the Building
EXHIBIT C - Work Agreement
EXHIBIT D - Schematic Space Plan for the Premises
EXHIBIT E - Rules and Regulations
EXHIBIT F - Guaranty
iii
<PAGE>
LEASE AGREEMENT
TERMS AND CONDITIONS
--------------------
SECTION 1. DEMISE AND RENT:
- --------- ---------------
1.1 Demise: Landlord hereby leases to Tenant, and Tenant hereby leases
------
from Landlord, upon and subject to the terms, covenants, provisions and
conditions of this Lease Agreement (herein called the "Lease"), the premises
described in Section 1.2 in the building (herein called "Building") located on
the Land described on EXHIBIT A attached hereto and incorporated herein.
---------
1.2 Premises: The Premises (herein called "Premises") leased to Tenant are
--------
described in the Basic Lease Information, and are outlined on the floor plan(s)
for the Building attached hereto as EXHIBIT B and incorporated herein by this
---------
reference.
1.3 Commencement and Expiration Dates: The term of this Lease (herein
---------------------------------
called "Lease Term") shall be for the period specified in the Basic Lease
Information subject to adjustment as provided in Section 30 (or until sooner
terminated as herein provided). If Landlord gives Tenant notice of an adjustment
in the Commencement Date pursuant to Section 30, it shall be deemed a request
for an estoppel statement from Tenant confirming the adjustment pursuant to
Section 27. Unless Tenant gives notice to Landlord of an objection to the
adjustment within fifteen (15) days of Landlord's notice, it shall be final and
binding on the Tenant as an amendment of this Lease.
1.4 Rent: The rents shall be and consist of a Base Rent (herein called
----
"Base Rent") and Additional Rent (herein called "Additional Rent"). For purposes
of this Lease Agreement, Base Rent and Additional Rent are referred to
collectively as "Rent." Base Rent shall be the amount indicated in the Basic
Lease Information. Base Rent shall be payable in equal monthly installments in
advance on the first day of each and every calendar month during the term of
this Lease (except to the extent otherwise specifically provided elsewhere in
this Lease and except that Tenant shall pay, upon the execution and delivery of
this Lease by Tenant, the sum indicated in the Basic Lease Information, to be
applied against the first installment(s) of Base Rent becoming due under this
Lease). Additional Rent shall consist of all other sums of money as shall become
due from and payable by Tenant to Landlord under this Lease. All Rent shall be
paid in lawful money of the United States of America to Landlord at its office
or such other place, as Landlord shall designate by notice to Tenant. Tenant
shall pay the Base Rent and Additional Rent promptly when due without notice or
demand and without any abatement, deduction or offset for any reason whatsoever,
except as expressly provided in this Lease. If the Commencement Date occurs on a
day other than the first day of a calendar month, the Base Rent for that partial
calendar month shall be prorated on a daily basis. If the Basic Lease
Information provides for the abatement of Base Rent for any specified periods of
time during the term of the Lease ("Rent Free Period(s)"), none of the Base Rent
specified in this Lease as payable during the Lease Term shall be allocable to
any such Rent Free Period(s). In the event of any default by Tenant, Landlord
shall have the right to collect Rent for the Premises from Tenant for all Rent
Free Period(s) at the same Base Rent in effect immediately after any such Rent
Free Period(s).
1.5 Late Charge: Tenant recognizes that late payment of any Rent from
-----------
Tenant to Landlord will result in administrative expense to Landlord, the extent
of which additional expense is extremely difficult and economically impractical
to ascertain. Tenant therefore agrees that if Rent from Tenant to Landlord
remains unpaid five (5) days after said amount is due, the amount of such unpaid
Rent or other payments shall be increased by a late charge to be paid to
Landlord by Tenant in an amount equal to five percent (5%) of the amount of the
delinquent Rent or other payment. Tenant agrees that such amount is a reasonable
estimate of the loss and expense to be suffered by Landlord as a result of such
late payment by Tenant and may be charged by Landlord to defray such loss and
expense. The provisions of this Section in no way relieve Tenant of the
obligation to pay Rent or other payments on or before the date on which they are
due, nor do the terms of this Section in any way affect Landlord's remedies
pursuant to Section 21 of this Lease in the event Rent is past due.
1.6 Confidentiality: Tenant shall keep the Rent and other terms of this
---------------
Lease confidential from other current and prospective occupants of the Building
and any other buildings owned by Landlord except to the extent disclosure is
reasonably necessary in the conduct of Tenant's business.
1 LEASE AGREEMENT
<PAGE>
SECTION 2. USE:
- --------- ---
Tenant shall use and occupy the Premises continuously during the term
of this Lease for the use specified in the Basic Lease Information and for no
other purpose without the written consent of Landlord, which consent shall not
be unreasonably withheld. If any governmental license or permit, other than a
Certificate of Occupancy, shall be required for the proper and lawful conduct of
Tenant's business in the Premises or any part thereof, Tenant, at its expense,
shall duly procure and thereafter maintain such license or permit and submit the
same to Landlord for inspection. Tenant shall at all times comply with the terms
and conditions of each such license or permit. Tenant shall not do or permit
anything to be done in or about the Premises which will in any way obstruct or
interfere with the rights of other tenants or occupants of the Building or
injure or annoy them, nor use or allow the Premises to be used for any improper,
immoral, unlawful or objectionable purpose, nor shall Tenant cause or maintain
or permit any nuisance in, on, or about the Premises. Tenant shall not commit or
allow the commission of any waste in, on, or about the Premises. Tenant shall
not use the Premises or permit anything to be done in or about the Premises
which will in any way conflict with any law, statute, ordinance, or governmental
rule or regulation now in force or which may hereafter be enacted or
promulgated. Tenant shall not do or permit anything to be done on or about the
Premises or bring or keep anything therein which will in any way increase the
rate of any insurance upon the Building in which the Premises are situated or
any of its contents or cause a cancellation of said insurance or otherwise
affect said insurance in any manner. Tenant shall, at its sole cost and expense,
promptly comply with all laws, statutes, ordinances, and governmental rules,
regulations, or requirements now in force or which may hereafter be in force
("Legal Requirements") and with the requirements of any board of fire
underwriters or other similar body now or hereafter constituted relating to or
affecting the condition, use, or occupancy of the Premises, excluding structural
changes not related to or affected by: (i) alterations or improvements made by
or for Tenant; or (ii) Tenant's acts. The judgment of any court of competent
jurisdiction or the admission of Tenant in an action against Tenant, whether
Landlord be a party thereto or not, that Tenant has so violated any such law,
statute, ordinance, rule, regulation, or requirement, shall be conclusive of
such violation as between Landlord and Tenant. Tenant shall use its best efforts
to prevent any violation of applicable Legal Requirements by its partners,
directors, officers, agents and employees.
SECTION 3. TENANT'S ACCEPTANCE AND MAINTENANCE OF PREMISES:
- --------- -----------------------------------------------
By taking possession of the Premises, Tenant accepts the Premises as
being in the condition in which Landlord is obligated to deliver them and
otherwise in good order, condition and repair. Landlord's obligations to
maintain the Building are as set forth in Section 14.1 hereof. Tenant shall, at
all times during the term hereof at Tenant's sole cost and expense, keep the
following items in good order, condition and repair: (i) floor coverings, (ii)
wall coverings, (iii) paint, (iv) casework, (v) ceiling tiles, (vi) all of
Tenant's Property (as defined in Section 13.2 herein); and (vii) any and all
Non-Building-Standard Tenant Improvements. Landlord shall have no obligation to
alter, remove, improve, repair, decorate, or paint the Premises or any part
thereof except as specified in EXHIBIT C attached hereto and made a part hereof.
---------
No representations respecting the condition of the Premises or the Building have
been made by Landlord to Tenant except as herein set forth.
SECTION 4. OPERATING EXPENSES AND TAXES:
- --------- ----------------------------
4.1 Operating Expenses: For the purposes of this Lease, the term
------------------
"Operating Expenses" shall mean all expenses paid or incurred by Landlord (or
on Landlord's behalf) as reasonably determined by Landlord to be necessary or
appropriate for the efficient operation, maintenance and repair of the Land
and/or Building including the common areas of the Building, including without
limitation: (i) salaries, wages, medical, surgical, union and general welfare
benefits (including, without limitation, group life insurance) and pension
payments of employees of Landlord engaged in the repair, operation and
maintenance of the Land and/or Building; (ii) payroll taxes, workers'
compensation insurance, uniforms and related expenses for employees; (iii) the
cost of all charges for gas, steam, electricity, heat, ventilation, air-
conditioning, water and other utilities furnished to the Building, together with
any taxes on such utilities; (iv) the cost of painting of public areas; (v) the
cost of all charges of insurance, including but not limited to all risk property
insurance with rent loss coverage, liability and fidelity insurance, with regard
to the Land and/or Building and the maintenance and/or operation thereof; (vi)
the cost or rental of all supplies, including without limitation, cleaning
supplies, light bulbs, tubes and ballasts, materials and equipment, and sales
and other taxes thereon; (vii) the cost of hand tools and other movable
equipment used in the repair, maintenance or operation of the Building amortized
over the useful life of such hand tools and movable equipment (as reasonably
estimated by Landlord); (viii) the cost of all charges for window and other
cleaning and janitorial and security services; (ix) charges of independent
contractors performing repairs or services to the Land and/or Building; (x) non-
capital repairs; (xi) remodeling of the public and common areas of the Building
including, without limitation, repainting, replacement and repair of
furnishings, fixtures, accessories, carpeting or other floor covering, wall and
window coverings in the public and common areas, the cost of which shall be
amortized (with interest at the rate of nine percent [9%] on the unamortized
balance) over the useful life of the improvements as reasonably estimated by
Landlord;
2 LEASE AGREEMENT
<PAGE>
(xii) alterations and improvements to the Building made by reason of the laws
and requirements of any public authorities or the requirements of insurance
bodies; (xiii) management fees paid to a third party, or, if no managing agent
is employed by Landlord, Landlord shall be entitled to charge a management fee
which is not in excess of four percent (4%) of gross revenue, and such fee shall
be included in the Operating Expenses; (xiv) the cost of any capital
improvements or repairs to the Building and/or of any machinery or equipment
installed in the Building amortized (with interest at the rate of nine percent
(19%) on the unamortized balance) over the useful life of the improvement,
machinery and/or equipment as reasonably estimated by Landlord, which is made or
becomes operational, as the case may be, after the completion of the
construction of the Building and which have a reasonable probability of reducing
the expenses which otherwise would be included in Operating Expenses; (xv)
reasonable legal, accounting and other professional fees incurred in connection
with operation, maintenance and management of the Land and/or Building; (xvi)
the cost of providing elevator service; (xvii) the cost of landscape and
parking area maintenance and repair; (xviii) the common area charges to which
the Building is subject; (xix) Taxes as defined in Section 4.3; and (xx) all
other charges properly allocable to the operation, repair and maintenance of the
Building in accordance with generally accepted accounting principles.
4.2 Exclusions From Operating Expenses: Operating expenses shall not
----------------------------------
include: (i) depreciation or amortization (except as provided above in Section
4.1); (ii) interest on and amortization of debts (except as provided above in
Section 4.1); (iii) leasehold improvements made for new tenants of the Building;
(iv) leasing commissions, attorneys' fees, costs and disbursements and other
expenses (including advertising) incurred in connection with leasing,
renovating, or improving space for tenants or other occupants or prospective
tenants or occupants of the Building; (v) refinancing costs; (vi) the cost of
any work or services performed for any occupants of any leased space in the
Building (including Tenant), whether at the expense of Landlord or such
occupants, to the extent that such work or services is in excess of the work or
services which Landlord, at its expense, is required to furnish to Tenant under
this Lease; (vii) the cost of any electricity furnished to the Premises or any
other leased space in the Building in excess of the electricity to be provided
by Landlord under this Lease; (viii) damages recoverable by any occupant due to
violation by Landlord of any of the terms and conditions of this Lease or any
other lease relating to the Building; (ix) repairs occasioned by fire, windstorm
or other casualty, to the extent such repairs are paid for by insurance
proceeds; and (x) capital repairs and replacements (except as provided above in
Section 4.1).
4.3 Taxes: The term "Taxes" shall include (i) all real property taxes and
-----
assessments and personal property taxes, charges, rates, duties and assessments
rated, levied or imposed by any governmental authority with respect to the Land,
the Building and any improvements, fixtures and equipment located therein or
thereon, and with respect to all other property of Landlord, real or personal,
located in or on the Land or the Building and used in connection with the
operation of the Building; (ii) any tax in lieu of a real property tax; (iii)
any tax or excise levied or assessed by any governmental authority on the
rentals payable under this Lease or rentals accruing from the use of the Land or
the Building; provided that this shall not include federal or state, corporate
or personal income taxes; and (iv) any tax or excise imposed or assessed against
Landlord which is measured or based in whole or in part on the capital employed
by Landlord to improve the Land and construct the Building. If Landlord receives
a refund of Taxes then Landlord shall credit such refund, net of any
professional fees and costs incurred by Landlord to obtain the same, against the
Taxes for the Operating Year to which the refund is applicable or the current
Operating Year, at Landlord's option. The amount of the Taxes for the Base Year
shall reflect any refund resulting from any appeal, protest, or other action by
Landlord contesting the amount claimed by the governmental authorities and any
statements by Landlord as to the amount of Base Year Taxes shall be tentative
until any such contest is completed.
SECTION 5. PAYMENT OF OPERATING EXPENSES:
- --------- -----------------------------
5.1 Operating Year: As used in this Section 5, the term "Operating Year"
--------------
shall mean each calendar year of the Lease Term and in the event this Lease
begins or ends on any date other than the first day of the calendar year, the
calculations, costs and payments referred to herein shall be prorated as
provided in Section 31.11.
5.2 Tenant's Pro Rata Share: Throughout the entire Lease Term, Tenant
-----------------------
shall pay, as Additional Rent, its pro rata share of the increase in Operating
Expenses of the Building, if any, over the Operating Expenses for the Base Year.
Tenant's pro rata share of the increase in Operating Expenses of the Building
for each Operating Year shall be calculated as follows: the Operating Expenses
for each Operating Year less the Operating Expenses for the Base Year shall be
multiplied by Tenant's percentage (as specified in the Basic Lease Information,
and as adjusted as provided herein). If in any Operating Year Tenant occupies
the Premises for less than the full Operating Year, then the product from the
foregoing multiplication shall be multiplied by the percentage of the Operating
Year in which Tenant occupied the Premises. "Tenant's percentage" shall mean a
percentage, the numerator of which is the number of rentable square feet of the
leased Premises and the denominator of which is the total number of rentable
square feet of the Building, whether or not such space is actually rented. The
Tenant's percentage (as specified in the Basic Lease Information, and adjusted
as provided
3 LEASE AGREEMENT
<PAGE>
herein) shall be changed from time to time to reflect any change in the total
rentable square footage in the Building. All calculations of rentable area shall
be on the basis as originally used to determine the rentable area shown in the
Basic Lease Information. During the periods when the Building is not fully
occupied, Landlord shall reasonably adjust Operating Expenses to reflect the
costs that would normally have been incurred had the Building been fully
occupied for the entire period and the Building had been fully assessed for
property tax purposes. The Building shall be considered fully occupied when
occupancy reaches Ninety percent (90%). If during any Operating Year the tenant
of any space in the Building performs work or services therein pursuant to a
written agreement between Landlord and such tenant in lieu of having Landlord
perform the same and the cost thereof would have been included in Landlord's
Operating Expenses, then in any such event(s), at Landlord's option, the
Operating Expenses for such Operating Year shall be adjusted to reflect the
Operating Expenses that would have been incurred if Landlord had performed such
work or services, as the case may be. In the event Operating Expenses are
decreased as a result of extraordinary changes then the Base Year Operating
Expenses shall be correspondingly reduced. An extraordinary change shall mean
changes unrelated to the normal inflation and deflation of the cost of goods and
services making up the Operating Expenses, such as a change in the rentable area
contained in the Building resulting from condemnation, casualty, demolition,
alteration or construction of the additional improvements. Any decrease in Taxes
shall be considered an extraordinary change if due to any statewide property tax
limitation or reduction legislation. If the total rentable area of the Building
changes, Landlord shall reasonably determine a revised Tenant's Percentage
reflecting the change.
5.3 Written Statement of Estimate: Prior to the commencement of each
-----------------------------
Operating Year during the Lease Term, Landlord shall furnish Tenant with a
written statement setting forth Tenant's pro rata share of the estimated
increase in Operating Expenses and Taxes for the next Operating Year. Tenant
shall pay to Landlord as Additional Rent commencing on January 1 of the
Operating Year, and thereafter on the first day of each calendar month, an
amount equal to one-twelfth of the amount of Tenant's pro rata share as shown in
Landlord's written statement. In the event Landlord delivers the written
statement late, Tenant shall continue to pay to Landlord an amount equal to one-
twelfth of Tenant's pro rata share of the estimated Operating Expenses for the
immediately preceding Operating Year until Landlord does furnish the written
statement, at which time Tenant shall pay the amount of any excess of the
Tenant's pro rata share for the expired portion of the current Operating Year
over the Tenant's actual payments during such time and any excess payments by
Tenant shall be credited to the next due payment of Rent from Tenant. The late
delivery of any written statement by Landlord shall not constitute a waiver of
Tenant's obligation to pay its pro rata share of Operating Expenses nor subject
the Landlord to any liability, but Landlord shall use reasonable efforts to
deliver such written statements of estimated increase in Operating Expenses as
soon as reasonably possible after the commencement of each Operating Year.
5.4 Final Written Statement: Within 120 days after the close of each
-----------------------
Operating Year during the Lease Term, Landlord shall deliver to Tenant a written
statement (the "Operating Statement") setting forth Tenant's actual pro rata
share of the increase in Operating Expenses for the preceding Operating Year. In
the event Tenant's pro rata share of the actual increase in Operating Expenses
is in excess of the Tenant's pro rata estimated increase in Operating Expenses,
Tenant shall pay the amount of such excess to Landlord as Additional Rent within
thirty (30) days after receipt of such statement by Tenant. In the event
Tenant's pro rata share of the actual increase in Operating Expenses is less
than the Tenant's pro rata share of the estimated increase in Operating Expenses
actually paid by Tenant then the amount of the excess overpayment shall be paid
by Landlord to Tenant within thirty (30) days following the date of such
statement or Landlord may elect to apply the overpayment to Tenant's next Rent
payment, reimbursing only the excess over such next payment, if any. The late
delivery of any written statement by Landlord shall not constitute a waiver of
Tenant's obligation to pay its pro rata share of Operating Expenses, but
Landlord shall use reasonable efforts to deliver such written statements as soon
as reasonably possible after the commencement of each Operating Year.
5.5 Tenant Examination: The Operating Statement referred to herein need
------------------
not be audited but shall contain sufficient detail to enable Tenant to verify
the calculation of its pro rata share. In addition, Tenant, upon at least five
days advance written notice to Landlord and during business hours, may examine
any invoices, receipts, canceled checks, vouchers or other instruments used to
support the figures shown on the Operating Statement, provided however, that
Tenant shall only be entitled to such an examination once in each Operating
Year, and the examination shall not be conducted by anyone who is engaged on a
contingent fee basis to represent Tenant or who is a competitor of Landlord.
Property managers and commercial building owners shall be deemed competitors of
Landlord. The person conducting the examination on behalf of Tenant shall enter
into a confidentiality agreement satisfactory to Landlord. In the event the
examination fails to discover a valid overcharge in excess of 5% of the
Operating Expense payments during the Operating Year covered by the examination,
Tenant shall reimburse Landlord for the costs incurred by Landlord due to the
examination.
5.6 Disputes: Each such Operating Statement given by Landlord pursuant to
--------
this Section shall be conclusive and binding upon Tenant unless within thirty
(30) days after the receipt of such Operating Statement Tenant shall notify
Landlord that it disputes the correctness of the Operating Statement, specifying
the particular respects in which the Operating Statement is claimed to be
incorrect. If such disputes shall not have been
4 LEASE AGREEMENT
<PAGE>
settled by agreement, either party, within thirty (30) days after receipt of
such Statement, may pursue its available legal remedies, but Tenant hereby
agrees that a dispute over the Operating Statement or any error by Landlord in
interpreting or applying Section 4 or in calculating the amounts in the
Operating Statement shall not be a breach of this Lease by Landlord, and even if
any legal proceeding over the Operating Statement is resolved against Landlord
this Lease shall remain in full force and effect and Landlord shall not be
liable for any consequential damages, and pending the determination of such
dispute, Tenant, within ten (10) days of receipt of such Operating Statement,
shall pay Additional Rent in accordance with the Operating Statement, without
prejudice to Tenant's position. If the dispute shall be determined in Tenant's
favor, Landlord shall forthwith pay to Tenant the amount of Tenant's overpayment
of rents resulting from compliance with the Operating Statement.
5.7 Payment: If an Operating Year ends after the expiration or termination
-------
of this Lease, the Additional Rent in respect thereof payable under this Section
shall be paid by Tenant within ten (10) days of its receipt of the Operating
Statement for such Operating Year.
5.8 No Reduction in Amount of Base Rent: Nothing in the Lease shall be
-----------------------------------
construed to mean the Base Rent amount specified in the Basic Lease Information
shall be reduced due to any decrease in Operating Expenses, it being intended
that the amount of the Base Rent remain fixed throughout the Lease Term.
SECTION 6. SECURITY DEPOSIT:
- ---------- -----------------
6.1 Security Deposit: Upon the execution of this Lease by Tenant, Tenant
----------------
shall pay to Landlord the sum indicated in the Basic Lease Information as
security for the full and faithful performance and observance by Tenant of
Tenant's covenants and obligations under this Lease and Tenant shall not be
entitled to interest thereon (the "Security Deposit"). Failure to promptly pay
such Security Deposit shall be considered a default under this Lease. Landlord
may commingle this Security Deposit. If Tenant defaults on the full and prompt
payment and performance of any of Tenant's covenants and obligations under this
Lease, including, but not limited to, the payment of Base Rent and Additional
Rent, Landlord may use, apply or retain the whole or any part of the Security
Deposit so deposited to the extent required for the payment of any Base Rent
and Additional Rent or any other sums as to which Tenant is in default or for
any such sums which Landlord may expend or may be required to expend by reason
of Tenant's default in respect of any of the terms, covenants and conditions of
this Lease, including, but not limited to, any damages or deficiency in the
reletting of the Premises, whether such damages or deficiency accrue before or
after summary proceedings or other re-entry by Landlord.
6.2 Disposition of Security Deposit: If Landlord shall so use, apply or
-------------------------------
retain the whole or any part of the security, Tenant shall upon demand
immediately deposit with Landlord a sum equal to the amount so used, applied or
retained, as security as aforesaid. If Tenant shall fully and faithfully comply
with all of Tenant's covenants and obligations under this Lease, the security or
any balance thereof shall be returned or paid over to Tenant after the date on
which this Lease shall expire or sooner end or terminate. In the event of any
sale of Landlord's interest in the Building or any leasing of the Building,
whether or not in connection with a sale or leasing of the Land, Landlord shall
have the right to transfer the security to the vendee or lessee and Landlord
shall thereupon be released by Tenant from all liability for the return or
payment thereof; and Tenant shall look solely to the new landlord for the return
or payment of the same; and the provisions hereof shall apply to every transfer
or assignment made of the same to a new landlord. Tenant shall not assign or
encumber or attempt to assign or encumber the monies deposited herein as
security and neither Landlord nor its successors or assigns shall be bound by
any such assignment, encumbrance, attempted assignment or attempted encumbrance.
SECTION 7. SUBORDINATION, NOTICE TO SUPERIOR LESSORS AND MORTGAGEES:
- --------- --------------------------------------------------------
7.1 Subordination: Any lease to which this Lease is, at the time referred
-------------
to, subject and subordinate is herein called "Superior Lease" and the lessor of
a Superior Lease or its successor in interest, at the time referred to, is
herein called "Superior Lessor," and any mortgage to which this Lease is, at the
time referred to, subject and subordinate is herein called "Superior Mortgage"
and the holder of a Superior Mortgage, or its successor in interest, at the time
referred to, is herein called "Superior Mortgagee". This Lease, and all rights
of Tenant hereunder, are and shall be subject and subordinate to any ground
leases covering the Land and/or the Building now or hereafter existing, and to
all mortgages which may now or hereafter affect the Land and/or the Building
and/or any of such leases, whether or not such mortgages shall also cover other
lands and/or buildings and/or leases, to each and every advance made or
hereafter to be made under such mortgages, and to all renewals, modifications,
replacements and extensions of such leases and such mortgages. This Section
shall be self-operative, and no further instrument of subordination shall be
required. In confirmation of such subordination, Tenant shall promptly execute,
acknowledge or deliver any instrument
5 LEASE AGREEMENT
<PAGE>
that Landlord, any Superior Lessor or any Superior Mortgagee may reasonably
request to evidence such subordination.
7.2 Notice: If any act or omission of Landlord would give Tenant the
------
right, immediately or after lapse of a period of time, to cancel or terminate
this Lease, or to claim a partial or total eviction, Tenant shall not exercise
such right: (i) until it has given written notice of such act or omission to
Landlord and each Superior Mortgagee and each Superior Lessor whose name and
address shall previously have been furnished to Tenant; and (ii) until a
reasonable period of time for such parties to cure the condition has passed.
7.3 Attornment: For the purposes of this Section, the term "Successor
----------
Landlord" shall mean the Superior Lessor or Superior Mortgagee if the same
succeeds to the rights of Landlord under this Lease, whether through possession
or foreclosure action or delivery of a new lease or deed, or any third party
that succeeds to the rights of Landlord under this Lease by virtue of having
purchased the Land and the Building at a foreclosure sale. The Successor
Landlord shall accept Tenant's attornment, assume Landlord's obligations under
the Lease, and shall not disturb Tenant's quiet possession of the Premises.
Tenant shall attorn to and recognize such Successor Landlord as Tenant's
Landlord under this Lease and shall promptly execute and deliver any instrument
that such Successor Landlord may reasonably request to evidence such attornment.
Upon such attornment this Lease shall continue in full force and effect as a
direct lease between the Successor Landlord and Tenant upon all of the terms,
conditions and covenants as are set forth in this Lease except that the
Successor Landlord shall not: (i) be liable for any previous act or omission of
Landlord under this Lease except that Tenant may terminate the Lease if the
Successor Landlord fails to cure any continuing breach of this Lease caused by
the Landlord's prior acts or omissions within a reasonable period of time; (ii)
be subject to any offset, deficiency or defense which theretofore shall have
accrued to Tenant against Landlord; (iii) be bound by any previous modification
of this Lease or by any previous prepayment of more than one (1) month's Base
Rent, unless such modification or prepayment shall have been expressly approved
in writing by the Superior Lessor or the Superior Mortgagee whose name and
address shall previously have been furnished to Tenant and through or by reason
of which the Successor Landlord shall have succeeded to the right of Landlord
under this Lease; (iv) be liable for the commencement or completion of any
construction or any contribution toward construction or installation of any
improvements upon the Premises required under this Lease, or any expansion or
rehabilitation of existing improvements upon the Premises, or for restoration of
improvements following any casualty not required to be insured under this Lease
or for the costs of any restoration in excess of the proceeds recovered under
any insurance required to be carried under this Lease; (v) be liable for any
lien, right, power or interest, if any, which may have arisen or intervened in
the period between the recording of any Superior Mortgage and the execution of
this Lease or any lien or judgment which may arise at any time under the terms
of this Lease; or (vi) be liable for the return of any security deposit which
was not actually transferred to the Successor Landlord.
SECTION 8. QUIET ENJOYMENT:
- ---------- ---------------
So long as Tenant pays all of the Base Rent and Additional Rent and
performs all of Tenant's other obligations hereunder, Tenant shall peaceably and
quietly have, hold and enjoy the Premises without hindrance, ejection or
molestation by Landlord or any person lawfully claiming through or under
Landlord, subject nevertheless, to the provisions of this Lease and to any
Superior Lease and/or Superior Mortgage. This covenant shall be construed as a
covenant running with the Land, and is not, nor shall it be construed as, a
personal covenant of Landlord, except to the extent of Landlord's interest in
this Lease and only so long as such interest shall continue, and thereafter this
covenant shall be binding only upon subsequent successors in interest of
Landlord's interest in this Lease, to the extent of their respective interests,
as and when they shall acquire the same, and so long as they shall retain such
interest.
SECTION 9. ASSIGNMENT AND SUBLETTING:
- ---------- --------------------------
9.1 Generally: Tenant shall not sell, assign, sublet, encumber or
---------
otherwise transfer by operation of law or otherwise this Lease or any interest
herein, or the Premises or any portion thereof, without the prior written
consent of Landlord (which Landlord shall not unreasonably withhold) nor shall
Tenant permit any lien to be placed on the Tenant's interest by operation of
law. Any change in effective control of a corporation, partnership or other
artificial entity which is the Tenant shall be deemed a transfer of this Lease.
Any transfer hereunder by Tenant shall not result in Tenant being released or
discharged from any liability under this Lease. Any sale, assignment,
encumbrance, subletting, occupation, lien or other transfer of this Lease which
does not comply with the provisions of this Section 9 shall be void. Any listing
on Building directories or other signage using a name other than Tenant's in
conjunction with the Premises will not be deemed, nor will it substitute for,
Landlord's consent, as required by this Lease, to any sublease, assignment or
other occupancy of the Premises.
9.1.1 Tenant shall, by written notice, advise Landlord of its
desire from and after a stated date (which shall not be less than thirty [30]
days nor more than ninety [90] days after the date of Tenant's notice), to
transfer its interest in the Premises or any portion thereof for any part of the
term hereof; and such
6 LEASE AGREEMENT
<PAGE>
notice by Tenant shall state the name and address of the proposed transferee,
and Tenant shall deliver to Landlord a true and complete copy of the proposed
transfer instrument with said notice.
9.1.2 Upon any request by Tenant to transfer all or any part of the
Premises, Landlord shall have the right to either: (a) permit the transfer on
the conditions referred to in Section 9.2 and any other conditions Landlord may
impose; (b) deny Tenant's request, in which event this Lease shall continue in
full force and effect and unmodified; or (c) terminate this Lease by written
notice to Tenant with respect to the portion of the Premises described in
Tenant's notice and if Landlord desires, to then lease such space to any party
including the transferee identified in Tenant's notice at whatever times
Landlord establishes. Any such termination with respect to less than all of the
Premises shall result in a percentage reduction in Rent equal to the percentage
of the Premises as to which the Lease is terminated.
9.2 Conditions of Landlord's Consent: As a condition to Landlord's prior
--------------------------------
written consent as provided for in this Section, (a) Tenant shall pay Landlord's
legal fees and costs incurred due to the transfer; (b) the transferee(s) shall
agree in writing to comply with and be bound by all of the terms, covenants,
conditions, provisions and agreements of this Lease; and (c) Tenant shall
deliver to Landlord, promptly after execution, an executed copy of each transfer
instrument and an agreement of said compliance by each transferee. Landlord may
require as a condition of granting consent to a transfer that Tenant shall pay
to Landlord all profits from the transfer determined by deducting from the total
consideration paid directly or indirectly to or for the benefit of Tenant or its
designee for the transferred interest, the reasonable costs of the transfer
incurred by the Tenant and subtracting the remaining rent obligation of the
Tenant at such time under this Lease. For purposes of determining all profits
from the transfer, substance shall control over form such that Landlord may
ignore any attempt by Tenant to inflate the purchase price of any other assets
transferred in an attempt to conceal the profit on the transfer of the Tenant's
interest in this Lease. Sums payable hereunder shall be paid to Landlord as and
when paid by the transferee to Tenant.
SECTION 10. INSURANCE:
- ---------- ---------
10.1 Waiver of Right of Recovery: Neither party, nor its officers,
---------------------------
directors, employees, agents or invitees, nor, in case of Tenant, its
subtenants, shall be liable to the other party or to any insurance company (by
way of subrogation or otherwise) insuring the other party for any loss or damage
to any building, structure or other tangible property normally covered under an
all risk policy of property insurance or under workers' compensation insurance
even though such loss or damage might have been occasioned by the negligence of
such party, its agents or employees.
10.2 Public Liability Insurance: Tenant, at its expense, shall maintain at
--------------------------
all times during the term of this Lease, public liability insurance in respect
of the Premises and the conduct or operation of business therein, with Landlord,
its asset manager and property manager, if any, and any Superior Lessor or
Superior Mortgagee whose name and address shall previously have been furnished
to Tenant, as additional insureds, with One Million and No/100 Dollars
($1,000,000.00) minimum combined single limit coverage, or its equivalent. All
such insurance shall insure the performance by Tenant of the indemnity agreement
as to liability for injury to, illness of, or death of persons and damage to
property set forth in Section 17. Tenant shall deliver to Landlord and any
additional insured Accord Form 25 certificates of insurance issued by the
insurance company or its authorized agent; at least ten (10) days before the
Commencement Date. Tenant shall procure and pay for renewals of such insurance
from time to time before the expiration thereof, and Tenant shall deliver to
Landlord and any additional insured such renewal certificate at least thirty
(30) days before the expiration of any existing policy.
10.3 Acceptable Insurance Companies: All insurance policies required to be
------------------------------
carried by Tenant hereunder shall be issued by responsible insurance companies
authorized to issue insurance in the State of Oregon rated B VII or higher by
Best's Insurance Rating Service.
10.4 Increase in Coverage: Landlord may from time to time, but not more
--------------------
frequently than once every three (3) years, require that the amount of public
liability insurance to be maintained by Tenant under Section 10.2 be increased
so that the amount thereof adequately protects the Landlord's interest based on
amounts of coverage required of comparable tenants in comparable buildings.
SECTION 11. RULES AND REGULATIONS:
- ---------- ---------------------
Tenant shall faithfully observe and comply with the rules and
regulations printed on or annexed to this Lease as EXHIBIT E and all reasonable
---------
modifications thereof and additions thereto from time to time established by
Landlord by written notice to Tenant. Landlord shall not be responsible for the
nonperformance by any other Tenant or occupant of the Building of any said
rules and regulations but Landlord shall use reasonable efforts to remedy any
violation of the rules and regulations applicable to any other Building occupant
upon Tenant's request.
7 LEASE AGREEMENT
<PAGE>
SECTION 12. ALTERATIONS:
- ---------- -----------
12.1 Requirements: Tenant shall not make or suffer to be made any
------------
alterations, additions, or improvements in, on, or to the Premises or any part
thereof which would require a building permit without the prior written consent
of Landlord, which shall not be reasonably withheld, conditioned or delayed. Any
such alterations, additions, or improvements in, on, or to said Premises, except
for Tenant's movable furniture and equipment, shall immediately become
Landlord's property and, at the end of the term hereof, shall remain on the
Premises without compensation to Tenant. In the event Landlord consents to the
making of any such alterations, additions, or improvements by Tenant, the same
shall be made by Tenant, at Tenant's sole cost and expense, in accordance with
plans and specifications approved by Landlord, and any contractor or person
selected by Tenant to make the same must first be approved in writing by
Landlord. If the alterations, additions or improvements shall be made by
Landlord for Tenant's account, Tenant shall reimburse Landlord for the cost
thereof within twenty (20) days after receipt of a statement, setting forth the
actual cost of such alterations, additions or improvements. In any event, Tenant
shall pay Landlord an administrative charge of fifteen percent (15%) of the
actual cost of such alterations, additions or improvements. After the expiration
or sooner termination of the Lease Term and upon demand by Landlord, Tenant
shall remove any or all alterations, additions, or improvements made by or for
the account of Tenant, designated by Landlord to be removed, and Tenant shall
repair and restore the Premises to their original condition, subject to ordinary
wear and tear. Such removal, repair and restoration work shall be done promptly
and with all due diligence at Tenant's sole cost and expense. The provisions of
this Section 12 shall not apply to the initial Tenant Improvements described in
Exhibit C to this Lease.
12.2 Indemnification of Landlord: Tenant, at its expense, and with
---------------------------
diligence and dispatch, shall procure the cancellation or discharge of all
notices of violation arising from or otherwise connected with alterations, or
any other work, labor, services or materials done for or supplied to Tenant,
or any other person claiming through or under Tenant, which shall be issued by
any public authority having or asserting jurisdiction. Tenant shall defend,
indemnify and save harmless Landlord and any Superior Lessor or Superior
Mortgagee from and against any and all mechanic's and other liens and
encumbrances filed in connection with alterations, or any other work, labor,
services or materials done for or supplied to Tenant, or any person claiming
through or under Tenant, including, without limitation, security interests in
any materials, fixtures or articles so installed in and constituting part of the
Premises and against all costs, expenses and liabilities incurred in connection
with any such lien or encumbrance or any action or proceeding brought thereon.
Tenant, at its expense, shall procure the satisfaction or discharge of record of
all such liens and encumbrances within fifteen (15) days after the filing
thereof. Nothing herein contained shall prevent Tenant from contesting, in good
faith and at its own expense, any notice of violation, or lien provided Tenant
posts for the protection of Landlord security acceptable to Landlord.
SECTION 13. LANDLORD'S AND TENANT'S PROPERTY:
- ---------- --------------------------------
13.1 Landlord's Property: All fixtures, carpeting, equipment, improvements
-------------------
and appurtenances attached to or built into the Premises at the commencement of
or during the term of this Lease, whether or not by or at the expense of Tenant,
shall be and remain a part of the Premises, shall be deemed the property of
Landlord and shall not be removed by Tenant, except as provided in Section 13.2;
provided, that at Landlord's written request, Tenant shall, at its sole expense
and upon termination of the Lease, remove those items specified by Landlord,
including any or all fixtures, equipment, improvements, appurtenances and other
personal property, which are deemed herein the property of Landlord, but not
including the initial Tenant Improvements provided by Landlord pursuant to
Exhibit C of this Lease. Tenant's covenant to remove property specified by
Landlord shall survive the termination of this Lease.
13.2 Tenant's Property: All unattached business and trade fixtures,
-----------------
machinery and equipment, communications equipment and office equipment which are
installed in the Premises by or for the account of Tenant without expense to
Landlord and which can be removed without structural damage to the Building and
all furniture, furnishings (excluding window coverings) and other articles of
movable personal property owned by Tenant and located in the Premises (herein
collectively called "Tenant's Property") shall be and remain the property of
Tenant and may be removed by Tenant at any time during the term of this Lease;
provided, that if any of Tenant's Property is removed, Tenant shall repair or
pay the cost of repairing any damage to the Premises or to the Building
resulting from the installation and/or removal thereof. Any equipment or other
property for which Landlord shall have granted any allowance or credit to Tenant
shall be deemed not to have been installed by or for the account of Tenant
without expense to Landlord, shall not be considered Tenant's Property, and
shall be deemed the property of Landlord.
13.3 Abandonment: Any items of Tenant's Property may be deemed, at the
-----------
option of Landlord, to have been abandoned if left in the Premises after the
abandonment deadline, and in such case such items may be retained by Landlord,
without accountability, in such manner as Landlord shall determine at Tenant's
expense. The abandonment deadline means the earlier of the expiration date of
this Lease, or fifteen (15) days following
8 LEASE AGREEMENT
<PAGE>
an earlier termination date, or three (3) days following entry of an order of
possession for restoration of the Premises to Landlord.
SECTION 14. SERVICES AND UTILITIES:
- ---------- ----------------------
14.1 Building Maintenance: Landlord shall maintain the Building, including
--------------------
public and common areas of the Building, such as the lobbies, stairs, elevators,
corridors and rest rooms, the windows in the Building, the mechanical, plumbing
and electrical equipment serving the Building, and the structure itself, in
reasonably good order and condition except for damage occasioned by the act of
the Tenant, which damage shall be repaired by Landlord at Tenant's expense.
14.2 Utilities: Provided the Tenant shall not be in default hereunder, and
---------
subject to the provisions elsewhere herein contained and to the rules and
regulations of the Building. Landlord agrees to furnish to the Premises (i) heat
and air-conditioning required in Landlord's reasonable judgment for the
comfortable use and occupation of the Premises from 7:00 A.M. to 6:00 P.M. on
weekdays, and 8:00 A.M. to 1:00 P.M. on Saturdays exclusive of legal holidays,
(ii) continuous water and electricity service suitable for the intended use of
the Premises, (iii) janitorial services after 6:00 P.M. on weekdays exclusive of
legal holidays in the manner that such services are, in Landlord's reasonable
judgment, customarily furnished in comparable office buildings in the immediate
market area, and (iv) continuous elevator service which shall mean service by
unattended automatic elevators. Landlord shall provide additional or after-hours
heating or air-conditioning at Tenant's request, and Tenant shall pay to
Landlord a reasonable charge for such services as determined by Landlord. Tenant
agrees to keep and cause to be kept closed all window coverings when necessary
because of the sun's position, and Tenant also agrees at all times to cooperate
fully with Landlord and to abide by all the regulations and requirements which
Landlord may prescribe for the proper functioning and protection of the heating,
ventilating, and air-conditioning system. Wherever heat-generating machines,
excess lighting or equipment are used in the Premises which affect the
temperature otherwise maintained by the air-conditioning system, Landlord
reserves the right to install supplementary air-conditioning units in the
Premises, and the cost thereof, including the cost of installation and the cost
of operation and maintenance thereof, shall be paid by Tenant to Landlord upon
demand by Landlord. Any sums payable under Section 14 shall be considered
Additional Rent and may be added to any installment of Base Rent thereafter
becoming due, and Landlord shall have the same remedies for a default in payment
of such sum as for a default in the payment of Base Rent.
