<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended September 30, 1997
---------------------------------------
Commission File Number 000-22567
--------------------------------
THE WMF GROUP, LTD.
--------------------
(Exact name of registrant as specified in its charter)
Delaware 54-1647759
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) identification no.)
1593 Spring Hill Road, Suite 400, Vienna, Virginia 22182
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including are code (703) 610-1400
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days, Yes No X
--- ---
Common Stock, $.01 par value, outstanding as of November 14, 1997:
4,217,478 Shares of Common Stock
<PAGE> 2
The WMF GROUP, LTD.
(Formerly NHP Financial Services, Ltd.
and Formerly WMF Holdings Ltd.)
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
Part I Financial Information
Item 1. Consolidated Balance Sheets
As of September 30, 1997 (unaudited) and December 31, 1996 1
Consolidated Statements of Operations
For the Three Months Ending September 30, 1997 and 1996
(unaudited), For the Nine Months Ending September 30, 1997
(unaudited), The Period April 1, 1996 to September 30, 1996
(unaudited) and
The Period January 1, 1996 to March 31, 1996 2
Consolidated Statements of Cash Flows
For the Nine Months Ending September 30, 1997 (unaudited),
For the Period April 1, 1996 to September 30, 1996
(unaudited) and
For the Period January 1, 1996 to March 31, 1996 3
Notes to Unaudited Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation 9
Part II. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
<PAGE> 3
Part 1. Financial Information
The WMF GROUP, LTD.
(Formerly NHP Financial Services, Ltd. and
Formerly WMF Holdings Ltd.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of As of
September 30, 1997 December 31, 1996
------------------- -----------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $8,433,843 $6,601,044
Restricted cash equivalents 1,478,348 1,193,549
Mortgage-backed securities, at amortized cost, pledged 3,865,647 3,909,863
Mortgage loans held for sale, pledged 35,649,547 40,262,782
Due from investors 2,332,170 -
Principal, interest and other servicing advances 2,719,221 2,012,440
Furniture, equipment and leasehold improvements, net 1,698,013 1,484,613
Servicing rights, net 22,520,260 22,460,014
Goodwill, net 11,936,269 7,704,847
Other assets 3,150,138 2,467,489
----------- -----------
Total assets $93,783,456 $88,096,641
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Accounts payable and accrued expenses $5,161,002 $ 2,609,350
Warehouse lines of credit 34,874,951 39,924,736
Servicing acquisition line of credit 5,711,745 6,211,745
Deferred fees 3,817,460 2,786,071
Allowance for loan servicing portfolio losses 4,871,679 4,395,749
Due to affiliates 9,560,920 872,000
Other liabilities 2,389,555 5,585,075
Deferred tax liability, net 3,143,885 3,183,885
---------- ----------
Total liabilities 69,531,197 65,568,611
---------- ----------
Shareholder's equity:
Common stock, $.01 par value, 7,899,380
shares authorized, 4,217,478 issued and outstanding 42,175 42,175
Additional paid-in capital 21,330,690 21,330,690
Retained earnings 2,879,394 1,155,165
---------- ----------
Total shareholder's equity 24,252,259 22,528,030
---------- ----------
Total liabilities and shareholder's equity $ 93,783,456 $88,096,641
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
1
<PAGE> 4
THE WMF GROUP, LTD.