14.3 Excess Usage: If Tenant uses excessive amounts of non-metered
------------
utilities or services of any kind because of operation outside of normal
Building hours, high demands from office machinery and equipment, nonstandard
lighting, or any other cause, Landlord may impose a reasonable charge for
supplying such extra utilities services, which charge shall be payable monthly
by Tenant in conjunction with Rent payments. Landlord may install in the
Premises a special meter to measure the amount of water, electric current or
other resource consumed for any such other use. In case of dispute over any
extra charge under this paragraph, Landlord shall designate a qualified
independent engineer whose decision shall be conclusive on both parties. The
party not prevailing in such dispute shall pay the cost of such engineer's
determination.
14.4 Disclaimer: Landlord shall not be in default hereunder or be liable
----------
for any damages directly or indirectly resulting from, or by reason of (i) the
installation, use or interruption of use of any equipment in connection with the
furnishing of the foregoing utilities and services, (ii) failure to furnish or
delay in furnishing any such utilities or services when such failure or delay is
caused by acts of God or the elements, labor disturbances of any character, any
other accidents or other conditions beyond the reasonable control of Landlord,
or by the making of repairs or improvements to the Premises or the Building,
or (iii) the limitation, curtailment, rationing or restriction on use of water
or electricity, gas or any other form of energy or any other service or utility
whatsoever serving the Premises or the Building. Furthermore, Landlord shall be
entitled to cooperate voluntarily in a reasonable manner with the efforts of
national, state or local governmental agencies or utilities suppliers in
reducing energy or other resource consumption. Rent shall be abated in
accordance with the terms of Section 18 due to the occurrence of any of the
foregoing conditions which are covered by Landlord's insurance.
14.5 Use of Common Areas and Facilities: All common facilities and areas
----------------------------------
furnished by Landlord in or near the Building, including parking areas, lighting
facilities, pedestrian sidewalks and ramps, landscaped areas, exterior
stairways, rest rooms and other areas and improvements provided by Landlord for
the general use, in common, of tenants, their officers, agents, employees and
customers shall at all times be subject to the exclusive control and management
of Landlord. Without limiting the scope of such discretion, Landlord shall have
the full right and authority to employ all personnel and to establish, modify
and enforce reasonable rules and regulations necessary for the proper operation
and maintenance of common areas and facilities. Landlord shall have the right to
close all or any portion of the common areas or facilities to such extent as, in
the opinion of Landlord's legal counsel, may be legally sufficient to prevent a
dedication thereof or the accrual of any rights to any person (other than
Tenant) or the public therein; and to do and perform such other acts in and to
said areas and improvements as the Landlord shall reasonably determine to be
advisable. All common areas and
9 LEASE AGREEMENT
<PAGE>
facilities not within the Premises, which Tenant may be permitted to use and
occupy, are to be used and occupied under a revocable license, and if the amount
of such areas be diminished, Landlord shall not be subject to any liability nor
shall Tenant be entitled to any compensation or diminution or abatement of Rent,
nor shall such diminution of such areas be deemed constructive or actual
eviction.
14.6 Parking Facilities: If the common area of this Building includes
------------------
surface parking areas on the Land, then at all times Tenant's use (including use
by Tenant or Tenant's employees, agents, invitees and licensees) of such surface
parking area shall be free of any separate parking charges, but shall not exceed
the Tenant's percentage of the Building as specified in the Basic Lease
Information. Tenant shall have the right throughout the Lease Term to use the
number of non-reserved parking spaces in the Building parking garage specified
in the Basic Lease Information subject to the prevailing parking charges, terms
and conditions as such may be changed from time to time by the parking garage
operator. Tenant may rent additional parking spaces in the Building parking
garage on a month-to-month basis as and when available. The availability of, and
need for termination of parking in excess of the Tenant's allowance shall be
determined by Landlord in its sole and unfettered discretion.
14.7 Signage: Landlord shall provide Tenant, at no additional charge,
-------
Building standard signage.
14.8 Mailbox: Landlord shall furnish Tenant, without additional charge, a
-------
locked mailbox in the Building.
SECTION 15. ACCESS AND NAME:
- ---------- ---------------
Landlord reserves, and shall at all times have, the right to re-enter
the Premises upon 24 hours' prior notice to Tenant (except in an emergency) to
inspect the same, to supply janitor service and any other service to be provided
by Landlord to Tenant, to show the Premises to prospective purchasers,
mortgagees or tenants, to post notices of nonresponsibility, and to alter,
improve or repair the Premises and any portion of the Building of which the
Premises are a part, without abatement of Rent. For such purpose, Landlord may
erect, use and maintain scaffolding, pipes, conduits and other necessary
structures in and through the Premises where reasonably required by the
character of the work to be performed, provided that entrance to the Premises
shall not be blocked thereby, and further provided that the business of Tenant
shall not be interfered with unreasonably. Tenant hereby waives any claim for
damages for any injury or inconvenience to or interference with Tenant's
business, any loss of occupancy or quiet enjoyment of the Premises and any other
loss occasioned by Landlord's conduct pursuant to this Section. For each of the
purposes stated in this Section, Landlord shall at all times have and retain a
key with which to unlock all of the doors in, upon and about the Premises,
excluding Tenant's vaults and safes or special security areas (designated in
advance). Landlord shall have the right to use any and all means which Landlord
may deem necessary or proper to open all doors in an emergency, in order to
obtain entry to any portion of the Premises, and any entry to any portion of the
Premises obtained by Landlord by any such means, or otherwise shall not under
any circumstances be construed or deemed to be a forcible or unlawful entry
into, or a detainer of, the Premises, or an eviction, actual or constructive, of
Tenant from all or part of the Premises. Landlord shall also have the right at
any time, without the same constituting an actual or constructive eviction and
without incurring any liability to Tenant, to change the arrangement and/or
location of entrances, lobbies, parking facilities, passageways, doors and
doorways, corridors, elevators, stairs, toilets or other public parts of the
Building and to change the name, number or designation by which the Building is
commonly known.
SECTION 16. NOTICE OF OCCURRENCES:
- ---------- ---------------------
Tenant shall give prompt notice to Landlord of: (i) any occurrence in
or about the Premises for which Landlord might be liable; (ii) any fire or other
casualty in the Premises; (iii) any damage to or defect in the Premises
including the fixtures, equipment and appurtenances thereof, for the repair of
which Landlord might be responsible; and (iv) damage to or defect in any part or
appurtenances of the Building's sanitary, electrical, heating, ventilating, air-
conditioning, elevator or other systems located in or passing through the
Premises or any part thereof.
SECTION 17. NONLIABILITY AND INDEMNIFICATION:
- ---------- --------------------------------
17.1 Waiver: Landlord shall not be liable for any loss or damage to person
------
or property sustained by Tenant, or other persons, which may be caused by theft,
or by any act or neglect of any tenant of the Building or by any other person in
or about the Building. Neither Landlord nor any partner, director, officer,
agent, servant or employee of Landlord shall be liable to Tenant for any loss,
injury or damage to Tenant or to any other person, or to its or their property,
irrespective of the cause of such injury, damage or loss except to the extent
caused by or resulting from the intentional torts of Landlord, it being the
intent of the parties that Tenant look to its own all risk insurance policy for
coverage of any such item resulting from an accident even if caused by the
negligence of Landlord. Further, neither Landlord nor any partner, director,
officer, agent.
10 LEASE AGREEMENT
<PAGE>
servant or employee of Landlord shall be liable: (i) for any such damage caused
by other tenants or persons in, upon or about the Building, or caused by
operations in construction of any private, public or quasi-public work; or (ii)
in any event for consequential damages, including lost profits, of Tenant or any
person claiming through or under Tenant.
17.2 Indemnification: Tenant shall indemnify and hold harmless
---------------
Landlord and all Superior Lessors and/or Superior Mortgagees and its and their
respective partners, directors, officers, agents and employees from and against
any and all third party claims for bodily injury and/or property damage arising
from or in connection with any accident, injury or damage whatever (even if
caused by Landlord's negligence or breach of this Lease) occurring in, at or
upon the Premises; together with all costs, expenses and liabilities incurred or
in connection with each such claim or action or proceeding brought thereon,
including, without limitation, all attorneys' fees and expenses at trial and
upon appeal. Landlord shall indemnify and hold harmless Tenant and its
directors, officers, agents and employees from and against any and all third
party claims for bodily injury and/or property damage arising from or in
connection with any accident, injury or damage whatever (even if caused by
Tenant's negligence or breach of this Lease) occurring in, at or upon the common
areas of the Land and the Building; together with all costs, expenses and
liabilities incurred or in connection with each such claim or action or
proceeding brought thereon, including, without limitation, all attorneys' fees
and expenses at trial and upon appeal. The foregoing indemnity obligations of
the parties shall be limited to the amount of liability insurance coverage
required of Tenant under Section 10 of this Lease.
17.3 Duty to Defend: In case any action or proceeding is brought
--------------
against Landlord and/or any Superior Lessor and/or Superior Mortgagee and/or its
or their partners, directors, officers, agents and/or employees and such claim
is a claim from which Tenant is obligated to indemnify Landlord pursuant to
Section 17.2, Tenant, upon notice from Landlord or such Superior Lessor or
Superior Mortgagee, shall resist and defend such action or proceeding (by
counsel reasonably satisfactory to Landlord). The obligation of Tenant under
this Section 17 shall survive termination of this Lease. In case any action or
proceeding is brought against Tenant and/or its directors, officers, agents
and/or employees and such claim is a claim from which Landlord is obligated to
indemnify Tenant pursuant to Section 17.2, Landlord, upon notice from Tenant,
shall resist and defend such action or proceeding (by counsel reasonably
satisfactory to Tenant). The obligation of Landlord under this Section 17 shall
survive termination of this Lease.
SECTION 18. DAMAGE OR DESTRUCTION:
- ---------- ---------------------
18.1 Casualty: If the Premises or the Building are damaged by fire
--------
or other casualty, Landlord shall forthwith repair the same unless this Lease
is terminated as permitted herein. Within twenty (20) days from the date of
such damage, Landlord shall notify Tenant if the Building is damaged in excess
of twenty-five percent (25%) of the Building's precasualty value, as reasonably
determined by Landlord (damage in excess of such amount being referred to as
"Major Damage" and damage equal to or less than such amount being referred to as
"Minor Damage"). If Major Damage occurs, Landlord may elect to terminate the
Lease. If Minor Damage occurs then Landlord shall repair such damage and
rebuild that portion of the Building or the Premises damaged. In the event of
Major Damage, if Landlord gives its written notice to Tenant electing to
rebuild or in the event of Minor Damage, this Lease shall remain in full force
and effect provided the repairs are completed within one hundred eighty (180)
days except the Rent shall be reasonably abated during the period of repair
based on that portion of the Premises not reasonably usable by Tenant. If in
the event of Major Damage, Landlord elects by written notice to Tenant not to
rebuild, then this Lease shall automatically terminate as of the effective date
of such notice, the Rent shall be reduced by a proportionate amount based upon
the extent to which said damage interfered with the business carried on by
Tenant in the Premises, and the Tenant shall pay such reduced Rent up to the
date of termination. Landlord agrees to refund to Tenant any Rent previously
paid for any period of time subsequent to such date of termination. Landlord
shall not be required to repair any damage by fire or other cause to the
property of Tenant.
18.2 Condemnation: If more than twenty-five percent (25%) of the
------------
Land and/or Building shall be taken or appropriated under the power of eminent
domain or conveyed in lieu thereof, Landlord shall have the right to terminate
this Lease. If such taking renders the Premises unsuitable for the conduct of
Tenant's business then tenant shall have the right to terminate this Lease. If
this Lease is terminated, Landlord shall receive (and Tenant shall assign to
Landlord upon demand from Landlord) any and all income, rent, award or any
interest thereon which may be paid or owed in connection with the exercise of
such power of eminent domain or conveyance in lieu thereof, and Tenant shall
have no claim against the agency exercising such power or receiving such
conveyance, for any part of such sum paid by virtue of such proceedings, whether
or not attributable to the value of the unexpired term of this Lease except for
the unamortized value of Tenant Improvements paid for by Tenant and relocation
benefits, if any. If a part of the Land and/or Building shall be so taken or
appropriated or conveyed and Landlord hereto shall elect not to terminate this
Lease, Landlord shall nonetheless receive (and Tenant shall assign to Landlord
upon demand from Landlord) any and all income, rent, award or any interest
thereon paid or owed in connection with such taking, appropriation or
conveyance; and if the Premises have been damaged as a consequence of such
partial taking or appropriation or conveyance,
11 LEASE AGREEMENT
<PAGE>
Landlord shall restore the Premises and this Lease shall remain in full force
and effect except that Tenant shall be entitled to an appropriate reduction in
Rent while such restoration is being made by Landlord. Such proportionate
reduction shall be based upon the extent to which the restoration being made by
Landlord shall interfere with the business carried on by Tenant in the demised
Premises. Landlord will not be required to repair or restore any injury or
damage to the property of Tenant.
SECTION 19. SURRENDER AND HOLDING OVER:
- ---------- --------------------------
19.1 General: On the last day of the term of this Lease, or upon re-entry
-------
by Landlord upon the Premises, Tenant shall quit and surrender the Premises to
Landlord "broom-clean" and in good order, condition and repair, except for
ordinary wear and tear in accordance with the provisions of Section 13 of this
Lease.
19.2 Surrender: No agreement relating to the surrender of the Premises by
---------
Tenant shall be valid unless in writing and signed by Landlord.
19.3 Holding Over with Consent: Any holding over after the expiration of
-------------------------
the term of this Lease with the written consent of Landlord shall be a tenancy
from month to month. The terms, covenants and conditions of such tenancy shall
be the same as provided herein, and the monthly Rent shall be the then fair
market rent for the Premises as determined by Landlord, subject to adjustment as
provided in Section 4 herein. Acceptance by Landlord of Rent after such
expiration shall not result in any other tenancy or any renewal of the term of
this Lease, and the provisions of this Section are in addition to and do not
affect Landlord's right of re-entry or other rights provided under this Lease or
by applicable law.
19.4 Holding Over Without Consent: If Tenant shall retain possession of the
----------------------------
Premises or any part thereof without Landlord's consent following the expiration
or sooner termination of this Lease for any reason, then Tenant shall pay to
Landlord for each day of such retention double the amount of the daily Rent for
the last period prior to the date of such expiration or termination, subject to
adjustment as provided in Section 4. Tenant shall also indemnify and hold
Landlord harmless from any loss or liability resulting from delay by Tenant in
surrendering the Premises, including, without limitation, any claims made by any
succeeding tenant founded on such delay. Alternatively, if Landlord gives notice
to Tenant of Landlord's election thereof, such holding over shall constitute
renewal of this Lease for a period from month to month. Acceptance of Rent by
Landlord following expiration or termination shall not constitute a renewal of
this Lease, and nothing contained in this Section shall waive Landlord's right
of re-entry or any other right. Unless Landlord exercises the option hereby
given to it, Tenant shall be only a Tenant at sufferance, whether or not
Landlord accepts any Rent from Tenant while Tenant is holding over without
Landlord's written consent.
SECTION 20. EVENTS OF DEFAULT:
- ---------- -----------------
20.1 Events of Default: The occurrence of any one or more of the following
-----------------
events of default shall constitute a breach of this Lease by Tenant:
20.1.1 If Tenant shall default in the payment of any security
deposit, Base Rent or Additional Rent, and such default shall continue for three
(3) days after Landlord shall have given Tenant a notice specifying the same; or
20.1.2 If Tenant shall, whether by action or inaction, be in
default of any of its obligations under this Lease (other than a default in the
payment of Base Rent or Additional Rent) and such default shall continue and not
be remedied within fifteen (15) days after Landlord shall have given to Tenant a
notice specifying the same, or, in the case of a default which cannot with due
diligence be cured within such time period and the continuance of which for the
period required for cure will not subject Landlord or any Superior Lessor to
prosecution for a crime or termination of any Superior Lease or foreclosure of
any Superior Mortgage, if Tenant shall not, (i) within such time period advise
Landlord of Tenant's intention to take all steps necessary to remedy such
default; (ii) duly commence within such time period, and thereafter diligently
prosecute to completion all steps necessary to remedy the default; and (iii)
complete such remedy within a reasonable time after the date of said notice of
Landlord; or
20.1.3 If any event shall occur or any contingency shall arise
whereby this Lease or the estate hereby granted or the unexpired balance of the
term hereof would, by operation of law or otherwise, devolve upon or pass to any
person, firm or corporation other than Tenant, except as expressly permitted by
Section 9; or
20.1.4 If Tenant shall vacate or abandon the Premises; or
20.1.5 If Tenant or any guarantor of Tenant's obligations shall
make a general assignment for the benefit of creditors, or shall be unable to
pay its debts as they become due, or shall file a petition in
12 LEASE AGREEMENT
<PAGE>
bankruptcy, or shall be adjudicated as bankrupt or insolvent, or shall file a
petition seeking any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any present or future statute,
law or regulation, or shall file an answer admitting or shall fail timely to
contest the material allegations of a petition filed against it in any such
proceeding, or shall seek or consent to or acquiesce in the appointment of any
trustee, receiver or liquidator of Tenant or any material part of its
properties; or
20.1.6 If within ninety (90) days after the commencement of any
proceeding against Tenant seeking any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any present or
future statute, law or regulation, such proceeding shall not have been dismissed
or if, within ninety (90) days after the appointment without the consent or
acquiescence of Tenant of any trustee, receiver or liquidator of Tenant or of
any material part of its properties, such appointment shall not have been
vacated; or
20.1.7 If this Lease or any estate of Tenant hereunder shall be
levied upon under any attachment or execution and such attachment or execution
is not vacated within ten (10) days.
20.2 Limitation of Tenant Right to Notice: During any twelve (12) month
------------------------------------
period, Tenant shall be entitled to only two (2) notices pursuant to Section
20.1.1 and one (1) notice each for the same type of default pursuant to Section
20.1.2.
SECTION 21. REMEDIES UPON DEFAULT:
- ---------- ---------------------
21.1 Remedies: Upon the occurrence of an event of default constituting a
--------
breach of this Lease under Section 20, Landlord may exercise any one or more of
the remedies set forth in this Section 21 or in Section 24, or any other remedy
available under applicable law or contained in this Lease.
21.1.1 Landlord or Landlord's agents and employees may immediately
or at any time thereafter re-enter the Premises, or any part thereof, either by
summary eviction proceedings or by any suitable action or proceeding at law, or
by force or otherwise, without being liable to indictment, prosection or damages
therefor, and may repossess the same, and may remove any person therefrom, to
the end that Landlord may have, hold and enjoy the Premises.
21.1.2 Landlord at its option may relet the whole or any part of
the Premises from time to time, either in the name of the Landlord or otherwise,
to such tenants, for such terms ending before, on or after the expiration date
of the Lease Term, at such rentals and upon such other conditions (including
concessions, tenant improvements, and free rent periods) as Landlord may
determine to be appropriate. Landlord at its option may make such physical
changes to the Premises as Landlord considers advisable or necessary in
connection with any such reletting or proposed reletting, without relieving
Tenant of any liability under this Lease or otherwise affecting Tenant's
liability. If there is other unleased space in the Building, Landlord may lease
such other space without prejudice to its remedies against Tenant.
21.1.3 Whether or not Landlord retakes possession or relets the
Premises, Landlord shall have the right to recover unpaid rent and all damages
caused by the default as well as all costs and expenses incurred in the
connection with the enforcement of this Lease, including reasonable attorney
fees and court costs. Damages shall include, without limitation; (i) all rentals
lost; (ii) all legal expenses and other related costs incurred by Landlord
following Tenant's default; (iii) all costs incurred by Landlord in restoring
the Premises to good order and condition, or in remodeling, renovating or
otherwise preparing the Premises for reletting; and (iv) all costs incurred by
Landlord in reletting the Premises, including, without limitation, any brokerage
commissions and the value of Landlord's time.
21.1.4 To the extent permitted under Oregon law, Landlord may sue
periodically for damages as they accrue without barring a later action for
further damages. Landlord may in one action recover accrued damages plus damages
attributable to the remaining Lease Term equal to the difference between the
rent reserved in this Lease (including an estimated amount of Additional Rent as
determined by Landlord) for the balance of the Lease Term after the time of
award, and the fair rental value of the Premises for the same period, discounted
to the time of award at the rate of nine percent (9%) per annum. If Landlord has
relet the Premises for the period which otherwise would have constituted the
unexpired portion of the Lease Term or any part, the amount of rent reserved
upon such reletting shall be deemed, prima facie, to be the fair and reasonable
rental value for the part or the whole of the Premises so relet during the term
of the reletting.
21.1.5 To seize and dispose of Tenant's Property (as that term is
defined in Section 13.2) in any manner permitted by law.
21.2 Cumulative Remedies: The remedies provided for in this Lease are
-------------------
cumulative and are not intended to be exclusive of any other remedies to which
Landlord may lawfully be entitled at any time, and
13 LEASE AGREEMENT
<PAGE>
Landlord may invoke any remedy allowed at law or in equity, including an action
for specific performance, as if specific remedies were not provided for herein.
In the event of a breach threatened breach by Tenant of any of its obligations
under this Lease, Landlord shall also have the right to obtain an injunction and
any other appropriate equitable relief.
21.3 Termination: Even though Tenant has breached this Lease, the
-----------
lease shall continue in effect for so long as Landlord does not terminate
Tenant's possession of the Premises or Tenant does not abandon the Premises.
Even after Tenant is no longer in possession of the Premises, Tenant shall have
continuing contractual liability under the Lease, and Landlord may enforce its
rights and remedies under this Lease in the event of a breach, including the
right to recover its damages for loss of Rent for the remainder of the Lease
Term after Tenant is dispossessed of the Premises. Acts of maintenance or
preservation or efforts to relet the Premises or the appointment of a receiver
upon initiative of Landlord of protect Landlord's interest under this Lease
shall not constitute a termination of Tenant's contractual liability under the
Lease unless written release of liability is given by Landlord to Tenant.
21.4 Interest on Damages: In addition to any other remedies
--------------------
Landlord may have under this Lease, and without reducing or adversely affecting
any of Landlord's rights and remedies under this Section 21, if any Base Rent,
Additional Rent or damages payable hereunder by Tenant to Landlord are not paid
within five (5) days after demand therefor, the same shall bear interest at the
annual rate of fifteen percent (15%) or the maximum rate permitted by law,
whichever is less, calculated monthly from the due date thereof until paid, and
the amount of such interest shall be included as Additional Rent.
SECTION 22. SERVICES IN THE EVENT OF DEFAULT:
- ---------- --------------------------------
In addition to any rights and remedies which Landlord may have
under this Lease, if there shall be a default hereunder by Tenant which shall
not have been remedied within the applicable grace period, Landlord shall not be
obligated to furnish Tenant or the Premises any heat, ventilation or air-
conditioning services outside of business hours on business days, or any extra
or additional cleaning services; and the discontinuance of any one or more such
services shall be without liability by Landlord to Tenant and shall not reduce,
diminish or otherwise affect any of Tenant's covenants and obligations under
this Lease.
SECTION 23. NO WAIVERS OF PERFORMANCE:
- ---------- -------------------------
The failure of either party to insist in any one more instances
upon the strict performance of any one or more of the obligations of this Lease,
or to exercise any election herein, contained, shall not be construed as a
waiver or relinquishment for the future of the performance of such one or more
obligations or any other obligations of this Lease or of this Lease or of the
right to exercise such election, but the same shall continue and remain in full
force and effect with respect to any subsequent breach, act or omission. The
receipt by Landlord of Rent with knowledge of a breach by Tenant of any
obligation of this Lease shall not be deemed a waiver of such breach.
SECTION 24. CURING TENANT'S DEFAULTS:
- ---------- ------------------------
All covenants and agreements to be performed by the Tenant
under of the terms of this Lease shall be performed by Tenant at Tenant's sole
cost and expense and without any abatement of Rent except as expressly provided
otherwise herein. If the Tenant shall fail to pay any sum of money, other than
Rent, required to be paid by it hereunder or shall fail to perform any other act
on its part to be performed hereunder, and such failure shall continue for the
periods referred to in Section 20 hereof after notice thereof by the Landlord,
the Landlord may make any such payment or perform any such act on the Tenant's
part to be made or performed as in this Lease provided but shall not be
obligated so to do. Any such payment or performance shall not be a waiver or
release of Tenant's obligations. All sums so paid by the Landlord and all
necessary incidental costs together with interest thereon at the rate specified
in Section 21.4 from the date of such payment by the Landlord shall be payable
as Additional Rent to the Landlord on demand, and the Tenant covenants to pay
any such sums, and the Landlord shall have, in addition to any other right or
remedy of the Landlord, the same rights and remedies in the event of the
nonpayment thereof by the Tenant as in the case of default by the Tenant in the
payment of the Rent.
SECTION 25. BROKER:
- ---------- ------
Tenant covenants, warrants and represents that no broker except
as provided in the Basic Lease Information (the "Broker") was instrumental in
bringing about or consummating this Lease and that Tenant had no conversations
or negotiations with any broker except the Broker concerning the leasing of the
Premises. Tenant agrees to indemnify and hold harmless Landlord against and form
any claims for any brokerage commissions and all costs, expenses and liabilities
in connection therewith, including, without limitation, attorneys' fees and
expenses, arising out of any conversations or negotiations had by Tenant with
any
<PAGE>
broker other than the Broker. Landlord shall pay any brokerage commissions due
the Broker as per a separate agreement between Landlord and the Broker.
SECTION 26. NOTICES:
- ---------- -------
Any notice, statement, demand, consent, approval or other
communication required or permitted to be given, rendered or made by either
party to the other, pursuant to this Lease or pursuant to any applicable law or
requirement of public authority, shall be in writing (whether or not so stated
elsewhere in this Lease). Notices shall be deemed to have been properly given,
rendered or made: if delivered in person to the Landlord or Tenant and receipt
is acknowledged; or, if sent postage prepaid by registered or certified mail,
return receipt requested, effective forty-eight (48) hours after posted in a
United States post office station or letter box in the continental United
States, addressed to the other party at the address designated by the party
(except that after the Commencement Date, Tenant's address, unless Tenant shall
give notice to the contrary, shall be the Building). Either party may, by notice
as aforesaid, designate a different address or addresses for notices,
statements, demands, consents, approvals or other communications intended for
it.
SECTION 27. ESTOPPEL CERTIFICATES:
- ---------- ---------------------
Each party agrees, at any time and from time to time, as
requested by the other party with not less than ten (10) days' prior nor notice,
to execute and deliver to the other a statement certifying that this Lease is
unmodified and in full force and effect (or if there have been modifications,
that the same is in full force and effect as modified and stating the
modifications), certifying the dates to which the Base Rent and Additional Rent
have been paid, stating whether or not, to the best knowledge of the signer, the
other party is in default in performance of any of its obligations under this
Lease, and, if so, specifying each such default of which the signer shall have
knowledge, and stating whether or not, to the best knowledge of the signer, any
event has occurred which with the giving of notice or passage of time, or both,
would constitute such a default, and, if so, specifying each such event, it
being intended that any such statement delivered pursuant hereto shall be deemed
a representation and warranty to be relied upon by the party requesting the
certificate and by others with whom such party may be dealing, regardless of
independent investigation. Tenant also shall include in any such statement such
other information concerning this Lease as Landlord may reasonably request. If
either party fails to respond within fifteen (15) days of receipt by the party
of a written request for such a statement, the party shall be deemed to have
given such statement and shall be deemed to have admitted the accuracy of any
information contained in the request for such statement and that the Lease is
unmodified and in full force and effect, that there are not uncured defaults in
Landlord's performance, and that not more than one (1) month's Rent has been
paid in advance.
SECTION 28. MEMORANDUM OF LEASE:
- ---------- -------------------
Tenant shall not record this Lease. Upon ten (10) days prior
written notice from Landlord, Tenant shall execute, acknowledge and deliver to
Landlord a memorandum of lease in respect of this Lease sufficient for
recording. Such memorandum shall not be deemed to change or otherwise affect any
of the obligations or provisions of this Lease.
SECTION 29. RELOCATION OF PREMISES:
- ---------- ----------------------
In the event Landlord requires the Premises for use in
conjunction with another suite or other reasons connected with the Building
leasing program, Landlord shall have the right, after first giving sixty (60)
days written notice to Tenant to move the Tenant to another space of similar
size within the Building or within another building within the Project (as such
term is defined below in this Section). Tenant's failure to cooperate in such a
relocation shall constitute a material breach of this Lease giving the Landlord
the right to terminate Tenant's possession of the Premises pursuant to Section
21, and to recover the amounts stated in Section 19.4 for holding over without
the Landlord's consent. Such move shall be at the sole cost and expense of
Landlord, including but not limited to all costs and expenses related to
improving the space with leasehold improvements equal to those then in the
Premises, moving the furniture, office equipment and other contents of the
Premises to the new space, reinstating telecommunications equipment, printing of
new stationery, business cards and other printed matter bearing the address of
the Tenant and such other expenses as Tenant may incur, it being the intention
of the parties that Tenant incur no cost or expense as a result of the move.
After such move, all terms and conditions of this Lease shall remain in full
force and effect, save and excepting that the Premises shall be the new space.
The term "Project" as used in this Section shall mean the larger multi-building
development, if any, of which the Building is a part. Tenant acknowledges that
the new premises may be located in a building within the Project owned by
Landlord or one of Landlord's affiliates.
15 LEASE AGREEMENT
<PAGE>
SECTION 30: ADJUSTMENT OF COMMENCEMENT AND EXPIRATION DATES:
- ---------- -----------------------------------------------
30.1 Commencement Date: The term of this Lease shall commence on a
-----------------
date (herein the "Commencement Date") which shall be the date specified in the
Basic Lease Information unless:
30.1.1 Landlord notifies Tenant of an earlier or later
Commencement Date at least thirty (30) days in advance; or
30.1.2 Tenant actually occupies the Premises earlier than the
date specified in the Basic Lease Information or any notice given pursuant to
Section 30.1.1, in which event the occupancy date shall be the Commencement
Date.
30.2 Tenant Obligations: If the Premises are not ready for
------------------
Tenant's occupancy by the Commencement Date (as specified in the Basic Lease
Information) due to the fault of the Landlord or due to the occurrence of an
event of force majeure, the Base Rent and Additional Rent payable hereunder
shall be abated for the time period of such delay. Tenant shall be considered to
have caused any delay in the preparation of the Premises resulting from Tenant's
failure to sign this Lease on or before the Construction Information Submittal
Date specified in the Basic Lease Information or, in the alternative, to provide
Landlord by such date a written agreement in form and content satisfactory to
Landlord guarantying Tenant will pay Landlord for any and all costs incurred in
connection with the work done prior to execution of this Lease to prepare the
Premises for Tenant. If the Tenant Improvements are not completed on the
Commencement Date due to (i) the failure of Tenant to fulfill any obligation
pursuant to the terms of this Lease or any exhibit hereto, including without
limitation Tenant's failure to comply with the Construction Information
Submittal and Construction Approval Dates specified in the Basic Lease
Information; or (ii) any changes in the Tenant Improvements requested by Tenant,
then Tenant shall not be entitled to any abatement of Rent due to such delay.
30.3 Tenant Termination Rights: In the event the Premises are not
-------------------------
ready for Tenant's occupancy within sixty (60) days after the Commencement Date
specified in the Basic Lease Information, because of the holding over or
retention of possession by any tenant, subtenant or occupant, or because of the
fact that a temporary or permanent certificate of occupancy has not been
procured, or because the Premises are not ready for occupancy for any other
reason, Tenant may terminate this Lease by written notice if Tenant is not
responsible for the delay; and provided, however, that such time period may at
Landlord's sole option be extended by any period, not to exceed ninety (90) days
after the Commencement Date specified in the Basic Lease Information for delays
due to an occurrence of any of the events of force majeure described in Section
31.5, casualties, acts of God, strikes, shortages of labor or materials or other
causes beyond the reasonable control of Landlord. If the Premises are not ready
for Tenant's occupancy within such time period including any extension, this
Lease shall be deemed null and void and all rights and obligations of the
parties shall terminate, and Landlord shall not be subject to any liability
therefor. Termination under this Section 30.3 shall be Tenant's sole remedy and
Tenant shall have no other rights or claims hereunder at law or in equity except
that Landlord shall return to Tenant promptly after any termination any Rent
deposited previously with Landlord.
30.4 Expiration Date: In the event the Commencement Date is adjusted
---------------
to a date other than as specified in the Basic Lease Information, the Expiration
Date shall be extended as necessary so that the Lease Term will contain the
number of full calendar months indicated in the Rent Schedule of the Basic Lease
Information and so that the Expiration Date will fall on the last day of a
calendar month.
30.5 Early Occupancy: If Landlord has given Tenant permission to enter
---------------
into the possession of the Premises prior to the Commencement Date, such
possession or occupancy shall be deemed to be upon all the terms, covenants,
conditions and provisions of this Lease, including, without limitation, the
payment of Base Rent and the Additional Rent.
SECTION 31. MISCELLANEOUS:
- ---------- -------------
31.1 Merger: All understandings and agreements heretofore had between
------
the parties are merged in this Lease and any other written agreement(s) made
concurrently herewith, which alone fully and completely express the agreement of
the parties and which are entered into after full investigation, neither party
relying upon any statement or representation not embodied in this Lease or any
other written agreement(s) made concurrently herewith.
31.2 Modifications: No agreement shall be effective to change, modify,
-------------
waive, release, discharge, terminate or effect an abandonment of this Lease, in
whole or in part, unless such agreement is in writing, refers expressly to this
Lease and is signed by the party against whom enforcement is sought. If Tenant
shall at any time request Landlord to sublet the Premises for Tenant's account,
Landlord or its agent is authorized to receive the keys for such purposes
without releasing Tenant from any of its obligations under this Lease, and
16 LEASE AGREEMENT
<PAGE>
Tenant hereby releases Landlord of any liability for loss or damage to any of
the Tenant's Property in connection with such subletting.
31.3 Successors and Assigns: Except as otherwise expressly provided
----------------------
in this Lease, the obligations of this Lease shall bind and benefit the
successors and assigns of the parties hereto with the same effect as if
mentioned in each instance where a party is named or referred to; provided,
however, that: (i) no violation of the provisions of Section 9 shall operate to
vest any rights in any successor or assignee of Tenant; and (ii) the provisions
of this Section shall not be construed as modifying the provisions of Section 9
or 20.
31.4 Nonrecourse Lease: Tenant shall look only to Landlord's estate
-----------------
and property in the Land and the Building (or the proceeds thereof) for the
satisfaction of Tenant's remedies for the collection of a judgment (or other
judicial process) requiring the payment of money by Landlord in the event of any
default by Landlord hereunder, and no other property or assets of Landlord or
its partners or principals, disclosed or undisclosed, shall be subject to levy,
execution or other enforcement procedure for the satisfaction of Tenant's
remedies under or with respect to this Lease, the relationship of Landlord and
Tenant hereunder or Tenant's use or occupancy of the Premises.
31.5 Force Majeure: The obligations of Tenant hereunder shall be in
-------------
no way affected, impaired or excused, nor shall Landlord have any liability
whatsoever to Tenant, because:
31.5.1. Landlord is unable to fulfill, or is delayed in
fulfilling, any of its obligations under this Lease by reason of strike, other
labor trouble, governmental pre-emption of priorities or other controls in
connection with a national or other public emergency or shortages of fuel,
supplies or labor resulting therefrom, or any other cause, whether similar or
dissimilar, beyond Landlord's reasonable control; or
31.5.2 of any failure or defect in the supply, quantity or
character of electricity, water or other utilities furnished to the Premises, by
reason of any requirement, act or omission of the public utility or others
serving the Building with electric energy, steam, oil, gas or water, or for any
other reason whether similar or dissimilar, beyond Landlord's reasonable
control.
31.6 Definitions: For the purpose of this Lease, the following terms
-----------
have the meanings indicated:
31.6.1 The term "mortgage" shall include a mortgage and/or deed
of trust, and the term "holder of a mortgage" or "mortgagee" or words of similar
import shall include a mortgagee of a mortgage or a beneficiary of a deed of
trust.
31.6.2 The term "laws and requirements of any public
authorities" and words of similar import shall mean laws and ordinances of any
or all of the federal, state, city, town, county, borough and village
governments and rules, regulations, orders and directives of any and all
departments, subdivisions, bureaus, agencies or offices thereof, and of any
other governmental, public or quasi-public authorities having jurisdiction over
the Building and/or the Premises, and the direction of any public officer
pursuant to law, whether now or hereafter in force.
31.6.3 The term "requirements of insurance bodies" and words of
similar import shall mean rules, regulations, orders and other requirements of
the Oregon Surveying and Rating Bureau and/or any other similar body performing
the same or similar functions and having jurisdiction or cognizance over the
Building and/or the Premises, whether now or hereafter in force.
31.6.4 The term "Tenant" shall mean the Tenant herein named or
any assignee or other successor in interest (immediate or remote) of the Tenant
herein named, which at the time in question is the owner of the Tenant's estate
and interest granted by this Lease; but the foregoing provisions of this
subsection shall not be construed to permit any assignment of this Lease or to
relieve the Tenant herein named or any assignee or other successor in interest
(whether immediate or remote) of the Tenant herein named from the full and
prompt payment, performance and observance of the covenants, obligations and
conditions to be paid, performed and observed by Tenant under this Lease.
31.6.5 The term "Land" shall mean the real property lot or
parcel upon which the Building is located including without limitation parking
areas, landscaped areas, walkways, driveways, sidewalks and curbs.
31.6.6 The term "Landlord" shall mean only the owner at the time
in question of the Building or of a lease of the Building, so that in the event
of any transfer or transfers of title to the Building or of Landlord's interest
in a lease of the Building, the transferror shall be and hereby is relieved and
freed of all obligations of Landlord under this Lease accruing after such
transfer, and it shall be deemed without further agreement that such transferee
has assumed and agreed to perform and observe all obligations of Landlord herein
during the period it is the holder of Landlord's interest under this Lease.
17 LEASE AGREEMENT
<PAGE>
31.6.7 The term "herein," "hereof" and "hereunder," and words of
similar import, shall be construed to refer to this Lease as a whole, and not to
any particular Section, unless expressly so stated.
31.6.8 The term "and/or" when applied to two or more matters or
things shall construed to apply to any one or more or all thereof as the
circumstances warrant at the time in question.
31.6.9 The term "person" shall mean natural person or persons, a
partnership, a corporation and any other form of business or legal association
or entity.
31.7 Effect of Expiration: Upon the expiration or other termination
--------------------
of this Lease, neither party shall have any further obligation or liability to
the other except as otherwise expressly provided in this Lease and except for
such obligations as by their nature or under the circumstances can only be, or
by the provisions of this Lease, may be, performed after such expiration or
other termination; and, in any event, unless otherwise expressly provided in
this Lease, any liability for a payment (including, without limitation,
Additional Rent, herein) which shall have accrued to or with respect to any
period ending at the time of expiration or other termination of this Lease shall
survive the expiration or other termination of this Lease.
31.8 Modifications for Superior Mortgagee: If any Superior Mortgagee
------------------------------------
shall require any modifications(s) of this Lease, Tenant upon ten (10) days
prior written notice of Landlord's request, shall execute and deliver to
Landlord such instruments effecting such modifications(s) as Landlord shall
require, provided that such modification(s) do not adversely affect in any
material respect any of Tenant's rights under this Lease.
31.9 Excavation: If an excavation shall be made upon land adjacent to
----------
or under the Building, or shall be authorized to be made, Tenant shall afford to
the person causing or authorized to cause such excavation, license to enter the
Premises for the purpose of performing such work as said person shall deem
necessary or desirable to preserve and protect the Building from injury or
damage and to support the same by proper foundations, and without reducing or
otherwise affecting Tenant's obligations under this Lease.
31.10 Union Contracts: Tenant agrees that the exercise of its rights
---------------
pursuant to the provision of Section 12 or of any other provisions of this Lease
or the Exhibits hereto shall not be done in a manner which would violate
Landlord's union contracts affecting the Land and/or Building, nor create any
lawful work stoppage, picketing, labor disruption or dispute or any interference
with the business of Landlord or any tenant or occupant of the Building.
31.11 Prorations: Any apportionments or prorations of Base Rent or
----------
Additional Rent to be made under this Lease shall be computed on the basis of a
three hundred sixty (360) day year, with twelve (12) months of thirty (30) days
each.
31.12 Governing Law: Regardless of the place of execution or
-------------
performance, this Lease shall be governed by and construed in accordance with
the laws of the State of Oregon. If any provision of this Lease or the
application thereof to any person or circumstances shall, for any reason and to
any extent, be invalid or unenforceable, the remainder of this Lease and the
application of that provision to other persons or circumstances shall not be
affected but rather shall be enforced to the extent permitted by law. The table
of contents, captions, heading and titles in this Lease are solely for
convenience or reference and shall not affect its interpretation. Each covenant,
agreement, obligation or other provision of this Lease on Tenant's part to be
performed, shall be deemed and construed as a separate and independent covenant
of Tenant, not dependent on any other provision of this Lease. All terms and
words used in this Lease, regardless of the number or gender in which they are
used, shall be deemed to include any other number and any other gender as the
context may require. Time is of the essence of this Lease and all of its
provisions.
31.13 Light Air and View: Any diminution or shutting off of light, air
------------------
or view by any structure which may be erected on lands adjacent to or near the
Building shall in no way affect this Lease or impose any liability on Landlord.
31.14 Tenant Representations: If Tenant is a corporation, each person
----------------------
executing this Lease on behalf of Tenant does hereby covenant and warrant that:
31.14.1 Tenant is duly incorporated and validly existing under
the laws of its state of incorporation, and, if such corporation is existing
under the laws of a jurisdiction other than Oregon, qualified to transact
business in Oregon;
31.14.2 Tenant has full corporate right and authority to enter
into this Lease and to perform all Tenant's obligations hereunder; and
18 LEASE AGREEMENT
<PAGE>
31.14.3 Each person (and both of the persons if more than one
signs) signing this Lease on behalf of the corporation is duly and validly
authorized to do so.
31.15 Defined Terms: Words capitalized other than as the first word of a
-------------
sentence are defined terms and have the meaning, throughout this Lease, given to
them when they are first used with an initial capital or when used in quotation
marks.
31.16 Counterparts. This Lease may be executed in one or more counterparts
------------
by separate signature, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument, binding on all
parties hereto, even though all parties are not signatories to the original or
to the same counterpart. Any counterpart of this Lease that has attached to it
separate signature pages, which together contain the signatures of all parties,
shall for all purposes be deemed a fully executed instrument, and in making
proof of this Lease, it shall not be necessary to produce or account for more
than one such counterpart.
31.17 Costs and Attorney Fees:
-----------------------
31.17.1 No Suit or Action Filed. If this Lease is placed in
-----------------------
the hands of an attorney due to a default in the payment or performance of any
of its terms, the defaulting party shall pay, immediately upon demand, all of
the other party's costs and expenses associated with enforcing the Lease,
including reasonable attorney fees and collection costs even though no suit or
action is held thereon, and any other fees or expenses incurred by the
nondefaulting party.
31.17.2 Arbitration or Mediation; Trial and Appeal. If any
------------------------------------------
arbitration, mediation, or other proceeding is brought in lieu of litigation, or
if legal action is instituted to enforce or interpret any of the terms of this
Lease or if legal action is instituted in a Bankruptcy Court for a United States
District Court to enforce or interpret any of the terms of this Lease, to seek
relief from an automatic stay, to obtain adequate protection, or to otherwise
assert the interest of Landlord in a bankruptcy proceeding, the party not
prevailing shall pay the prevailing party's costs and disbursements, the fees
and expenses of expert witnesses in determining reasonable attorney fees, and
such sums as the court may determine to be reasonable for the prevailing party's
attorney fees connected with the trial and any appeal and by petition for review
thereof.
31.17.3 Definitions. For purposes of this Contract, the term
-----------
attorney fees includes all charges of the prevailing party's attorneys and their
staff (including without limitation legal assistants, paralegals, word
processing, and other support personnel) and any postpetition fees in a
bankruptcy court. For purposes of this Contract, the term fees and expenses
includes but is not limited to long-distance telephone charges; expenses of
facsimile transmission; expenses for postage (including costs of registered or
certified mail and return receipts), express mail, or parcel delivery; mileage
and all deposition charges, including but not limited to court reporters'
charges, appearance fees, and all costs of transcription; costs incurred in
searching records.
31.18 Effect of Failure to Consent: The parties acknowledge that the
----------------------------
obligation of good faith and fair dealing generally applies to this Lease
requiring each party to act reasonably except to the extent explicitly and
specifically provided otherwise in this Lease. If either party unreasonably
withholds or conditions a requested consent or demands payment of an
unreasonable sum, the other party shall not be entitled to any damages for the
unreasonableness, if being intended that the sole remedy shall be to proceed as
if the unreasonable party had responded reasonably.
IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Lease
Agreement as of the date and year first above written.
LANDLORD TENANT
- -------- ------
WCB FIFTEEN LIMITED PARTNERSHIP, VIRTUAL MORTGAGE NETWORK,
a Delaware limited partnership a Nevada corporation
By: WCB Fifteen Inc.,
a Delaware corporation,
the General Partner
By: /s/ Jim Edwards By: /s/ Lee W. Shorey
----------------------------- -----------------------------
Jim Edwards
Vice President Title: V. P. Administration
--------------------------
Date: Dec. 16, 1996 Date: 12-6-96
--------------------------- --------------------------
<PAGE>
EXHIBIT A
---------
LEASE AGREEMENT
---------------
Legal Description for Land
--------------------------
<PAGE>
EXHIBIT A
---------
LEGAL DESCRIPTION
-----------------
FOR
---
KRUSE WOODSLEASE AGREEMENT
--------------------------
A tract of land situated in Lots 18 & 7 of the duly recorded plot of BONITA
MEADOWS, in the Northeast quarter if Section 7, Township 2 South, Range 1 East,
of the Willamette Meridian, Clackamas County, Oregon, begin more particularly
described as follows:
Beginning at the Northeast corner of Lot 18, BONITA MEADOWS; thence along the
Easterly line of said Lots 18 & 7, South 0 degrees 14' 52" West 500.08 feet to a
point on the Northerly right-of-way line of Meadows Road, said point being
115.73 feet Southerly from the Northeast corner of said Lot 7 (said Meadows Road
right-of-way is laid out in Clackamas County Survey Number 19907); thence along
said Northerly right-of-way of Meadows Road, the courses and distances as
follows: Northeastly though a 470.00 foot radius curve, concave to the North, an
arc distance of 36.53 feet (chord bears North 67 degrees 27' 44" West, 36.52
feet); thence North 24 degrees 45' 50" East, 20.00 feet; thence North 65 degrees
14' 09" West, 150.32 feet; thence Northwesterly though a 550.00 foot radius
curve, concave to the South, an arc distance of 235.44 feet (chord bears North
77 degrees 29' 57" West, 233.65 feet); thence North 89 degrees 45' 44" West,
139.58 feet; thence North 44 degrees 44' 52" West, 24.04 feet to a point on the
Easterly right-of-way of a 100.00 foot wide roadway; thence Northerly along the
Easterly right-of-way of said 100.00 foot wide roadway North 0 degrees 16' 00"
East, 339.28 feet to a point on the Northerly boundary of said Lot, said point
being 20.01 feet Easterly from the Northwest corner of said Lot 18, said point
also being on the Southerly right-of-way line of Kurse Way; thence along the
North boundary of said Lot 18, and the Southerly right-of-way of said Kruse Way,
South 89 degrees 44' 00" East, 547.04 feet to the point of beginning.
1 - LEGAL DESCRIPTION EXHIBIT A TO LEASE
KRUSE WOODS ONE
________________________________________________________________________________
EXHIBIT A TO LEASE
<PAGE>
EXHIBIT B
---------
LEASE AGREEMENT
---------------
Floor Plan For The Building
---------------------------
<PAGE>
[KRUSE WOODS ONE THIRD FLOOR CHART]
<PAGE>
EXHIBIT C
---------
LEASE AGREEMENT
---------------
Work Agreement
--------------
Section 1. TENANT IMPROVEMENTS PROVIDED BY LANDLORD. Landlord agrees to
- --------- ----------------------------------------
provide the following Building-Standard Tenant Improvements in the Premises at
Landlord's sole cost and expense:
1.1 Partitions: . Add 32 lineal feet of partitions, as
----------
designated on EXHIBIT D.
---------
. Demolish fourteen (14) lineal feet of
demising wall as designated on EXHIBIT D.
---------
. Patch seven (7) demo locations as designated
on Exhibit D.
1.2 Painting: All Tenant walls shall be painted in Building
--------
Standard color(s).
1.3 Doors, Frames and Hardware: Add two (2) interior solid core
--------------------------
door(s) with frames and hardware including latch sets, hinges and stops, as
designated on Exhibit D.
---------
1.4 Ceiling: Replace 56 sq.ft. of 2x4 suspended acoustical tile
-------
and repair 14 lineal feet of grid penetration.
1.5 Lighting: Relocate two (2), rewire one (1), and relocate and
--------
rewire one (1) recessed two tube fluorescent light fixtures with parabolic lens,
and two (2) light switches.
1.6 Floor Covering: 116 square feet of carpet and base.
--------------
1.7 Window Covering: Window covering for all exterior windows.
----------------
1.8 Electrical: . Add four (4) 120-volt duplex electrical wall
----------
outlets.
. Terminate and remove one (1) 120-volt duplex
electrical wall outlets and two (2) floor
monuments.
. One dedicated 110-volt circuit.
1.9 Telephone/Data Outlets: Two (2) telephone mud rings with pull
----------------------
strings.
1.10 Sprinkler Drops: Relocate or add two (2) sprinkler drops.
---------------
1.11 Horn Strobe: One (1).
-----------
1.12 HVAC: Add one (1) supply device.
----
EXHIBIT C, 1 - Work Agreement
- ---------
<PAGE>
Section 2. ADDITIONAL TENANT IMPROVEMENTS PROVIDED BY LANDLORD.
- --------- ---------------------------------------------------
Intentionally omitted.
Section 3. ADDITIONAL TENANT IMPROVEMENTS AT TENANT'S EXPENSE.
- --------- --------------------------------------------------
Intentionally omitted.
Section 4. TENANT IMPROVEMENT ALLOWANCES PROVIDED BY LANDLORD.
- --------- --------------------------------------------------
Intentionally omitted.
Section 5. DESIGN OF TENANT IMPROVEMENTS.
- --------- -----------------------------
5.1 CDP Preparation: Landlord's office planner shall prepare a
---------------
construction document package (hereafter the "CDP") consisting of a floor plan,
a reflected ceiling/lighting plan and Tenant's supplement specification.
5.1.1 The CDP shall be based upon the schematic space plan
attached as Exhibit D and the construction information provided by Tenant.
5.1.2 Tenant shall provide Landlord's office planner with all of
the construction information requested by Landlord's office planner by no later
than the construction information submittal date specified in the Basic Lease
Information.
5.1.3 Tenant shall be responsible for all delays in occupancy and
additional costs, including without limitation design fees, resulting from its
failure to submit such information on time and any Tenant requested changes in
the Tenant Improvements specified in this Lease (herein "Change Items").
5.2 CDP Approval: Tenant shall approve the CDP by the construction
------------
document approval date specified in the Basic Lease Information subject to any
corrections requested to make the CDP consistent with the construction
information submitted to Landlord's office planner, and subject to any request
deletions. The CDP shall include a statement (the "Statement") of the costs, if
any, for which Tenant will be responsible under the terms of this Work
Agreement. The CDP and the Statement included therein must be approved by Tenant
in writing before the Landlord will proceed to obtain building permits and
commence construction.
5.3 Rentable Area Definition. The amount of rentable area shall be 108% of
------------------------
the usable area located on a single-tenant floor and 115% of the usable area
located on a multi-tenant floor. Usable area on multi-tenant floors shall be
computed by measuring to the finished surface of the office-side of corridors
and other permanent walls, to the center of partitions that separate the
Premises from adjoining office suites, and to the inside finished surfaces of
the dominant portion of the permanent outer building walls. The usable area of a
multi-tenant floor shall be equal to the sum of all usable areas on that floor.
Usable area on single-tenant floors shall be computed by measuring to the inside
finished surfaces of the dominant portion of the permanent outer building walls,
excluding any major verticle penetrations of the floor such as elevators. No
deductions shall be made for columns and projections necessary to the Building
when calculating the usable area on any floor of the Building. The precise
amount of the rentable area in the Premises indicated in the approved CDP shall
be controlling in the event of any variance from the approximate rentable area
specified in the Basic Lease Information. Base Rent, Tenant's Percentage, the
number of parking spaces, if any, available to Tenant and any similar item based
upon the size of the Premises shall be adjusted to reflect the precise rentable
area in the Premises determined by the approved CDP. If Landlord gives Tenant
notice of an adjustment in the size of the Premises by means of the CDP or
otherwise and adjustment of any other Lease terms based upon the changed size of
the Premises, it shall be deemed a request for an estoppel statement from Tenant
confirming the adjustments pursuant to Section 27. Unless Tenant gives notice to
Landlord of an objection to the adjustments within fifteen (15) days of
Landlord's notice, it shall be final and binding on Tenant as an amendment of
this Lease.
5.4 Tenant Responsibilities: Tenant shall be responsible for delays and
-----------------------
additional costs, including without limitation design fees, caused by: (i) any
changes made by Tenant to the CDP other than corrections and deletions of the
type described in Section 5.2; (ii) Tenant's failure to approve the CDP and the
Statement by the construction document approval date; or (iii) by delays in
delivery of non-building-standard materials requiring long lead times. Tenant
shall pay, prior to taking occupancy of the Premises, all of Landlord's design
fees arising out of the inclusion of non-building-standard materials in the
Premises.
EXHIBIT C, 2 - Work Agreement
- ---------
<PAGE>
Section 6. CONSTRUCTION.
- --------- ------------
Approval of the CDP shall constitute written authorization to complete
the Premises in accordance with the CDP. Tenant may in such authorization delete
items to reduce its cost. In the absence of such written authorization, Landlord
shall not be obligated to commence work on the Premises. Tenant shall be
responsible for any costs due to any resulting delay in completion of the
Premises. Landlord shall complete the construction of the Tenant Improvements as
soon as reasonably possible after the approval to commence construction is given
by Tenant. Landlord's contractor shall complete the Tenant Improvements in
accordance with Tenant's approved CDP.
Section 7. FIELD CHANGE ORDERS.
- --------- -------------------
If Tenant shall request any change in the Tenant approved CDP, Tenant
shall request such change in writing to Landlord, and such request shall be
accompanied by all information necessary to prepare plans and specifications for
such change. After receiving this information, Landlord shall cause its office
planner to prepare such plans and specifications and a proposed field change
order ("FCO") as soon as reasonably possible thereafter. Landlord shall not be
obligated to proceed with any work which would be affected by a proposed FCO
until it is effective or Tenant withdraws the FCO requests Tenant shall be
responsible for any and all delays in construction and occupancy caused by
Tenant's FCO requests. The proposed FCO shall set forth the estimated cost of
the changes. THe proposed FCO shall be effective only when signed by both
Landlord and Tenant, and Tenant has deposited the estimated cost of the changes
with Landlord. Landlord shall hold this payment as an additional security
deposit. Upon the acceptance of the Premises by Tenant, this additional security
deposit shall be applied to pay the cost of the work. If the actual cost of the
change order is more or less than this security deposit then the excess or
deficiency shall be refunded or paid at the same time, as the case may be. Even
if Tenant fails to approve the proposed FCO, Tenant shall be responsible for the
cost of preparing any plans and specifications for the proposed FCO. The actual
cost, including design and administrative fees, of any FCO shall be paid by
Tenant on or before the date Tenant first occupies the Premises unless stated
otherwise in the FCO.
Section 8. IMPROVEMENTS CONSTRUCTED BY TENANT.
- --------- ----------------------------------
If any work is to be performed in connection with Tenant Improvements on
the Premises by Tenant or Tenant's contractor.
8.1 Landlord's Approval: Such work shall not proceed until Landlord's
-------------------
written approval of each of the following items: (a) Tenant's contractor; (b)
public liability and property damage insurance carried by Tenant or its
contractor; and (c) schematic plans and specifications for such work. The
detailed construction plans and specifications shall be prepared by Landlord's
office planner at Tenant's expense based upon the schematic plans and
specifications. All such work shall done in strict conformity with such final
plans and specifications subject to field change orders prepared and approved in
the manner specified in Section 3.1 above. As built plans shall be prepared by
Landlord's office planner at Tenant's expense after the work is fully completed
and a copy retained by Landlord for its use.
8.2 Permits: All work shall be done in conformity with a valid building
-------
permit (obtained at Tenant's expense) when required, a copy of which shall be
furnished to Landlord before such work is commenced, and in any case, all such
work shall be performed in accordance with all applicable governmental
regulations at Tenant's sole expense. Notwithstanding any failure by Landlord to
object to any such work, Landlord shall have no responsibility for Tenant's
failure to meet all applicable regulations.
8.3 Coordination: All work by Tenant or Tenant's contractor shall be
------------
scheduled through Landlord. Tenant or Tenant's contractor shall arrange for
necessary utility, hoisting and elevator service with Landlord's contractor and
shall pay such reasonable charges for such services as may be charged by
Landlord's contractor.
8.4 Manner of Entry: Tenant's entry to the Premises for any purpose,
---------------
including without limitation, inspection or performance of Tenant construction
by Tenant's agents, prior to the Lease Commencement Date as specified in the
Basic Lease Information shall be at such times as are approved by Landlord and
subject to all the terms and conditions of the lease except the payment of Rent.
Tenant's entry shall mean entry by Tenant, its officers, contractors,
licensees, agents, servants, employees, guests, invitees, or visitors.
8.5 Faulty Work: Tenant shall promptly reimburse Landlord upon demand
-----------
for any extra expense incurred by the Landlord by reason of faulty work done by
Tenant or its contractors or by reason of any delays caused by such work, or by
reason of inadequate cleanup.
EXHIBIT C, 3 - Work Agreement
- ---------
<PAGE>
EXHIBIT D
---------
LEASE AGREEMENT
---------------
Schematic Space Plan for the Premises
-------------------------------------
EHIBIT D, 1 - Schematic Space Plan for Premises
- --------
<PAGE>
[VIRTUAL MORTGAGE CHART]
<PAGE>
EXHIBIT E
---------
LEASE AGREEMENT
---------------
Rules and Regulations
---------------------
1. The rights of each tenant in the entrances, corridors and
elevators servicing the Building are limited to ingress to and egress from such
tenant's Premises for the tenant and its employees, licensees and invitees, and
no tenant shall use, or permit the use of, the entrances, corridors or elevators
for any other purpose. No tenant shall invite to the tenant's Premises, or
permit the visit of, persons in such numbers or under such conditions as to
unreasonably interfere with the use and enjoyment of any of the plazas,
entrances, corridors, elevators and other facilities of the Building by any
other tenants. No tenant shall encumber or obstruct, or permit the encumbrance
or obstruction of any of the sidewalks, plazas, entrances, corridors, elevators,
fire exits or stairways of the Building. Landlord reserves the right to control
and operate the public portions of the Building and the public facilities as
well as facilities furnished for the common use of the tenants, in such manner
as it in its reasonable judgment deems best for the benefit of the tenants
generally.
2. Admission to the Building in certain areas and during certain
hours may be restricted by Landlord by means of access devices such as keys,
entry cards, combination codes and the like. Landlord may require all persons
admitted to or leaving the Building outside of business hours on business days
to provide appropriate identification, use a designated access device and to
comply with all other Building security requirements. Tenant shall be
responsible for all persons to whom it issues an access device or discloses an
access code and shall be liable to Landlord for all acts or omissions of such
persons. Any person whose presence in the Building at any time shall, in the
reasonable judgement of Landlord, be prejudicial to the safety, character or
reputation of the Building or of its tenants may be denied access to the
Building or may be ejected therefrom. During any invasion, riot, public
excitement or other commotion, Landlord may prevent all access to the Building
by closing the doors or otherwise for the safety of the tenants and protection
of property in the Building. Each tenant shall pay Landlord a refundable deposit
in an amount reasonably determined by Landlord from time to time for each access
device issued to a tenant.
3. Smoking is prohibited at all times in all areas of the Building,
including, but not limited to, offices, restrooms, corridors, stairwells,
lobbies and elevators.
4. No tenant shall obtain or accept for use in its Premises ice,
food, beverages, cleaning or other similar services from any persons
reasonably prohibited in writing from furnishing such services. Such services
shall be furnished only at such hours, and under such reasonable regulations, as
may be fixed by Landlord from time to time.
5. The cost of repairing any damage to the public portions of the
Building, the common areas or the public facilities or to any facilities used in
common with other tenants, caused by a tenant or its employees, agents,
contractors, licensees or invitees, shall be paid by such tenant.
6. No awnings or other projections shall be attached to the outside
walls of the Building. No curtains, blinds, shades or screens, if any, which are
different from the standards adopted by Landlord for the Building shall be
attached to or hung in or used in connection with any exterior window or door of
the Premises of any tenant without the prior written consent of Landlord. All
tenants with Premises visible from one of the lobbies, or any other public
portion of the Building, shall furnish and maintain the Premises in a first-
class manner, utilizing furnishings and other decorations commensurate in
quality and style with the furnishings and decor in the public portions of the
Building.
7. No lettering, sign, advertisement, notice or object shall be
displayed in or on the exterior windows or doors, or on the outside of any
tenant's Premises, or at any point inside any tenant's Premises where the same
might be visible outside of such Premises, without the prior written consent of
Landlord which consent may be withheld in Landlord's sole and unfettered
discretion. In the event of the violation of the foregoing by any tenant,
Landlord may remove the same without any liability, and may charge the expense
incurred in such removal to the tenant violating this rule. Interior signs,
elevator cab designations, and lettering on doors, if and when approved by
Landlord, shall be inscribed, painted or affixed for each tenant by Landlord at
the expense of such tenant, and shall be of a size, color and style acceptable
to Landlord.
8. The windows that reflect or admit light and air into the halls,
passageways or other public places in the Building shall not be covered or
obstructed by any tenant, nor shall any bottles, parcels or other articles be
placed on the window sills.
EXHIBIT E, 1 - Rules and Regulations
- ---------
<PAGE>
9. No showcases or other articles shall be put in front of or
affixed to any part of the exterior of the Building, nor placed in the halls,
corridors or vestibules.
10. No bicycles, vehicles, animals, fish or birds of any kind shall
be brought into or kept in or about the Premises of any tenant or the Building
except in areas designated by Landlord.
11. No noise, including, but not limited to, music or the playing of
musical instruments, recordings, radio or television, which, in the judgment of
Landlord, might disturb other tenants in the Building, shall be made or
permitted by any tenant. Nothing shall be done or permitted in the Premises of
any tenant which would impair or interfere with the use or enjoyment by any
other tenant of any other space in the Building.
12. No tenant, nor any tenant's contractors, employees, agents,
visitors or licensees, shall at any time bring into or keep upon the Premises or
the Building any hazardous, inflammable, combustible, explosive or otherwise
dangerous fluid, chemical or substance, except any fluids or substances used in
the ordinary course of Tenant's business as part of a use permitted under the
Lease. Landlord shall be notified of any threatened or actual violation of
environmental laws or other Legal Requirements as soon as possible after any
tenant becomes aware of the situation.
13. Additional locks or bolts of any kind which shall not be operable
by the Grand Master Key for the Building shall not be placed upon any of the
doors or windows by any tenant, nor shall any changes be made in locks or
mechanisms thereof which shall make such locks inoperable by said Grand Master
Key. Additional keys for a tenant's Premises and rest rooms shall be procured
only from the Landlord who may make a reasonable charge therefor. Each tenant
shall, upon the termination of its tenancy, turn over to Landlord all keys of
stores, offices and toilet rooms, either furnished to, or otherwise procured by,
such tenant, and in the event of the loss of any keys furnished by Landlord,
such tenant shall pay to Landlord the cost thereof.
14. All removals, or the carrying in or out of any safes, freight,
furniture, packages, boxes, crates or any other object or matter of any
description must take place during such hours and in such elevators, and in such
manner as Landlord or its agent may determine from time to time. The persons
employed to move furnishings, fixtures and equipment in and out of the Building
shall be reasonably acceptable to Landlord and, if so required by law, shall
hold a Master Rigger's or comparable license. Landlord shall have the right to
require an additional security deposit from Tenant as a condition of approving a
particular moving company for such purposes. Tenant must make arrangements in
advance with Landlord for moving large quantities of furniture and equipment
into or out of the Building. All labor and engineering cost incurred by
Landlord in connection with any moving specified in this rule, including a
reasonable charge for overhead and profit, shall be paid by Tenant to Landlord,
on demand.
15. Landlord reserves the right to inspect all objects and matter to
be brought into the Building and to exclude from the Building all objects and
matter which violate any of these Rules and Regulations or the Lease of which
this Exhibit is a part. Landlord may require any person leaving the Building
with any package or other object or matter to submit a pass listing such package
or object or matter from the tenant from whose Premises the package or object or
matter is being removed, but the establishment and enlargement of such
requirement shall not impose any responsibility on Landlord for the protection
of any tenant against the removal of property form the Premises of such tenant.
Landlord shall in no way be liable to any tenant for damages or loss arising
from the admission, exclusion or ejection of any person to or from the Premises
or the Building under the provisions of this Rule or of Rule 2 hereof.
16. No tenant shall occupy or permit any portion of its Premises to
be occupied as an office for secretarial or word processing services to third
parties without the prior written consent of Landlord which consent may be
withheld in the sole and unfettered discretion of Landlord. No tenant shall use
its Premises or any part thereof to be used, for manufacturing or the sale at
retail or auction of merchandise, goods or property of any kind or for the
possession, storage, manufacture, or sale of liquor, narcotics, dope, tobacco in
any form, or as a barber, beauty or manicure shop, or as a school.
17. Landlord shall have the right to prohibit any advertising or
identifying sign by any tenant which, in good faith, Landlord believes will
impair the reputation of the Building or its desirability as a building for
others, and upon written notice from Landlord, such tenant shall refrain from
and discontinue such advertising or identifying sign.
18. Landlord shall have the right to prescribe the weight and
position of safes and other objects of excessive weight, and no safe or other
object whose weight exceeds the lawful load for the area upon which it would
stand shall be brought into or kept upon any tenant's Premises. If, in the
reasonable judgment
EXHIBIT E, 2 - Rules and Regulations
- ---------
<PAGE>
of Landlord, it is necessary to distribute the concentrated weight of any heavy
object, the work involved in such distribution shall be done at the expense of
the tenant and in such manner as Landlord shall determine.
19. No machinery or mechanical equipment other than ordinary portable
business machines may be installed or operated in any tenant's Premises without
Landlord's prior written consent which consent shall not be unreasonably
withheld, conditioned or delayed, and in no case (even where the same are of a
type so excepted or as so consented to by Landlord) shall any machines or
mechanical equipment be so placed or operated as to disturb other tenants, but
machines and mechanical equipment which may be permitted to be installed and
used in tenant's Premises shall be so equipped, installed and maintained by such
tenant as to prevent any disturbing noise, vibration or electrical or other
interference from being transmitted from such Premises to any other area of the
Building.
20. Landlord, its contractors, and their respective employees, shall
have the right to use, without charge therefor, all light, power and water in
the Premises of any tenant while cleaning or making repairs or alterations in
the Premises of such tenant.
21. No Premises of any tenant shall be used for lodging or sleeping
or for any immoral or illegal purpose.
22. The requirements of tenants will be attended to only upon
application at the office of the Building. Employees of Landlord shall not
perform any work or do anything outside of their regular duties, unless under
special instructions from Landlord.
23. Canvassing, soliciting and peddling in the Building are
prohibited and each tenant shall cooperate to prevent the same.
24. No tenant shall cause or permit any unusual or objectionable
odors to emanate from its Premises which would annoy other tenants or create a
public or private nuisance. No cooking shall be done in the Premises of any
tenant except as is expressly permitted in such tenant's Lease, except that
Tenant may use microwave ovens for non-commercial microwave cooking of food to
be consumed on the premises by the tenant's personnel.
25. Nothing shall be done or permitted in any tenant's Premises, and
nothing shall be brought into or kept in any tenant's Premises, which would
impair or interfere with any of the Building's services or the proper and
economic heating, cleaning or other servicing of the Building or the Premises,
or the use or enjoyment by any other tenant of any other Premises, nor shall
there be installed by any tenant any ventilating, air-conditioning, electrical
or other equipment of any kind which, in the reasonable judgment of Landlord,
might cause any such impairment or interference.
26. No acids, vapors or other materials shall be discharged or
permitted to be discharged into the waste lines, vents or flues of the Building
which may damage them. The water and wash closets and other plumbing fixtures in
or serving any tenant's Premises shall not be used for any purpose other than
the purposes for which they were designed or constructed, and no sweepings,
rubbish, rags acids or other foreign substances shall be deposited therein. All
damages resulting from any misuse of the fixtures shall be borne by the tenants
who, or whose servants, employees, agents, visitors or licensees shall have
cause the same.
27. All entrance doors in each tenant's Premises shall be left locked
and all windows shall be left closed by the tenant when the tenant's Premises
are not in use. Entrance doors shall not be propped open at any time. Each
tenant, before closing and leaving its Premises at any time, shall turn out all
lights.
28. Hand trucks not equipped with rubber tires and side guards shall
not be used within the Building.
29. The coverings for all windows in each tenant's Premises above the
ground floor shall be lowered and closed as reasonably required because of the
position of the sun, during the operation of the Building air-conditioning
system to cool or ventilate the tenant's Premises.
30. Landlord reserves the right to rescind, alter or waive any rule
or regulation at any time prescribed for the Building when, in its reasonable
judgment, it deems it necessary, desirable or proper for its best interest and
for the best interests of the tenants generally, and no alteration or waiver of
any rule or regulation in favor of one tenant shall operate as an alteration or
waiver in favor of any other tenant. Landlord shall not be responsible to any
tenant for the nonobservance or violation of any other tenant of any of the
rules and regulations at any time prescribed for the Building.
EXHIBIT E, 3 - Rules and Regulations
- ---------
<PAGE>
EXHIBIT 10.63
OFFICE BUILDING LEASE
BETWEEN
KOLL CENTER NEWPORT NUMBER 8
LANDLORD
AND
VIRTUAL REALTY NETWORK, INC.
TENANT
<PAGE>
OFFICE BUILDING LEASE
---------------------
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. BASIC LEASE TERMS.........................................................1
2. PREMISES AND COMMON AREAS.................................................3
3. TERM......................................................................3
4. POSSESSION................................................................3
5. RENT......................................................................4
6. OPERATING EXPENSES........................................................4
7. SECURITY DEPOSIT..........................................................5
8. USE.......................................................................5
9. NOTICES...................................................................5
10. BROKERS...................................................................6
11. SURRENDER; HOLDING OVER...................................................6
12. TAXES ON TENANT'S PROPERTY................................................6
13. ALTERATIONS...............................................................6
14. REPAIRS...................................................................7
15. LIENS.....................................................................8
16. ENTRY BY LANDLORD.........................................................8
17. UTILITIES AND SERVICES....................................................8
18. ASSUMPTION OF RISK AND INDEMNIFICATION....................................8
19. INSURANCE.................................................................9
20. DAMAGE OR DESTRUCTION....................................................10
21. EMINENT DOMAIN...........................................................11
22. DEFAULTS AND REMEDIES....................................................12
23. LANDLORD'S DEFAULT.......................................................13
24. ASSIGNMENT AND SUBLETTING................................................13
25. SUBORDINATION............................................................15
26. ESTOPPEL CERTIFICATE.....................................................15
27. BUILDING PLANNING........................................................15
28. RULES AND REGULATIONS....................................................16
29. MODIFICATION AND CURE RIGHTS OF LANDLORD'S
MORTGAGEES AND LESSORS...................................................16
30. DEFINITION OF LANDLORD...................................................16
31. WAIVER...................................................................16
32. PARKING..................................................................16
33. FORCE MAJEURE............................................................17
34. SIGNS....................................................................17
35. LIMITATION ON LIABILITY..................................................18
36. FINANCIAL STATEMENTS.....................................................18
37. QUIET ENJOYMENT..........................................................18
38. MISCELLANEOUS............................................................18
39. EXECUTION OF LEASE.......................................................19
SIGNATURE PAGE......................................................19
</TABLE>
EXHIBITS:
A-I Site Plan
A-II Outline of Floor Plan of Premises
B Rentable Square Feet and Usable Square Feet
D Notice of Lease Term Dates and Tenant's Percentage
E Definition of Operating Expenses
F Standards for Utilities and Services
G Estoppel Certificate
H Rules and Regulations
i
<PAGE>
OFFICE BUILDING LEASE
This OFFICE BUILDING LEASE ("LEASE") is entered into as of the 5 day of
---
September, 1995 by and between Koll Center Newport Number 8, a California
- --------- -- ---------------------------- ----------
limited partnership ("Landlord"), and Virtual Realty Network, Inc., a Nevada
- ------------------- ---------------------------- ------
corporation ("Tenant").
- -----------
1. BASIC LEASE TERMS. For purposes of this Lease, the following terms have the
following definitions and meanings:
(a) Landlord: Koll Center Newport Number 8, a California limited partnership.
---------------------------- ------------------------------
(b) Landlord's Address (For Notices):
4350 Von Karman Avenue, Suite 100
---------------------------------
Newport Beach, Ca 92660 Attention: KCN 8 Manager.
----------------------- -------------
or such other place as Landlord may from time to time designate by notice to
Tenant.
(c) Tenant: Virtual Realty Network, Inc., a Nevada corporation.
--------------------------- ------------------
(d) Tenant's Address (Premises):
4590 MacArthur Boulevard, Suite 175
-----------------------------------
Newport Beach, CA 92660 Attention: Lee Shorey.
----------------------- ----------
(e) Development: The parcel(s) of real property commonly known as Koll Center
-----------
Newport and located in the City of Newport Beach (the "City"), County of Orange
- ------- ------------- -----
(the "County"), State of California ("State"), as shown on the site plan
----------
attached hereto as Exhibit "A-1".
------------
(f) Building: A six (6) story office building located within the Development,
------
which Building contains approximately 113,787 Rentable Square Feet (subject to
-------
adjustment as provided in Exhibit "B"), with the street address of 4590
----------- ----
MacArthur Boulevard, Newport Beach, CA 92660.
- --------------------------------------------
(g) Premises: Those certain premises known as Suite(s) 175 as generally shown
-----
attached hereto as Exhibit "A-II", located on the ground floor(s) of the
------------- ------
Building which Premises contains approximately 4,236 Rentable Square Feet and
-----
3,774 Usable Square Feet.
- -----
(h) Tenant's Percentage: Tenant's percentage of the Building on a Rentable
Square Foot basis, which initially is 3.7227%.
------
(i) Term: one (1) Lease Year and one (1) and 1/2 Month.
------- ---------------
(j) Commencement Date: August 1, 1997.
-------- --
Expiration Date: September 14, 1998.
------------ --
(k) Commencement Date: The date on which the Term of this Lease will commence
as set forth subparagraph 1(j) above.
(l) Monthly Base Rent: $6,565.80.
---------
<PAGE>
(m) Adjustment to Monthly Base Rent: Monthly Base Rent will be adjusted in
accordance with the following:
LEASE YEAR OR MONTHS MONTHLY BASE RENT
Months 1 - 11: $6,565.80 per month.
------------------ --------------------
__________________ ____________________
__________________ ____________________
__________________ ____________________
__________________ ____________________
(n) Operating Expense Allowance: Operating Expense Allowance means that portion
of Tenant's Percentage of Operating Expenses as described in Paragraph 6 below
which Landlord has included in Monthly Base Rent, which, for purposes of this
Lease, will be an amount equal to Tenant percentage of Operating Expenses for
-------------------------------------------
the 1995 Calendar Year.
- -----------------------
(o) Security Deposit: $7,222.38 (to be paid to Landlord on or before August 1,
-------------------------------------------------------
1997).
- ------
(p)
(q)
(r) Permitted Use: General office use consistent with other Class "A" offices
----------------------------------------------------------
uses at Koll Center Newport and no other use without the express written
- ---------------------------
consent of Landlord, which consent Landlord may withhold in its sole and
absolute discretion.
(s) Parking: Fifteen (15) unreserved employee parking spaces at $15.00 per space
----------------------------------------------------------
per month subject to the terms and conditions of Paragraph 32 below and the
- ---------
Rules and Regulations regarding parking contained in Exhibit "H".
------------
(t) Broker(s): N/A
---
(u) Guarantor(s): N/A
---
(v) Interest Rate: shall mean the greater of ten percent (10%) per annum or two
percent (2%) in excess of the prime lending or reference rate of Wells Fargo
Bank N.A. or any successor bank in effect on the twenty-fifth (25th) day of the
calendar month immediately prior to the event giving rise to the Interest Rate
imposition; provided, however, the Interest Rate will in no event exceed the
maximum interest rate permitted to be charged by applicable law.
(w) Exhibits: A-1 through H (excluding Exhibit C) which Exhibits are attached
--- ---
to this Lease and incorporated herein by this reference. As provided in
Paragraph 3 below, a completed version of Exhibit "D" will be delivered
-----------
to Tenant after Landlord delivers possession of the Premises to Tenant.
(x) Addendum Paragraphs: 40 through 42, inclusive, which Addendum Paragraphs
---- ----
are attached to this Lease and incorporated herein by this reference.
This Paragraph 1 represents a summary of the basic terms and definitions of this
Lease. In the event of any inconsistency between the terms contained in this
Paragraph 1 and any specific provision of this Lease, the terms of the more
specific provision shall prevail.
-2-
<PAGE>
2. PREMISES AND COMMON AREAS.
(a) Premises. Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord the Premises as improved or to be improved with the Tenant Improvements
described in the Work Letter Agreement, a copy of which is attached hereto as
Exhibit "C".
- -----------
(b) Mutual Covenants. Landlord and Tenant agree that the letting and hiring of
the Premises is upon and subject to the terms, covenants and conditions
contained in this Lease and each party covenants as a material part of the
consideration for this Lease to keep and perform their respective obligations
under this Lease.
(c) Tenant's Use of Common Areas. During the Term of this Lease, Tenant shall
have the nonexclusive right to use in common with Landlord and all persons,
firms and corporations conducting business in the Development and their
respective customers, guests, licensees, invitees, subtenants, employees and
agents (collectively, "Development Occupants"), subject to the terms of this
Lease, the Rules and Regulations referenced in Paragraph 32 below and all
covenants, conditions and restrictions now or hereafter affecting the
Development, the following common areas of the Building and/or the Development
(collectively, the "Common Areas"):
(i) The Building's common entrances, hallways, lobbies, public restrooms on
multi-tenant floors, elevators, stairways and accessways, loading docks, ramps,
drives and platforms and any passageways and serviceways thereto, and the common
pipes, conduits, wires and appurtenant equipment within the Building which serve
the Premises (collectively, "Building Common Areas"); and
(ii) The parking facilities of the Development which serve the Building (subject
to the provisions of Exhibit "H"), loading and unloading areas, trash areas,
-----------
roadways, sidewalks, walkways, parkways, driveways, landscaped areas, plaza
areas, fountains and similar areas and facilities situated within the
Development and appurtenant to the Building which are not reserved for the
exclusive use of any Development Occupants (collectively, "Development Common
Areas").
(d) Landlord's Reservation of Rights. Provided Tenant's use of and access to
the Premises and parking to be provided to Tenant under this Lease is not
interfered with in an unreasonable manner, Landlord reserves for itself and for
all other owner(s) and operator(s) of the Development Common Areas and the
balance of the Development, the right from time to time to: (i) install, use,
maintain, repair, replace and relocate pipes, ducts, conduits, wires and
appurtenant meters and equipment above the ceiling surfaces, below the floor
surfaces, within the walls and in the central core areas of the Building; (ii)
make changes to the design and layout of the Development, including, without
limitation, changes to buildings, driveways, entrances, loading and unloading
areas, direction of traffic, landscaped areas and walkways, and, subject to the
parking provisions contained in Paragraph 32 and Exhibit "H", parking spaces and
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parking areas; and (iii) use or close temporarily the Building Common Areas, the
Development Common Areas and/or other portions of the Development while engaged
in making improvements, repairs or alterations to the Building, the Development,
or any portion thereof.
3. TERM. The term of this Lease ("Term") will be for the period designated in
Subparagraph 1(i), commencing on the Commencement Date, and ending on the last
day of the month in which the expiration of such period occurs, including any
extensions of the Term pursuant to any provision of this Lease or written
agreement of the parties. Notwithstanding the foregoing, if the Commencement
Date falls on any day other than the first day of a calendar month then the Term
of this Lease will be measured from the first day of the month following the
month in which the Commencement Date occurs. Each consecutive twelve (12) month
period of the Term of this Lease, commencing on the Commencement Date, will be
referred to herein as a "Lease Year". Landlord's Notice of Lease Term Dates and
Tenant's Percentage ("Notice"), in the form of Exhibit "D" attached hereto, will
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set forth the Commencement Date, the date upon which the Term of this Lease
shall end, the Rentable Square Feet within the Premises and the Building, and
Tenant's Percentage and will be delivered to Tenant after Landlord delivers
possession of the Premises to Tenant. The Notice will be binding upon Tenant
unless Tenant objects to the Notice in writing within five (5) days of Tenant's
receipt of the Notice.
4. POSSESSION.
(a) Delivery of Possession. Tenant shall be in possession of the Premises on
the Commencement Date.
(b) Condition of Premises. Tenant has accepted the Premises in "AS-IS"
condition.
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5. RENT.
(a) Monthly Base Rent. Tenant agrees to pay Landlord the Monthly Base Rent for
the Premises (subject to adjustment as hereinafter provided) in advance on the
first day of each calendar month during the Teem without prior notice or demand,
except that Tenant agrees to pay the Monthly Base Rent for the first month of
the Term directly to Landlord concurrently with Tenant's delivery of the
executed Lease to Landlord. If the Term of this Lease commences or ends on a day
other than the first day of a calendar month, then the rent for such period will
be prorated in the proportion that the number of days this Lease is in effect
during such period bears to the number of days in such month. All rent must be
paid to Landlord, without any deduction or offset, in lawful money of the United
States of America, at the address designated by Landlord or to such other person
or at such other place as Landlord may from time to time designate in writing.
Monthly Base Rent will be adjusted during the Term of this Lease as provided in
Subparagraph 1(m).
(b) Additional Rent. All amounts and charges to be paid by Tenant hereunder,
including, without limitation, payments for Operating Expenses, insurance,
repairs and parking, will be considered additional rent for purposes of this
Lease, and the word "rent" as used in this Lease will include all such
additional rent unless the context specifically or clearly implies that only
Monthly Base Rent is intended.
(c) Late Payments. Late payments of Monthly Base Rent and/or any item of
additional rent will be subject to interest and a late charge as provided in
Subparagraph 22(f) below.