(Formerly NHP Financial Services, Ltd. and
Formerly WMF Holdings Ltd.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Three Months Nine Months The Period The Period
Ending September Ending Ending April 1, 1996 January 1,
30, 1997 September 30, September 30, to September 30, 1996 to March
1996 1997 1996 31, 1996
--------------------- ----------------- ---------------- ----------------- --------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUES:
<S> <C> <C> <C> <C> <C>
Servicing fees $3,074,046 $2,388,377 $8,704,902 $4,619,110 $2,055,031
Gain on sale of mortgage loans, net 6,254,721 1,845,671 12,171,969 4,449,465 2,107,720
Gain on sale of servicing 296,605 - 296,605 - -
Interest income 1,542,565 1,132,942 3,653,328 2,247,088 861,761
Placement fee income 1,556,191 1,273,050 3,868,515 2,468,303 1,135,732
Other income 232,864 370,916 802,068 497,391 667,698
--------- --------- ------- ------- -------
Total Revenues 12,956,992 7,010,956 29,497,387 14,281,357 6,827,942
---------- --------- ---------- ---------- ---------
EXPENSES:
Salaries and employee benefits 5,471,237 3,109,914 13,125,027 5,924,105 2,770,006
General and administrative 2,398,433 1,219,812 5,186,428 2,583,606 926,835
Occupancy 501,112 426,017 1,539,195 707,839 241,178
Provision for loan servicing losses 26,680 246,765 479,930 502,659 285,343
Interest 686,123 247,598 1,288,809 743,805 307,320
Amortization of servicing rights 1,145,485 1,024,358 3,353,580 1,975,384 470,917
Depreciation and amortization 441,413 305,095 1,180,209 588,159 80,578
Losses from Beverly Hills Securities
investment/advances - - - - 600,125
---------- --------- ---------- ---------- ---------
Total Expenses 10,670,483 6,579,559 26,153,178 13,025,557 5,682,302
---------- --------- ---------- ---------- ---------
Income before income tax expense 2,286,509 431,397 3,344,209 1,255,800 1,145,640
Income tax expense 1,013,687 249,373 1,619,980 652,220 840,431
--------- ------- --------- ------- -------
Net income $1,272,822 $182,024 $1,724,229 $603,580 $305,209
========== ======== ========== ======== =======
Net income per share $0.30 $0.04 $0.41 $0.15 $0.07
===== ===== ===== ===== =====
Weighted average number of shares
outstanding 4,217,478 4,217,478 4,217,478 4,217,478 4,217,478
========== ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE> 5
THE WMF GROUP, LTD.
(Formerly NHP Financial Services, Ltd. and
Formerly WMF Holdings Ltd.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
The Nine Months The Period
Ended April 1, 1996 The Period
September 30, to September 30, January 1, 1996 to
1997 1996 March 31, 1996
---- ---- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $1,724,229 $603,580 $305,209
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of furniture, equipment
and leasehold improvements 433,388 248,500 77,192
Amortization of mortgage servicing rights 3,353,580 1,975,384 470,917
Amortization of goodwill 746,821 339,659 2,933
Losses from investments/advances 0 0 600,125
Gain on sale of mortgage serving rights (296,605) 0 0
Provision for possible loan losses 475,930 502,659 285,343
Deferred tax benefit (40,000) (152,306) 0
Mortgage loans originated (926,137,157) (439,550,893) (176,724,231)
Mortgage loans sold 930,750,392 407,170,814 186,069,611
Decrease (increase) in principal, interest and other
servicing advances (706,781) 287,410 (924,432)
Increase (decrease) in due to affiliates 5,326,826 (15,001) 280,082
Increase in due from investors (2,332,170) 0 0
Increase in restricted cash equivalents (284,799) (153,916) (59,509)
Decrease (increase) in other assets (659,277) 409,867 (805,023)
Increase in accounts payable and accrued expenses 4,039,514 1,698,271 1,711,832
Increase (decrease) in warehouse lines of credit, net (5,049,785) 30,724,198 (9,169,894)
Increase (decrease) in deferred fees 1,031,389 230,021 (1,157,316)
Decrease in other liabilities (1,321,288) (1,493,269) (143,907)
----------- ------------- -------------
Net cash provided by operating activities 11,054,207 2,824,978 818,932
----------- ------------- -------------
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold
improvements (619,702) (807,074) (71,065)
Purchase of mortgage servicing rights (2,378,454) (3,003,045) (332,569)
Origination of servicing rights (1,666,423) (1,768,117) (150,088)
Purchase of ACR production system and pipeline (4,978,243) 0 0
Askew acquisition 0 (2,000,000)
Proceeds from sale of mortgage servicing rights 927,656 0 0
Principal from mortgage-backed securities 20,844 13,110 5,218
----------- ------------- -------------
Net cash used in investing activities (8,694,322) (7,565,126) (548,504)
----------- ------------- -------------
Cash flows from financing activities:
Repayment of and borrowings on servicing acquisition
line of credit (500,000) 3,330,967 (26,350)
Capital lease obligation (27,086) (16,419) (5,277)
----------- ------------- -------------
Net cash (used for) provided by financing activities (527,086) 3,314,548 (31,627)
----------- ------------- -------------
Net increase (decrease) in cash 1,832,799 (1,425,600) 238,801
Cash at beginning of period 6,601,044 5,435,954 5,197,153
----------- ---------- -------------
Cash at end of period $8,433,843 $4,010,354 $5,435,954
=========== ========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE> 6
THE WMF GROUP, LTD.