6. OPERATING EXPENSES.
(a) Operating Expenses. In addition to Monthly Base Rent, throughout the Term
of this Lease, Tenant agrees to pay Landlord as additional rent in accordance
with the terms or this Paragraph 6. Tenant's Percentage of Operating Expenses as
defined in Exhibit "E" attached hereto to the extent Tenant's Percentage of
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Operating Expenses exceeds Tenant's Operating Expense Allowance.
(b) Estimate Statement. Prior to the Commencement Date and on or about March
1st of each subsequent calendar year during the Term of this Lease. Landlord
will endeavor to deliver to Tenant a statement ("Estimate Statement") wherein
Landlord will estimate both the Operating Expenses and Tenant's Percentage of
Operating Expenses for the then current calendar year. If the estimate of
Tenant's Percentage of Operating Expenses in the Estimate Statement exceeds
Tenant's Operating Expense Allowance, Tenant agrees to pay Landlord, as
"Additional Rent", one-twelfth (1/12th) of such excess each month thereafter,
beginning with the next installment of rent due, until such time as Landlord
issues a revised Estimate Statement or the Estimate Statement for the succeeding
calendar year, except that, concurrently with the regular monthly rent payment
next due following the receipt of each such Estimate Statement. Tenant agrees to
pay Landlord an amount equal to one monthly installment of such excess (less any
applicable Operating Expenses already paid) multiplied by the number of months
from January, in the current calendar year, to the month of such rent payment
next due, all months inclusive. If at any time during the Term of this Lease,
but not more often than quarterly, Landlord reasonably determines that Tenant's
Percentage of Operating Expenses for the current calendar year will be greater
than the amount set forth in the then current Estimate Statement, Landlord may
issue a revised Estimate Statement and Tenant agrees to pay Landlord, within ten
(10) days of receipt of the revised Estimate Statement, the difference between
the amount owed by Tenant under such revised Estimate Statement and the amount
owed by Tenant under the original Estimate Statement for the portion of the then
current calendar year which has expired. Thereafter Tenant agrees to pay
Tenant's Percentage of Operating Expenses based on such revised Estimate
Statement until Tenant receives the next calendar year's Estimate Statement or a
new revised Estimate Statement for the current calendar year. In the event
Tenant's Percentage of Operating Expenses for any calendar year is less than
Tenant's Operating Expense Allowance, Tenant will not be entitled to a credit
against any rent, additional rent or Tenant's Percentage of future Operating
Expenses payable hereunder.
(c) Actual Statement. By March 1st of each calendar year during the Term of
this Lease, Landlord will also endeavor to deliver to Tenant a statement
("Actual Statement") which states the actual Operating Expenses for the
preceding calendar year. If the Actual Statement reveals that Tenant's
Percentage of the actual Operating Expenses is more than the total Additional
Rent paid by Tenant for Operating Expenses on account of the preceding calendar
year, Tenant agrees to pay Landlord the difference in a lump sum within ten (10)
days of receipt of the Actual Statement. If the Actual Statement reveals that
Tenant's Percentage of the actual Operating Expenses is less than the Additional
Rent paid by Tenant for Operating Expenses on account of the preceding calendar
year, Landlord will credit any overpayment toward the next monthly
installment(s) of Tenant's Percentage of the Operating Expenses due under this
Lease.
(d) Miscellaneous. Any delay or failure by Landlord in delivering any Estimate
Statement or Actual Statement pursuant to this Paragraph 6 will not constitute a
waiver of its right to require an increase in rent nor will it relieve Tenant of
its obligations pursuant to this Paragraph 6, except that Tenant will not be
obligated to make any payments based on such Estimate Statement or Actual
Statement until ten (10) days after receipt of such Estimate Statement or Actual
Statement. Even though the Term has expired and Tenant has vacated the Premises,
when the final determination is made of Tenant's Percentage of the actual
Operating Expenses for the year in which this Lease terminates, Tenant agrees to
promptly pay any increase due over the estimated expenses paid and, conversely,
any overpayment made in the event said expenses decrease shall promptly be
rebated by Landlord to Tenant. Such obligation will be a continuing one which
will survive the expiration or earlier termination of this Lease. Prior to the
expiration or sooner termination of the Lease Term and Landlord's acceptance of
Tenant's surrender of the Premises, Landlord will have the right to estimate the
actual Operating Expenses for the then current Lease Year and to collect from
Tenant prior to Tenant's surrender of the Premises, Tenant's Percentage of any
excess of such actual Operating Expenses over the estimated Operating Expenses
paid by Tenant in such Lease Year.
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7. SECURITY DEPOSIT. Concurrently with Tenant's execution of this Lease.
Tenant will deposit with Landlord the Security Deposit designated in
Subparagraph 1(o). The Security Deposit will be held by Landlord as security for
the full and faithful performance by Tenant of all of the terms, covenants, and
conditions of this Lease to be kept and performed by Tenant during the Term
hereof. If Tenant fully and faithfully performs its obligations under this
Lease, including, without limitation, surrendering the Premises upon the
expiration or sooner termination of this Lease in compliance with Subparagraph
11(a) below, the Security Deposit or any balance thereof will be returned to
Tenant (or, at Landlord's option, to the last assignee of Tenant's interest
hereunder) within thirty (30) days following the expiration of the Lease Term or
as required under applicable law, provided that Landlord may retain the Security
Deposit until such time as any outstanding rent or additional rent amount has
been determined and paid in full. The Security Deposit is not, and may not be
construed by Tenant to constitute, rent for the last month or any portion
thereof. If Tenant defaults with respect to any provisions of this Lease
including, but not limited to, the provisions relating to the payment of rent or
additional rent, Landlord may (but will not be required to) use, apply or retain
all or any part of the Security Deposit for the payment of any rent or any other
sum in default, or for the payment of any other amount which Landlord may spend
or become obligated to spend by reason of Tenant's default or to compensate
Landlord for any loss or damage which Landlord may suffer by reason of Tenant's
default. If any portion of the Security Deposit is so used or applied, Tenant
agrees within ten (10) days after Landlord's written demand therefor, to deposit
cash with Landlord in an amount sufficient to restore the Security Deposit to
its original amount and Tenant's failure to do so shall constitute a default
under this Lease. Landlord is not required to keep Tenant's Security Deposit
separate from its general funds, and Tenant is not entitled to interest on such
Security Deposit. Should Landlord sell its interest in the Premises during the
Term hereof and deposit with the purchaser thereof the then unappropriated
Security Deposit funds, Landlord will be discharged from any further liability
with respect to such Security Deposit.
8. USE.
(a) Tenant's Use of the Premises. The Premises may be used for the use or uses
set forth in Subparagraph 1(r) only, and Tenant will not use or permit the
Premises to be used for any other purpose without the prior written consent of
Landlord, which consent Landlord may withhold in its sole arid absolute
discretion. Nothing in this Lease will be deemed to give Tenant any exclusive
right to such use in the Building or the Development.
(b) Compliance. At Tenant's sole cost and expense, Tenant agrees to procure
maintain and hold available for Landlords inspection, all governmental licenses
and permits required for the proper and lawful conduct of Tenant's business from
the Premises, if any. Tenant agrees not to use, alter or occupy the Premises or
allow the Premises to be used, altered or occupied in violation of, and Tenant,
at its sole cost and expense, agrees to use and occupy the Premises and cause
the Premises to be used and occupied in compliance with: (i) any and all laws,
statutes, zoning restrictions, ordinances, rules, regulations, orders and
rulings now or hereafter in force and any requirements of any insurer, insurance
authority or duly constituted public authority having jurisdiction over the
Premises, the Building or the Development now or hereafter in force, (ii) the
requirements of the Board of Fire Underwriters and any other similar body, (iii)
the Certificate of Occupancy issued for the Building, and (iv) any recorded
covenants, conditions and restrictions and similar regulatory agreements, if
any, which affect the use, occupation or alteration of the Premises, the
Building and/or the Development. Tenant agrees to comply with the Rules and
Regulations referenced in Paragraph 28 below. Tenant agrees not to do or permit
anything to be done in or about the Premises which will in any manner obstruct
or interfere with the rights of other tenants or occupants of the Development,
or injure or unreasonably annoy them, or use or allow the Premises to be used
for any unlawful or unreasonably objectionable purpose. Tenant agrees not to
cause, maintain or permit any nuisance or waste in, on, under or about the
Premises or elsewhere within the Development. Notwithstanding anything contained
in this Lease to the contrary, all transferable development rights related in
any way to the Development are and will remain vested in Landlord, and Tenant
hereby waives any rights thereto.
(c) Hazardous Materials. Except for ordinary and general office supplies
typically used in the ordinary course of business within office buildings, such
as copier toner, liquid paper, glue, ink and common household cleaning materials
(some or all of which may constitute "Hazardous Materials" as defined in this
Lease), Tenant agrees not to cause or permit any Hazardous Materials to be
brought upon, stored, used, handled, generated, released or disposed of on, in,
under or about the Premises, the Building, the Common Areas or any other portion
of the Development by Tenant, its agents, employees, subtenants, assignees,
licensees. contractors or invitees (collectively, "Tenant's Parties"), without
the prior written consent of Landlord, which consent Landlord may withhold in
its sole and absolute discretion. Upon the expiration or earlier termination of
this Lease, Tenant agrees to promptly remove from the Premises, the Building and
the Development, at its sole cost and expense, any and all Hazardous Materials,
including any equipment or systems containing Hazardous Materials which are
installed, brought upon, stored, used, generated or released upon, in, under or
about the Premises, the Building and/or the Development or any portion thereof
by Tenant or any of Tenant's Parties. To the fullest extent permitted by law,
Tenant agrees to promptly indemnify, protect, defend and hold harmless Landlord
and Landlord's partners, officers, directors, employees, agents, successors and
assigns (collectively, "Landlord Indemnified Parties") from and against any and
all claims, damages, judgments, suits, causes of action, losses, liabilities,
penalties, fines, expenses and costs (including, without limitation, clean-up,
removal, remediation and restoration costs, sums paid in settlement of claims,
attorneys' fees, consultant fees and expert fees and court costs) which arise or
result from the presence of Hazardous Materials on, in, under or about the
Premises, the Building or any other portion of the Development and which are
caused or permitted by Tenant or any of Tenant's Parties. Tenant agrees to
promptly notify Landlord of any release of Hazardous Materials at the Premises,
the Building or any other portion of the Development which Tenant becomes aware
of during the Term of this Lease, whether caused by Tenant or any other persons
or entities. In the event of any release of Hazardous Materials caused or
permitted by Tenant or any of Tenant's Parties, Landlord shall have the right,
but not the obligation, to cause Tenant to immediately take all steps Landlord
deems necessary or appropriate to remediate such release and prevent any similar
future release to the satisfaction of Landlord and Landlord's mortgagee(s). As
used in this Lease, the term "Hazardous Materials" shall mean and include any
hazardous or toxic materials, substances or wastes as now or hereafter
designated under any law, statute, ordinance, rule, regulation, order or ruling
of any agency of the State, the United States Government or any local
governmental authority, including, without limitation, asbestos, petroleum,
petroleum hydrocarbons and petroleum based products, urea formaldehyde foam
insulation, polychlorinated biphenyls ("PCBs"), and freon and other
chlorofluorocarbons. The provisions of this Subparagraph 8(c) will survive the
expiration or earlier termination of this Lease.
9. NOTICES. Any notice required or permitted to be given hereunder must be in
writing and may be given by personal delivery (including delivery by overnight
courier or an express mailing service) or by mail, if sent by registered or
certified mail. Notices to Tenant shall be sufficient if delivered to Tenant at
the Premises and notices to Landlord shall be sufficient if delivered to
Landlord
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<PAGE>
at the address designated in Subparagraph 1(b). Either party may specify a
different address for notice purposes by written notice to the other, except
that the Landlord may in any event use the Premises as Tenant's address for
notice purposes
10. BROKERS. The parties acknowledge that the broker(s) who negotiated this
Lease are stated in Subparagraph 1(t). Each party represents and warrants to the
other, that, to its knowledge, no other broker, agent or finder (a) negotiated
or was instrumental in negotiating or consummating this Lease on its behalf, and
(b) is or might be entitled to a commission or compensation in connection with
this Lease. Landlord and Tenant each agree to promptly indemnify, protect,
defend and hold harmless the other from and against any and all claims, damages,
judgments, suits, causes of action, losses, liabilities, penalties, fines,
expenses and costs (including attorneys' fees and court costs) resulting from
any breach by the indemnifying party of the foregoing representation, including,
without limitation, any claims that may be asserted by any broker, agent or
finder undisclosed by the indemnifying party. The foregoing mutual indemnity
shall survive the expiration or earlier termination of this Lease.
11. SURRENDER; HOLDING OVER.
(a) Surrender. The voluntary or other surrender of this Lease by Tenant, or a
mutual cancellation thereof, shall not constitute a merger, and shall, at the
option of Landlord, operate as an assignment to Landlord of any or all subleases
or subtenancies. Upon the expiration or earlier termination of this Lease,
Tenant agrees to peaceably surrender the Premises to Landlord broom clean and
in a state of first-class order, repair and condition, ordinary wear and tear
and casualty damage (if this Lease is terminated as a result thereof pursuant to
Paragraph 20) excepted, with all of Tenant's personal property and Alterations
(as defined in Paragraph 13) removed from the Premises to the extent required
under Paragraph 13 and all damage caused by such removal repaired as required by
Paragraph 13. Prior to the date Tenant is to actually surrender the Premises to
Landlord, Tenant agrees to give Landlord reasonable prior notice of the exact
date Tenant will surrender the Premises so that Landlord and Tenant can schedule
a walk-through of the Premises to review the condition of the Premises and
identify the Alterations and personal property which are to remain upon the
Premises and which items Tenant is to remove, as well as any repairs Tenant is
to make upon surrender of the Premises. The delivery of keys to any employee of
Landlord or to Landlord's agent or any employee thereof alone will not be
sufficient to constitute a termination of this Lease or a surrender of the
Premises.
(b) Holding Over. Tenant will not be permitted to hold over possession of the
Premises after the expiration or earlier termination of the Term without the
express written consent of Landlord, which consent Landlord may withhold in its
sole and absolute discretion. If Tenant holds over after the expiration or
earlier termination of the Term, Landlord may, at its option, treat Tenant as a
tenant at sufferance only, and such continued occupancy by Tenant shall be
subject to all of the terms, covenants and conditions of this Lease, so far as
applicable, except that the Monthly Base Rent for any such holdover period shall
be equal to the greater of (i) one hundred fifty percent (150%) of the Monthly
Base Rent in effect under this Lease immediately prior to such holdover, or (ii)
the then currently scheduled rental rate for comparable space in the Building,
in either event prorated on a daily basis. Acceptance by Landlord of rent after
such expiration or earlier termination will not result in a renewal of this
Lease. The foregoing provisions of this Paragraph 11 are in addition to and do
not affect Landlord's right of re-entry or any rights of Landlord under this
Lease or as otherwise provided by law. If Tenant fails to surrender the Premises
upon the expiration of this Lease in accordance with the terms of this Paragraph
11 despite demand to do so by Landlord, Tenant agrees to promptly indemnify,
protect, defend and hold Landlord harmless from all claims, damages, judgments,
suits, causes of action, losses, liabilities, penalties, fines, expenses and
costs (including attorneys' fees and costs), including, without limitation,
costs and expenses incurred by Landlord in returning the Premises to the
condition in which Tenant was to surrender it and claims made by any succeeding
tenant founded on or resulting from Tenant's failure to surrender the Premises.
The provisions of this Subparagraph 11(b) will survive the expiration or earlier
termination of this Lease.
12. TAXES ON TENANT'S PROPERTY. Tenant agrees to pay before delinquency, all
taxes and assessments (real and personal) levied against (a) any personal
property or trade fixtures placed by Tenant in or about the Premises (including
any increase in the assessed value of the Premises based upon the value of any
such personal property or trade fixtures); and (b) any Tenant Improvements or
Alterations in the Premises (whether installed and/or paid for by Landlord or
Tenant) to the extent such items are assessed at a valuation higher than the
valuation at which tenant improvements conforming to Landlord's building
standard tenant improvements are assessed. If any such taxes or assessments are
levied against Landlord or Landlord's property, Landlord may, after written
notice to Tenant (and under proper protest if requested by Tenant) pay such
taxes and assessments, in which event Tenant agrees to reimburse Landlord all
amounts paid by Landlord within ten (10) business days after demand by Landlord,
provided, however, Tenant, at its sole cost and expense, will have the right,
with Landlord's cooperation, to bring suit in any court of competent
jurisdiction to recover the amount of any such taxes and assessments so paid
under protest.
13. ALTERATIONS. After installation of the initial Tenant Improvements for the
Premises pursuant to Exhibit "C", Tenant may, at its sole cost and expense, make
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alterations, additions, improvements and decorations to the Premises
(collectively, "Alterations") subject to and upon the following terms and
conditions;
(a) Prohibited Alterations. Tenant may not make any Alterations which (i)
affect any area outside the Premises; (ii) affect the Building's structure,
equipment, services or systems, or the proper functioning thereof, or Landlord's
access thereto; (iii) affect the outside appearance, character or use of the
Building or the Building Common Areas; (iv) in the reasonable opinion of
Landlord, lessen the value of the Building; or (v) will violate or require a
change in any occupancy certificate applicable to the Premises.
(b) Landlord's Approval. Before proceeding with any Alterations which are not
prohibited in Subparagraph 13(a) above, Tenant must first obtain Landlord's
written approval of the plans, specifications and working drawings for such
Alterations, which approval Landlord will not unreasonably withhold or delay,
provided, however, Landlord's prior approval will not be required for any such
Alterations which are not prohibited by Subparagraph 13(a) above and which cost
less than Two Thousand Five Hundred Dollars ($2,500) as long as (i) Tenant
delivers to Landlord notice and a copy of any final plans, specifications and
working drawings for any such Alterations at least ten (10) days prior to
commencement of the work thereof, and (ii) the other conditions of this
Paragraph 13 are satisfied, including, without limitation, conforming to
Landlord's rules, regulations and insurance requirements which govern
contractors. Landlord's approval of plans, specifications and/or working
drawings for Alterations will not create any responsibility or liability on the
part of Landlord for their completeness, design sufficiency, or compliance with
applicable permits, laws, rules and regulations of governmental agencies or
authorities. In approving any Alterations, Landlord reserves the right to
require Tenant to
<PAGE>
increase its Security Deposit to provide Landlord with additional reasonable
security for the removal of such Alterations by Tenant as may be required by
this Lease.
(c) Contractors. Alterations may be made or installed only by contractors and
subcontractors which have been approved by Landlord, which approval Landlord
will not unreasonably withhold or delay; provided, however, Landlord reserves
the right to require that Landlord's contractor for the Building be given the
first opportunity to bid for any Alteration work. Before proceeding with any
Alterations, Tenant agrees to provide Landlord with ten (10) days prior written
notice and Tenant's contractors must obtain and maintain, on behalf of Tenant
and at Tenant's sole cost and expense: (i) all necessary governmental permits
and approvals for the commencement and completion of such Alterations; and (ii)
if requested by Landlord, a completion and lien indemnity bond, or other surety,
reasonably satisfactory to Landlord for such Alterations. Throughout the
performance of any Alterations, Tenant agrees to obtain, or cause its
contractors to obtain, workers compensation insurance and general liability
insurance in compliance with the provisions of Paragraph 19 of this Lease.
(d) Manner of Performance. All Alterations must be performed: (i) in accordance
with the approved plans, specifications and working drawings; (ii) in a
lien-free and first-class and workmanlike manner, (iii) in compliance with all
applicable permits, laws, statutes, ordinances, rules, regulations, orders and
rulings now or hereafter in effect and imposed by any governmental agencies and
authorities which assert jurisdiction; (iv) in such a manner so as not to
interfere with the occupancy of any other tenant in the Building, nor impose any
additional expense upon nor delay Landlord in the maintenance and operation of
the Building; and (v) at such times, in such manner, and subject to such rules
and regulations as Landlord may from time to time reasonably designate.
(e) Ownership. The Tenant Improvements, including, without limitation, all
affixed sinks, dishwashers, microwave ovens and other fixtures, and all
Alterations will become the property of Landlord and will remain upon and be
surrendered with the Premises at the end of the Term of this Lease; provided,
however, Landlord may, by written notice delivered to Tenant concurrently with
Landlord's approval of the final working drawings for any Alterations, identify
those Alterations which Landlord will require Tenant to remove at the end of the
Term of this Lease. Landlord may also require Tenant to remove Alterations which
Landlord did not have the opportunity to approve as provided in this Paragraph
13. If Landlord requires Tenant to remove any Alterations, Tenant, at its sole
cost and expense, agrees to remove the identified Alterations on or before the
expiration or earlier termination of this Lease and repair any damage to the
Premises caused by such removal (or, at Landlord's option, Tenant agrees to pay
to Landlord all of Landlord's costs of such removal and repair).
(f) Plan Review. Tenant agrees to pay Landlord, as additional rent, the
reasonable costs of professional services and costs for general conditions of
Landlord's third party consultants if utilized by Landlord (but not Landlord's
"in-house" personnel) for review of all plans, specifications and working
drawings for any Alterations, within ten (10) business days after Tenant's
receipt of invoices either from Landlord or such consultants. In addition,
Tenant agrees to pay Landlord, within ten (10) business days after completion of
any Alterations, a fee to cover Landlord's costs of supervising and
administering the installation of such Alterations, in the amount of eight
percent (8%) of the cost of such Alterations, but in no event less than Two
Hundred Fifty Dollars ($250.00).
(g) Personal Property. All articles of personal property owned by Tenant or
installed by Tenant at its expense in the Premises (including Tenant's business
and trade fixtures, furniture, movable partitions and equipment [such as
telephones, copy machines, computer terminals, refrigerators and facsimile
machines]) will be and remain the property of Tenant, and must be removed by
Tenant from the Premises, at Tenant's sole cost and expense, on or before the
expiration or earlier termination of this Lease. Tenant agrees to repair any
damage caused by such removal at its cost on or before the expiration or earlier
termination of this Lease.
(h) Removal of Alterations. If Tenant fails to remove by the expiration or
earlier termination of this Lease all of its personal property, or any
Alterations identified by Landlord for removal, Landlord may, at its option,
treat such failure as a hold-over pursuant to Subparagraph 11(b) above, and/or
Landlord may (without liability to Tenant for loss thereof) treat such personal
property and/or Alterations as abandoned and, at Tenant's sole cost and expense,
and in addition to Landlord's other rights and remedies under this Lease, at law
or in equity: (a) remove and store such items; and/or (b) upon ten (10) days
prior notice to Tenant, sell, discard or otherwise dispose of all or any such
items at private or public sale for such price as Landlord may obtain or by
other commercially reasonable means. Tenant shall be liable for all costs of
disposition of Tenant's abandoned property and Landlord shall have no liability
to Tenant with respect to any such abandoned property. Landlord agrees to apply
the proceeds of any sale of any such property to any amounts due to Landlord
under this Lease from Tenant (including Landlord's attorneys' fees and other
costs incurred in the removal, storage and/or sale of such items), with any
remainder to be paid to Tenant.
14. REPAIRS.
(a) Landlord's obligations. Landlord agrees to repair and maintain the
structural portions of the Building and the plumbing, heating, ventilating, air
conditioning, elevator and electrical systems installed or furnished by
Landlord, unless such maintenance and repairs are (i) attributable to items
installed in Tenant's Premises which are above standard interior improvements
(such as, for example, custom lighting, special HVAC and/or electrical panels or
systems, kitchen or restroom facilities and appliances constructed or installed
within Tenant's Premises) or (ii) caused in part or in whole by the act, neglect
or omission of any duty by Tenant, its agents, servants, employees or invitees,
in which case Tenant will pay to Landlord, as additional rent, the reasonable
cost of such maintenance and repairs. Landlord will not be liable for any
failure to make any such repairs, or to perform any maintenance unless such
failure shall persist for an unreasonable time after written notice of the need
of such repairs or maintenance is given to Landlord by Tenant. Except as
provided in Paragraph 20, Tenant will not be entitled to any abatement of rent
and Landlord will not have any liability by reason of any injury to or
interference with Tenant's business arising from the making of any repairs,
alterations or improvements in or to any portion of the Building or the Premises
or in or to fixtures, appurtenances and equipment therein. Tenant waives the
right to make repairs at Landlord's expense under any law, statute, ordinance,
rule, regulation, order or ruling (including, without limitation, to the extent
the Premises are located in California, the provisions of California Civil Code
Sections 1941 and 1942 and any successor statutes or laws of a similar nature).
(b) Tenant's Obligations. Tenant agrees to keep, maintain and preserve the
Premises in first class condition and repair and, when and if needed, at
Tenant's sole cost and expense, to make all repairs to the Premises and every
part thereof. Any such maintenance and repairs will be performed by Landlord's
contractor, or at Landlord's option, by such contractor or contractors as Tenant
may choose from an approved list to be submitted by Landlord. Tenant agrees to
pay all costs and expenses incurred in such
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maintenance and repair within seven (7) days after billing by Landlord or such
contractor or contractors. Tenant agrees to cause any mechanics' liens or other
liens arising as a result of work performed by Tenant or at Tenant's direction
to be eliminated as provided in Paragraph 15 below. Except as provided in
Subparagraph 14(a) above, Landlord has no obligation to alter, remodel, improve,
repair, decorate or paint the Premises or any part thereof.
(c) Tenant's Failure to Repair. If Tenant refuses or neglects to repair and
maintain the Premises properly as required hereunder to the reasonable
satisfaction of Landlord, Landlord, at any time following ten (10) days from the
date on which Landlord makes a written demand on Tenant to effect such repair
and maintenance, may enter upon the Premises and make such repairs and/or
maintenance, and upon completion thereof, Tenant agrees to pay to Landlord as
additional rent, Landlord's costs for making such repairs plus an amount not to
exceed ten percent (10%) of such costs for overhead, within ten (10) days of
receipt from Landlord of a written itemized bill therefor. Any amounts not
reimbursed by Tenant within such ten (10) day period will bear interest at the
Interest Rate until paid by Tenant.
15. LIENS. Tenant agrees not to permit any mechanic's, materialmen's or other
liens to be filed against all or any part of the Development, the Building or
the Premises, nor against Tenant's leasehold interest in the Premises, by reason
of or in connection with any repairs, alterations, improvements or other work
contracted for or undertaken by Tenant or any other act or omission of Tenant or
Tenant's agents, employees, contractors, licensees or invitees. At Landlord's
request, Tenant agrees to provide Landlord with enforceable, conditional and
final lien releases (or other evidence reasonably requested by Landlord to
demonstrate protection from liens) from all persons furnishing labor and/or
materials at the Premises. Landlord will have the right at all reasonable times
to post on the Premises and record any notices of non-responsibility which it
deems necessary for protection from such liens. If any such liens are filed,
Tenant will, at its sole cost, promptly cause such liens to be released of
record or bonded so that it no longer affects title to the Development, the
Building or the Premises. If Tenant fails to cause any such liens to be so
released or bonded within ten (10) days after filing thereof, such failure will
be deemed a material breach by Tenant under this Lease without the benefit of
any additional notice or cure period described in Paragraph 22 below, and
Landlord may, without waiving its rights and remedies based on such breach, and
without releasing Tenant from any of its obligations, cause such liens to be
released by any means it shall deem proper, including payment in satisfaction of
the claims giving rise to such liens. Tenant agrees to pay to Landlord within
ten (10) days after receipt of invoice from Landlord, any sum paid by Landlord
to remove such liens, together with interest at the Interest Rate from the date
of such payment by Landlord.
16. ENTRY BY LANDLORD. Landlord and its employees and agents will at all
times have the right to enter the Premises to inspect the same, to supply
janitorial service and any other service to be provided by Landlord to Tenant
hereunder, to show the Premises to prospective purchasers or tenants, to post
notices of nonresponsibility, and/or to repair the Premises as permitted or
required by this Lease. In exercising such entry rights, Landlord will endeavor
to minimize, as reasonably practicable, the interference with Tenant's business,
and will provide Tenant with reasonable advance notice of any such entry (except
in emergency situations). Landlord may, in order to carry out such purposes,
erect scaffolding and other necessary structures where reasonably required by
the character of the work to be performed. Landlord will at all times have and
retain a key with which to unlock all doors in the Premises, excluding Tenant's
vaults and safes. Landlord will have the right to use any and all means which
Landlord may reasonably deem proper to open said doors in an emergency in order
to obtain entry to the Premises. Any entry to the Premises obtained by Landlord
by any of said means, or otherwise, will not be construed or deemed to be a
forcible or unlawful entry into the Premises, or an eviction of Tenant from the
Premises. Landlord will not be liable to Tenant for any damages or losses for
any entry by Landlord.
17. UTILITIES AND SERVICES. Throughout the Term of the Lease so long as the
Premises are occupied, Landlord agrees to furnish or cause to be furnished to
the Premises the utilities and services described in the Standards for Utilities
and Services attached hereto as Exhibit "F", subject to the conditions and in
-----------
accordance with the standards set forth therein. Landlord may require Tenant
from time to time to provide Landlord with a list of Tenant's employees and/or
agents which are authorized by Tenant to subscribe on behalf of Tenant for any
additional services which may be provided by Landlord. Any such additional
services will be provided to Tenant at Tenant's cost. Landlord will not be
liable to Tenant for any failure to furnish any of the foregoing utilities and
services if such failure is caused by all or any of the following: (i) accident,
breakage or repairs, (ii) strikes, lockouts or other labor disturbance or labor
dispute of any character; (iii) governmental regulation, moratorium or other
governmental action or inaction; (iv) inability despite the exercise of
reasonable diligence to obtain electricity, water or fuel; or (v) any other
cause beyond Landlord's reasonable control. In addition, in the event of any
stoppage or interruption of services or utilities, Tenant shall not be entitled
to any abatement or reduction of rent (except as expressly provided in
Subparagraphs 20(f) or 21(b) if such failure results from a damage or taking
described therein), no eviction of Tenant will result from such failure and
Tenant will not be relieved from the performance of any covenant or agreement in
this Lease because of such failure. In the event of any failure, stoppage or
interruption thereof, Landlord agrees to diligently attempt to resume service
promptly. If Tenant requires or utilizes more water or electrical power than is
considered reasonable or normal by Landlord, Landlord may at its option require
Tenant to pay, as additional rent, the cost, as fairly determined by Landlord,
incurred by such extraordinary usage and/or Landlord may install separate
meter(s) for the Premises, at Tenant's sole expense, and Tenant agrees
thereafter to pay all charges of the utility providing service and Landlord will
make an appropriate adjustment to Tenant's Operating Expenses calculation to
account for the fact Tenant is directly paying such metered charges, provided
Tenant will remain obligated to pay its proportionate share of Operating
Expenses subject to such adjustment.
18. ASSUMPTION OF RISK AND INDEMNIFICATION.
(a) Assumption of Risk. Tenant, as a material part of the consideration to
Landlord, hereby agrees that neither Landlord nor any Landlord Indemnified
Parties (as defined in Subparagraph 8(c) above) will be liable to Tenant for,
and Tenant expressly assumes the risk of and waives any and all claims it may
have against Landlord or any Landlord Indemnified Parties with respect to, (i)
any and all damage to property or injury to persons in, upon or about the
Premises, the Building or the Development resulting from any act or omission
(except for the grossly negligent or intentionally wrongful act or omission) of
Landlord, (ii) any such damage caused by other tenants or persons in or about
the Building or the Development, or caused by quasi-public work, (iii) any
damage to property entrusted to employees of the Building, (iv) any loss of or
damage to property by theft or otherwise, or (v) any injury or damage to persons
or property resulting from any casualty, explosion, falling plaster or other
masonry or glass, steam, gas, electricity, water or rain which may leak from any
part of the Building or any other portion of the Development or from the pipes,
appliances or plumbing works therein or from the roof, street or subsurface or
from any place, or resulting from dampness.
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Notwithstanding anything to the contrary contained in this Lease, neither
Landlord nor any Landlord Indemnified Parties will be liable for consequential
damages arising out of any loss of the use of the Premises or any equipment or
facilities therein by Tenant or any Tenant Parties or for interference with
light or other incorporeal hereditaments. Tenant agrees to give prompt notice to
Landlord in case of fire or accidents in the Premises or the Building, or of
defects therein or in the fixtures or equipment.
(b) Indemnification. Tenant will be liable for, and agrees to the maximum
extent permissible under applicable law, to promptly indemnify, protect, defend
and hold harmless Landlord and all Landlord Indemnified Parties, from and
against, any and all claims, damages, judgments, suits, causes of action,
losses, liabilities, penalties, fines, expenses and costs, including attorney's
fees and court costs (collectively, "Indemnified Claims"), arising or resulting
from (i) any act of omission of Tenant or any Tenant Parties (as defined in
Subparagraph 8(c) above); (ii) the use of the Premises and Common Areas and
conduct of Tenant's business by Tenant or any Tenant Parties, or any other
activity, work or thing done, permitted or suffered by Tenant or any Tenant
Parties, in or about the Premises, the Building or elsewhere within the
Development; and/or (iii) any default by Tenant of any obligations on Tenant's
part to be performed under the terms of this Lease. In case any action or
proceeding is brought against Landlord or any Landlord Indemnified Parties by
reason of any such Indemnified Claims, Tenant, upon notice from Landlord, agrees
to promptly defend the same at Tenant's sole cost and expense by counsel
approved in writing by Landlord, which approval Landlord will not unreasonably
withhold.
(c) Survival; No Release of Insurers. Tenant's indemnification obligations
under Subparagraph 18(b) will survive the expiration or earlier termination of
this Lease. Tenant's covenants, agreements and indemnification obligation in
Subparagraphs 18(a) and 18(b) above, are not intended to and will not relieve
any insurance carrier of its obligations under policies required to be carried
by Tenant pursuant to the provisions of this Lease.
19. INSURANCE
(a) Tenant's Insurance. On or before the earlier to occur of (i) the
Commencement Date, or (ii) the date Tenant commences any work of any type in the
Premises pursuant to this Lease (which may be prior to the Commencement Date),
and continuing throughout the entire Term hereof and any other period of
occupancy, Tenant agrees to keep in full force and effect, at its sole cost and
expense, the following insurance;
(i) "All Risks" property insurance including at least the following perils:
fire and extended coverage, smoke damage, vandalism, malicious mischief,
sprinkler leakage (including earthquake sprinkler leakage). This insurance
policy must be upon all property owned by Tenant, for which Tenant is legally
liable, or which is installed at Tenant's expense, and which is located in the
Building including, without limitation, any Tenant Improvements which satisfy
the foregoing qualification and any Alterations, and all furniture, fittings,
installations, fixtures and any other personal property of Tenant, in an amount
not less than the full replacement cost thereof. If there is a dispute as to
full replacement cost, the decision of Landlord or any mortgagee of Landlord
will be presumptive.
(ii) One (1) year insurance coverage for business interruption and loss of
income and extra expense insuring the same perils described in Subparagraph
19(a)(i) above, in such amounts as will reimburse Tenant for any direct or
indirect loss of earnings attributable to any such perils including prevention
of access to the Premises, Tenant's parking areas or the Building as a result of
any such perils.
(iii) Commercial General Liability Insurance or Comprehensive General Liability
Insurance (on an occurrence form) insuring bodily injury, personal injury and
property damage including the following divisions and extensions of coverage:
Premises and Operations; Owners and Contractors protective; blanket contractual
liability (including coverage for Tenant's indemnity obligations under this
Lease); products and completed operations; liquor liability (if Tenant serves
alcohol on the Premises); and fire and water damage legal liability in an amount
sufficient to cover the replacement value of the Premises, including Tenant
Improvements, that are rented under the terms of this Lease. Such insurance must
have the following minimum limits of liability: bodily injury, personal injury
and property damage - $1,000,000 each occurrence, provided that if liability
coverage is provided by a Commercial General Liability policy the general
aggregate limit shall apply separately and in total to this location only (per
location general aggregate), and provided further, such minimum limits of
liability may be adjusted from year to year to reflect increases in coverages as
recommended by Landlord's insurance carrier as being prudent and commercially
reasonable for tenants of first class office buildings comparable to the
Building, rounded to the nearest five hundred thousand dollars.
(iv) Comprehensive Automobile Liability insuring bodily injury and property
damage from all owned, non-owned and hired vehicles, if any, with minimum limits
of liability of $1,000,000 per accident.
(v) Worker's Compensation as required by the laws of the State with the
following minimum limits of liability: Coverage A - statutory benefits;
Coverage B - $1,000,000 per accident and disease.
(vi) Any other form or forms of insurance as Tenant or Landlord or any
mortgagees of Landlord may reasonably require from time to time in form, in
amounts, and for insurance risks against which, a prudent tenant would protect
itself, but only to the extent coverage for such risks and amounts are available
in the insurance market at commercially acceptable rates. Landlord makes no
representation that the limits of liability required to be carried by Tenant
under the terms of this Lease are adequate to protect Tenant's interests and
Tenant should obtain such additional insurance or increased liability limits as
Tenant deems appropriate.
(b) Supplemental Tenant Insurance Requirements.
(i) All policies must be in a form reasonably satisfactory to Landlord and
issued by an insurer admitted to do business in the State.
(ii) All policies must be issued by insurers with a policyholder rating of "A"
and a financial rating of "X" in the most recent version of Best's Key Rating
Guide.
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(iii) All policies must contain a requirement to notify Landlord (and Landlord's
property manager and any mortgagees or ground lessors of Landlord who are named
as additional insureds, if any) in writing not less than thirty (30) days prior
to any material change, reduction in coverage, cancellation or other termination
thereof. Tenant agrees to deliver to Landlord, as soon as practicable after
placing the required insurance, but in any event within the time frame specified
in Subparagraph 19(a) above, certificate(s) of insurance and/or if required by
Landlord, certified copies of each policy evidencing the existence of such
insurance and Tenant's compliance with the provisions of this Paragraph 19,
Tenant agrees to cause replacement policies or certificates to be delivered to
Landlord not less than thirty (30) days prior to the expiration of any such
policy or policies. If any such initial or replacement policies or certificates
are not furnished within the time(s) specified herein. Tenant will be deemed to
be in material default under this Lease without the benefit of any additional
notice or cure period provided in Subparagraph 22(a)(iii) below, and Landlord
will have the right, but not the obligation, to procure such insurance as
Landlord deems necessary to protect Landlord's interests at Tenant's expense. If
Landlord obtains any insurance that is the responsibility of Tenant under this
Paragraph 19, Landlord agrees to deliver to Tenant a written statement setting
forth the cost of any such insurance and showing in reasonable detail the manner
in which it has been computed and Tenant agrees to promptly reimburse Landlord
for such costs as additional rent.
(iv) General Liability and Automobile Liability policies under Subparagraphs
19(a)(iii) and (iv) must name Landlord and Landlord's property manager (and at
Landlord's request, Landlords, mortgagees and ground lessors of which Tenant has
been informed in writing) as additional insureds and must also contain a
provision that the insurance afforded by such policy is primary insurance and
any insurance carried by Landlord and Landlord's property manager or Landlord's
mortgagees or ground lessors, if any, will be excess over and non-contributing
with Tenant's insurance.
(c) Tenant's Use. Tenant will not keep, use, sell or offer for sale in or upon
the Premises any article which may be prohibited by any insurance policy
periodically in force covering the Building or the Development Common Areas. If
Tenant's occupancy or business in, or on, the Premises, whether or not Landlord
has consented to the same,results in any increase in premiums for the insurance
periodically carried by Landlord with respect to the Building or the Development
Common Areas or results in the need for Landlord to maintain special or
additional insurance, Tenant agrees to pay Landlord the cost of any such
increase in premiums or special or additional coverage as additional rent within
ten (10) days after being billed therefor by Landlord. In determining whether
increased premiums are a result of Tenant's use of the Premises, a schedule
issued by the organization computing the insurance rate on the Building, the
Development Common Areas or the Tenant Improvements showing the various
components of such rate, will be conclusive evidence of the several items and
charges which make up such rate. Tenant agrees to promptly comply with all
reasonable requirements of the insurance authority or any present or future
insurer relating to the Premises.
(d) Cancellation of Landlord's Policies. If any of Landlord's insurance
policies are cancelled or cancellation is threatened or the coverage reduced or
threatened to be reduced in any way because of the use of the Premises or any
part thereof by Tenant or any assignee or subtenant of Tenant of by anyone
Tenant permits on the Premises and, if Tenant fails to remedy the condition
giving rise to such cancellation, threatened cancellation, reduction of
coverage, threatened reduction of coverage, increase in premiums, or threatened
increase in premiums, within forty-eight (48) hours after notice thereof, Tenant
will be deemed to be in material default of this Lease and Landlord may, at its
option, either terminate this Lease or enter upon the Premises and attempt to
remedy such condition, and Tenant shall promptly pay Landlord the reasonable
costs of such remedy as additional rent. If Landlord is unable, or elects not to
remedy such condition, then Landlord will have all of the remedies provided for
in this Lease in the event of a default by Tenant.
(e) Waiver of Subrogation. Tenant's property insurance shall contain a clause
whereby the insurer waives all rights of recovery by way of subrogation against
Landlord. Tenant shall also obtain and furnish evidence to Landlord of the
waiver by Tenant's worker's compensation insurance carrier of all rights of
recovery by way of subrogation against Landlord.
20. DAMAGE OR DESTRUCTION.
(a) Partial Destruction. If the Premises or the Building are damaged by fire or
other casualty to an extent not exceeding twenty-five percent (25%) of the full
replacement cost thereof, and Landlord's contractor reasonably estimates in a
writing delivered to Landlord and Tenant that the damage thereto may be
repaired, reconstructed or restored to substantially its condition immediately
prior to such damage within one hundred eighty (180) days from the date of such
casualty, and Landlord will receive insurance proceeds sufficient to cover the
costs of such repairs, reconstruction and restoration (including proceeds from
Tenant and/or Tenant's insurance which Tenant is required to deliver to Landlord
pursuant to Subparagraph 20(c) below to cover Tenant's obligation for the costs
of repair, reconstruction and restoration of any portion of the Tenant
Improvements and any Alterations for which Tenant is responsible under this
Lease), then Landlord agrees to continue and proceed diligently with the work of
repair, reconstruction and restoration and this Lease will continue in full
force and effect.
(b) Substantial Destruction. Any damage or destruction to the Premises or the
Building which Landlord is not obligated to repair pursuant to Subparagraph
20(a) above will be deemed a substantial destruction. In the event of a
substantial destruction, Landlord may elect to either (i) repair, reconstruct
and restore the portion of the Building or the premises damaged by such
casualty, in which case this Lease will continue in full force and effect,
subject to Tenant's termination right contained in Subparagraph 20(d) below, or
(ii) terminate this Lease effective as of the date which is thirty (30) days
after Tenant's receipt of Landlord's election to so terminate.
(c) Notice. Under any of the conditions of Subparagraph 20(a) or (b) above,
Landlord agrees to give written notice to Tenant of its intention to repair or
terminate, as permitted in such paragraphs, within the earlier of sixty (60)
days after the occurrence of such casualty, or fifteen (15) days after
Landlord's receipt of the estimate from Landlord's contractor (the applicable
time period to be referred to herein as the "Notice Period").
(d) Tenant's Termination Rights. If Landlord elects to repair, reconstruct and
restore pursuant to Subparagraph 20(b)(i) hereinabove, and if Landlord's
contractor estimates that as a result of such damage, Tenant cannot be given
reasonable use of and access to the Premises within three hundred sixty-five
(365) days after the date of such damage, then Tenant may terminate this Lease
effective upon delivery of written notice to Landlord within ten (10) days after
Landlord delivers notice to Tenant of its election to so repair, reconstruct or
restore.
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(e) Tenant's Costs and Insurance Proceeds. In the event of any damage or
destruction of all or any part of the Premises, Tenant agrees to immediately (i)
notify Landlord thereof, and (ii) deliver to Landlord all property insurance
proceeds received by Tenant with respect to any Tenant Improvements installed by
or at the cost of Tenant and any Alterations, but excluding proceeds for
Tenant's furniture, fixtures, equipment and other personal property, whether or
not this Lease is terminated as permitted in this Paragraph 20, and Tenant
hereby assigns to Landlord all rights to receive such insurance proceeds. If,
for any reason (including Tenant's failure to obtain insurance for the full
replacement cost of any Tenant Improvements installed by or at the cost of
Tenant and any Alterations from any and all casualties), Tenant fails to receive
insurance proceeds covering the full replacement cost of any Tenant Improvements
installed by or at the cost of Tenant and any Alterations which are damaged,
Tenant will be deemed to have self-insured the replacement cost of such items,
and upon any damage or destruction thereto, Tenant agrees to immediately pay to
Landlord the full replacement cost of such items, less any insurance proceeds
actually received by Landlord from Landlord's or Tenant's insurance with respect
to such items.
(f) Abatement of Rent. In the event of any damage, repair, reconstruction
and/or restoration described in this Paragraph 20, rent will be abated or
reduced, as the case may be, from the date of such casualty, in proportion to
the degree to which Tenant's use of the Premises is impaired during such period
of repair until such use is restored. Except for abatement of rent as provided
hereinabove, Tenant will not be entitled to any compensation or damages for loss
of, or interference with, Tenant's business or use or access of all or any part
of the Premises or for lost profits or any other consequential damages of any
kind or nature, which result from any such damage, repair, reconstruction or
restoration.
(g) Inability to Complete. Notwithstanding anything to the contrary contained
in this Paragraph 20, if Landlord is obligated or elects to repair, reconstruct
and/or restore the damaged portion of the Building or the Premises pursuant to
Subparagraph 20(a) or 20(b)(i) above, but is delayed from completing such
repair, reconstruction and/or restoration beyond the date which is one hundred
eighty (180) days after the date estimated by Landlord's contractor for
completion thereof by reason of any causes (other than delays caused by Tenant,
its subtenants, employees, agents or contractors) which are beyond the
reasonable control of Landlord as described in Paragraph 33, then either
Landlord or Tenant may elect to terminate this Lease upon ten (10) days prior
written notice given to the other after the expiration of such one hundred
eighty (180) day period.
(h) Damage Near End of Term. Landlord and Tenant shall each have the right to
terminate this Lease if any damage to the Premises or the Building occurs during
the last twelve (12) months of the Term of this Lease where Landlord's
contractor estimates in a writing delivered to Landlord and Tenant that the
repair, reconstruction or restoration of such damage cannot be completed within
sixty (60) days after the date of such casualty. If either party desires to
terminate this Lease under this Subparagraph (h), it shall provide written
notice to the other party of such election within ten (10) days after receipt of
Landlord's contractor's repair estimates.
(i) Waiver of Termination Right. Landlord and Tenant agree that the foregoing
provisions of this Paragraph 20 are to govern their respective rights and
obligations in the event of any damage or destruction and supersede and are in
lieu of the provisions of any applicable law, statute, ordinance, rule,
regulation, order or ruling now or hereafter in force which provide remedies for
damage or destruction of leased premises (including, without limitation, to the
extent the Premises are located in California, the provisions of California
Civil Code Section 1932, Subsection 2, and Section 1933, Subsection 4 and any
successor statute or laws of a similar nature).
(j) Termination. Upon any termination of this Lease under any of the provisions
of this Paragraph 20, the parties will be released without further obligation to
the other from the date possession of the Premises is surrendered to Landlord
except for items which have accrued and are unpaid as of the date of termination
and matters which are to survive any termination of this Lease as provided in
this Lease.
21. EMINENT DOMAIN.
(a) Substantial Taking. If the whole of the Premises, or such part thereof as
shall substantially interfere with Tenant's use and occupancy of the Premises,
as contemplated by this Lease, is taken for any public or quasi-public purpose
by any lawful power or authority by exercise of the right of appropriation,
condemnation or eminent domain, or sold to prevent such taking, either party
will have the right to terminate this Lease effective as of the date possession
is required to be surrendered to such authority.
(b) Partial Taking; Abatement of Rent. In the event of a taking of a portion of
the Premises which does not substantially interfere with Tenant's use and
occupancy of the Premises, then, neither party will have the right to terminate
this Lease and Landlord will thereafter proceed to make a functional unit of the
remaining portion of the Premises (but only to the extent Landlord receives
proceeds therefor from the condemning authority), and rent will be abated with
respect to the part of the Premises which Tenant is deprived of on account of
such taking. Notwithstanding the immediately preceding sentence to the contrary,
if any part of the Building or the Development is taken (whether or not such
taking substantially interferes with Tenant's use of the Premises), Landlord may
terminate this Lease upon thirty (30) days prior written notice to Tenant if
Landlord also terminates the leases of the other tenants of the Building which
are leasing comparably sized space for comparable lease terms.
(c) Condemnation Award. In connection with any taking of the Premises or the
Building, Landlord will be entitled to receive the entire amount of any award
which may be made or given in such taking or condemnation, without deduction or
apportionment for any estate or interest of Tenant, it being expressly
understood and agreed by Tenant that no portion of any such award will be
allowed or paid to Tenant for any so-called bonus or excess value of this Lease,
and such bonus or excess value will be the sole property of Landlord. Tenant
agrees not to assert any claim against Landlord or the taking authority for any
compensation because of such taking (including any claim for bonus or excess
value of this Lease); provided, however, if any portion of the Premises is
taken, Tenant will have the right to recover from the condemning authority (but
not from Landlord) any compensation as may be separately awarded or recoverable
by Tenant for the taking of Tenant's furniture, fixtures, equipment and other
personal property within the Premises, for Tenant's relocation expenses, and for
any loss of goodwill or other damage to Tenant's business by reason of such
taking.
(d) Temporary Taking. In the event of taking of the Premises or any part
thereof for temporary use, (i) this Lease will remain unaffected thereby and
rent will not abate, and (ii) Tenant will be entitled to receive such portion or
portions of any award made for
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such use with respect to the period of the taking which is within the Term,
provided that if such taking remains in force at the expiration or earlier
termination of this Lease, Tenant will then pay to Landlord a sum equal to the
reasonable cost of performing Tenant's obligations under Paragraph 11 with
respect to surrender of the Premises and upon such payment Tenant will be
excused from such obligations. For purpose of this Subparagraph 21(d), a
temporary taking shall be defined as a taking for a period of ninety (90) days
or less.
22. DEFAULTS AND REMEDIES.
(a) Defaults. The occurrence of any one or more of the following events will
be deemed a default by Tenant:
(i) The abandonment of the Premises by Tenant, which for purposes of this
Lease means any absence by Tenant from the Premises for five (5) business days
or longer while in default of any other provision of this Lease and, with
respect to ground floor space only, any vacation of the Premises, which for
purposes of this Lease means any absence by Tenant from the Premises for thirty
(30) days or longer whether or not Tenant is in default under any provision of
this Lease.
(ii) The failure by Tenant to make any payment of rent or additional rent or
any other payment required to be made by Tenant hereunder, as and when due,
where such failure continues for a period of three (3) days after written notice
thereof from Landlord to Tenant; provided, however, that any such notice will be
in lieu of, and not in addition to, any notice required under applicable law
(including, without limitation, to the extent the Premises are located in
California, the provisions of California Code of Civil Procedure Section 1161
regarding unlawful detainer actions or any successor statute or law of a similar
nature).
(iii) The failure by Tenant to observe or perform any of the express or implied
covenants or provisions of this Lease to be observed or performed by Tenant,
other than as specified in Subparagraph 22(a)(i) or (ii) above, where such
failure continues for a period of ten (10) days after written notice thereof
from Landlord to Tenant. The provisions of any such notice will be in lieu of,
and not in addition to, any notice required under applicable law (including,
without limitation, to the extent the Premises are located in California,
California Code of Civil Procedure Section 1161 regarding unlawful detainer
actions and any successor statue or similar law). If the nature of Tenant's
default is such that more than ten (10) days are reasonably required for its
cure, then Tenant will not be deemed to be in default if Tenant, with Landlord's
concurrence, commences such cure within such ten (10) day period and thereafter
diligently prosecutes such cure to completion.
(iv) (A) The making by Tenant of any general assignment for the benefit of
creditors, (B) the filing by or against Tenant of a petition to have Tenant
adjudged a bankrupt or a petition for reorganization or arrangement under any
law relating to bankruptcy (unless, in the case of a petition filed against
Tenant, the same is dismissed within sixty (60) days); (C) the appointment of a
trustee or receiver to take possession of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease, where possession
is not restored to Tenant within thirty (30) days; or (D) the attachment,
execution or other judicial seizure of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease where such seizure
is not discharged within thirty (30) days.
(b) Landlord's Remedies; Termination. In the event of any default by Tenant,
in addition to any other remedies available to Landlord at law or in equity
under applicable law (including, without limitation, to the extent the Premises
are located in California, the remedies of Civil Code Section 1951.4 and any
successor statute or similar law), Landlord will have the immediate right and
option to terminate this Lease and all rights of Tenant hereunder. If Landlord
elects to terminate this Lease then, to the extent permitted under applicable
law, Landlord may recover from Tenant (i) The worth at the time of award of any
unpaid rent which had been earned at the time of such termination; plus (ii) the
worth at the time of award of the amount by which the unpaid rent which would
have been earned after termination until the time of award exceeds that amount
of such rent loss that Tenant proves could have been reasonably avoided; plus
(iii) the worth at the time of award of the amount by which the unpaid rent for
the balance of the Term after the time of award exceeds the amount of such rent
loss that Tenant proves could be reasonably avoided; plus (iv) any other amount
necessary to compensate Landlord for all the detriment proximately caused by
Tenant's failure to perform its obligations under this Lease or which, in the
ordinary course of things, results therefrom including, but not limited to:
attorneys' fees and costs; brokers' commissions; the costs of refurbishment,
alterations, renovation and repair of the Premises, and removal (including the
repair of any damage caused by such removal) and storage (or disposal) of
Tenant's personal property, equipment, fixtures, Alterations, the Tenant
Improvements and any other items which Tenant is required under this Lease to
remove but does not remove, as well as the unamortized value of any free rent,
reduced rent, free parking, reduced rate parking and any Tenant Improvement
Allowance or other costs or economic concessions provided, paid, granted or
incurred by Landlord pursuant to this Lease. The unamortized value of such
concessions shall be determined by taking the total value of such concessions
and multiplying such value by a fraction, the numerator of which is the number
of months of the Lease Term not yet elapsed as of the date on which the Lease is
terminated, and the denominator of which is the total number of months of the
Lease Term. As used in Subparagraphs 22(b)(i) and (ii) above, the "worth at the
time of award" is computed by allowing interest at the Interest Rate. As used in
Subparagraph 22(b)(iii) above, the "worth at the time of award" is computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of award plus one percent (1%).
(c) Landlord's Remedies; Re-Entry Rights. In the event of any default by
Tenant, in addition to any other remedies available to Landlord under this
Lease, at law or in equity, Landlord will also have the right, with or without
terminating this Lease, to re-enter the Premises and remove all persons and
property from the Premises; such property may be removed and stored in a public
warehouse or elsewhere and/or disposed of at the sole cost and expense of and
for the account of Tenant in accordance with the provisions of Subparagraph
13(h) of this Lease or any other procedures permitted by applicable law. No
re-entry or taking possession of the Premises by Landlord pursuant to this
Subparagraph 22(c) will be construed as an election to terminate this Lease
unless a written notice of such intention is given to Tenant or unless the
termination thereof is decreed by a court of competent jurisdiction.
(d) Landlord's Remedies; Re-Letting. In the event of the vacation or
abandonment of the Premises by Tenant or in the event that Landlord elects to
re-enter the Premises or takes possession of the Premises pursuant to legal
proceeding or pursuant to any notice provided by law, then if Landlord does not
elect to terminate this Lease, Landlord may from time to time, without
terminating this Lease, either recover all rent as it becomes due or relet the
Premises or any part thereof on terms and conditions as Landlord in its sole and
absolute discretion may deem advisable with the right to make alterations and
repairs to the Premises in connection with
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such reletting. If Landlord elects to relet the Premises, then rents received
by Landlord from such reletting will be applied; first, to the payment of any
indebtedness other than rent due hereunder from Tenant to Landlord; second, to
the payment of any cost of such reletting; third, to the payment of the cost of
any alterations and repairs to the Premises incurred in connection with such
reletting; fourth, to the payment of rent due and unpaid hereunder and the
residue, if any, will be held by Landlord and applied to payment of future rent
as the same may become due and payable hereunder. Should that portion of such
rents received from such reletting during any month, which is applied to the
payment of rent hereunder, be less than the rent payable during that month by
Tenant hereunder, then Tenant agrees to pay such deficiency to Landlord
immediately upon demand therefor by Landlord. Such deficiency will be
calculated and paid monthly.
(e) Landlord's Remedies; Performance for Tenant. All covenants and agreements
to be performed by Tenant under any of the terms of this Lease are to be
performed by Tenant at Tenant's sole cost and expense and without any abatement
of rent. If Tenant fails to pay any sum of money owed to any party other than
Landlord, for which it is liable under this Lease, or if Tenant fails to perform
any other act on its part to be performed hereunder, and such failure
continues for ten (10) days after notice thereof by Landlord, Landlord may,
without waiving or releasing Tenant from its obligations, but shall be obligated
to, make any such payment or perform any such other act to be made or performed
by Tenant. Tenant agrees to reimburse Landlord upon demand for all sums so paid
by Landlord and all necessary incidental costs, together with interest thereon
at the Interest Rate, from the date of such payment by Landlord until reimbursed
by Tenant. This remedy shall be in addition to any other right or remedy of
Landlord set forth in this Paragraph 22.
(f) Late Payment. If Tenant fails to pay any installment of rent within five
(5) days of when due or if Tenant fails to make any other payment for which
Tenant is obligated under this Lease within five (5) days of when due, such
late amount will accrue interest at the Interest Rate and Tenant agrees to pay
Landlord as additional rent such interest on such amount from the date such
amount becomes due until such amount is paid. In addition, Tenant agrees to pay
to Landlord concurrently with such late payment amount, as additional rent, a
late charge equal to five percent (5%) of the amount due to compensate Landlord
for the extra costs Landlord will incur as a result of such late payment. The
parties agree that (i) it would be impractical and extremely difficult to fix
the actual damage Landlord will suffer in the event of Tenant's late payment,
(ii) such interest and late charge represents a fair and reasonable estimate of
the detriment that Landlord will suffer by reason of late payment by Tenant, and
(iii) the payment of interest and late charges are distinct and separate in that
the payment of interest is to compensate Landlord for the use of Landlord's
money by Tenant, while the payment of late charges is to compensate Landlord for
Landlord's processing, administrative and other costs incurred by Landlord as a
result of Tenant's delinquent payments. Acceptance of any such interest and late
charge will not constitute a waiver of the Tenant's default with respect to the
overdue amount, or prevent Landlord from exercising any of the other rights and
remedies available to Landlord. If Tenant incurs a late charge more than three
(3) times in any period of twelve (12) months during the Lease Term, then,
notwithstanding that Tenant cures the late payments for which such late charges
are imposed, Landlord will have the right to require Tenant thereafter to pay
all installments of Monthly Base Rent quarterly in advance throughout the
remainder of the Lease Term.
(g) Landlord's Security Interest. Tenant hereby grants to Landlord a lien and
security interest on all property of Tenant now or hereafter placed in or upon
the Premises including, but not limited to, all fixtures, machinery, equipment,
furnishings and other articles of personal property, and all proceeds of the
sale or other disposition of such property (collectively, the "Collateral") to
secure the payment of all rent to be paid by Tenant pursuant to this Lease.
Such lien and security interest shall be in addition to any landlord's lien
provided by law. This Lease shall constitute a security agreement under the
Commercial Code of the State so that Landlord shall have and may enforce a
security interest in the Collateral. Tenant agrees to execute as debtor and
deliver such financing statement or statements and any further documents as
Landlord may now or hereafter reasonably request to protect such security
interest pursuant to such code. Landlord may also at any time file a copy of
this Lease as a financing statement. Landlord, as secured party, shall be
entitled to all rights and remedies afforded as secured party under such code,
which rights and remedies shall be in addition to Landlord's liens and rights
provided by law or by the other terms and provisions of this Lease.
(h) Rights and Remedies Cumulative. All rights, options and remedies of
Landlord contained in this Lease will be construed and held to be cumulative,
and no one of them will be exclusive of the other, and Landlord shall have the
right to pursue any one or all of such remedies or any other remedy or relief
which may be provided by law or in equity, whether or not stated in this Lease.
Nothing in this Paragraph 22 will be deemed to limit or otherwise affect
Tenant's indemnification of Landlord pursuant to any provision of this Lease.
23. LANDLORD'S DEFAULT. Landlord will not be in default in the performance of
any obligation required to be performed by Landlord under this Lease unless
Landlord fails to perform such obligation within thirty (30) days after the
receipt of written notice from Tenant specifying in detail Landlord's failure to
perform; provided however, that if the nature of Landlord's obligation is such
that more than thirty (30) days are required for performance, then Landlord will
not be deemed in default if it commences such performance within such thirty
(30) day period and thereafter diligently pursues the same to completion. Upon
any default by Landlord, Tenant may exercise any of its rights provided at law
or in equity, subject to the limitations on liability set forth in Paragraph 35
of this Lease.
24. ASSIGNMENT AND SUBLETTING.
(a) Restriction on Transfer. Except as expressly provided in this
Paragraph 24, Tenant will not, either voluntarily or by operation of law, assign
or encumber this Lease or any interest herein or sublet the Premises or any part
thereof, or permit the use or occupancy of the Premises by any party other than
Tenant (any such assignment, encumbrance, sublease or the like will sometimes be
referred to as a "Transfer"), without the prior written consent of Landlord,
which consent Landlord will not unreasonably withhold.
(b) Corporate and Partnership Transfers. For purposes of this Paragraph 24,
if Tenant is a corporation, partnership or other entity, any transfer,
assignment, encumbrance or hypothecation of twenty-five (25%) or more
(individually or in the aggregate) of any stock or other ownership interest in
such entity, and/or any transfer, assignment, hypothecation or encumbrance of
any controlling ownership or voting interest in such entity, will be deemed a
Transfer and will be subject to all of the restrictions and provisions contained
in this Paragraph 24. Notwithstanding the foregoing, the immediately preceding
sentence will not apply to
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any transfers of stock of Tenant if Tenant is a publicly-held corporation and
such stock is transferred publicly over a recognized security exchange or
over-the-counter market.
(c) Permitted Controlled Transfers. Notwithstanding the provisions of this
Paragraph 24 to the contrary. Tenant may assign this Lease or sublet the
Premises or any portion thereof ("Permitted Transfer"), without Landlord's
consent and without extending any sublease termination option to Landlord, to
any parent, subsidiary or affiliate corporation which controls, is controlled by
or is under common control with Tenant, or to any corporation resulting from a
merger or consolidation with Tenant, or to any person or entity which acquires
all the assets of Tenant's business as a going concern, provided that: (i) at
least twenty (20) days prior to such assignment or sublease, Tenant delivers to
Landlord the financial statements and other financial and background information
of the assignee or sublessee described in Subparagraph 24(d) below, (ii) if an
assignment, the assignee assumes, in full, the obligations of Tenant under this
Lease (or if a sublease, the sublessee of a portion of the Premises or Term
assumes, in full, the obligations of Tenant with respect to such portion), (iii)
the financial net worth of the assignee or sublessee as of the time of the
proposed assignment or sublease equals or exceeds that of Tenant as of the date
of execution of this Lease; (iv) Tenant remains fully liable under this Lease;
and (v) the use of the Premises under Paragraph 8 remains unchanged.
(d) Transfer Notice. If Tenant desires to effect a Transfer, then at least
thirty (30) days prior to the date when Tenant desires the Transfer to be
effective (the "Transfer Date"), Tenant agrees to give Landlord a notice (the
"Transfer Notice"), stating the name, address and business of the proposed
assignee, sublessee or other transferee (sometimes referred to hereinafter as
"Transferee"), reasonable information (including references) concerning the
character, ownership, and financial condition of the proposed Transferee, the
Transfer Date, any ownership or commercial relationship between Tenant and the
proposed Transferee, and the consideration and all other material terms and
conditions of the proposed Transfer, all in such detail as Landlord may
reasonably require. If Landlord reasonably requests additional detail, the
Transfer Notice will not be deemed to have been received until Landlord receives
such additional detail, and Landlord may withhold consent to any Transfer until
such information is provided to it.
(e) Landlord's Options. Within fifteen (15) days of Landlord's receipt of any
Transfer Notice, and any additional information requested by Landlord concerning
the proposed Transferee's financial responsibility, Landlord will elect to do
one of the following (i) consent to the proposed Transfer, (ii) refuse such
consent, which refusal shall be on reasonable grounds including, without
limitation, those set forth in Subparagraph 24(f) below, or (iii) terminate this
Lease as to all or such portion of the Premises which is proposed to be sublet
or assigned and recapture all or such portion of the Premises for reletting by
Landlord.
(f) Reasonable Disapproval. Landlord and Tenant hereby acknowledge that
Landlord's disapproval of any proposed Transfer pursuant to Subparagraph 24(e)
will be deemed reasonably withheld if based upon any reasonable factor,
including, without limitation, any or all of the following factors: (i) if the
Building is less than eighty percent (80%) occupied, if the net effective rent
payable by the Transferee (adjusted on a rentable square foot basis) is less
than the net effective rent then being quoted by Landlord for new leases in the
Building for comparable size space for a comparable period of time; (ii) the
proposed Transferee is a governmental entity; (iii) the portion of the Premises
to be sublet or assigned is irregular in shape with inadequate means of ingress
and egress; (iv) the use of the Premises by the Transferee (A) is not permitted
by the use provisions in Paragraph 8 hereof, (B) violates any exclusive use
granted by Landlord to another tenant in the Building, or (C) otherwise poses a
risk of increased liability to Landlord; (v) the Transfer would likely result in
a significant and inappropriate increase in the use of the parking areas or
Development Common Areas by the Transferee's employees or visitors, and/or
significantly increase the demand upon utilities and services to be provided by
Landlord to the Premises; (vi) the Transferee does not have the financial
capability to fulfill the obligations imposed by the Transfer and this Lease;
(vii) the Transferee is not in Landlord's reasonable opinion consistent with
Landlord's desired tenant mix; or (viii) the Transferee poses a business or
other economic risk which Landlord deems unacceptable.
(g) Additional Conditions. A condition to Landlord's consent to any Transfer of
this Lease will be the delivery to Landlord of a true copy of the fully executed
instrument of assignment, sublease, transfer or hypothecation, and, in the case
of an assignment, the delivery to Landlord of an agreement executed by the
Transferee in form and substance reasonably satisfactory to Landlord, whereby
the Transferee assumes and agrees to be bound by all of the terms and provisions
of this Lease and to perform all of the obligations of Tenant hereunder. As a
condition for granting its consent to any assignment or sublease, Landlord may
require that the assignee or sublessee remit directly to Landlord on a monthly
basis, all monies due to Tenant by said assignee or sublesee. As a condition to
Landlord's consent to any sublease, such sublease must provide that it is
subject and subordinate to this Lease and to all mortgages; that Landlord may
enforce the provisions of the sublease, including collection of rent; that in
the event of termination of this Lease for any reason, including without
limitation a voluntary surrender by Tenant, or in the event of any reentry or
repossession of the Premises by Landlord, Landlord may, at its option, either
(i) terminate the sublease, or (ii) take over all of the right, title and
interest of Tenant, as sublesse under such sublease, in which case such
sublessee will attorn to Landlord, but that nevertheless Landlord will not (1)
be liable for any previous act or omission of Tenant under such sublease, (2) be
subject to any defense or offset previously accrued in favor of the sublessee
against Tenant, or (3) be bound by any previous modification of any sublease
made without Landlord's written consent, or by any previous prepayment by
sublessee of more than one month's rent.
(h) Excess Rent. If Landlord consents to any assignment of this Lease, Tenant
agrees to pay to Landlord, as additional rent, all sums and other consideration
payable to and for the benefit of Tenant by the assignee, on account of the
assignment,as and when such sums and other consideration are due and payable by
the assignee to or for the benefit of Tenant (or, if Landlord so requires, and
without any release of Tenant's liability for the same, Tenant agrees to
instruct the assignee to pay such sums and other consideration directly to
Landlord). If for any sublease, Tenant receives rent or other consideration,
either initially or over the term of the sublease, in excess of the rent fairly
allocable to the portion of the Premises which is subleased based on square
footage. Tenant agrees to pay to Landlord as additional rent the excess of each
such payment of rent or other consideration received by Tenant promptly after
its receipt. In calculating excess rent or other consideration which may be
payable to Landlord under this paragraph, Tenant will be entitled to deduct
commercially reasonable third party brokerage commissions and attorneys' fees
and other amounts reasonably and actually expended by Tenant in connection with
such assignment or subletting if acceptable written evidence of such
expenditures is provided to Landlord.
(i) Termination Rights. If Tenant requests Landlord's consent to any assignment
or subletting of all or a portion of the Premises, Landlord will have the right,
as provided in Subparagraph 24(e), to terminate this Lease as to all or such
portion of the Premises which is proposed to be sublet or assigned effective as
of the date Tenant proposes to sublet or assign all or less than all of
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the Premises. Landlord's right to terminate this Lease as to less than all of
the Premises proposed to be sublet or assigned will not terminate as to any
future additional subletting or assignment as a result of Landlord's consent to
a subletting of less than all of the Premises or Landlord's failure to exercise
its termination right with respect to any subletting or assignment. Landlord
will exercise such termination right, if at all, by giving written notice to
Tenant within thirty (30) days of receipt by Landlord of the financial
responsibility information required by this Paragraph 24. Tenant understands and
acknowledges that the option, as provided in this Paragraph 24, to terminate
this Lease as to all or such portion of the Premises which is proposed to be
sublet or assigned rather than approve the subletting or assignment of all or a
portion of the Premises, is a material inducement for Landlord's agreeing to
lease the Premises to Tenant upon the terms and conditions herein set forth. In
the event of any such termination with respect to less than all of the Premises,
the cost of segregating the recaptured space from the balance of the Premises
will be paid by Tenant and Tenant's future monetary obligations under this Lease
will be reduced proportionately on a square footage basis to correspond to the
balance of the Premises which Tenant continues to lease.
(j) No Release. No Transfer will release Tenant of Tenant's obligations under
this Lease or alter the primary liability of Tenant to pay the rent and to
perform all other obligations to be performed by Tenant hereunder. Landlord may
require that any Transferee remit directly to Landlord on a monthly basis, all
monies due Tenant by said Transferee. However, the acceptance of rent by
Landlord from any other person will not be deemed to be a waiver by Landlord of
any provision hereof. Consent by Landlord to one Transfer will not be deemed
consent to any subsequent Transfer. In the event of default by any Transferee of
Tenant or any successor of Tenant in the performance of any of the terms hereof,
Landlord may proceed directly against Tenant without the necessity of exhausting
remedies against such Transferee or successor. Landlord may consent to
subsequent assignments of this Lease or sublettings or amendments or
modifications to this Lease with assignees of Tenant, without notifying Tenant,
or any successor of Tenant, and without obtaining its or their consent thereto
and any such actions will not relieve Tenant of liability under this Lease.
(k) Administrative and Attorneys' Fees. If Tenant effects a Transfer or
requests the consent of Landlord to any Transfer (whether or not such Transfer
is consummated), then, upon demand, Tenant agrees to pay Landlord a
non-refundable administrative fee of Two Hundred Fifty Dollars ($250.00), plus
any reasonable attorneys' and paralegal fees incurred by Landlord in connection
with such Transfer or request for consent (whether attributable to Landlord's
in-house attorneys or paralegals or otherwise) not to exceed One Hundred Dollars
($100.00) for each one thousand (1,000) rentable square feet of area contained
within the Premises or portion thereof to be assigned or sublet. Acceptance of
the Two Hundred Fifty Dollar ($250.00) administrative fee and/or reimbursement
of Landlord's attorneys' and paralegal fees will in no event obligate Landlord
to consent to any proposed Transfer.
25. SUBORDINATION. Without the necessity of any additional document being
executed by Tenant for the purpose of effecting a subordination, and at the
election of Landlord or any mortgagee or beneficiary with a deed of trust
encumbering the Building and/or the Development, or any lessor of a ground or
underlying lease with respect to the Building, this Lease will be subject and
subordinate at all times to: (i) all ground leases or underlying leases which
may now exist or hereafter be executed affecting the Building; and (ii) the lien
of any mortgage or deed of trust which may now exist or hereafter be executed
for which the Building, the Development or any leases thereof, or Landlord's
interest and estate in any of said items, is specified as security.
Notwithstanding the foregoing, Landlord reserves the right to subordinate any
such ground leases or underlying leases or any such liens to this Lease. If any
such ground lease or underlying lease terminates for any reason or any such
mortgage or deed of trust is foreclosed or conveyance in lieu of foreclosure is
made for any reason, at the election of Landlord's successor in interest, Tenant
agrees to attorn to and become the tenant of such successor in which event
Tenant's right to possession of the Premises will not be disturbed as long as
Tenant is not in default under this Lease. Tenant hereby waives its rights under
any law which gives or purports to give Tenant any right to terminate or
otherwise adversely affect this Lease and the obligations of Tenant hereunder in
the event of any such foreclosure proceeding or sale. Tenant covenants and
agrees to execute and deliver, upon demand by Landlord and in the form
reasonably required by Landlord, any additional documents evidencing the
priority or subordination of this Lease and Tenant's attornment agreement with
respect to any such ground lease or underlying leases or the lien of any such
mortgage or deed of trust. If Tenant fails to sign and return any such documents
within ten (10) days of receipt, Tenant will be in default hereunder.
26. ESTOPPEL CERTIFICATE.
(a) Tenant's Obligations. Within ten (10) days following any written request
which Landlord may make from time to time, Tenant agrees to execute and deliver
to Landlord a statement, in a form substantially similar to the form of Exhibit
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"G" attached hereto or as may reasonably be required by Landlord's lender,
-
certifying: (i) the date of commencement of this Lease; (ii) the fact that this
Lease is unmodified and in full force and effect (or, if there have been
modifications, that this Lease is in full force and effect, and stating the date
and nature of such modifications); (iii) the date to which the rent and other
sums payable under this Lease have been paid; (iv) that there are no current
defaults under this Lease by either Landlord or Tenant except as specified in
Tenant's statement; and (v) such other matters reasonably requested by Landlord.
Landlord and Tenant intend that any statement delivered pursuant to this
Paragraph 26 may be relied upon by any mortgagee, beneficiary, purchaser or
prospective purchaser of the Building or any interest therein.
(b) Tenant's Failure to Deliver. Tenant's failure to deliver such statement
within such time will be conclusive upon Tenant (i) that this Lease is in full
force and effect, without modification except as may be represented by
Landlord, (ii) that there are no uncured defaults in Landlord's performance, and
(iii) that not more than one (1) month's rent has been paid in advance. Without
limiting the foregoing, if Tenant fails to deliver any such statement within
such ten (10) day period, Landlord may deliver to Tenant an additional request
for such statement and Tenant's failure to deliver such statement to Landlord
within ten (10) days after delivery of such additional request will constitute a
default under this Lease. Tenant agrees to indemnify and protect Landlord from
and against any and all claims, damages, losses, liabilities and expenses
(including attorneys' fees and costs) attributable to any failure by Tenant to
timely deliver any such estoppel certificate to Landlord as required by this
Paragraph 26.
27. BUILDING PLANNING. If Landlord requires the Premises for use in conjunction
with another suite or for other reasons connected with the planning program for
the Building, Landlord will have the right, upon sixty (60) days prior written
notice to Tenant, to move Tenant to other space in the Building of substantially
similar size as the Premises, and with tenant improvements of substantially
similar age, quality and layout as then existing in the Premises. Any such
relocation will be at Landlord's cost and expense, including the cost of
providing such substantially similar tenant improvements (but not any furniture
or personal property) and Tenant's reasonable moving, telephone installation and
stationary reprinting costs. If Landlord so relocates Tenant, the terms
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and conditions of this Lease will remain in full force and effect and apply to
the new space, except that (a) a revised Exhibit "A-O" will become part of this
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Lease and will reflect the location of the new space, (b) Paragraph 1 of this
Lease will be amended to include and state all correct data as to the new space,
(c) the new space will thereafter be deemed to be the "Premises", and (d) all
economic terms and conditions (e.g. rent, total Operating Expense Allowance,
etc.) will be adjusted on a per square foot basis based on the total number of
rentable square feet of area contained in the new space. Landlord and Tenant
agree to cooperate fully with one another in order to minimize the inconvenience
of Tenant resulting from any such relocation. However, if the new space does not
meet with Tenant's reasonable approval, Tenant will have the right to cancel
this Lease upon giving Landlord thirty (30) days notice within ten (10) days of
receipt of Landlord's relocation notification; provided, however, Landlord has
the right, by written notice to Tenant given within ten (10) days following
receipt of Tenant's cancellation notice to rescind Landlord's relocation notice,
in which event Landlord's relocation notice will be rescinded, Tenant's
cancellation notice will be cancelled and this Lease will remain in full force
and effect. If Tenant cancels this Lease pursuant to this Paragraph 27, Tenant
agrees to vacate Building and the Premises within thirty (30) days of its
delivery to Landlord of the notice of cancellation.
28. RULES AND REGULATIONS. Tenant agrees to faithfully observe and comply with
the "Rules and Regulations," a copy of which is attached hereto and incorporated
herein by this reference as Exhibit "H", and all reasonable and
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nondiscriminatory modifications thereof and additions thereto from time to time
put into effect by Landlord. Landlord will not be responsible to Tenant for the
violation or non-performance by any other tenant or occupant of the Building of
any of the Rules and Regulations.
29. MODIFICATIONS AND CURE RIGHTS OF LANDLORD'S MORTGAGEES AND LESSORS.
(a) Modifications. If, in connection with Landlord's obtaining or entering
into any financing or ground lease for any portion of the Building or the
Development, the lender or ground lessor requests modification to this Lease,
Tenant within ten (10) days after requests therefor, agrees to execute an
amendment to this Lease incorporating such modifications, provided such
modifications are reasonable and do not increase the obligations of Tenant under
this Lease or adversely affect the leasehold estate created by this Lease.
(b) Cure Rights. In the event of any default on the part of Landlord, Tenant
will give notice by registered or certified mail to any beneficiary of a deed of
trust or mortgage covering the Premises or ground lessor of Landlord whose
address had been furnished to Tenant, and Tenant agrees to offer such
beneficiary, mortgagee or ground lessor a reasonable opportunity to cure the
default (including with respect to any such beneficiary or mortgagee, time to
obtain possession of the Premises, subject to this Lease and Tenant's rights
hereunder, by power of sale or a judicial foreclosure, if such should prove
necessary to effect a sure).
30. DEFINITION OF LANDLORD. The term "Landlord," as used in this Lease, so far
as covenants or obligations on the part of Landlord are concerned, means and
includes only the owner and owners, at the time in question, of the fee title of
the Premises or the lessees under any ground lease, if any. In the event of any
transfer, assignment or other conveyance or transfers of any such title (other
than a transfer for security purposes only), Landlord herein named (and in case
of any subsequent transfers or conveyances, the then grantor) will be
automatically relieved from and after the date of such transfer, assignment or
conveyance of all liability as respects the performance of any covenants or
obligations on the part of Landlord contained in this Lease thereafter to be
performed, so long as the transferee assumes in writing all such covenants and
obligations of Landlord arising after the date of such transfer. Landlord and
Landlord's transferees and assignees have the absolute right to transfer all or
any portion of their respective title and interest in the Development, the
Building, the Premises and/or this Lease without the consent of Tenant, and such
transfer or subsequent transfer will not be deemed a violation on Landlord's
part of any of the terms and conditions of this Lease.
31. WAIVER. The waiver by either party of any breach of any term, covenant or
condtion herein contained will not be deemed to be a waiver of any subsequent
breach of the same or any other term, covenant or condition herein contained,
nor will any custom or practice which may develop between the parties in the
administration of the terms hereof be deemed a waiver of or in any way affect
the right of either party to insist upon performance in strict accordance with
said terms. The subsequent acceptance of rent or any other payment hereunder by
Landlord will not be deemed to be a waiver of any preceding breach by Tenant of
any term, covenant or condition of this Lease, other than the failure of Tenant
to pay the particular rent so accepted, regardless of Landlord's knowledge of
such preceding breach at the time of acceptance of such rent. No acceptance by
Landlord of a lesser sum than the basic rent and additional rent or other sum
then due will be deemed to be other than on account of the earliest installment
of such rent or other amount due, nor will any endorsement or statement on any
check or any letter accompanying any check be deemed an accord and satisfaction,
and Landlord may accept such check or payment without prejudice to Landlord's
right to recover the balance of such installment or other amount or pursue any
other remedy provided in this Lease. The consent or approval of Landlord to or
of any act by Tenant requiring Landlord's consent or approval will not be deemed
to waive or render unnecessary Landlord's consent or approval to or of any
subsequent similar acts by Tenant.
32. PARKING.
(a) Grant of Parking Rights. So long as this Lease is in effect and provided
Tenant is not in default hereunder, Landlord grants to Tenant and Tenant's
Authorized Users (as defined below) a license to use the number and type of
parking spaces designated in Subparagraph 1(s) subject to the terms and
conditions of this Paragraph 32 and the Rules and Regulations regarding parking
contained in Exhibit "H" attached hereto. Except as otherwise expressly set
-----------
forth in Subparagraph 1(s), as consideration for the use of such parking spaces,
Tenant agrees to pay to Landlord or, at Landlord's election, directly to
Landlord's parking operator, as additional rent under this Lease, the prevailing
parking rate for each such parking space as established by Landlords in its
discretion from time to time. Tenant agrees that all parking charges
will be payable on a monthly basis concurrently with each monthly payment of
Monthly Base Rent. Tenant agrees to submit to Landlord or, at Landlord's
election, directly to Landlord's parking operator with a copy to Landlord,
written notice in a form reasonably specified by Landlord containing the names,
home and office addresses and telephone numbers of those persons who are
authorized by Tenant to use Tenant's parking spaces on a monthly basis
("Tenant's Authorized Users") and shall use its best efforts to identify each
vehicle of Tenant's Authorized Users by make, model and license number. Tenant
agree to deliver such notice prior to the beginning of the Term of this Lease
and to periodically update such notice as well as upon specific request by
Landlord or Landlord's parking operator to reflect changes to Tenant's
Authorized Users or their vehicles.
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<PAGE>
(b) Visitor Parking. So long as this Lease is in effect, Tenant's visitors and
guests will be entitled to use those specific parking areas which are designated
for short term visitor parking and which are located within the surface parking
area(s), if any, and/or within the parking structure(s) which serve the
Building. Visitor parking will be made available at a charge to Tenant's
visitors and guests, with the rate being established by Landlord in its
discretion from time to time. Tenant, at its sole cost and expense, may elect to
validate such parking for its visitors and guests. All such visitor parking will
be on a non-exclusive, in common basis with all other visitors and guests of the
Development.