(Formerly NHP Financial Services, Ltd. and
Formerly WMF Holdings Ltd.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION:
On April 1, 1996, NHP Incorporated ("NHP"), a Delaware Corporation,
acquired all the outstanding capital stock of WMF Holdings Ltd. ("Holdings"), a
Delaware corporation, for consideration of approximately $21 million in the form
of $16.8 million in cash and 210,000 shares of NHP's common stock. Holdings was
subsequently renamed NHP Financial Services, Ltd. and NHP Financial Services,
Ltd. has subsequently been renamed The WMF Group, Ltd. (the "Company"). The
Company's principal business activities are mortgage loan origination, secondary
marketing, and servicing.
Apartment Investment and Management Company ("AIMCO"), a wholly-owned
subsidiary of AIMCO and NHP have entered into an Agreement and Plan of Merger,
dated as of April 21, 1997 and amended and restated as of October 14, 1997(the
"Merger Agreement") pursuant to which the AIMCO subsidiary will, subject to the
terms and conditions provided in the Merger Agreement, merge with and into NHP
(the "Merger"), thereby making NHP, as the surviving corporation, a
wholly-owned subsidiary of AIMCO (the "Surviving Corporation"). In addition,
AIMCO (through an unconsolidated subsidiary) purchased 51 percent of the shares
of NHP Common Stock on May 5, 1997 pursuant to a stock purchase agreement among
AIMCO, Demeter Holdings Corporation and Capricorn Investors, L.P. ("Capricorn")
and subsequently acquired additional shares and now holds 53.3% of the shares
of NHP Common Stock. AIMCO required that a rights distribution occur as a
condition to the Merger. On May 9, 1997, NHP distributed to each holder of
record of NHP Common Stock at the close of business on May 2, 1997, one right
(a "Right") for each outstanding share of NHP Common Stock (the "Rights
Distribution"). Each Right entitles the holder to receive from the Company, or
any successor thereof, a distribution (the "Share Distribution" and, with the
Rights Distribution, the "Distribution") of one-third of a share of Company
Common Stock, subject to the terms of a Rights Agreement, dated as of April 21,
1997 (the "Rights Agreement") between NHP, the Company and The First National
Bank of Boston, as Rights Agent. The Rights distributed on May 9, 1997 are
evidenced by the certificates of NHP Common Stock then outstanding. NHP Common
Stock issued after May 9, 1997 and prior to the Maturity Time (as defined
below) will have a legend and reference to the Rights Agreement. Subject to
certain conditions, the Rights will mature at the earlier of (i) the effective
time of the Merger and (ii) December 1, 1997 (such time being referred to as
the "Maturity Time"). Capricorn Investors II, L.P., whose general partner is
managed by the person who controls the general partner of Capricorn, has
entered into a commitment pursuant to which it would, following the negotiation
and execution of definitive documentation and subject to the satisfaction of
the conditions that will be specified therein, purchase 546,448 shares of
Company common stock at the time of the Share Distribution for a price of $9.15
per share. The Merger Agreement requires NHP to contribute to the Company an
amount equal to NHP's Free Cash Flow (as defined in the Merger Agreement) since
February 1, 1997 to the extent such amount exceeds Merger transaction costs.
Pursuant to the Rights Agreement, NHP will distribute all of the issued
and outstanding shares of the Company's Common Stock held by NHP to holders of
Rights as governed by the Rights Agreement ("Share Distribution"). NHP
Stockholders will receive cash in respect of fractional shares of Company Common
Stock that would otherwise be distributed at the rate of $9.15 per share of
Company Common Stock. The NHP stockholders will not be required to pay any
consideration for the shares of Company Common Stock they receive in the Share
Distribution. The Company's Board of Directors has approved a stock split of
approximately 789.94 per share and approved the issuance of additional shares to
NHP immediately prior to the Share Distribution so that the number of shares of
the Company Common Stock held by NHP at the time of the Share Distribution is
equal to exactly one-third of the issued and outstanding shares of NHP Common
Stock at such time. The split has been applied retroactively to all periods
presented. Additionally, the authorized number of shares increased to
25,000,000 on October 3, 1997.