(c) Use of Parking Spaces. Tenant will not use or allow any of Tenant's
Authorized Users to use any parking spaces which have been specifically assigned
by Landlord to other tenants or occupants or for other uses such as visitor
parking or which have been designated by any governmental entity as being
restricted to certain uses. Tenant will not be entitled to increase or reduce
its parking privileges applicable to the Premises during the Term of the Lease
except as follows: If at any time Tenant desires to increase or reduce the
number of parking spaces allocated to it under the terms of this Lease. Tenant
must notify Landlord in writing of such desire and Landlord will have the right,
in its sole and absolute discretion, to either (a) approve such requested
increase in the number of parking spaces allocated to Tenant (with an
appropriate increase to the additional rent payable to Tenant for such
additional spaces based on the then prevailing parking rates), (b) approve such
requested decrease in the number of parking spaces allocated to Tenant (with an
appropriate reduction in the additional rent payable by Tenant for such
eliminated parking spaces based on the then prevailing parking rates), or (c)
disapprove such requested increase or decrease in the number of parking spaces
allocated to Tenant. Promptly following receipt of Tenant's written request,
Landlord will provide Tenant with written notice of its decision including a
statement of any adjustments to the additional rent payable by Tenant for
parking under the Lease, if applicable.
(d) General Provisions. Except as otherwise expressly set forth in Subparagraph
1(s), Landlord reserves the right to set and increase monthly fees and/or daily
and hourly rates for parking privileges from time to time during the Term of the
Lease. Landlord may assign any unreserved and unassigned parking spaces and/or
make all or any portion of such spaces reserved, if Landlord reasonably
determines that it is necessary for orderly and efficient parking or for any
other reasonable reason. Failure to pay the rent for any particular parking
spaces or failure to comply with any terms and conditions of this Lease
applicable to parking may be treated by Landlord as a default under this Lease
and, in addition to all other remedies available to Landlord under the Lease, at
law or in equity, Landlord may elect to recapture such parking spaces for the
balance of the Term of this Lease if Tenant does not cure such failure within
the applicable cure period set forth in Paragraph 22 of this Lease. In such
event, Tenant and Tenant's Authorized Users will be deemed visitors for purposes
of parking space use and will be entitled to use only those parking areas
specifically designated for visitor parking subject to all provisions of this
Lease applicable to such visitor parking use. Except in connection with an
assignment or sublease expressly permitted under the terms of this Lease,
Tenant's parking rights and privileges described herein are personal to Tenant
and may not be assigned or transferred or otherwise conveyed, without Landlord's
prior written consent, which consent Landlord may withhold in its sole and
absolute discretion. In any event, under no circumstances may Tenant's parking
rights and privileges be transferred, assigned or otherwise conveyed separate
and apart from Tenant's interest in this Lease.
(e) Cooperation with Traffic Mitigation Measures. Tenant agrees to use its
reasonable, good faith efforts to cooperate in traffic mitigation programs which
may be undertaken by Landlord independently, or in cooperation with local
municipalities or governmental agencies or other property owners in the vicinity
of the Building. Such programs may include, but will not be limited to,
carpools, vanpools and other ridesharing programs, public and private transit,
flexible work hours, preferential assigned parking programs and programs to
coordinate tenants within the Development with existing or proposed traffic
mitigation programs.
(f) Parking Rules and Regulations. Tenant and Tenant's Authorized Users shall
comply with all rules and regulations regarding parking set forth in Exhibit "H"
-----------
attached hereto and Tenant agrees to cause its employees, subtenants, assignees,
contractors, suppliers, customers and invitees to comply with such rules and
regulations. Landlord reserves the right from time to time to modify and/or
adopt such other reasonable and non-discriminatory rules and regulations for the
parking facilities as it deems reasonably necessary for the operation of the
parking facilities.
33. FORCE MAJEURE. If either Landlord or Tenant is delayed, hindered in or
prevented from the performance of any act required under this Lease by reason of
strikes, lock-outs, labor troubles, inability to procure standard materials,
failure of power, restrictive governmental laws, regulations or orders or
governmental action or inaction (including failure, refusal or delay in issuing
permits, approvals and/or authorizations which is not the result of the action
or inaction of the party claiming such delay), riots, civil unrest or
insurrection, war, fire, earthquake, flood or other natural disaster, unusual
and unforeseeable delay which results from an interruption of any public
utilities (e.g., electricity, gas, water, telephone) or other unusual and
unforeseeable delay not within the reasonable control of the party delayed in
performing work or doing acts required under the provisions of this Lease, then
performance of such act will be excused for the period of the delay and the
period for the performance of any such act will be extended for a period
equivalent to the period of such delay. The provisions of this Paragraph 33 will
not operate to excuse Tenant from prompt payment of rent or any other payments
required under the provisions of this Lease.
34. SIGNS. Landlord will designate the location on the Premises, if any, for
one or more Tenant identification sign(s). Tenant agrees to have Landlord
install and maintain Tenant's identification sign(s) in such designated location
in accordance with this Paragraph 34 at Tenant's sole cost and expense. Tenant
has no right to install Tenant identification signs in any other location in, on
or about the Premises of the Development and will not display or erect any other
signs, displays or other advertising materials that are visible from the
exterior of the Building or from within the Building in any interior or exterior
common areas. The size, design, color and other physical aspects of any and all
permitted sign(s) will be subject to (i) Landlord's written approval prior to
installation, which approval may be withheld in Landlord's discretion, (ii) any
covenants, conditions or restrictions governing the Premises, and (iii) any
applicable municipal or governmental permits and approvals. Tenant will be
solely responsible for all costs for installation, maintenance, repair and
removal of any Tenant identification sign(s). If Tenant fails to remove Tenant's
sign(s) upon termination of this Lease and repair any damage caused by such
removal, Landlord may do so at Tenant's sole cost and expense. Tenant agrees to
reimburse Landlord for all costs incurred by Landlord to effect any
installation, maintenance or removal on Tenant's account, which amount will be
deemed additional rent, and may include, without limitation, all sums disbursed,
incurred or deposited by Landlord including Landlord's costs, expenses and
actual attorneys' fees with interest thereon at the Interest Rate from the date
of Landlord's demand until paid by Tenant. Any sign rights granted to Tenant
under this Lease are personal to
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<PAGE>
Tenant and may not be assigned, transferred or otherwise conveyed to any
assignee or subtenant of Tenant without Landlord's prior written consent, which
consent Landlord may withhold in its sole and absolute discretion.
35. LIMITATION ON LIABILITY. In consideration of the benefits accruing
hereunder. Tenant on behalf of itself and all successors and assigns of Tenant
covenants and agrees that, in the event of any actual or alleged failure, breach
or default hereunder by Landlord: (a) Tenant's recourse against Landlord for
monetary damages will be limited to Landlord's interest in the Building
including, subject to the prior rights of any Mortgagee, Landlord's interest in
the rents of the Building and any insurance proceeds payable to Landlord: (b)
Except as may be necessary to secure jurisdiction of the partnership, no partner
of Landlord shall be sued or named as a party in any suit or action and no
service of process shall be made against any partner of Landlord; (c) No partner
of Landlord shall be required to answer or otherwise plead to any service of
process; (d) No judgment will be taken against any partner of Landlord and any
judgment taken against any partner of Landlord may be vacated and set aside at
any time after the fact; (e) No writ of execution will be levied against the
assets of any partner of Landlord; (f) The obligations under this Lease do not
constitute personal obligations of the individual partners, directors, officers
or shareholders of Landlord, and Tenant shall not seek recourse against the
individual partners, directors, officers or shareholders of Landlord or any of
their personal assets for satisfaction of any liability in respect to this
Lease; and (g) These covenants and agreements are enforceable both by Landlord
and also by any partner of Landlord.
36. FINANCIAL STATEMENTS. Prior to the execution of this Lease by Landlord and
at any time during the Term of this Lease upon ten (10) days prior written
notice from Landlord, Tenant agrees to provide Landlord with a current financial
statement for Tenant and any guarantors of Tenant and financial statements for
the two (2) years prior to the current financial statement year for Tenant and
any guarantors of Tenant. Such statements are to be prepared in accordance with
generally accepted accounting principles and, if such is the normal practice of
Tenant, audited by an independent certified public accountant.
37. QUIET ENJOYMENT. Landlord covenants and agrees with Tenant that upon Tenant
paying the rent required under this Lease and paying all other charges and
performing all of the covenants and provisions on Tenant's part to be observed
and performed under this Lease, Tenant may peaceably and quietly have, hold and
enjoy the Premises in accordance with this Lease.
38. MISCELLANEOUS.
(a) Conflict of Laws. This Lease shall be governed by and construed solely
pursuant to the laws of the State, without giving effect to choice of law
principles thereunder.
(b) Successors and Assigns. Except as otherwise provided in this Lease, all of
the covenants, conditions and provisions of this Lease shall be binding upon and
shall inure to the benefit of the parties hereto and their respective heirs,
personal representatives, successors and assigns.
(c) Professional Fees and Costs. If either Landlord or Tenant should bring suit
against the other with respect to this Lease, then all costs and expenses,
including without limitation, actual professional fees and costs such as
appraisers', accountants' and attorneys' fees and costs, incurred by the party
which prevails in such action, whether by final judgment or out of court
settlement, shall be paid by the other party, which obligation on the part of
the other party shall be deemed to have accrued on the date of the commencement
of such action and shall be enforceable whether or not the action is prosecuted
to judgment. As used herein, attorneys' fees and costs shall include, without
limitation, attorneys' fees, costs and expenses incurred in connection with any
(i) postjudgment motions; (ii) contempt proceedings; (iii) garnishment, levy,
and debtor and third party examination; (iv) discovery; and (v) bankruptcy
litigation.
(d) Terms and Headings. The words "Landlord" and "Tenant" as used herein shall
include the plural as well as the singular. Words used in any gender include
other genders. The paragraph headings of this Lease are not a part of this Lease
and shall have no effect upon the construction or interpretation of any part
hereof.
(e) Time. Time is of the essence with respect to the performance of every
provision of this Lease in which time of performance is a factor.
(f) Prior Agreement; Amendments. This Lease constitutes and is intended by the
parties to be a final, complete and exclusive statement of their entire
agreement with respect to the subject matter of this Lease. This Lease
supersedes any and all prior and contemporaneous agreements and understandings
of any kind relating to the subject matter of this Lease. There are no other
agreements, understandings, representations, warranties, or statements, either
oral or in written form, concerning the subject matter of this Lease. No
alteration, modification, amendment or interpretation of this Lease shall be
binding on the parties unless contained in a writing which is signed by both
parties.
(g) Separability. The provisions of this Lease shall be considered separable
such that if any provision or part of this Lease is ever held to be invalid,
void or illegal under any law or ruling, all remaining provisions of this Lease
shall remain in full force and effect to the maximum extent permitted by law.
(h) Recording. Neither Landlord nor Tenant shall record this Lease nor a short
form memorandum thereof without the consent of the other.
(i) Counterparts. This Lease may be executed in one or more counterparts, each
of which shall constitute an original and all of which shall be one and the same
agreement.
(j) Nondisclosure of Lease Terms. Tenant acknowledges and agrees that the terms
of this Lease are confidential and constitute proprietary information of
Landlord. Disclosure of the terms could adversely affect the ability of Landlord
to negotiate other leases and impair Landlord's relationship with other tenants.
Accordingly, Tenant agrees that it, and its partners, officers, directors,
employees, agents and attorneys, shall not intentionally and voluntarily
disclosure the terms and conditions of this Lease to any newspaper or other
publication or any other tenant or apparent prospective tenant of the Building
or other portion of the
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<PAGE>
Development, or real estate agent, either directly or indirectly, without the
prior written consent of Landlord, provided, however, that Tenant may disclose
the terms to prospective subtenants or assignees under this Lease.
(k) Non-Discrimination. Tenant acknowledges and agrees that there shall be no
discrimination against, or segregation of, any person, group of persons, or
entity on the basis of race, color, creed, religion, age, sex, marital status,
national origin, or ancestry in the leasing, subleasing, transferring,
assignment, occupancy, tenure, use, or enjoyment of the Premises, or any portion
thereof.
39 EXECUTION OF LEASE.
(a) Joint and Several Obligations. If more than one person executes this Lease
as Tenant, their execution of this Lease will constitute their covenant and
agreement that (i) each of them is jointly and severally liable for the keeping,
observing and performing of all of the terms, covenants, provisions and
agreements of this Lease to be kept, observed and performed by Tenant, and (ii)
the term "Tenant" as used in this Lease means and includes each of them jointly
and severally. The act of or notice from, or notice or refund to, or the
signature of any one or more of them, with respect to the tenancy of this Lease,
including, but not limited to, any renewal, extension, expiration, termination
or modification of this Lease, will be binding upon each and all of the persons
executing this Lease as Tenant with the same force and effect as if each and all
of them had so acted or so given or received such notice or refund or so signed.
(b) Tenant as Corporation or Partnership. If Tenant executes this Lease as a
corporation or partnership, then Tenant and the persons executing the Lease on
behalf of Tenant represent and warrant that such entity is duly qualified and in
good standing to do business in California and that the individuals executing
this Lease on Tenant's behalf are duly authorized to execute and deliver this
Lease on its behalf, and in the case of a corporation, in accordance with a duly
adopted resolution of the board of directors of Tenant, a copy of which is to be
delivered to Landlord on execution hereof, if requested by Landlord, and in
accordance with the by-laws of Tenant, and, in the case of a partnership, in
accordance with the partnership agreement and the most current amendments
thereto, if any, copies of which are to be delivered to Landlord on execution
hereof, if requested by Landlord, and that this Lease is binding upon Tenant in
accordance with its terms.
(c) Examination of Lease. Submission of this instrument by Landlord to Tenant
for examination or signature by Tenant does not constitute a reservation of or
option for lease, and it is not effective as a lease or otherwise until
execution by and delivery to both Landlord and Tenant.
IN WITNESS WHEREOF, the parties have caused this Lease to be duly executed by
their duly authorized representatives as of the date first above written.
"TENANT" "LANDLORD"
VIRTUAL REALITY NETWORK, INC., KOLL CENTER NEWPORT NUMBER 8,
a Nevada corporation a California limited partnership
By: /s/ Michael A. Barron By: KOLL MANAGEMENT SERVICES, INC.,
----------------------------- a Delaware Corporation,
as Agent
Print Name: Michael A. Barron
------------------ By: /s/ Richard Koenig
------------------------------
Title: President
---------------------------- Print Name: Richard Koenig
---------------------
Title: Senior Manager
---------------------------
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<PAGE>
ADDENDUM TO OFFICE BUILDING LEASE
DATED SEPTEMBER 8, 1995
BY AND BETWEEN KOLL CENTER NEWPORT NUMBER 8,
A CALIFORNIA LIMITED PARTNERSHIP, AS "LANDLORD" AND
VIRTUAL REALTY NETWORK, INC.,
AS "TENANT"
- --------------------------------------------------------------------------------
40. OPTION TO EXTEND:
----------------
(a) Subject to the terms of this Paragraph #40 and Paragraph #41
entitled "Options," Landlord hereby grants to Tenant an option (the "Extension
Option") to extend the Term of the Lease for an additional period of five (5)
years (the "Option Term"), on the same terms, covenants and conditions as
provided for in the Lease during the initial Lease Term, except that all
economic terms such as, without limitation, Monthly Basic Rent, an Operating
Expense Allowance, if any, parking charges, partially abated rent, etc., shall
be established based on the "fair market rental rate" for the Premises for the
Option Term as defined and determined in accordance with the provisions of this
Paragraph below.
(b) In no event shall the Monthly Base Rent be less than the Monthly
Base Rent for the last month of the initial Term of the Lease.
(c) The Extension Option must be exercised, if at all, by written
notice ("Extension Notice") delivered by Tenant to Landlord no earlier than the
date which is two hundred seventy (270) days, and no later than the date which
is one hundred eighty (180) days prior to the expiration of the then current
Term of the Lease.
(d) The term "fair market rental rate" as used in the Lease and any
Rider or Addendum attached thereto shall mean Landlord's reasonable and good
faith determination of the annual amount per rentable square foot, projected
during the relevant period, that a willing, comparable, non-equity tenant
(excluding sublease and assignment transactions) would pay, and a willing,
comparable landlord of a comparable Class "A" quality office building located in
the Newport Beach-Irvine-Costa Mesa airport area ("Comparison Area") would
accept, at arm's length (what Landlord is accepting in current transactions for
the Building may be considered), for space comparable size, quality and floor
height as the leased area at issue taking into account the age, quality and
layout of the existing improvements in the leased area at issue and taking into
account items that professional real estate brokers customarily consider,
including, but not limited to, rental rates, office space availability, tenant
size, tenant improvement allowances, operating expenses and allowance, parking
charges, free rent, free parking and any other lease concessions, if any, then
being charged or granted by Landlord or the lessors of such similar office
buildings.
(e) Landlord's determination of the fair market rental rate shall be
delivered to Tenant in writing ("Landlord's Determination") within fifteen (15)
days following Landlord's receipt of the Extension Notice. If Tenant reasonably
objects to Landlord's Determination, then Tenant shall have the right, by
delivering written notice to Landlord within fifteen (15) days following
Tenant's receipt of Landlord's Determination, to rescind Tenant's Extension
Notice, in which event, Tenant's Extension Option shall be void and of no
further force or effect.
41. OPTIONS:
-------
(a) Definition: As used in this Paragraph, the word "Option" has the
----------
following meaning:
(i) The Option to Extend pursuant to Paragraph 40 herein.
(b) Option Personal: Each Option granted to Tenant is personal to the
---------------
original Tenant executing this Lease and may be exercised only by the original
Tenant executing this Lease while occupying the entire Premises (as expanded)
and without the intent of thereafter assigning this Lease or subletting the
Premises (as expanded) and may not be exercised or be assigned, voluntarily or
involuntarily, by any person or entity other than the original Tenant executing
this Lease. The Options, if any, granted to Tenant under this Lease are not
assignable separate and apart from this Lease, nor may any Option be separated
from this Lease in any manner, either by reservation or otherwise.
(c) Effect of Default on Option: Tenant shall have no right to
---------------------------
exercise any Option, notwithstanding any provision of the grant of Option to the
contrary, and Tenant's exercise of any Option may be nullified by Landlord and
deemed of no further force or effect, if Tenant shall be in default of any
monetary obligation or material non-monetary obligation under the terms of the
Lease (or if Tenant would be in such default under the Lease but for the passage
of time or the giving of
<PAGE>
VIRTUAL REALTY NETWORK, INC.
Addendum
Page 2
notice, or both) as of Tenant's exercise of the Option in question or at any
time after the exercise of any such Option and prior to the commencement of the
Option event.
42. CONFLICT WITH BASIC LEASE: To the extent of any conflict between the
-------------------------
printed portion of this Lease and the provisions of this Addendum Sections 40
through 41, the provisions of this Addendum shall prevail.
"TENANT" "LANDLORD"
VIRTUAL REALTY NETWORK, INC., KOLL CENTER NEWPORT NUMBER 8,
a Nevada corporation a California limited partnership
By: /s/ Michael A. Barron By: KOLL MANAGEMENT SERVICES, INC.,
------------------------------- a Delaware corporation
Print Name: Michael A. Barron as Agent
-----------------------
Title: President By: /s/ Richard Koenig
---------------------------- --------------------------------
Print Name: Richard Koenig
------------------------
Print Title: Senior Manager
-----------------------
<PAGE>
SITE PLAN
---------
[KOLL CENTER NEWPORT]
-------------------
[LOGO MAP TO FOLLOW]
EXHIBIT "A-I"
-------------
<PAGE>
OUTLINE OF FLOOR
PLAN OF PREMISES
----------------
[FLOOR 1]
[KOLL CENTER NEWPORT 8]
FLOOR 1
Koll Center Newport 8
4590 MacArthur Blvd
[LOGO TO FOLLOW]
EXHIBIT "A-II"
--------------
<PAGE>
RENTABLE SQUARE FEET AND USABLE SQUARE FEET
-------------------------------------------
1. The term "Rentable Square Feet" as used in the Lease will be deemed to
include: (a) with respect to the Premises, the usable area of the Premises
determined in accordance with the Method for Measuring Floor Area in Office
Buildings, ANSI Z65 1-1980 (the "BOMA Standard"), plus a pro rata portion of the
main lobby area on the ground floor and all elevator machine rooms, electrical
and telephone equipment rooms and mail delivery facilities and other areas used
by all tenants of the Building, if any, plus (i) for single tenancy floors, all
the area covered by the elevator lobbies, corridors, special stairways,
restrooms, mechanical rooms, electrical rooms and telephone closets on such
floors, or (ii) for multiple tenancy floors, a pro-rata portion of all of the
area covered by the elevator lobbies, corridors, special stairways, restrooms,
mechanical rooms, electrical rooms and telephone closets on such floor; and (b)
with respect to the Building, the total rentable area for all floors in the
Building computed in accordance with the provisions of Subparagraph 1(a) above.
In calculating the "Rentable Square Feet" of the Premises or the Building, the
area contained within the exterior walls of the Building stairs, fire towers,
vertical ducts, elevator shafts, flues, vents, stacks and major pipe shafts will
be excluded.
2. The term "Usable Square Feet" as used in Exhibit "C" with respect to the
-----------
Premises will be deemed to include the usable area of the Premises as determined
in accordance with the BOMA Standard.
3. For purposes of establishing the initial Tenant's Percentage, Tenant's
Operating Expense Allowance, Monthly Base Rent, and Security Deposit as shown in
Paragraph 1 of the Lease, the number of Rentable Square Feet of the Premises is
deemed to be as set forth in Subparagraph 1(g) of the Lease, and the number of
Rentable Square Feet of the Building is deemed to be as set forth in
Subparagraph 1(f) of the Lease. For purposes of establishing the amount of the
Tenant Improvement Allowance in Exhibit "C" the number of Usable Square Feet of
-----------
the Premises is deemed to be as set forth in Subparagraph 1(g).
<PAGE>
NOTICE OF LEASE TERM DATES
AND TENANT'S PERCENTAGE
--------------------------
To:
-----------------------------
- --------------------------------
- --------------------------------
Date:
----------------
Re: Lease dated______________________, 19__ (the "Lease"), between
_________________________________, Landlord, and __________________; Tenant
concerning Suite____________ located at ___________________________________
(the "Premises").
To Whom It May Concern:
In accordance with the subject Lease, we wish to advise and/or confirm as
follows:
1. That the Premises have been accepted by the Tenant as being substantially
complete in accordance with the subject Lease and that there is no deficiency
in construction except as may be indicated on the "Punch-List" prepared by
Landlord and Tenant, a copy of which is attached hereto.
2. That the Tenant has possession of the subject Premises and acknowledges
that under the provisions of the Lease the Commencement Date is________________
_____________________, and the Term of the Lease will expire on_______________.
3. That in accordance with the Lease, rent commenced to accrue on __________.
4. If the Commencement Date of the Lease is other than the first day of the
month, the first billing will contain a pro rata adjustment. Each billing there-
after will be for the full amount of the monthly installment as provided for in
the Lease.
5. Rent is due and payable in advance on the first day of each and every
month during the Term of the Lease. Your rent checks should be made payable to
_______________________________________________ at ___________________________.
6. The number of Rentable Square Feet within the Premises is ________________
square feet as determined by Landlord's architect in accordance with the terms
the Lease.
7. The number of Rentable Square Feet within the Premises is _______________
square feet as determined by Landlord's architect in accordance with the terms
of the Lease.
8. Tenant's Percentage, as adjusted upon the number of Rentable Square Feet
within the Premises, is ________________%.
LANDLORD:
----------------------------
a
---------------------------
By:
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Print Name:
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EXHIBIT "D"
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(a) any tax on Landlord's "right" to rent or "right" to other income from the
Premises or as against Landlord's business of leasing the Premises;
(b) any assessment, tax, fee, levy or charge in substitution, partially or
totally, of any assessment, tax, fee, levy or charge previously included within
the definition of real property tax, it being acknowledge by Tenant and Landlord
that Proposition 13 was adopted by the voters of the State of California in the
June, 1978 election and that assessments, taxes, fees, levies and charges may be
imposed by governmental agencies for such services as fire protection, street,
sidewalk and road maintenance, refuse removal and for other governmental
services formerly provided without charge to property owners or occupants. It is
the intention of Tenant and Landlord that all such new and increased
assessments, taxes, fees, levies and charges be included within the definition
of "real property taxes" for the purposes of this Lease;
(c) any assessment, tax, fee, levy or charge allocable to or measured by the
area of the Premises or other premises in the Building or the rent payable by
Tenant hereunder or other tenants of the Building, including, without
limitation, any gross receipts tax or excise tax levied by state, city or
federal government, or any political subdivision thereof, with respect to the
receipt of such rent, or upon or with respect to the possession, leasing,
operation, management, maintenance, alteration, repair, use or occupancy by
Tenant of the Premises, or any portion thereof but not on Landlord's other
operations;
(d) any assessment, tax, fee, levy or charge upon this transaction or any
document to which Tenant is a party, creating or transferring an interest or an
estate in the Premises; and/or
(e) any assessment, tax, fee, levy or charge by any governmental agency related
to any transportation plan, fund or system (including assessment districts)
instituted within the geographic area of which the Building is a part.
Notwithstanding the foregoing, if at any time after the Commencement Date, the
amount of Real Property Taxes and Assessments decreases, then for purposes of
all subsequent Lease Years, including the Lease Year in which such decrease in
Real Property Taxes and Assessments occurs, Tenant's Operating Expense Allowance
shall be decreased by an amount equal to such decrease in Real Property Taxes
and Assessments.
3. Items Excluded From Operating Expenses. Notwithstanding the provisions of
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Paragraphs 1 and 2 above to the contrary, "Operating Expenses" will not include:
(a) Landlord's federal or state income, franchise, inheritance or estate taxes;
(b) any ground lease rental;
(c) costs incurred by Landlord for the repair of damage to the Building to the
extent that Landlord is reimbursed by insurance or condemnation proceeds or by
tenants, warrantors or other third persons;
(d) depreciation, amortization and interest payments, except as specifically
provided herein, and except on materials, tools, supplies and vendor-type
equipment purchased by Landlord to enable Landlord to supply services Landlord
might otherwise contract for with a third party, where such depreciation,
amortization and interest payments would otherwise have been included in the
charge for such third party's services, all as determined in accordance with
standard accounting practices;
(e) brokerage commissions, finders' fees, attorneys' fees, space planning costs
and other costs incurred by Landlord in leasing or attempting to lease space in
the Building;
(f) costs of a capital nature, including, without limitation, capital
improvements, capital replacements, capital repairs, capital equipment and
capital tools, all as determined in accordance with standard accounting
practices; provided, however, the capital expenditures set forth in Subparagraph
1(m) above will in any event be included in the definition of Operating
Expenses;
(g) interest, principal, points and fees on debt or amortization on any
mortgage, deed of trust or other debt encumbering the Building or the
Development;
(h) costs, including permit, license and inspection costs, incurred with
respect to the installation of tenant improvements for tenants in the Building
(including the original Tenant Improvements for the Premises), or incurred in
renovating or otherwise improving, decorating, painting or redecorating space
for tenants or other occupants of the Building, including space planning and
interior design costs and fees;
(i) attorneys' fees and other costs and expenses incurred in connection with
negotiations or disputes with present or prospective tenants or other occupants
of the Building; provided, however, that Operating Expenses will include those
attorneys' fees and other costs and expenses incurred in connection with
negotiations, disputes or claims relating to items of Operating Expenses,
enforcement of rules and regulations of the Building, and such other matters
relating to the maintenance of standards required of Landlord under the Lease;
(j) except for the administrative/management fees described in Subparagraph
l(h) above, costs of Landlord's general corporate overhead;
(k) all items and services for which Tenant or any other tenant in the Building
reimburses Landlord (other than through operating expense pass-through
provisions);
(l) electric power costs for which any tenant directly contracts with the local
public service company; and
(m) costs arising from Landlord's charitable or political contributions.
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STANDARDS FOR UTILITIES AND SERVICES
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The following standards for utilities and services are in effect. Landlord
reserves the right to adopt nondiscriminatory modifications and additions
hereto.
Subject to the terms and conditions of the Lease and provided Tenant remains in
occupancy of the Premises, Landlord will provide or make available the
following utilities and services.
1. Provide non-attended automatic elevator facilities Monday through Friday,
except holidays from 8 a.m. to 6 p.m., and have one elevator available for
Tenant's use at all other times.
2. On Monday through Friday, except holidays, from 8 a.m. to 6 p.m. and on
Saturday from 8 a.m. to 12 Noon (and other times for a reasonable additional
charge to be fixed by Landlord), ventilate the Premises and furnish air
conditioning or heating on such days and hours, when in the reasonable judgment
of Landlord it may be required for the comfortable occupancy of the Premises.
The air conditioning system achieves maximum cooling when the window coverings
are extended to the full length of the window opening and adjusted to a
45(degree) angle upwards. Landlord will not be responsible for room temperatures
if Tenant does not keep all window coverings in the Premises extended to the
full length of the window opening and adjusted to a 45(degree) angle upwards
whenever the system is in operation. Tenant agrees to cooperate fully at all
times with Landlord, and to abide by all reasonable regulations and requirements
which Landlord may prescribe for the proper function and protection of said air
conditioning system. Tenant agrees not to connect any apparatus, device, conduit
or pipe to the chilled and hot water air conditioning supply lines of the
Building. Tenant further agrees that neither Tenant nor its servants, employees,
agents, visitors, licensees or contractors shall at any time enter the
mechanical installations or facilities of the Building or the Development or
adjust, tamper with, touch or otherwise in any manner affect said installations
or facilities. The cost of maintenance and service calls to adjust and regulate
the air conditioning system will be charged to Tenant if the need for
maintenance work results from either Tenant's adjustment of room thermostats or
Tenant's failure to comply with its obligations under this Exhibit, including
keeping window coverings extended to the full length of the window opening and
adjusted to a 45(degree) angle upwards. Such work will be charged at hourly
rates equal to then current journeyman's wages for air conditioning mechanics.
3. Landlord will make available to the Premises, 24 hours per day, seven days a
week, electric current as required by the Building standard office lighting and
fractional horsepower office business machines including copiers, personal
computers and word processing equipment in an amount not to exceed six (6) watts
per square foot per normal business day. Tenant agrees, should its electrical
installation or electrical consumption be in excess of the aforesaid quantity or
extend beyond normal business hours, to reimburse Landlord monthly for the
measured consumption at the average cost per kilowatt hour charged to the
Building during the period. If a separate meter is not installed at Tenant's
cost, such excess cost will be established by an estimate agreed upon by
Landlord and Tenant, and if the parties fail to agree, such cost will be
established by an independent licensed engineer selected in Landlord's
reasonable discretion, whose fee shall be shared equally by Landlord and Tenant.
Tenant agrees not to use any apparatus or device in, upon or about the Premises
(other than standard office business machines, personal computers and word
processing equipment) which may in any way increase the amount of such services
usually furnished or supplied to said Premises, and Tenant further agrees not to
connect any apparatus or device with wires, conduits or pipes, or other means by
which such services are supplied, for the purpose of using additional or unusual
amounts of such services without the written consent of Landlord. Should Tenant
use the same to excess, the refusal on the part of Tenant to pay upon demand of
Landlord the amount established by Landlord for such excess charge will
constitute a breach of the obligation to pay rent under this Lease and will
entitle Landlord to the rights therein granted for such breach. Tenant's use of
electric current will never exceed the capacity of the feeders to the Building,
or the risers or wiring installation and Tenants will not install or use or
permit the installation or use of any computer or electronic data processing
equipment in the Premises (except standard office business machines, personal
computers and word processing equipment) without the prior written consent of
Landlord.
4. Water will be available in public areas for drinking and lavatory purposes
only, but if Tenant requires, uses or consumes water for any purpose in addition
to ordinary drinking and lavatory purposes, of which fact Tenant constitutes
Landlord to be the sole judge, Landlord may install a water meter and thereby
measure Tenant's water consumption for all purposes. Tenant agrees to pay
Landlord for the cost of the meter and the cost of the installation thereof and
throughout the duration of Tenant's occupancy Tenant will keep said meter and
installation equipment in good working order and repair at Tenant's own cost and
expense, in default of which Landlord may cause such meter and equipment to be
replaced or repaired and collect the cost thereof from Tenant. Tenant agrees to
pay for water consumed, as shown on such meter, as and when bills are rendered,
and on default in making such payment, Landlord may pay such charges and collect
the same from Tenant. Any such costs or expenses incurred, or payments made by
Landlord for any of the reasons or purposes hereinabove stated will be deemed to
be additional rent payable by Tenant and collectible by Landlord as such.
5. Landlord will provide janitor service to the Premises, provided the same are
used exclusively as offices, and are kept reasonably in order by Tenant, and
unless otherwise agreed to by Landlord and Tenant no one other than persons
approved by Landlord shall be permitted to enter the Premises for such purposes.
If the Premises are not used exclusively as offices, they will be kept clean and
in order by Tenant, at Tenant's expense, and to the satisfaction of Landlord,
and by persons approved by Landlord. Tenant agrees to pay to Landlord the cost
of removal of any of Tenant's refuse and rubbish to the extent that the same
exceeds the refuse and rubbish usually attendant upon the use of the Premises as
offices.
6. Landlord reserves the right to stop service of the elevator, plumbing,
ventilation, air conditioning and electrical systems, when necessary, by reason
of accident or emergency or for repairs, alterations or improvements, when in
the judgment of Landlord such actions are desirable or necessary to be made,
until said repairs, alterations or improvements shall have been completed, and
Landlord will have no responsibility or liability for failure to supply elevator
facilities, plumbing, ventilating, air conditioning or electric service, when
prevented from so doing by strike or accident or by any cause beyond Landlord's
reasonable control, or by laws, rules, orders, ordinances, directions,
regulations or by reason of the requirements of any federal, state, county or
municipal authority or failure of gas, oil or other suitable fuel supply or
inability by exercise of reasonable diligence to obtain gas, oil or other
suitable fuel supply. It is expressly understood and agreed that any covenants
on Landlord's part to furnish any services pursuant to any of the terms,
covenants, conditions, provisions or agreements of this Lease, or to perform any
act or thing for the benefit of Tenant, will not be deemed breached if Landlord
is unable to furnish or perform the same by virtue of a strike or labor trouble
or any other cause whatsoever beyond Landlord's control.
EXHIBIT "F"
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ESTOPPEL CERTIFICATE
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The undersigned,________________________________ ("Tenant"), hereby certifies to
__________________________________________________, as follows:
1. Attached hereto is a true, correct and complete copy of that certain lease
dated ____________________________, 1993, between ______________________________
a __________________________ ("Landlord") and Tenant (the "Lease"), regarding
the premises located at ________________________________________________________
(the "Premises"). The Lease is now in full force and effect and has not been
amended, modified or supplemented, except as set forth in Paragraph 4 below.
2. The Term of the Lease commenced on ______________________, 19__.
3. The Term of the Lease will expire on ____________________, 19__.
4. The Lease has: (Initial one)
(_________) not been amended, modified supplemented, extended, renewed or
assigned.
(_________) been amended, modified, supplemented, extended, renewed or assigned
by the following described terms or agreements, copies of which are attached
hereto:
______________________________________________________________________________
______________________________________________________________________________
5. Tenant has accepted and is now in possession of the Premises.
6. Tenant and Landlord acknowledge that Landlord's interest in the Lease will
be assigned to ___________________________________ and that no modification,
adjustment, revision or cancellation of the Lease or amendments thereto shall be
effective unless written consent of __________________________ is obtained, and
that until further notice, payments under the Lease may continue as heretofore.
7. The amount of Monthly Base Rent is $_______________.
8. The amount of Security Deposit (if any) is $______________. No other
security deposits have been made except as follows:___________________________
____________________________________________________________________________
9. Tenant is paying the full lease rental which has been paid in full as of the
date hereof. No rent or other charges under the Lease have been paid for more
than thirty (30) days in advance of its due date except as follows:____________
_______________________________________________________________________________.
10. All work required to be performed by Landlord under the Lease has been
completed except as follows:___________________________________________________.
11. There are no defaults on the part of the Landlord or Tenant under the Lease
except as follows:______________________________________________________________
12. Neither Landlord nor Tenant has any defense as to its obligations under the
Lease and claims no set-off or counterclaim against the other party except as
follows:______________________________________________________________________.
13. Tenant has no right to any concession (rental or otherwise) or similar
compensation in connection with renting the space it occupies other than as
provided in the Lease except as follows:______________________________________
_______________________________________.
All provisions of the Lease and the amendments thereto (if any) referred to
above are hereby ratified.
The foregoing certification is made with the knowledge that __________________
_________________________ is relying upon the representations herein made in
funding a loan to Landlord in purchasing the Premises.
IN WITNESS WHEREOF, this certificate has been duly executed and delivered by the
authorized officers of the undersigned as of ___________________, 19__.
TENANT:
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EXHIBIT "G"
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RULES AND REGULATIONS
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A. General Rules and Regulations. The following rules and regulations govern the
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use of the Building and the Development Common Areas. Tenant will be bound by
such rules and regulations and agrees to cause Tenant's Authorized Users, its
employees, subtenants, assignees, contractors, suppliers, customers and invitees
to observe the same.
1. Except as specifically provided in the Lease to which these Rules and
Regulations are attached, no sign, placard, picture, advertisement, name or
notice may be installed or displayed on any part of the outside or inside of the
Building or the Development without the prior written consent of Landlord.
Landlord will have the right to remove, at Tenant's expense and without notice,
any sign installed or displayed in violation of this rule. All approved signs or
lettering on doors and walls are to be printed, painted, affixed or inscribed at
the expense of Tenant and under the direction of Landlord by a person or company
designated or approved by Landlord.
2. If Landlord objects in writing to any curtains, blinds, shades, screens or
hanging plants or other similar objects attached to or used in connection with
any window or door of the Premises, or placed on any windowsill, which is
visible from the exterior of the Premises, Tenant will immediately discontinue
such use. Tenant agrees not to place anything against or near glass partitions
or doors or windows which may appear unsightly from outside the Premises
including from within any interior common areas.
3. Tenant will not obstruct any sidewalks, halls, passages, exits, entrances,
elevators, escalators, or stairways of the Development. The halls, passages,
exits, entrances, elevators and stairways are not open to the general public,
but are open, subject to reasonable regulations, to Tenant's business invitees.
Landlord will in all cases retain the right to control and prevent access
thereto of all persons whose presence in the reasonable judgment of Landlord
would be prejudicial to the safety, character, reputation and interest of the
Development and its tenants, provided that nothing herein contained will be
construed to prevent such access to persons with whom any tenant normally deals
in the ordinary course of its business, unless such persons are engaged in
illegal or unlawful activities. No tenant and no employee or invitee of any
tenant will go upon the roof of the Building.
4. Tenant will not obtain for use on the Premises ice, drinking water, food,
food vendors, beverage, towel or other similar services or accept barbering or
bootblacking service upon the Premises, except at such reasonable hours and
under such reasonable regulations as may be fixed by Landlord. Landlord
expressly reserves the right to absolutely prohibit solicitation, canvassing,
distribution of handbills or any other written material, peddling, sales and
displays of products, goods and wares in all portions of the Development except
as may be expressly permitted under the Lease. Landlord reserves the right to
restrict and regulate the use of the common areas of the Development and
Building by invitees of tenants providing services to tenants on a periodic or
daily basis including food and beverage vendors. Such restrictions may include
limitations on time, place, manner and duration of access to a tenant's premises
for such purposes. Without limiting the foregoing, Landlord may require that
such parties use service elevators, halls, passageways and stairways for such
purposes to preserve access within the Building for tenants and the general
public.
5. Landlord reserves the right to require tenants to periodically provide
Landlord with a written list of any and all business invitees which periodically
or regularly provide goods and services to such tenants at the premises.
Landlord reserves the right to preclude all vendors from entering or conducting
business within the Building and the Development if such vendors are not listed
on a tenant's list of requested vendors.
6. Landlord reserves the right to exclude from the Building between the hours of
6 p.m. and 8 am. the following business day, or such other hours as may be
established from time to time by Landlord, and on Sundays and legal holidays,
any person unless that person is known to the person or employee in charge of
the Building or has a pass or is properly identified. Tenant will be responsible
for all persons for whom it requests passes and will be liable to Landlord for
all acts of such persons. Landlord will not be liable for damages for any error
with regard to the admission to or exclusion from the Building of any person.
Landlord reserves the right to prevent access to the Building in case of
invasion, mob, riot, public excitement or other commotion by closing the doors
or by other appropriate action.
7. The directory of the Building or the Development will be provided exclusively
for the display of the name and location of tenants only and Landlord reserves
the right to exclude any other name therefrom.
8. All cleaning and janitorial services for the Development and the Premises
will be provided exclusively through Landlord, and except with the written
consent of Landlord, no person or persons other than those approved by Landlord
will be employed by Tenant or permitted to enter the Development for the purpose
of cleaning the same. Tenant will not cause any unnecessary labor by
carelessness or indifference to the good order and cleanliness of the Premises.
9. Landlord will furnish Tenant, free of charge, with two keys to each door lock
in the Premises. Landlord may make a reasonable charge for any additional keys.
Tenant shall not make or have made additional keys, and Tenant shall not alter
any lock or install any new additional lock or bolt on any door of the Premises.
Tenant, upon the termination of its tenancy, will deliver to Landlord the keys
to all doors which have been furnished to Tenant, and in the event of loss of
any keys so furnished, will pay Landlord therefor.
10. If Tenant requires telegraphic, telephonic, burglar alarm, satellite dishes,
antennae or similar services, it will first obtain Landlord's approval, and
comply with, Landlord's reasonable rules and requirements applicable to such
services, which may include separate licensing by, and fees paid to, Landlord.
11. Freight elevator(s) will be available for use by all tenants in the
Building, subject to such reasonable scheduling as Landlord, in its discretion,
deems appropriate. No equipment, materials, furniture, packages, supplies,
merchandise or other property will be received in the Building or carried in the
elevators except between such hours and in such elevators as may be designated
by Landlord. Tenant's initial move in and subsequent deliveries of bulky items,
such as furniture, safes and similar items will, unless otherwise agreed in
writing by Landlord, be made during the hours of 6:00 p.m. to 6:00 a.m. or on
Saturday or Sunday. Deliveries
EXHIBIT "H"
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<PAGE>
during normal office hours shall be limited to normal office supplies and other
small items. No deliveries will be made which impede or interfere with other
tenants or the operation of the Building.
12. Tenant will not place a load upon any floor of the Premises which exceeds
the load per square foot which such floor was designed to carry and which is
allowed by law. Landlord will have the right to reasonably prescribe the weight,
size and position of all safes, heavy equipment, files, materials, furniture or
other property brought into the Building. Heavy objects will, if considered
necessary by Landlord, stand on such platforms as determined by Landlord to be
necessary to properly distribute the weight, which platforms will be provided at
Tenant's expense. Business machines and mechanical equipment belonging to
Tenant, which cause noise or vibration that may be transmitted to the structure
of the Building or to any space therein to such a degree as to be objectionable
to any tenants in the Building or Landlord, are to be placed and maintained by
Tenant, at Tenant's expense, on vibration eliminators or other devises
sufficient to eliminate noise or vibration. Tenant will be responsible for all
structural engineering required to determine structural load, as well as the
expense thereof. The persons employed to move such equipment in or out of the
Building must be reasonably acceptable to Landlord. Landlord will not be
responsible for loss of, or damage to, any such equipment or other property from
any cause, and all damage done to the Building by maintaining or moving such
equipment or other property will be repaired at the expense of Tenant.
13. Tenant will not use or keep in the Premises any kerosene, gasoline or
inflammable or combustible fluid or material other than those limited quantities
necessary for the operation or maintenance of office equipment. Tenant will not
use or permit to be used in the Premises any foul or noxious gas or substance,
or permit or allow the Premises to be occupied or used in a manner offensive or
objectionable to Landlord or other occupants of the Building by reason of noise,
odors or vibrations, nor will Tenant bring into or keep in or about the
Premises any birds or animals.
14. Tenant will not use any method of heating or air conditioning other than
that supplied by Landlord without Landlord's prior written consent.
15. Tenant will not waste electricity, water or air conditioning and agrees to
cooperate fully with Landlord to assure the most effective operation of the
Building's heating and air conditioning and to comply with any governmental
energy-saving rules, laws or regulations of which Tenant has actual notice, and
will refrain front attempting to adjust controls. Tenant will keep corridor
doors closed, and shall keep all window coverings pulled down.
16. Landlord reserves the right, exercisable without notice and without
liability to Tenant, to change the name and street address of the Building.
Without the written consent of Landlord, Tenant will not use the name of the
Building or the Development in connection with or in promoting or advertising
the business of Tenant except as Tenant's address.
17. Tenant will close and lock the doors of its Premises and entirely shut off
all water faucets or other water apparatus, and lighting or gas before Tenant
and its employees leave the Premises. Tenant will be responsible for any damage
or injuries sustained by other tenants or occupants of the Building or by
Landlord for noncompliance with this rule.
18. The toilet rooms, toilets, urinals, wash bowls and other apparatus will not
be used for any purpose other than that for which they were constructed and no
foreign substance of any kind whatsoever shall be thrown therein. The expense
of any breakage, stoppage or damage resulting from any violation of this rule
will be borne by the tenant who, or whose employees or invitees, break this
rule. Cleaning of equipment of any type is prohibited. Shaving is prohibited.
19. Tenant will not sell, or permit the sale at retail of newspapers, magazines,
periodicals, theater tickets or any other goods or merchandise to the general
public in or on the Premises. Tenant will not use the Premises for any business
or activity other than that specifically provided for in this Lease. Tenant will
not conduct, nor permit to be conducted, either voluntarily or involuntarily,
any auction upon the Premises without first having obtained Landlord's prior
written consent, which consent Landlord may withhold in its sole and absolute
discretion.
20. Tenant will not install any radio or television antenna, loudspeaker,
satellite dishes or other devices on the roof(s) or exterior walls of the
Building or the Development. Tenant will not interfere with radio or television
broadcasting or reception from or in the Development or elsewhere.
21. Except for the ordinary hanging of pictures and wall decorations, Tenant
will not mark, drive nails, screw or drill into the partitions, woodwork or
plaster or in any way deface the Premises or any part thereof, except in
accordance with the provisions of the Lease pertaining to alterations. Landlord
reserves the right to direct electricians as to where and how telephone and
telegraph wires are to be introduced to the Premises. Tenant will not cut or
bore holes for wires. Tenant will not affix any floor covering to the floor of
the Premises in any manner except as approved by Landlord. Tenant shall repair
any damage resulting from noncompliance with this rule.
22. Tenant will not install, maintain or operate upon the Premises any vending
machines without the written consent of Landlord.
23. Landlord reserves the right to exclude or expel from the Development any
person who, in Landlord's judgment, is intoxicated or under the influence of
liquor or drugs or who is in violation of any of the Rules and Regulations of
the Building.
24. Tenant will store all its trash and garbage within its Premises or in other
facilities provided by Landlord. Tenant will not place in any trash box or
receptacle any material which cannot be disposed of in the ordinary and
customary manner of trash and garbage disposal. All garbage and refuse disposal
is to be made in accordance with directions issued from time to time by
Landlord.
25. The Premises will not be used for lodging or for the storage of merchandise
held for sale to the general public, or for lodging or for manufacturing of any
kind, nor shall the Premises be used for any improper, immoral or objectionable
purpose. No cooking will be done or permitted on the Premises without Landlord's
consent, except the use by Tenant of Underwriters' Laboratory approved equipment
for brewing coffee, tea, hot chocolate and similar beverages shall be permitted,
and the use of a microwave oven for employees use will be permitted, provided
that such equipment and use is in accordance with all applicable federal, state,
county and city laws, codes, ordinances, rules and regulations.
H-2
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26. Neither Tenant nor any of its employees, agents, customers and invitees
may use in any space or in the public halls of the Building or the Development
any hand truck except those equipped with rubber tires and side guards or such
other material-handling equipment as Landlord may approve. Tenant will not bring
any other vehicles of any kind into the Building.
27. Tenant agrees to comply with all safety, fire protection and evacuation
procedures and regulations established by Landlord or any governmental agency.
28. Tenant assumes any and all responsibility for protecting its Premises from
theft, robbery and pilferage, which includes keeping doors locked and other
means of entry to the Premises closed.
29. To the extent Landlord reasonably deems it necessary to exercise exclusive
control over any portions of the Common Areas for the mutual benefit of the
tenants in the Building or the Development, Landlord may do so subject to
reasonable, non-discriminatory additional rules and regulations.
30. Landlord may prohibit smoking in the Building and may require Tenant and
any of its employees, agents, clients, customers, invitees and guests who desire
to smoke, to smoke within designated smoking areas within the Development.
31. Tenant's requirements will be attended to only upon appropriate
application to Landlord's asset management office for the Development by an
authorized individual of Tenant. Employees of Landlord will not perform any work
or do anything outside of their regular duties unless under special instructions
from Landlord, and no employee of Landlord will admit any person (Tenant or
otherwise) to any office without specific instructions from Landlord.
32. These Rules and Regulations are in addition to, and will not be construed
to in any way modify or amend, in whole or in part, the terms, covenants,
agreements and conditions of the Lease. Landlord may waive any one or more of
these Rules and Regulations for the benefit of Tenant or any other tenant, but
no such waiver by Landlord will be construed as a waiver of such Rules and
Regulations in favor of Tenant or any other tenant, nor prevent Landlord from
thereafter enforcing any such Rules and Regulations against any or all of the
tenants of the Development.
33. Landlord reserves the right to make such other and reasonable and
non-discriminatory Rules and Regulations as, in its judgment, may from time to
time be needed for safety and security, for care and cleanliness of the
Development and for the preservation of good order therein. Tenant agrees to
abide by all such Rules and Regulations herein above stated and any additional
reasonable and non-discriminatory rules and regulations which are adopted.
Tenant is responsible for the observance of all of the foregoing rules by
Tenant's employees, agents, clients, customers, invitees and guests.
B. Parking Rules and Regulations. The following rules and regulations govern
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the use of the parking facilities which serve the Building. Tenant will be bound
by such rules and regulations and agrees to cause its employees, subtenants,
assignees, contractors, suppliers, customers and invitees to observe the same:
1. Tenant will not permit or allow any vehicles that belong to or are
controlled by Tenant or Tenant's employees, subtenants, customers or invitees to
be loaded, unloaded or parked in areas other than those designated by Landlord
for such activities. No vehicles are to be left in the parking areas overnight
and no vehicles are to be perked in the parking areas other than normally sized
passenger automobiles, motorcycles and pick-up trucks. No extended term storage
of vehicles is permitted.
2. Vehicles must be parked entirely within painted stall lines of a single
parking stall.
3. All directional signs and arrows must be observed.
4. The speed limit within all parking areas shall be five (5) miles per hour.
5. Parking is prohibited: (a) in areas not striped for parking; (b) in aisles
or on ramps; (c) where "no parking" signs are posted; (d) in cross-hatched
areas; and (e) in such other areas as may be designated from time to time by
Landlord or Landlord's parking operator.
6. Landlord reserves the right, without cost or liability to Landlord, to tow
any vehicle if such vehicle's audio theft alarm system remains engaged for an
unreasonable period of time.
7. Washing, waxing, cleaning or servicing of any vehicle in any area not
specifically reserved for such purpose is prohibited.
8. Landlord may refuse to permit any person to park in the parking facilities
who violates these rules with unreasonable frequency, and any violation of these
rules shall subject the violator's car to removal, at such car owner's expense.
Tenant agrees to use its best efforts to acquaint its employees, subtenants,
assignees, contractors, suppliers, customers and invitees with these parking
provisions, rules and regulations.
9. Parking stickers, access cards, or any other device or form of
identification supplied by Landlord as a condition of use of the parking
facilities shall remain the property of Landlord. Parking identification
devices, if utilized by Landlord, must be displayed as requested and may not be
mutilated in any manner. The serial number of the parking identification device
may not be obliterated. Parking identification devices, if any, are not
transferable and any device in the possession of an unauthorized holder will be
void. Landlord reserves the right to refuse the sale of monthly stickers or
other parking identification devices to Tenant or any of its agents, employees
or representatives who willfully refuse to comply with these rules and
regulations and all unposted city, state or federal ordinances, laws or
agreements.
10. Loss or theft of parking identification devices or access cards must be
reported to the management office in the Development immediately, and a lost or
stolen report must be filed by the Tenant or user of such parking identification
device or access card at the time. Landlord has the right to exclude any vehicle
from the parking facilities that does not have a parking identification device
H-3
<PAGE>
or valid access card. Any parking identification device or access card which is
reported lost or stolen and which is subsequently found in the possession of an
unauthorized person will be confiscated and the illegal holder will be subject
to prosecution.
11. All damage or loss claimed to be the responsibility of Landlord must be
reported, itemized in writing and delivered to the management office located
within the Development within ten (10) business days after any claimed damage or
loss occurs. Any claim not so made is waived. Landlord is not responsible for
damage by water or fire, or for the acts or omissions of others, or for articles
left in vehicles. In any event, the total liability of Landlord, if any, is
limited to Two Hundred Fifty Dollars ($250.00) for all damages or loss to any
car. Landlord is not responsible for loss of use.
12. The parking operators, managers or attendants are not authorized to make or
allow any exceptions to these rules and regulations, without the express written
consent of Landlord. Any exceptions to these rules and regulations made by the
parking operators, managers or attendants without the express written consent of
Landlord will not be deemed to have been approved by Landlord.
13. Landlord reserves the right, without cost or liability to Landlord, to tow
any vehicles which are used or parked in violation of these rules and
regulations.
14. Landlord reserves the right from time to time to modify and/or adopt such
other reasonable and non-discriminatory rules and regulations for the parking
facilities as it deems reasonably necessary for the operation of the parking
facilities.
H-4
<PAGE>
EXHIBIT 10.64
LEASE
THIS LEASE AGREEMENT ("Lease") is made this 21st day of November, 1996,
---- -------- --
between the "Landlord" and the "Tenant" hereafter set forth.
WITNESSETH:
1. DEFINITIONS
-----------
(a) "Landlord": Striper Partners IV, Ltd.
Address: 3016 U.S. Hwy. 301, North
Suite 400
Tampa, FL 33619
(b) "Tenant": Virtual Mortgage Network, Inc.
Address: 4590 MacArthur Blvd.
Suite 175
Newport Beach, CA 92660
(c) "Premises": Suite No. 708 consisting of approximately 848 square
--- ---
feet of net rentable area (which the parties agree are contained in the
Premises), as outlined in red on the attached Exhibit "A" expressly made a part
hereof. The Premises are located on the 1st floor of the structure, hereinafter
---
called the "Building," located at 9280 Bay Plaza Blvd., Tampa, FL 33619.
---------------------------------------
(d) Use of "Premises": General Office
--------------
(e) "Commencement Date": The later of December 1, 1996 ("the
----------------
anticipated Commencement Date"), or the date Landlord can deliver to Tenant
possession of the Premises.
(f) "Term": Not less than thirty-six (36) months commencing on the
---------------
Commencement Date, this Lease to end on the last day of the thirty-sixth (36th)
-------------------
calendar month after the Commencement Date.
(g) "Rent": The sum of eight hundred forty eight and 00/100----------
----------------------------------------------
DOLLARS ($848.00) per month as defined in Item 3. Rent and all other sums
------
payable by Tenant to Landlord under this Lease, plus any applicable tax, shall
be paid to Landlord, without demand, deduction or offset, at its office
presently located at 3016 U.S. Highway 301, Suite 400, Tampa, Florida, 33619,
-------------------------------------------------------
or at such other place as Landlord may hereafter specify in writing.
(h) "Security Deposit": The sum of nine hundred three and 12/100------
----------------------------------
DOLLARS ($903.12).
------
(i) "Operating Expense Base": $4.00 per rentable square foot of
----
Premises per annum.
(j) "Proportionate Share": The rentable area in the Premises (848
---
square feet) divided by the rentable area in the Building (78,314 square feet)
------
which equals 1.082 percent. If, the size of the Premises is for any reason
-----
adjusted, Tenant's Proportionate share shall be likewise adjusted accordingly.
2. PREMISES AND TERM. Landlord, in consideration of the Rent hereinafter
-----------------
reserved to be paid and of the covenants, conditions and agreements to be kept
and performed by Tenant, hereby leases, lets and demises to Tenant, and Tenant
hereby leases and hires from Landlord, that certain space called the Premises as
described above in Item 1, Section (c).
i
<PAGE>
If Landlord, for any reason whatsoever, cannot deliver possession of the
Premises to Tenant on or before the anticipated Commencement Date, this Lease
shall not be void or voidable, nor shall Landlord be liable to Tenant for any
loss or damage resulting therefrom, but, in that event, there shall be an
abatement of Rent covering the period between the anticipated Commencement Date
and the time when Landlord can deliver possession, the date when Landlord can
deliver possession being deemed to be the "Commencement Date" (Commencement
Date). The ending date of this Lease shall be extended for not less than an
identical period of time that transpired between the anticipated Commencement
Date and the date Landlord delivered possession (Commencement Date), it being
the parties' intent that this Lease have not less than a complete term as
described and contemplated in Item 1, Section (f) above. To this end, if the
actual Commencement Date is a day other than the first day of a particular
month, the term of the Lease shall not expire until the last day of the last
month of the proposed term as described in Item 1, Section (f). If the
Commencement Date is other than the anticipated Commencement Date, the parties'
representatives shall execute a letter amendment to this Lease (which they are
hereby authorized to do) whereby the Commencement Date and expiration date of
this Lease will be specified. By occupying the Premises, Tenant shall be
conclusively deemed to have accepted the Premises as complying fully with
Landlord's covenants and obligations.
3. RENT. Tenant covenants and agrees to pay, without demand, deduction or
----
offset, to Landlord Rent and Additional Rent for the Premises as described above
in Item 1, Section (g), on or before the first (1st) day of the first (1st) full
calendar month of the term hereof and on or before the first (1st) day of each
and every successive calendar month thereafter during the full term of this
Lease, subject to the adjustments as provided hereinafter, along with any
applicable tax, at the then current rate. In the event the Commencement Date
occurs on a day other than the first (1st) day of a calendar month, the first
Rent payment shall be in the amount of the Rent for one (1) full calendar month
plus the prorated Rent for the calendar month in which the term of this Lease
commences, such payment to be due on the Commencement Date.
Whenever under the terms of this Lease any sum of money is required to be
paid by Tenant in addition to the Rent herein reserved, whether or not such sum
is herein described as "Additional Rent" or a provision is made for the
collection of said sum as "Additional Rent", said sum shall nevertheless, at
Landlord's option, if not paid when due, be deemed Additional Rent, and shall be
collectible as such with the first installment of Rent thereafter falling due
hereunder. In the event any installment or increment of Rent or Additional Rent
payable under this Lease shall not be paid when due, a "late charge" of five
percent (5%) of the amount overdue may be charged (as Additional Rent) by
Landlord for the purpose of defraying the expense incident to handling such
overdue payment and for the purpose of compensating Landlord for its attendant
loss of cash flow.
4. CONSUMER PRICE ADJUSTMENT. For the purposes of this Lease: "Index" means
-------------------------
the Consumer Price Index for All Urban Consumers, all items, U.S. City Average
(1982-84=100) issued by the Bureau of Labor Statistics of the United States
Department of Labor. If the manner in which such Index is determined by the
Bureau of Labor Statistics is substantially revised, then the Bureau of Labor
Statistics shall be requested to furnish a statement converting the Index
published most recently prior to the start of the immediately preceding Lease
Year (as hereinafter defined) to a figure that would be comparable to the
revised Index published most recently prior to the start of the new Lease Year.
If the 1982-84 average shall no longer be used as an Index of 100, such change
shall constitute a substantial revision. If the Consumer Price Index published
by the Bureau of Labor Statistics is discontinued, then the Index shall be the
Consumer Price Index published by the U.S. Department of Commerce with
appropriate adjustment. If the U.S. Department of Commerce Index is
discontinued, then Landlord and Tenant shall agree on a reasonable substitute.
"Lease Year" means the twelve (12) month period beginning on (a) the first day
of the calendar month following the Commencement Date, or the Commencement Date
if the Commencement Date is the first day of the month, or (b) each anniversary
of the first day of the calendar month following the Commencement Date or each
anniversary of the Commencement Date if the Commencement Date is the first day
of the month. The Rent specified in Item 3 shall be paid during the first Lease
Year. On the first day of each and every Lease Year after the first Lease Year,
the Rent, as increased by previous Rent adjustments hereunder, shall be
increased by an amount equal to the product of the Rent, as increased by
previous Rent adjustments hereunder, multiplied by the difference, expressed as
a percentage, between the Index published most recently prior to the start of
such new Lease Year and the Index published most recently prior to the start of
the immediately preceding Lease Year. Tenant shall have thirty (30) days
following the submission to it by Landlord of each applicable Consumer Price
Adjustment calculation to object to such calculation. Should Tenant fail timely
to object to such calculation, which objection, to be effective, must be in
writing and must state the particulars of such objection, then, the parties
understand and agree, Landlord's calculation shall be conclusively deemed to be
correct.
ii
<PAGE>
5. OPERATING EXPENSE ADJUSTMENTS. The parties each acknowledge that the
-----------------------------
Rent specified in Item 3 of the Lease does not provide for increases in
operating expenses, real estate taxes, and utility casts which may hereafter
affect the Premises or the Building; accordingly, during the term of this Lease,
and any renewals thereof, Tenant shall pay to Landlord, in the form of
Additional Rent (plus any applicable tax), its Proportionate Share of increased
expenses over the base amount as defined in Item 1, Section (j).
To implement and effect the foregoing obligation of Tenant to pay its
Proportionate Share of the expenses, taxes and costs referenced in this Item 5,
the parties agree that Tenant shall pay Landlord on or before the first day of
each calendar month one-twelfth (1/12) of the amount of Tenant's estimated
annualized liability for such expenses, taxes and costs for the coming calendar
year. Any amount paid by Tenant which exceeds the correct amount due shall be
credited to the next succeeding payment due under this Item 5. If Tenant has
paid less than the correct amount due, Tenant shall pay the balance within ten
(10) days of receipt of notice from Landlord. If the term of this Lease shall
begin or end other than on the first day or last day of a calendar year, the
foregoing expenses, taxes and costs shall be billed and adjusted on the basis of
such fraction of a calendar year. Tenant's obligation to pay the adjustments
described in this Item 5 shall survive the expiration of this Lease. Tenant
shall have thirty (30) days following the submission to it by Landlord of each
applicable adjustment calculation to object to each such calculation. Should
Tenant fail duly and timely to object to each such calculation, which objection
to be effective, must be in writing and must state the particulars of such
objection, then, the parties understand and agree, Landlord's calculation shall
be conclusively deemed to be correct.
The term "Real Estate Taxes" shall mean the annual taxes and any special
assessments or other charges levied against the real property of which the
Premises are a part by any authority having the direct power so to tax,
including any city, county, state or Federal government, or any school,
agricultural, transportation or environmental control agency, lighting,
drainage, or other improvement district thereof, and shall include the expense
of contesting the amount or validity of any such taxes, charges or assessments.
The term "Operating Expenses" shall include the annual expenses of Landlord for
the operation and maintenance of the Building and the Premises which are
reasonable or customary for the operation of this type of Premises and Building,
and shall include, but not be limited to, management salaries, consultants'
fees, maintenance and janitorial expense, administrative salaries, costs and
fees, insurance, security and landscaping. The term "Utility Costs" shall
include Landlord's annual expenses for the operation and maintenance of the
Building and Premises with respect to utility charges for furnishing heat,
air-conditioning, electricity, water, sewerage, gas, garbage removal, etc.
6. USE OF PREMISES. The Premises shall be used by Tenant as described
---------------
above in Item 1, Section (d), and for no other purpose without the prior written
discretionary consent of Landlord. Tenant shall not do or permit to be done in
or about the Premises, nor bring or keep or permit to be brought or kept
therein, anything which is prohibited by or will in any way conflict with any
law, statute, ordinance or governmental rule or regulation now in force or which
may hereafter be enacted or promulgated, or which is prohibited by any standard
form of fire insurance policy or will in any way increase the existing rate of
or affect any fire or other insurance upon the Building or any of its contents
or cause a cancellation of any insurance policy covering the Building or any
part thereof or any of its contents. Tenant shall not do or permit anything to
be done in or about the Premises which will in any way obstruct or interfere
with the rights of other tenants of the Building, or injure or annoy them or use
or allow to be used the Premises for any improper, immoral, unlawful or
objectionable purpose (as determined by Landlord); nor shall Tenant cause,
maintain, or permit any nuisance (as determined by Landlord or by law) in or
about the Premises or commit or suffer to be committed any waste in, on, or
about the Premises. Tenant, at Tenant's expense, shall comply with all laws,
rules, orders, statutes, ordinances, directions, regulations and requirements of
all federal, state, county and municipal authorities pertaining to Tenant's use
of the Premises and with the recorded covenants, conditions and restrictions
pertaining thereto, regardless of when they become effective or applicable,
including, without limitation, all applicable federal, state and local laws,
regulations or ordinances pertaining to air and water quality, hazardous
materials, waste disposal, air emissions and other environmental matters, all
zoning and other land use matters, and with any direction of any public officer
or officials which shall impose any duty upon Landlord or Tenant with respect to
the use or occupation of the Premises.
7. ASSIGNMENT AND SUBLETTING. Tenant shall not assign the right of
-------------------------
occupancy under this Lease, or any other interest therein, or sublet the
Premises, or any portion thereof, without the prior written consent of Landlord,
which the parties agree may be withheld at Landlord's sole discretion. Tenant
absolutely shall have no right of assignment or subletting if it is or has
everbeen in default of this Lease. Should Landlord elect to grant its written
consent to any proposed assignment or sublease (whether by Tenant or by others
claiming by or through Tenant), Tenant or such others agree to pay Landlord an
administrative fee in a reasonable amount (but not less than $150.00), plus
attorney's fees
iii
<PAGE>
to process and approve such assignment or sublease, and Landlord may prescribe
the substance and form of such assignment or sublease.
Notwithstanding any assignment of the Lease, or the subletting of the
Premises, or any portion thereof, Tenant shall continue to be fully liable for
the performance of the terms, conditions and covenants of this Lease, including,
but not limited to, the payment of Rent and Additional Rent. Consent by Landlord
to one or more assignments or sublettings shall not operate as a waiver of
Landlord's rights as to any subsequent assignments or sublettings. Landlord
shall have the additional option, which shall be exercised by providing Tenant
with written notice, of terminating Tenant's rights and obligations under this
Lease rather than permitting any assignment or subletting by Tenant, any
statement or implication in this Lease or at law to the contrary
notwithstanding.
Should Landlord permit any assignment or subletting by Tenant and should
the monies received as a result of such assignment or subletting (when compared
to the monies still payable by Tenant to Landlord) be greater than would have
been received hereunder had not Landlord permitted such assignment or
subletting, then the excess shall be payable by Tenant to Landlord, it being the
parties' intention that Landlord, and not Tenant, in consideration for
Landlord's permitting such assignment or subletting, shall be the party to
receive any profit from any such assignment or subletting. If there are one or
more assignments or sublettings by Tenant to which Landlord consents, then any
and all renewal options to be exercised subsequent to the date of such
assignment or subletting and all options to lease additional space in the
Building to be exercised subsequent to the date of such assignment or subletting
are absolutely waived and terminated at Landlord's sole discretion. In the event
of the transfer and assignment by Landlord of its interest in this Lease and/or
sale of the Building containing the Premises, either of which it may do at its
sole option, Landlord shall thereby be released from any further obligations
hereunder, and Tenant agrees to look solely to such successor in interest of
Landlord for performance of such obligations. The provisions of Item 36
hereafter dealing with "Notices" shall be amended to provide the correct names
and addresses of the assignee or sublessee. If Tenant is a corporation whose
stock is not regularly traded on a bona fide public exchange, and if any
transfer, sale, pledge or other disposition of the common stock shall occur
which changes the power to vote the majority of the outstanding capital stock of
the company, such action shall be considered an assignment under the terms of
this Lease. Any breach of this Item 7 by Tenant will constitute an automatic
default under the terms of this Lease, per Item 20 hereof.
8. ACCESS TO PREMISES. Landlord or its authorized agent or agents shall
------------------
have the right to enter upon the Premises at all reasonable times for the
purposes of inspecting the same, preventing waste, making such repairs as
Landlord may consider and showing the Premises to prospective tenants,
mortgagees and/or purchasers. If during the last month of the term, Tenant shall
have removed all or substantially all of Tenant's property therefrom, Landlord
may immediately enter and alter, renovate and redecorate the Premises without
elimination or abatement of Rent or incurring liability to Tenant for any
compensation or offsets in Rent and charges owed and such acts shall have no
effect upon this Lease.
9. LANDLORD'S SERVICES. Landlord shall, at its expense, furnish the
-------------------
Premises with (i) electricity subject to Item 10 of this Lease; (ii) heat and
air-conditioning during reasonable and usual business hours (exclusive of
Saturdays, Sundays and holidays) reasonably required for the occupation of the
Premises, such heat and air-conditioning to be provided by utilizing the
existing Building systems it being expressly understood and agreed by the
parties that Landlord specifically shall not be liable for any losses or damages
of any nature whatsoever incurred by Tenant due to any failure of the equipment
to function properly, or while it is being repaired, or due to any governmental
laws, regulations or restrictions pertaining to the furnishing or use of such
heat and air-conditioning; (iii) elevator service; (iv) lighting replacement for
Building Standard lights; (v) toilet room supplies; (vi) daily janitor service
during the time and in the manner that such janitor service is customarily
furnished in first class office buildings in the metropolitan area where the
Building is located; (vii) water; and (viii) sewerage. The foregoing services
are designated "Building Standard."
Tenant agrees that Landlord is only responsible for Building Standard
maintenance and Building Standard services. If other, more complete or special
services and maintenance (over Building Standard are required), then Tenant
solely shall be and is responsible for same and for any expenses and costs of
any nature whatsoever associated with same. To this end, Tenant is and shall be
solely responsible for any expenses and costs of any nature whatsoever
associated with, among other things, maintaining upgraded tenant improvements in
the Premises, replacing non-Building Standard lighting fixtures and bulbs in the
Premises, servicing, operating and maintaining any separate and non-Building
Standard HVAC systems and facilities serving the Premises, etc.
Landlord shall not be liable for any damages directly or indirectly or
consequentially resulting from,
iv
<PAGE>
nor shall any Rent herein set forth be reduced or abated by reason of, (1)
installation, use, or interruption of use of any equipment in connection with
the furnishing of any of the foregoing services, or (2) failure to furnish, or
delay in furnishing, any such services when such failure or delay is caused by
accident or any condition beyond the reasonable control of Landlord or by the
making of necessary repairs or improvements to the Premises or to the Building
or because of any governmental laws, regulations or restrictions. The temporary
failure to furnish any such services shall not be construed as an eviction of
Tenant or relieve Tenant from the duty of observing and performing any and all
of the provisions of this Lease.
10. ELECTRICAL OVERLOAD: STRUCTURAL OVERLOAD.
----------------------------------------
A. Tenant's use of electrical services furnished by Landlord shall
be subject to the following:
(1) Tenant's electrical equipment shall be restricted to that
equipment which individually does not have a rated capacity
greater than .5 kilowatts per hour and/or require voltage
other than 120/208 volts, single phase. Collectively,
Tenant's equipment shall not have an electrical design load
greater than an average of 3 watts per square foot
(including overhead lighting).
(2) Tenant's overhead lighting shall not have a design load
greater than an average of 2 watts per square foot.
(3) If Tenant's consumption of electrical services exceeds
either the rated capacities and/or design loads as per
subsections (1) and (2) above, then Tenant shall remove such
equipment and/or lighting to achieve compliance within ten
(10) days after receiving notice from Landlord. Or upon
receiving Landlord's prior written approval, such equipment
and/or lighting may remain in the Premises, subject to the
following:
(a) Tenant shall pay for all costs of installation and
maintenance of submeter, wiring, air-conditioning and
other items required by Landlord, in Landlord's
discretion, to accommodate Tenant's excess design loads
and capacities;
(b) Tenant shall pay to Landlord, upon demand, the cost of
the excess demand and consumption of electrical service
at rates determined by Landlord which shall be in
accordance with any applicable laws;
(c) Landlord may, at its option, upon not less than thirty
(30) days' prior written notice to Tenant, discontinue
the availability of such extraordinary utility service.
If Landlord gives any such notice, Tenant will contract
directly with the public utility for the supplying of
such utility service to the Premises.
B. Tenant shall not place a load upon any floor of the Premises
exceeding the floor load per square foot area which such floor was designed to
carry and which may be allowed by law. Landlord reserves the right to prescribe
the weight and position of all heavy equipment and similar items, and to
prescribe the reinforcing necessary, if any, which in the opinion of Landlord
may be required under the circumstances, such reinforcing to be at Tenant's
pre-paid expense.
11. PARKING AREAS. Landlord shall keep and maintain in good condition any
-------------
parking areas that may be provided. Landlord reserves the right to control the
method, manner and time of parking in parking spaces.
12. LEASEHOLD IMPROVEMENTS. The Premises are rented "as is", without any
----------------------
additional services or improvements to be rendered by Landlord, other than those
services described in Item 9 and such other services or improvements as may be
described in Exhibit "B" attached hereto and expressly made a part hereof. If
Landlord is to additionally alter, remodel, improve, or do any physical act or
thing to the space as presently constituted or as described in Exhibit "B", same
shall be at the sole expense of Tenant and shall be effected only by an "Extra
Work Agreement" signed by the parties, the monies due Landlord from Tenant for
which shall be deemed "Additional Rent" hereunder. In the absence of an "Extra
Work Agreement" signed by the parties, Landlord is under no obligation to make
any such alteration, remodeling or improvement or do any physical act or thing
to the space.
v
<PAGE>
Any and all extraordinary expenses and costs of any nature whatsoever
attributable to the installation maintenance and/or removal of telephone
equipment, computer equipment and the like shall be borne solely by Tenant and
may be deemed by Landlord to be "Additional Rent" hereunder.
13. REPAIRS AND MAINTENANCE. Landlord will, at its own cost and expense,
------------------------
except as may be provided elsewhere herein, make necessary repairs of damage to
the Building corridors, lobby, structural members of the Building, and equipment
used to provide the Building Standard services referred to in Item 9, unless any
such damage is caused by acts or omissions of Tenant, its agents, customers,
employees, principals, contractors, consultants, assigns, subtenants or
invitees, in which event Tenant will bear the cost of such repairs. Tenant will
not injure the Premises or the Building but will maintain the Premises in a
clean, attractive condition and in good repair, except as to damage to be
repaired by Landlord as provided above. Upon termination of this Lease, Tenant
will surrender and deliver the Premises to Landlord in the same condition in
which they existed at the commencement of the Lease, excepting only ordinary
wear and tear and damage arising from any cause not required to be repaired by
Tenant. This Item 13 shall not apply in the case of damage or destruction by
fire or other casualty which is covered by insurance maintained by Landlord on
the Building (as to which Item 16 hereof shall apply) or damage resulting from
an Eminent Domain taking (as to which Item 18 hereof shall apply).
14. ALTERATIONS AND IMPROVEMENTS. Tenant shall make no alterations,
-----------------------------
additions or improvements to the Premises without the prior written approval of
Landlord, unless in each instance and for each such alteration, addition or
improvement Landlord or a contractor approved by Landlord is hired to do such
alterations, additions or improvements. Such approval shall not be unreasonably
withheld in the case of alterations, additions or improvements to the interior
of the Premises if such alterations, additions, or improvements are normal for
the use described in Item 1 (d) of this Lease, do not adversely affect utility
of the Premises for future tenants, do not alter the exterior of the Building,
and are accompanied by prepayment or bond provisions or waivers by the
contractor in form satisfactory to Landlord sufficient to protect the Building
from claims of lien of any sort; otherwise, such approval may be withheld for
any reason whatsoever. Furthermore, such alterations, additions or improvements
absolutely shall not affect the mechanical, plumbing, electrical and HVAC
systems in the Premises or the Building and shall not be of a structural nature.
Tenant shall conduct its work in such a manner as to maintain harmonious labor
relations and as not to interfere with the operation of the Building and shall,
prior to the commencement of the work, submit to Landlord copies of all
necessary permits. Landlord reserves the right to have final approval of the
contractors hired by Tenant. All such contractors hired by Tenant shall be, at
levels and coverages prescribed by Landlord, bonded and insured, and Landlord
may require evidence of same, which Tenant agrees to secure and provide Landlord
prior to the commencement of any work by such contractors. All alterations,
additions or improvements, whether temporary or permanent in character, made in
or upon the Premises, either by Landlord or Tenant, shall be Landlord's property
and at the end of the term hereof shall remain in or upon the Premises without
compensation to Tenant. If, however, Landlord shall request in writing, Tenant
will, prior to the expiration or earlier termination of this Lease, remove any
and all alterations, additions and improvements placed or installed by Tenant in
the Premises, and will repair any damage caused by such removal. All of Tenant's
furniture, movable trade fixtures and equipment not attached to the Building may
be removed by Tenant at the expiration of this Lease, if Tenant so elects, and
shall be so removed, if required by Landlord, and, if not so removed, shall, at
the option of Landlord, become the property of Landlord. To the extent Tenant
makes any alterations, additions or improvements and/or to the extent Landlord
on behalf of Tenant under an "Extra Work Agreement" makes such alterations,
additions or improvements, and as a result thereof it can be determined that
thereupon was caused an increase in real estate taxes or insurance premiums,
then Tenant shall be responsible for reimbursing Landlord for such increases as
Landlord may pay.
15. INDEMNITY. Landlord shall not be liable for, and Tenant will
----------
indemnify and save Landlord harmless of and from, all fines, suits, damages,
claims, demands, losses and actions (including attorney's fees) for any injury
to person or damage to or loss of property on or about the Premises and Building
caused by the negligence or misconduct or breach of this Lease by Tenant, its
employees, agents, principals, contractors, consultants, assigns, subtenants,
invitees or by any other person entering the Premises or the Building under
express or implied invitation of Tenant, or arising out of Tenant's use of the
Premises. Landlord shall not be liable or responsible for any loss or damage to
any property or the death or injury to any person occasioned by theft, fire, act
of God, public enemy, injunction, riot, strike, insurrection, war, court order,
requisition of governmental body or authority, by other tenants of the Building
or by any other matter beyond the absolute control of Landlord, or for any
injury or damage or inconvenience which may arise through repair or alteration
of any part of the Building, or failure to make repairs, or from any cause
whatsoever except Landlord's negligence or intentional act. It is specifically
understood and agreed that there shall be no personal liability on Landlord with
respect to any of the covenants, conditions or provisions of this Lease; in the
event of a breach or default by
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Landlord of any of its obligations under this Lease, Tenant shall look solely to
the equity of Landlord in the Building for the satisfaction of Tenant's
remedies.
16. DAMAGE BY FIRE OR THE ELEMENTS. In the event that the Building is
-------------------------------
totally destroyed by fire, tornado or other casualty, or in the event the
Premises or Building is so damaged that rebuilding or repairs cannot be
completed within one hundred eighty (180) days after the date of such damage,
either Landlord or Tenant may, at its option, by written notice to the other
given not more than thirty (30) days after the date of such fire or other
casualty, terminate this Lease. In such event, the Rent shall be abated during
the unexpired portion of this Lease effective with the date of such fire or
other casualty.
In the event the Building or the Premises are damaged by fire, tornado, or
other casualty covered by Landlord's insurance but only to such extent that
rebuilding or repairs can be completed within one hundred eighty (180) days
after the date of such damage, or if the damage should be more serious but
neither Landlord nor Tenant elects to terminate this Lease, then Landlord shall,
within thirty (30) days after the date of such damage or such election, commence
to rebuild or repair the Building and/or the Premises and shall proceed with
reasonable diligence to restore the Building and/or the Premises to
substantially the same condition in which it/they was/were immediately prior to
the happening of the casualty, except that Landlord shall not be required to
rebuild, repair or replace any part of the furniture, equipment, fixtures and
other improvements which may have been placed by Tenant or other tenants within
the Building or Premises. Landlord shall, unless such damage is the result of
the negligence or willful misconduct of Tenant or Tenant's employees, agents,
principals, contractors, consultants, assigns, subtenants or invitees, allow
Tenant a fair diminution of Rent during the time of such rebuilding or repairs.
In the event any mortgagee, or the holder of any deed of trust, security
agreement or mortgage on the Building, requires that the insurance proceeds be
used to retire the mortgage debt, Landlord shall have no obligation to rebuild
and this Lease shall terminate upon notice to Tenant. Any insurance which may be
carried by Landlord or by Tenant against loss or damage to the Premises shall be
for the sole benefit of the party carrying such insurance and under its sole
control.
17. BUILDING RULES AND REGULATIONS. Tenant shall faithfully observe and
-------------------------------
comply with the Rules and Regulations printed on or annexed to this Lease and
all reasonable modifications of and additions thereto from time to time put into
effect by Landlord. Landlord shall not be responsible to Tenant for the
nonperformance of any of said Rules and Regulations by any other tenant or
occupant of the Building. Tenant shall and does hereby have an affirmative
obligation (to include indemnification of Landlord, per Item 15 hereof) to
notify its agents, employees, principals, assigns, subtenants and invitees of
the contents of such Rules and Regulations and of this Lease and to assure their
compliance therewith.
18. EMINENT DOMAIN. If the whole or a portion of the Building shall be
---------------
taken for any public or quasi-public use under any statute or by right of
Eminent Domain or private purchase in lieu thereof, then at Landlord's option,
but not otherwise, the term hereby demised and all rights of Tenant hereunder
shall immediately cease and terminate and the Rent shall be adjusted as of the
date of such termination. Tenant shall be entitled to no part of the award made
for such condemnation (or other taking) or the purchase price thereof.
Nevertheless, anything to the contrary notwithstanding, likewise at Landlord's
option, but not otherwise, if the Premises are unaffected by such condemnation
(or other taking), then this Lease and each and every one of its provisions
shall continue in full force and effect.
19. SIGNS AND ADVERTISING. Without the prior written approval of
----------------------
Landlord, which may be withheld at Landlord's discretion, Tenant shall not
permit the painting or display of any signs, placard lettering, or advertising
material of any kind on or near the exterior of the Premises or the Building.