4
<PAGE> 7
The Company has one wholly owned subsidiary, Washington Mortgage
Financial Group, Ltd. ("Washington Mortgage"), which is incorporated under the
laws of Delaware. Washington Mortgage's subsidiaries are WMF Huntoon, Paige
Associates Limited ("WMF Huntoon Paige"), and WMF Proctor Ltd. ("WMF Proctor")
which are incorporated under the laws of the states of Delaware and Michigan,
respectively. The Company has offices in ten states.
As a result of the Company's acquisition on April 1, 1996 by NHP,
NHP's acquisition cost was pushed down to the Company and all assets acquired
were recorded at their estimated fair value which resulted in recording an asset
of approximately $19.1 million related to acquired servicing rights. In
addition, the Company recorded approximately $5.1 million of goodwill
related to the transaction and a deferred tax liability of approximately $3.2
million. The goodwill is being amortized over seven years. The acquired
servicing rights are being amortized over periods up to seven years. Both
acquired servicing rights and goodwill are amortized based upon the estimated
life of the servicing rights acquired. As a result of the acquisition,
shareholder's equity as of March 31, 1996, was eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated financial
statements contain all adjustments of a normal recurring nature necessary to
present fairly the financial position of the Company as of September 30, 1997
and December 31, 1996, the results of its operations for the three months ending
September 30, 1997 and 1996, the nine months ending September 30, 1997, the
period April 1, 1996 to September 30, 1996 and the period January 1, 1996 to
March 31, 1996, and its cash flows for the nine months ending September 30,
1997, the period April 1, 1996 to September 30, 1996 and the period January 1,
1996 to March 31, 1996
These financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
notes disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles are omitted. While the
management believes that the disclosures presented are adequate to make the
information not misleading, these financial statements should be read in
conjunction with the Company's Registration statement. The current period's
results of operations are not necessarily indicative of results which ultimately
may be achieved for the year.
METHOD OF ACCOUNTING
The consolidated financial statements of the Company are prepared on the
accrual basis of accounting in accordance with generally accepted accounting
principles. 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 at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period.
3. ACQUISITIONS AND DISPOSITIONS:
In May 1996, WMF Huntoon Paige purchased the loan production system and
pipeline, as well as certain fixed assets of American Capital Resource ("ACR")
for approximately $2.2 million cash. In connection with the purchase, WMF
Huntoon Paige also acquired approximately $2.0 million of servicing rights. As
a result, WMF Huntoon Paige recorded assets of approximately $4.2 million
representing the fair value of the assets acquired. The servicing rights
acquired are being amortized over seven years, which is the estimated life of
the servicing rights acquired. The loan production system and pipeline acquired
are being amortized in proportion to the loans originated from the acquired
pipeline. These costs were fully amortized. ACR specializes in the origination
and servicing of multifamily mortgage loans guaranteed by the FHA.
5
<PAGE> 8
On December 31, 1996, the Company purchased 100 percent of the
outstanding stock of WMF Proctor for approximately $3.7 million. NHP paid cash
for the purchase on January 2, 1997, on behalf of the Company. As such, the
Company has accrued approximately $3.7 million as of December 31, 1996. The
acquisition was accounted for as a purchase and accordingly, the acquired
assets and liabilities have been recorded at their estimated fair values at the
date of acquisition. As a result, tangible assets of approximately $600,000,
current liabilities of $200,000, and goodwill of $3.1 million were recorded.
The goodwill will be amortized on a straight-line basis over twenty years. The
twenty year amortization period is the estimated life of the mortgage loan
production operations acquired. WMF Proctor specializes in the origination and
servicing of commercial loans. WMF Proctor originated approximately $221
million in commercial mortgage loans in 1996.
On April 15, 1997, the Company purchased the assets and liabilities of
Askew Investment in Dallas, Texas for $5.6 million. In accordance with the
purchase agreement, $4.6 million of the purchase price was paid upon closing
with the remaining $1.0 million paid in the form of earnouts upon attainment of
certain performance objectives. The acquisition has been accounted for as a
purchase resulting in goodwill of $4.6 million. Such goodwill will be amortized
on a straight-line basis over twenty years which is the estimated life of the
mortgage loan production operations acquired. Askew Investment is a multifamily
and commercial mortgage bank, having correspondent relationships with fourteen
insurance companies, which originated $374 million of mortgages in 1996.
4. SERVICING RIGHTS:
The activity for servicing rights consists of the following:
<TABLE>
<CAPTION>
Nine months The Period The Period
Ending April 1, 1996 to January 1, 1996 to
September 30, 1997 December 31, 1996 March 31, 1996
--------------------- ----------------- -------------------
<S> <C> <C> <C>
Beginning balance, net $ 22,460,014 $ 8,477,403 $ 8,465,663
Increase due to acquisition - 10,657,597 -
Purchase 2,378,454 3,727,581 332,569
Originations 1,666,423 2,659,529 150,088
Sale (631,051) - -
Amortization (3,353,580) (3,062,096) (470,917)
------------ ------------ -----------
Ending balance, net $ 22,520,260 $ 22,460,014 $ 8,477,403
============ ============ ===========
</TABLE>
The fair value of the mortgage servicing rights was approximately $48.3
and $28.5 million at September 30, 1997 and December 31, 1996, respectively. The
estimated fair value presented herein is not necessarily indicative of the
amounts the Company could realize in a current market exchange. The use of
different market assumptions, valuation methodologies or both may have a
material effect on the estimates of fair value. The fair value estimate
presented herein is based on pertinent information available as of September 30,
1997.
5. DUE FROM (TO) AFFILIATES:
As of December 31, 1996, the Company has accrued, in other liabilities,
approximately $3.4 million payable to NHP as NHP funded the purchase of WMF
Proctor on January 2, 1997. The $872,000 of due to affiliate as of December 31,
1996, represents a payable to NHP for taxes paid on behalf of the Company. As
of September 30, 1997 the $3.4 million payable to NHP has been reclassified
into due to affiliate. Also in due to affiliate as of September 30, 1997 is
$4.6 million which is due to NHP as NHP funded the purchase of Askew (See
Note 3) in April 1997 on behalf of the Company. The remaining $1.6 million in
due to affiliate as of September 30, 1997 represents a payable to NHP for taxes
paid on behalf of the Company in addition to interest incurred and payable to
NHP related to these fundings by NHP.
6
<PAGE> 9
6. BALANCE SHEET CLASSIFICATION:
The Company prepares its consolidated balance sheet using an
unclassified balance sheet presentation as is customary in the mortgage banking
industry. A classified presentation would have aggregated current assets,
current liabilities, and net working capital as follows:
<TABLE>
<CAPTION>
As of As of
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Current assets $ 52,105,957 $ 51,343,755
Current liabilities 55,239,872 52,762,432
------------ ------------
Net working capital $ (3,133,915) $ (1,418,677)
============ ============
</TABLE>
7. LITIGATION:
The Company is involved in litigation related to the normal course of
its business. Management is of the opinion that the litigation will not have a
material adverse impact on the Company's financial position or operating
results. No amounts have been accrued because the loss, if any, cannot be
reasonably estimated.
8. FINANCIAL INSTRUMENTS:
The Company has entered into hedging arrangements on a limited basis to
reduce the effects of interest rate movements, and may in the future enter into
additional arrangements particularly if the Company increases its securitization
of mortgage loans. The instruments entered into to date have been swap
contracts, and future arrangements may also include futures contracts and the
short sale of financial instruments such as U.S. Treasury bonds. Such
transactions may be used for other purposes, including managing the effect of
interest rate changes on lines of credit with variable interest rates and on the
value of uncommitted loans held for sale (to the extent the Company elects to
hold such loans). The Company intends to use hedging instruments to manage risk,
and not for speculative purposes. Such transactions could nevertheless cause the
Company to recognize losses depending on the terms of the instrument, the
performance by counter-parties and actual interest rate movements. As of
September 30, 1997 and 1996 no such instruments were outstanding.
9. DUE FROM INVESTORS:
As of September 30, 1997, the Company utilized the Federal National
Mortgage Association's (Fannie Mae) "As Soon as Pooled" program to sell
approximately $350 million in conforming mortgage loans. Under the terms of the
program, the Company delivered the mortgage loans to Fannie Mae and assigned a
forward trade. The forward trade is an agreement between the Company and Fannie
Mae or a third party whereby the Company agrees to sell the mortgage loans on a
specified date for a specified price. The $2.7 million due from investors
represents the cash to be received by the Company upon settlement of the forward
trade.