Notwithstanding the foregoing, Tenant may, with Landlord's prior approval,
display Tenant's name on or near the entrance to the Premises, in a manner
prescribed by Landlord,
20. TENANT'S DEFAULT. Landlord, at its election, may exercise any one or
-----------------
more of the options referred to below upon the happening, or at any time after
the happening, of any one or more of the following events, to wit:
(a) Tenant's failure to pay the Rent, Additional Rent, or any other
sums payable hereunder for a period of three (3) days after
written notice by Landlord;
(b) Tenant's failure to observe, keep or perform any of the other
terms, covenants, agreements or conditions of this Lease or in
the Building Rules and Regulation for a period of ten (10) days
after written notice by Landlord;
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(c) The bankruptcy of Tenant;
(d) Tenant's making an assignment for the benefit of creditors;
(e) A receiver or trustee being appointed for Tenant or a substantial
portion of Tenant's assets;
(f) Tenant's voluntary petitioning for relief under, or otherwise
seeking the benefit of, any bankruptcy, reorganization,
arrangement or insolvency law;
(g) Tenant's deserting, vacating or abandoning any substantial
portion of the Premises or attempting to mortgage, or pledge or
otherwise encumber in any way its interest hereunder;
(h) Tenant's interest under this Lease being sold under execution or
other legal process;
(i) Tenant's interest under this Lease being modified or altered by
any unauthorized assignment or subletting or by operation of law;
(j) Any of the goods or chattels of Tenant used in, or incident to,
the operation of Tenant's business in the Premises being seized,
sequestered, or impounded by virtue of, or under authority of,
any legal proceeding;
(k) Tenant's failure to pay duly and timely the Rent, Additional
Rent, or any other sums payable hereunder when due for two (2)
consecutive months or for a total of four (4) months in any lease
or calendar year, no notice whatsoever to be due Tenant from
Landlord;
(l) Tenant's failure to operate continuously during normal business
hours from the Premises in a fully-staffed, fully-equipped manner
and/or as contemplated by Item 1 (d) of this Lease;
(m) Tenant's failure to take occupancy of the Premises when same is
tendered by Landlord to Tenant, unless Rent has been prepaid to
cover the applicable period of non-occupancy.
In the event of any of the foregoing happenings, Landlord, at its election,
may exercise any one or more of the following options, the exercise of any of
which shall not be deemed to preclude the exercise of any others herein listed
or otherwise provided by statute or general law at the same time or in
subsequent times or actions:
(1) Terminate Tenant's right to possession under the Lease and
re-enter and retake possession of the Premises and relet or
attempt to relet the Premises on behalf of Tenant at such rent
and under such terms and conditions as Landlord may deem best
under the circumstances for the purpose of reducing Tenant's
liability. Landlord shall not be deemed to have thereby accepted
a surrender of the Premises, and Tenant shall remain liable for
all Rent, Additional Rent, or other sums due under this Lease and
for all damages suffered by Landlord because of Tenant's breach
of any of the covenants or the Lease.
(2) Declare this Lease to be terminated, ended and null and void, and
re-enter upon and take possession of the Premises whereupon all
right, title and interest of Tenant in the Premises shall end.
(3) Accelerate and declare the entire remaining unpaid Rent and
Additional Rent for the balance of this Lease to be immediately
due and payable forthwith, and may, at once, take legal action to
recover and collect the same.
No re-entry or retaking possession of the Premises by Landlord shall be
construed as an election on its part to terminate this Lease, unless a written
notice of such intention be given to Tenant, nor shall pursuit of any remedy
herein provided constitute a forfeiture or waiver of any Rent or other monies
due to Landlord hereunder or of any damages accruing to Landlord by reason of
the violations of any of the terms, provisions and covenants herein contained.
Landlord's acceptance of Rent or Additional Rent or other monies following any
event of default hereunder shall not be construed as Landlord's waiver
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of such event of default. No forbearance by Landlord of action upon any
violation or breach of any of the terms, provisions, and covenants herein
contained shall be deemed or construed to constitute a waiver of the terms,
provisions, and covenants herein contained. Forbearance by Landlord to enforce
one or more of the remedies herein provided upon an event of default shall not
be deemed or construed to constitute a waiver of any other violation or default.
Legal actions to recover for loss or damage that Landlord may suffer by reason
of termination of this Lease or the deficiency from any reletting as provided
for above shall include the expense of repossession or reletting and any repairs
or remodeling undertaken by Landlord following repossession.
The parties hereto shall, and they hereby do, waive trial by jury in any
action, proceeding, or counterclaim brought by either of the parties hereto
against the other on any matters whatsoever arising out of, or in any way
connected with, this Lease, the relationship of landlord and tenant, Tenant's
use or occupancy of the Premises and/or Building, and/or claim of injury or
damage. In the event Landlord commences any proceeding to enforce this Lease or
the landlord/tenant relationship between the parties or for nonpayment of Rent
(of any nature whatsoever) or additional monies due Landlord from Tenant under
this Lease, Tenant will not interpose any counterclaim of whatever nature or
description in any such proceedings. In the event Tenant must, because of
applicable court rules, interpose any counterclaim or other claim against
Landlord in such proceedings, Landlord and Tenant covenant and agree that, in
addition to any other lawful remedy of Landlord, upon motion of Landlord, such
counterclaim or other claim asserted by Tenant shall be severed out of the
proceedings instituted by Landlord (and, if necessary, transferred to a court of
different jurisdiction), and the proceedings instituted by Landlord may proceed
to final judgement separately and apart from and without consolidation with or
reference to the status of each counterclaim or any other claim asserted by
Tenant.
The parties hereto agree that any and all suits for any and every breach of
this Lease shall be instituted and maintained only in those courts of competent
jurisdiction in the county or municipality in which the Building is located. In
the event it shall become necessary (as determined by Landlord) for Landlord at
any time to institute or defend any legal action or proceedings of any nature
for the enforcement of, or as regards, this Lease, or any of the provisions
hereof, or any of its statutory or common law rights as concern Tenant, or to
employ an attorney therefor, Tenant agrees to pay all court costs and attorney's
fees incurred by Landlord.
Time is of the essence of this Lease; and in case Tenant shall fail to
perform the covenants on its part to be performed at the time fixed for the
performance of such respective covenants by the provisions of this Lease,
Landlord may declare Tenant to be in default of such Lease.
21. CONTRACTUAL LANDLORD'S LIEN. Landlord shall have, at all times, a
---------------------------
valid security interest to secure payment of all Rent, Additional Rent and other
sums of money becoming due hereunder from Tenant, and to secure payment of any
damages or loss which Landlord may suffer by reason of the breach by Tenant of
any covenant, agreement or condition contained herein, upon all goods, wares,
equipment, fixtures, furniture, improvements and other personal property of
Tenant presently or which may hereinafter be situated in the Premises, and all
proceeds therefrom, and such property shall not be removed therefrom without the
consent of Landlord until all arrearages in Rent as well as any and all other
sums of money then due to Landlord hereunder shall first have been paid and
discharged and all of the covenants, agreements, and conditions hereof have been
fully complied with and performed by Tenant. In consideration of this Lease,
upon the occurrence of an event of default by Tenant, Landlord may, in addition
to any other remedies provided herein, enter upon the Premises and take
possession of any and all goods, wares, equipment, fixtures, furniture,
improvements, and other personal property of Tenant situated on or in the
Premises, without liability for trespass or conversion, and sell the same at
public or private sale, with or without having such property at the sale, after
giving Tenant reasonable notice of the time and place of any public sale or of
the time after which any private sale is to be made, at which sale Landlord or
its assigns may purchase unless otherwise prohibited by law. Unless otherwise
provided by law, and without intending to exclude any other manner of giving
Tenant reasonable notice, the requirement of reasonable notice shall be met if
such notice is given in the manner prescribed in Item 36 dealing with "Notices"
in this Lease at least five (5) days before the time of sale. The proceeds from
any such disposition, less any and all expenses connected with the taking of
possession, holding and selling of the property (including reasonable attorney's
fees and other expenses), shall be applied as a credit against the indebtedness
secured by the security interest granted in this Item 21. Any surplus shall be
paid to Tenant or as otherwise required by law, and Tenant shall pay any
deficiencies forthwith. Upon request by Landlord, Tenant agrees to execute and
deliver to Landlord a financing statement in form sufficient to perfect the
security interest of Landlord in the aforementioned property and proceeds
thereof under the provisions of the Uniform Commercial Code in force in the
State of Florida The foregoing lien rights shall be in addition to and not in
derogation of any statutory or common law lien right under the laws of the state
of Florida.
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22. SUBORDINATION. In consideration of the execution of this Lease by
--------------
Landlord, Tenant accepts this Lease subject to any deeds of conveyance and any
deeds of trust, master leases, security interests or mortgages and all renewals,
modifications, extensions, spreads, consolidations and replacements of the
foregoing which might now or hereafter constitute a lien upon the Building (or
the land upon which it is situated) or improvements therein or thereon or upon
the Premises and to zoning ordinances and other building and fire ordinances and
governmental regulations relating to the use of the property. Although no
instrument or act on the part of Tenant shall be necessary to effectuate such
subordination, Tenant shall, nevertheless, for the purpose of confirmation, at
any time hereafter, on demand in the form(s) prescribed by Landlord, execute any
instruments, estoppel certificates, releases or other documents that may be
requested or required by any purchaser or any holder of any superior interest
for the purposes of subjecting and subordinating this Lease to such deed of
conveyance or to the lien of any such deed of trust, master lease, security
interest, mortgage, or superior interest. Tenant hereby appoints Landlord
attorney-in-fact, irrevocably, to execute and deliver any such instrument or
document for Tenant should Tenant fail or refuse to do so.
23. QUIET ENJOYMENT. Provided Tenant has fully, duly and timely
----------------
performed all of the terms, covenants, agreements and conditions of this Lease
on its part to be performed, including the payment of Rent and all other sums
due hereunder, Tenant shall peaceably and quietly hold and enjoy the Premises,
except as described in Item 22 above, against Landlord and all persons claiming
by, through or under Landlord, for the term herein described, subject to the
provisions and conditions of this Lease.
24. SECURITY DEPOSIT. Tenant, concurrently with the execution of this
-----------------
Lease, has deposited or will deposit with Landlord a Security Deposit as
described in Item 1, Section (h), which sum shall be retained by Landlord as a
Security Deposit. The Security Deposit shall be held by Landlord without
liability for interest and as security for the performance by Tenant of Tenant's
covenants and obligations under this Lease, it being expressly understood that
such deposit shall not be considered an advance payment of Rent or Additional
Rent or a measure of Landlord's damages in case of default by Tenant. Upon the
occurrence of any event of default by Tenant, Landlord may, from time to time,
without prejudge to any other available remedy, use such deposit to the extent
necessary to make good any arrearages of Rent, Additional Rent and any other
damage, injury, expense or liability caused to Landlord by such event of
default. Following any such application of the Security Deposit, Tenant shall
pay to Landlord on demand the amount so applied in order to restore the Security
Deposit to its original amount. If Tenant is not then in default hereunder, any
remaining balance of such deposit shall be returned by Landlord to Tenant upon
expiration of this Lease. If Landlord transfers its ownership interest in the
Building during the Lease term, Landlord may assign the Security Deposit to the
transferee and thereafter Landlord shall have no further liability for the
return of such Security Deposit.
25. MECHANIC'S LIENS. Tenant is prohibited from making, and agrees not
-----------------
to make, alterations in the Premises, except as permitted by Item 14, and Tenant
will not permit any mechanic's lien or liens to be placed upon the Premises or
the Building or improvements thereon during the term hereof caused by or
resulting from any work performed, materials furnished or obligation incurred by
or at the request of Tenant, and in the case of the filing of any such lien,
Tenant will promptly pay same. If default in payment thereof shall continue for
ten (10) days after written notice thereof from Landlord to Tenant, Landlord
shall have the right and privilege, at Landlord's option, of paying the same or
any portion thereof without inquiry as to the validity thereof, and any amounts
so paid, including expenses, interest, and attorney's fees, shall be so much
additional indebtedness hereunder due from Tenant to Landlord and shall be
repaid to Landlord immediately on rendition of a bill therefor, together with
interest per annum at the maximum rate permitted by law until repaid, and if not
so paid within ten (10) days of the rendition of such bill shall constitute
default under Item 20 hereof.
The interest of Landlord shall not be subject to liens for improvements
made by Tenant in and to the Premises. Tenant shall notify every contractor
making such improvements of the provision set forth in the preceding sentence of
this paragraph. The parties agree, should Landlord so request, to execute
acknowledge and deliver without charge to the other a Memorandum of Lease in
recordable form containing a confirmation that the interest of Landlord shall
not be subject to liens for improvements made by Tenant to the Premises.
26. FORCE MAJEURE. Whenever a period of time is herein prescribed for
--------------
action to be taken by Landlord, Landlord shall not be liable or responsible for,
and there shall be excluded from the computation for any such period of time,
any delays due to strikes, riots, acts of God, shortages of labor or materials,
theft, fire, public enemy, injunction, insurrection, court order, requisition of
governmental body or authority, war, governmental laws, regulations or
restrictions or any other causes of any kind whatsoever which are beyond the
absolute control of Landlord.
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27. SEVERABILITY. If any clause or provision of this Lease is illegal,
------------
invalid or unenforceable under present or future laws effective during the term
of this Lease, then and in that event, it is the intention of the parties hereto
that the remainder of this Lease shall not be affected thereby.
28. HOLDING OVER. The failure of Tenant to surrender the Premises on the
------------
date provided herein for the expiration of the term of this Lease (or at the
time the Lease may be terminated otherwise by Landlord), and the subsequent
holding over by Tenant, with or without the consent of Landlord, shall result in
the creation of a tenancy at will at double the Rent payable at the time of the
date provided herein for the expiration of this Lease or at the time the Lease
may be terminated otherwise by Landlord. This provision does not give Tenant any
right to hold over at the expiration of the term of this Lease, and shall not be
deemed, the parties agree, to be a renewal of the Lease term, either by
operation of law or otherwise.
29. RELOCATION. If the Premises consist of less than two thousand, five
----------
hundred (2,500) square feet, Landlord may at any time during the term (as may be
extended) of this Lease relocate Tenant and substitute for the Premises other
space (which would then become the "Premises" for the purposes of this Lease) in
the Building. The parties expressly agree that Landlord shall pay the reasonable
physical moving costs of such relocation, but shall not be responsible for any
other expenses, costs, damages or injuries of any nature whatsoever. Tenant's
new space shall be comparable to the Premises hereby leased. Tenant shall
relocate within thirty (30) days (or such additional time as Landlord may
direct) of Landlord's written notice to Tenant that Tenant do so. Tenant's
failure timely so to relocate shall be a Default (see Item 20 of this Lease), no
curative notice of any nature (after the expiration of such 30 day or additional
period) to be due Tenant from Landlord. Upon such a Default by Tenant, Landlord
shall have all the rights and remedies described in said Item 20.
30. RENT A SEPARATE COVENANT. Tenant shall not for any reason withhold
------------------------
or reduce Tenant's required payments of Rent and other charges provided in this
Lease, it being expressly understood and agreed contractually by the parties
that the payment of Rent and Additional Rent is a contractual covenant by Tenant
that is independent of the other covenants of the parties under this Lease.
31. JOINT AND SEVERAL LIABILITY. If two or more individuals,
---------------------------
corporations, partnerships, or other business association (or any combination of
two or more thereof) shall sign this Lease as Tenant, the liability of each such
individual, corporation, partnership or other business association to pay Rent
and perform all other obligations hereunder shall be deemed to be joint and
several. In like manner, if Tenant is a partnership or other business
association, the members of which are, by virtue of statute or general law,
subject to personal liability, the liability of each such member shall be joint
and several.
32. ABSENCE OF OPTION. The submission of this Lease for examination does
-----------------
not constitute a reservation of or option for the Premises, and this Lease
becomes effective only upon execution and delivery thereof by Landlord.
33. CORPORATE TENANCY. If Tenant is a corporation, the undersigned
-----------------
officer of Tenant hereby warrants and certifies to Landlord that Tenant is a
corporation in good standing and is authorized to do business in the State of
Florida. The undersigned officer of Tenant hereby further warrants and certifies
to Landlord that he or she, as such officer, is authorized and empowered to bind
the corporation to the terms of this Lease by his or her signature thereto.
Landlord, before it accepts and delivers this Lease, may require Tenant to
supply it with a certified copy of the corporate resolution authorizing the
execution of this Lease by Tenant. If Tenant is a corporation (other than one
whose shares are regularly and publicly traded on a recognized stock exchange),
Tenant represents that the ownership and power to vote its entire outstanding
capital stock belongs to and is vested in the officer or officers executing this
Lease or members of his, her or their immediate family. If there shall occur any
change in the ownership of and/or power to vote the majority of the outstanding
capital stock of Tenant, whether such change of ownership is by sale,
assignment, bequest, inheritance, operation of law or otherwise, without the
prior written consent of Landlord, then Landlord shall have the option to
terminate this Lease upon thirty (30) days' written notice to Tenant;
furthermore, Tenant shall have an affirmative obligation to notify immediately
Landlord of any such change.
34. BROKERAGE COMMISSION. Tenant warrants that there are no claims for
--------------------
broker's commissions or finder's fees in connection with its execution of this
Lease other than the commission due to Sun Cove Realty, Inc., which shall be
obligation of the Landlord, and agrees to indemnify and save Landlord harmless
from any liability that may arise from such claim, including reasonable
attorney's fees.
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35. LANDLORD'S DEFAULT. Landlord shall in no event be charged with
------------------
default in the performance of any of its obligations under this Lease unless and
until Landlord shall have failed to perform such obligations within ten (10)
days (or within such additional time as is reasonably required to remedy any
such default) after written notice to Landlord by Tenant properly specifying and
detailing the particulars of wherein and whereby Tenant claims Landlord has
failed to perform any such obligations. If the holder of record of the first
mortgage covering the Premises shall have given prior written notice to Tenant
that it is the holder of such first mortgage and such notice includes the
address at which notices to such mortgagee are to be sent, then Tenant shall
give such mortgagee notice simultaneously with any notice given to Landlord to
correct any default of Landlord as hereinabove provided. Such mortgagee shall
have the right within thirty (30) days (or within such additional time as is
reasonably required to correct any such default) after receipt of such notice to
corrector remedy such default before Tenant may take any action under this
Lease by reason of such default. Any notice of default given Landlord by Tenant
shall be null and void unless simultaneous notice has been given by Tenant to
said first mortgagee. It is specifically understood and agreed, anything in this
Lease to the contrary notwithstanding, that there shall be no personal liability
on Landlord with respect to any of the covenants, conditions or provisions of
this Lease; in the event of a breach or default by Landlord of any of its
obligations under this Lease, Tenant shall look solely to the equity of Landlord
in the Building for the satisfaction of Tenant's remedies, and in absolutely no
event shall Landlord be liable for prospective profits or special, indirect, or
consequential damages.
36. NOTICES. Any notice or document required or permitted to be delivered
-------
hereunder shall be deemed to be delivered or given when (a) actually received or
(b) signed for or "refused" as indicated on the postal service return receipt.
Delivery shall and must be by personal delivery or by United States mail,
postage prepaid, certified or registered mail, addressed to the parties hereto
at the respective addresses set out opposite their names below, or at such other
address as they may hereafter specify by written notice delivered in accordance
herewith:
LANDLORD: Striper Partners IV, Ltd.
3016 U.S. Hwy. 301, N
Suite 400
Tampa, Florida 33619
TENANT: Virtual Mortgage Network, Inc.
MacArthur Blvd.
Suite 175
Newport Beach, CA 92660
Attn: Vivian Adair
37. INSURANCE. Tenant shall not conduct or permit to be conducted any
----------
activity, or place any equipment, materials or other items in, on or about the
Premises or the Building, which will in any way increase the rate of fire or
liability or casualty insurance on the Building. Should Tenant fail to comply
with the foregoing covenant on its part to be performed, Tenant shall reimburse
Landlord for such increased amount upon written demand therefor from Landlord,
the same to be considered Additional Rent payable hereunder.
Tenant shall, at Tenant's sole expense, obtain and keep in force at all
times during the term of this Lease comprehensive general liability insurance,
including property damage, on an occurrence basis, with limits of not less than
One Million Dollars ($1,000,000.00) combined single limit, insuring Landlord and
Tenant against any liability arising out of the ownership, use, occupancy or
maintenance of the Premises and all areas appurtenant thereto. The limit of
said insurance shall not, however, limit the liability of Tenant hereunder.
Tenant may carry said insurance under a blanket policy, provided an endorsement
naming Landlord as an additional insured is attached thereto.
Tenant shall maintain insurance upon all property in the Premises owned by
Tenant or for which Tenant is legally liable. Tenant shall maintain insurance
against such other perils and in such amounts as Landlord may in writing from
time to time require. The insurance required to be obtained and maintained
under this Lease shall be with a company or companies licensed to issue the
relevant insurance and licensed to do business in the State of Florida. Such
insurance company or companies shall each have a policyholder's rating of no
less than "A" in the most recent edition of Best's Insurance Reports. No policy
------------------------
shall be cancellable or subject to reduction of coverage except after thirty
(30) days' prior written notice to Landlord. Landlord shall receive written
evidence of insurance upon request. All policies or insurance maintained by
Tenant shall be in a form, and shall have a substance, acceptable to
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Landlord with satisfactory evidence that all premiums have been paid. Tenant
agrees not to violate or permit to be violated any of the conditions or
provisions of the insurance policies required to be furnished hereunder, and
agrees to promptly notify Landlord of any fire or other casualty. If Tenant
fails to procure and maintain insurance as required hereunder, Landlord may do
so, and Tenant shall, on written demand, as Additional Rent, reimburse Landlord
for all monies expended by Landlord to procure and maintain such insurance.
Tenant hereby waives and releases Landlord of and from any and all
liabilities, claims and losses for which Landlord is or may be held liable to
the extent Tenant receives or is entitled to receive insurance proceeds on
account thereof.
Upon Landlord's written request for same, Tenant will provide Landlord with
written evidence of Tenant's compliance with its obligations under this Item 37.
38. RECORDING. This Lease shall not be recorded without Landlord's prior
---------
written consent.
39. STATUTORILY MANDATED NOTIFICATION. As required by F.S. 404.056(8),
---------------------------------
Landlord notifies Tenant as follows: "RADON GAS: Radon is a naturally occurring
radioactive gas that, when it has accumulated in a building in sufficient
quantities, may present health risks to persons who are exposed to it over time.
Levels of radon that exceed federal and state guidelines have been found in
buildings in Florida. Additional information regarding radon and radon testing
may be obtained from your county public health unit."
40. NON-DISCLOSURE. Tenant agrees that it will not divulge or disclosure
--------------
to third parties the terms, provisions and conditions of this Lease. Tenant's
breach of this Item 40 shall constitute a Default under Item 20 of this Lease,
no curative notice to Tenant from Landlord being required.
41. HAZARDOUS MATERIALS. Tenant shall not cause or permit any Hazardous
-------------------
Material (as hereinafter defined) to be brought upon, kept or used in or about
the Premises or the Building by Tenant, its agents, principals, employees,
assigns, sublessees, contractors, consultants or invitees without the prior
written consent of Landlord, which consent may be withheld for any reason
whatsoever or for no reason at all. If Tenant breaches the obligations stated in
the preceding sentence, or if the presence of Hazardous Material on the Premises
or around the Building caused or permitted by Tenant (or the aforesaid others)
results in contamination of the Premises or the Building or the surrounding
area(s), or if contamination of the Premises or the Building or the surrounding
area(s) by Hazardous Material otherwise occurs for which Tenant is legally,
actually or factually liable or responsible to Landlord (or any party claiming
by, through or under Landlord) for damages, losses, costs or expenses resulting
therefrom, then Tenant shall fully and completely indemnify, defend and hold
harmless Landlord (or any party claiming by, through or under Landlord) from any
and all claims, judgments, damages, penalties, fines, costs liabilities or
losses [including, without limitation: (i) diminution in the value of the
Premise and/or the Building and/or the land on which the Building is located
and/or any adjoining area(s) which Landlord owns or in which it holds a property
interest; (ii) damages for the loss or restriction on use of rentable or usable
space of any amenity of the Premises, the Building or the land on which the
Building is located; (iii) damages arising from any adverse impact on marketing
of space; and (iv) any sums paid in settlement of claims, attorneys' fees,
consultants fees and expert fees] which arise during or after the term of this
Lease, as may be extended, as a consequence of such contamination. This
indemnification of Landlord by Tenant includes, without limitation, costs
incurred in connection with any investigation of site conditions or any
clean-up, remedial, removal or restoration work required by any federal, state
or local government agency or political subdivision because of Hazardous
Material present in the soil or ground water on or under the Premises or the
Building. Without limiting the foregoing, if the presence of any Hazardous
Material on, under or about the Premises, the Building or the surrounding
area(s) caused or permitted by Tenant (or the aforesaid others) results in any
contamination of the Premises, the Building or the surrounding area(s), Tenant
shall immediately take all actions at its sole expense as are necessary or
appropriate to return the Premises, the Building and the surrounding area(s) to
the condition existing prior to the introduction of any such Hazardous Material
thereto; provided that Landlord's prior written approval of such actions by
Tenant shall be first obtained. The foregoing obligations and responsibilities
of Tenant shall survive the expiration or earlier termination of this Lease.
As used herein, the term "Hazardous Material" means any hazardous or toxic
substance, material or waster, including, but not limited to, those substances,
materials, and wastes listed in the United States Department of Transportation
Hazardous Materials Table (49 CFR 172.101) or by the Environmental Protection
Agency as hazardous substances (40 CFR Part 302) and amendments thereto, or such
substances, materials and wastes that are or become regulated under any
applicable local, state or federal law. "Hazardous Material" includes any and
all material or substances which are defined as "hazardous
xiii
<PAGE>
waste", "extremely hazardous waste" or a "hazardous substance" pursuant to
state, federal or local governmental law. "Hazardous Substance" includes but is
not restricted to asbestos, polychlorobiphenyls ("PCB's") and petroleum.
Landlord and its agents shall have the right, but not the duty, to inspect
the Premises at any time to determine whether Tenant is complying with the terms
of this Lease. It Tenant is not in compliance with this Lease, Landlord shall
have the right to immediately enter upon the Premises to remedy any
contamination caused by Tenant's failure to comply, notwithstanding any other
provision of this Lease. Landlord shall use its best efforts to minimize
interference with Tenant's business, but shall not be liable for any
interference caused thereby.
Any non-compliance by Tenant with its duties, responsibilities and
obligations under this Item 41 shall be an "automatic" (no notice of any nature
from Landlord to Tenant being required) default of this Lease (see Item 20).
42. AMENDMENTS. This Lease contains the entire agreement between the
----------
parties hereto and may not be altered, changes or amended, except by written
instrument signed by both parties hereto. No provision of this Lease shall be
deemed to have been waived by Landlord unless such waiver is in writing signed
by Landlord and addressed to Tenant, nor shall any custom or practice which may
grow up between the parties in the administration of the provisions hereof be
construed to waive or lesson the right of Landlord to insist upon the
performance by Tenant in strict accordance with the terms hereof. The terms,
provisions, covenants, and conditions contained in this Lease shall apply to,
inure to the benefit of, and be binding upon the parties hereto, and upon their
respective successors in interest and legal representative, except as otherwise
herein expressly provided.
The parties acknowledge that they have read this Lease (to include its
Exhibits and attachments) in its entirety, that they are familiar with all of
the terms, covenants, provisions and conditions set forth therein and that there
are no other representations, understandings, warranties or agreements
concerning this Lease which do not appear in writing therein. The parties
further acknowledge that the terms and provisions contained within this Lease
have been fully, freely and fairly negotiated by and between them.
xiv
<PAGE>
IN WITNESS WHEREOF, the parties, by and through their undersigned,
duly-authorized representatives, have executed this Lease for the purposes
therein expressed.
Signed, sealed and delivered
in the presence of: TENANT:
Virtual Mortgage Network, Inc.
By: /s/ John D. Murray
/s/ Lee W. Shorey --------------------------------
- ------------------------
Witness
Name: John D. Murray
-------------------------------
/s/ Ellen Pierce
- ------------------------ Title: CEO/CFO
Witness ------------------------------
LANDLORD:
Striper Partners IV, Ltd.
By: /s/ James W. Lewis, Jr.
-------------------------------
/s/ Dana Sparks Name: James W. Lewis, Jr.
- ------------------------ -----------------------------
Witness
Title: President of General Partner
----------------------------
/s/ Diana L. Friedman
- ------------------------
Witness
xv
<PAGE>
[FLOOR PLAN APPEARS HERE]
-------------------------
SUITE 708
848 RENTABLE SF
SCALE 1/8" = 1' - 0"
8-12-96
-------------------------
<PAGE>
PAGE
EXHIBIT "B"
SPECIFICATIONS
DOORS
- -----
Interior
- --------
Existing doors and frames with the exception of the following:
NONE..
Entry
- -----
Existing doors and frames with the exception of the following:
NONE.
CEILING
- -------
Existing grid and ceiling tile with the exception of the following:
NONE.
ELECTRIC
- --------
Existing electrical with the exception of the following:
NONE.
LIGHTING
- --------
Existing lights with the exception of the following:
NONE.
WALLS
- -----
Existing walls with the exception of the following:
Repaint entire suite.
HVAC
- ----
Existing system with the exception of the following:
NONE.
FLOORING
- --------
Existing flooring with the exception of the following:
New 26 ounce commercial grade carpet throughout suite.
OTHER
- -----
Existing conditions with the exception of the following:
NONE.
xvii
<PAGE>
BUILDING RULES AND REGULATIONS
The following Building Rules and Regulations have been adopted by Landlord
for the care, protection and benefit of the Premises and the Building and for
the general comfort and welfare of all tenants.
1. The sidewalks, entrances, passages, halls, elevators and stairways shall not
be obstructed by Tenant or used by Tenant for any purpose other than for ingress
and egress to and from the Building and Tenant's Premises.
2. Restroom facilities, water fountains, and other water apparatus shall not be
used for any purposes other than those for which they were constructed.
3. Landlord reserves the right to designate the time when freight, furniture,
goods, merchandise and other articles may be brought into, moved or taken from
Tenant's Premises or the Building.
4. Tenant shall not put additional locks or latches upon any door without the
written discretionary consent of Landlord. Any and all locks so added on any
door shall remain for the benefit of Landlord, and the keys to such locks shall
be delivered to Landlord by and from Tenant.
5. Landlord shall not be liable for injuries, damage, theft, or other loss to
persons or property that may occur upon or near any parking areas that may be
provided by Landlord. Tenant, its agents, employees, and invitees are to use
same at their own risk, Landlord to provide no security with respect thereto.
The driveways, entrances, and exits upon, into and from such parking areas shall
not be obstructed by Tenant, Tenant's employees, agents, guests, or invitees;
provided, however, Landlord shall not be responsible or liable for failure of
any person to observe this rule. Tenant, its employees, agents, guests and/or
invitees shall not park in spaces(s) that may be reserved or designated for
others.
6. Tenant shall not install in the Premises any heavy weight equipment or
fixtures or permit any concentration of excessive weight in any portion thereof
without first having obtained Landlord's discretionary written consent.
7. Landlord reserves the right at all times to exclude newsboys, loiterers,
vendors, solicitors, and peddlers from the Building and to require registration
or satisfactory identification or credentials from all persons seeking access to
any part of the Building outside ordinary business hours. Landlord will exercise
its best judgment in the execution of such control but will not be liable for
the granting or refusal of such access.
8. Landlord reserves the right at all times to exclude the general public from
the Building upon such days and at such hours as in Landlord's sole judgment
will be in the best interest of the Building and its tenants.
9. No wires of any kind or type (including but not limited to T.V. and radio
antennas) shall be attached to the outside of the Building and no wires shall be
run or installed in any part of the Building without Landlord's prior
discretionary written consent.
10. If the Premises are furnished with carpeting, Tenant shall provide a
plexiglass or comparable carpet protection mat for each desk chair customarily
used by Tenant. For default or carelessness in these respects, Tenant shall pay
Landlord the cost of repairing or replacing said carpet, in whole or in part, as
Additional Rent when, in Landlord's sole judgment, such repair or replacement is
necessary.
11. Landlord shall furnish a reasonable number of door keys to Tenant's
Premises and/or the Building which shall be surrendered on termination or
expiration of the Lease. Landlord reserves the right to require a deposit for
such keys to insure their return at the termination or expiration of the Lease.
Tenant shall get keys only from Landlord and shall not obtain duplicate keys
from outside source. Further, Tenant shall not alter the locks or effect any
substitution of such locks as are presently being used in Tenant's Premises or
the Building.
12. Tenant shall keep all doors to Premises closed at all times except for
ingress and egress to the Premises.
13. All installations in the Common Telephone/Electrical Equipment Room shall
be limited to terminal boards and connections. All other electrical equipment
must be installed within Tenant's premises.
14. It is expressly understood and agreed that any items of any nature
whatsoever placed in Common Areas (i.e., hallways, restrooms, elevators, parking
garage, storage areas and equipment rooms) are placed at Tenant's sole risk and
Landlord assumes no responsibility whatsoever for any loss or damages regards
same.
<PAGE>
EXHIBIT 10.65
PROMISSORY NOTE
---------------
Dated as of
__________________
Amount: $____________
FOR VALUE RECEIVED, the undersigned Virtual Mortgage Network, Inc., a
Delaware corporation ("Maker"), promises to pay to the order of ________________
the principal amount of $_______, together with interest on the unpaid principal
balance on the earlier of (a) 90 days after the execution of this note or (b)
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. Interest is payable on the Maturity Date.
2. COMPUTATION. Interest chargeable hereunder shall be calculated from the
------------
date hereof, 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.
3. PAYMENT. The unpaid principal under this Promissory Note plus all
--------
accrued but unpaid interest thereon shall be payable upon the Maturity
Date. In the event that the Maturity Date occurs as a result of the
Maker's IPO, an additional amount of 35% of the outstanding principal
shall become due and payable (the "Prepayment Penalty").
4. DEFAULT. Maker will be in default if any of the following happens: (a)
--------
Maker fails to make payments when due or (b) 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. 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.
<PAGE>
Page 2
5. AMENDMENTS IN WRITING. This Promissory Note may be changed, modified
----------------------
or amended only in writing.
6. 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.
7. ENTIRE AGREEMENT. This Promissory Note contains the entire
-----------------
understanding among the parties hereto with respect to the subject
matter hereof and supersedes all prior written and oral agreements,
understandings, commitments and practices between the parties.
8. TRANSFERABILITY. The right to principle 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.
<PAGE>
Made and Executed at
________________, California Virtual Mortgage Network, Inc.
a Delaware corporation
By:
--------------------------
Michael A. Barron
Chief Executive Officer
Acknowledged and Agreed:
By:
-------------------------
Name:
-----------------------
Title:
----------------------
<PAGE>
ATTACHMENT I
VIRTUAL MORTGAGE NETWORK, INC.
LIST OF INVESTORS SIGNING THE
PROMISSORY NOTE
<TABLE>
<CAPTION>
Investor Note Amount
-------- -----------
<S> <C>
Brian D. Frenzel $100,000
Denis R. Coleman $100,000
Gerald S. Casilli $100,000
John J. Gottsman Trust $ 50,000
Paul F. Glenn Revocable Trust $100,000
</TABLE>
<PAGE>
EXHIBIT 10.66
To: Virtual Mortgage Network, Inc.
Bridge Debt Holders
Attention
Firm Name
Address
City, State, Zip
Dear:
This letter agreement is made and entered into as of February 2, 1998 by
and between Virtual Mortgage Network, Inc. and the person identified on the
signature page hereto ("Bridge Debt Holder").
The purpose of this letter agreement is to set forth the terms under which
the Bridge Debt Holder agrees to convert its outstanding debt principal and
accrued interest up to the effective date of the initial public offering of the
Company's common stock (the "IPO") into Series B Preferred Stock and Common
Stock to be issued simultaneously with the effectiveness of the IPO.
Exhibit A attached is the proposed instrument. It is a Series B Preferred
with several key components for the conversion of the debt principal.
1) Convertible Redeemable, non-voting Preferred shares with the following
features:
A) Liquidation value of $9.50 per share paid after the Company's
existing Series A Preferred which have a liquidation value of
$1.10 per share. There are 2,250,000 authorized Series A Preferred
shares.
B) The Series B Preferred are convertible into Common at a price of
$9.50 per share.
C) Redeemable at the Company's option at any time, at various levels
of redemption premiums as per Exhibit A, but after the Company has
offered to redeem the Series A Preferred and has completed any
redemption so requested.
In addition, the Company, if the "Greenshoe" has been exercised by the
underwriters in the IPO, will commence redeeming the Series B Preferred
on a pro-rata basis to the extent of the net proceeds of the
"Greenshoe" subject to the consent and, if requested, prior redemption
of the Series A Preferred Stock. The Company will not have any other
obligation to redeem the Series B Preferred Stock.
D) The conversion of the debt principal will be at $9.50 of debt per
share to determine the number of Series B Preferred shares.
E) Other provisions of importance are on Exhibit A.
F) Accumulated interest to the effective date of the IPO will be
converted into Common Stock at $7.50 of interest per share, the
expected IPO Offering price.
G) The Series B Preferred shares, the common shares into which they
may be converted and the Common Stock issued in exchange for
interest are hereby
<PAGE>
made subject to the Provisional Lock-up Agreement requested by the
underwriters.
As previously noted, Kay Capital Company made a loan to the Company
evidenced by a $1.3 million note. You affirm that:
1) Kay Capital Company is entitled to the rights of a party to the
current Bridge Debt Security and Intercreditor Agreement.
2) In the event of a bankruptcy, the Bridge Debt Holders agree to
appoint a majority of the creditors committee from persons
designated by Kay Capital Company.
The foregoing two items regarding Kay Capital Company merely confirm your prior
consent and approval.
Since we are attempting to refile with the SEC in the next few days, we are
asking for your prompt consent and agreement to the above items.
At the end of this letter, we have provided various consent sections so
that you can signify your approval to this request by item.
By signing this letter agreement, the undersigned acknowledges that it
supersedes all prior letter agreements and understandings of the parties on this
subject. The undersigned also confirms that they are familiar with the terms and
conditions of the Provisional Lock-up Agreement requested by the underwriters.
We realize you may have questions and I encourage you to call me at (714)
252-0700 (if I am unavailable, please ask for Ellen Pierce so she can pull me
from whatever I am doing to speak to you to avoid phone tag). In addition,
please feel free to speak with our underwriter, Mr. Carl Kleidman, Managing
Director of Barrington Capital at (212) 974-5764.
Sincerely,
________________________________
John D. Murray
President - CFO - COO
cc: Carl Kleidman, Barrington Capital
<PAGE>
Conversion of Bridge Debt and accumulated interest to Series B Preferred Stock
and Common Stock.
________________________________________
Approved
Approval to extend maturity date of Bridge Debt from January 6, 1998 to March
20, 1998.
________________________________________
Approved
Approval for Virtual Mortgage to extend Bridge Debt by up to $2,000,000.
________________________________________
Approved
Approval for Kay Capital Company to participate in Bridge Debt Security
Agreement and Intercreditor Agreement.
________________________________________
Approved
Approval that Bridge Debt Holder agrees to elect Kay Capital Company designees
to a majority of a creditor committee in the event of Bankruptcy.
________________________________________
Approved
<PAGE>
Virtual Mortgage Network, Inc.
Bridge Conversion Proposal
- - Convert face value of Bridge Debt into Convertible Redeemable, non-voting
Series B Preferred Shares with the following terms and conditions:
- - Dividend rate of 9.9% of liquidation value paid when declared and paid only
after dividends are paid in full on Series A Preferred Stock.
- - Liquidation value of $9.50 per share, paid only after Series A is paid.
- - Convertible into Common at a price of $9.50 per share;
- - Redeemable by the Company at any time (after the Company has offered to
redeem the Series A Preferred Stock and has completed any redemption so
requested) including out of the proceeds of the IPO "Greenshoe", at the
following redemption premiums:
- 105% plus accrued interest until August 1, 1998;
- 110% plus accrued interest from 8/1/98 through 1/31/1999;
- 115% plus accrued interest from 2/1/99 through 1/31/00;
- 125% plus accrued interest from 2/1/00 through 1/31/01;
- 140% plus accrued interest from 2/1/01 through 1/31/02;
- 155% plus accrued interest from 2/1/02 through 1/31/03;
- 170% plus accrued interest from 2/1/03 through 1/31/04;
- 185% plus accrued interest from 2/1/04 through 1/31/05;
- 200% thereafter.
<PAGE>
ATTACHMENT I
VIRTUAL MORTGAGE NETWORK, INC.
LIST OF INVESTORS EXCHANGING DEBT
<TABLE>
<CAPTION>
COMMON
SERIES B SHARES
PREFERRED (ASSUMES
NAME DEBT PRINCIPAL SHARES 3/6/98)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Anacapa Ventures $ 50,000 5,263 1,617
Boston Provident Partners 885,000 93,158 19,141
BP Institutional Partners LP 40,000 4,211 1,284
Maritime Global Subsidiary I, Ltd. 75,000 7,895 2,424
Daystar Partners 205,000 21,579 6,170
Fowler, Randall 85,000 8,947 2,843
Gendell, Jeffrey 500,000 52,632 12,611
Malik, Andrew 25,000 2,632 808
Moore Global Investments, Ltd. 500,000 52,632 12,100
Moore Global Investments, Ltd. 1,000,000 105,263 29,622
Nemirov, Steven 25,000 2,632 769
Scullion, James 57,500 6,053 1,802
Scibelli, James 100,000 10,526 2,473
Sundance Ventures 600,000 63,158 18,467
Wells, Larry 42,500 4,474 1,416
- --------------------------------------------------------------------------------
AMENDMENT NO. 1 FILING TOTAL $4,190,000
Driscoll, Vance 50,000 5,264 1,417
Wells, John 15,000 1,579 667
- --------------------------------------------------------------------------------
AMENDMENT NO. 2 FILING TOTAL $4,255,000 447,898 115,631
</TABLE>
<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