10. DEBT FACILITIES:
On May 1, 1997, the Company entered into a $35 million revolving line of
credit which will be principally drawn for purposes of originating loans. The
warehouse advances are secured by mortgage loans held for sale and are required
to be repaid upon sale of the mortgage loans. The interest rate on the warehouse
advances is 3/4 percent
7
<PAGE> 10
to the extent compensating balances are maintained or is equal to the Euro-Rate
plus 3/4 percent for amounts borrowed in excess of the compensating balances.
Interest is payable monthly. The facility can also be used for principal and
interest advances and working capital purposes with credit limits of $2.5
million to $5.0 million, respectively. The interest rate on the principal and
interest advances and working capital portion of the facility are 1.5% and 2.0%
to the extent compensating balances are maintained or the Euro-Rate plus 1.5% or
2% for amounts borrowed in excess of the compensating balances, respectively.
Interest is payable monthly. The maximum principal amount that may be borrowed
under the three different facilities is $35 million. There were no borrowings
under this facility as of September 30, 1997.
11. SUBSEQUENT EVENTS:
On November 5, 1997, the Company purchased 100 percent of the
outstanding stock of The Robert C. Wilson Company and its Arizona subsidiaries
("Wilson"), a Houston based commercial mortgage banking company. The purchase
price will be allocated between the fair value of the assets acquired with the
difference between the fair value and purchase price recorded as goodwill. The
Company acquired all of Wilson's issued and outstanding common stock for a
purchase price of approximately $4 million in cash (80 percent of which was paid
at closing and the remaining 20 percent of which would be paid in the form of
earnouts upon the attainment of certain performance objectives over a 42 month
period).
8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
OVERVIEW
On April 1, 1996, NHP acquired all the outstanding capital stock of the
Company for consideration of approximately $21 million, in the form of $16.8
million in cash and 210,000 shares of NHP Common Stock. (For periods prior to
NHP's acquisition of the Company, the Company is referred to as "WMF Holding.").
As a result of the acquisition of the Company by NHP, all assets and liabilities
acquired were recorded at their fair value which resulted in an increase of the
recorded value of the Company's servicing rights of $10.7 million and goodwill
of $5.1 million.
The following discussion and analysis presents the significant changes
in financial condition and results of operations of the Company for the three
months ended September 30, 1997 and 1996 and the nine months ended September 30,
1997 and 1996. The results of operations of acquired businesses are included in
the Company's and WMF Holding's Consolidated Financial Statements from the date
of acquisition. This discussion should be read in conjunction with the Company's
Consolidated Financial Statements and notes thereto included in the Information
Statement/Prospectus. For the purpose of comparing the nine months ended
September 30, 1997 to the nine months ended September 30, 1996 the three months
ended March 31, 1996 has been combined with the six months ended September 30,
1996. As a result of the acquisition of the Company by NHP, the nine months
ended September 30, 1997 includes $576,000 of additional amortization expense as
compared to the nine months ended September 30, 1996. For purposes of comparing
the nine months ended September 30, 1997 and 1996, no other income statement
amounts have been impacted by the acquisition.
The Company has experienced significant growth in its net income,
revenues, annual production volume and servicing volume. The Company seeks to
continue to expand its business through (i) acquisitions and internal growth;
(ii) design and delivery of new mortgage products; and (iii) expansion into
related businesses. On a going-forward basis, to the extent that the Company is
successful in completing acquisitions, the Company will experience increased
expenses associated with the amortization of goodwill and acquired mortgage
servicing rights and, if the acquisitions are financed by additional
indebtedness, an increase in interest expense. Through the acquisitions, the
Company's primary focus is to increase its mortgage origination capabilities and
servicing portfolio as well as to expand into related businesses. Accordingly,
such acquisitions may result in a short-term decrease in income from operations
during the period from acquisition through a period necessary to integrate the
acquired companies.
RESULTS OF OPERATIONS -- SUMMARY
The Company's primary business activities are commercial and multifamily
loan servicing, loan origination and sales of the loans to investors in the
secondary market. Revenues from mortgage banking activities are earned from the
origination of commercial and multifamily real estate mortgage loans and the
servicing of such loans. The Company's revenue includes loan servicing fees,
gains on sale of mortgage loans (including related gains on originated servicing
rights), interest income on loans prior to sale, "placement fees" (revenue
earned relating to utilization of escrow funds), origination fee income and
other income.
The Company's revenue is significantly influenced by the timing of
origination and sales of mortgage loans and is somewhat sensitive to economic
factors such as the general level of interest rates and demand for commercial
and multifamily real estate. As a result, future revenues may fluctuate due to
changes in these factors. Therefore, the Company's historical results may not be
indicative of future periods.
9
<PAGE> 12
The following table sets forth information derived from the Company's
consolidated statements of operations for each of the periods presented in
dollars.
SUMMARY FINANCIAL INFORMATION
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -----------------------------
1997 1996 1997 1996
--------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Servicing fees, net $ 3,074 $2,388 $ 8,705 $ 6,674
Gain on sale of mortgage loans 6,255 1,846 12,172 6,557
Gain on Sale of Servicing 296 - 296 -
Interest income 1,543 1,133 3,653 3,109
Placement fee income 1,556 1,273 3,869 3,604
Other 233 371 802 1,165
------- ------ ------- -------
Total revenues 12,957 7,011 29,497 21,109
------- ------ ------- -------
Expenses:
Salaries and employee benefits 5,471 3,110 13,125 8,694
General and administrative 2,899 1,646 6,725 4,460
Provision for loan servicing losses 27 247 480 788
Interest expense 686 248 1,289 1,051
Depreciation and amortization 1,587 1,329 4,534 3,115
Losses from Beverly Hills Securities - - - 600
------- ------ ------- -------
Total expenses 10,670 6,580 26,153 18,708
------- ------ ------- -------
Income before income taxes 2,287 431 3,344 2,401
Income taxes 1,014 249 1,620 1,492
------- ------ ------- -------
Net income $ 1,273 $ 182 $ 1,724 $ 909
======= ====== ======= =======
EBITDA 3,928 1,832 8,440 5,659
======= ====== ======= =======
</TABLE>
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE THREE
MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996
As a result of the acquisition of the Company by NHP, all assets and
liabilities acquired were recorded at their fair value which resulted in an
increase of the recorded value of the Company's servicing rights of $10.7
million and goodwill of $5.1 million. The increase in these assets has resulted
in additional amortization expense during the nine months ended September 30,
1997 compared to the nine months ended September 30, 1996 of approximately
$576,000. For purposes of comparing the nine months ended September 30, 1997 to
the nine months ended September 30, 1996, no other income statement amounts have
been impacted by the acquisition.
The Company's earnings before non operating interest expense, income
taxes, depreciation and amortization ("EBITDA") for the three months ended
September 30, 1997 was $3.9 million compared with $1.8 million for the three
months ended September 30, 1996, an improvement of $2.1 million or 117%.
EBITDA for the nine months ended September 30, 1997 was $8.4 million compared
with $5.6 million for the same period of 1996, an improvement of $2.8 million
or 50%. The increase in EBITDA for the three and nine month periods is
attributable to increased loan originations and sales as well as increased
servicing fees, with the third quarter of 1997 reflecting a relatively high
level of activity, as compared with historical levels, offset partially by
increased salaries, benefits and general administrative expenses, in part
related to the Company's expansion into non-multifamily commercial lending as
well as the impact of the WMF Proctor and Askew acquisitions. The Company
originated multifamily and commercial mortgages of $1,006 million and $1,637
million for the three and nine months ended September 30, 1997, respectively
compared to $319 million and $827 million in the three and nine months ended
September 30, 1996, respectively. The EBITDA increase also reflects the $600
loss on Beverly Hills securities in 1996 as discussed below.
The Company's revenue is to a large degree activity driven and is
somewhat sensitive to economic factors such as the general level of business
activity. Future revenues may fluctuate as a result of changes in these
factors. Therefore, the Company's third quarter and nine months results may
not be indicative of future periods results.
EBITDA is widely used in the industry as a measure of a company's
operating performance, but should not be considered as an alternative either
(i) to income from continuing operations (determined in accordance with
generally accepted accounting principles) as a measure of profitability or (ii)
to cash flows from operating activities (determined in accordance with
generally accepted accounting principles). EBITDA does not take into account
the Company's debt service requirements and other commitments and, accordingly,
is not necessarily indicative of amounts that may be available for
discretionary uses.
Net income was $1.2 million and $0.2 million for the three months ended
September 30, 1997 and 1996, respectively, and $1.7 million and $0.3 million for
the nine months ended September 30, 1997 and 1996, respectively. The net income
increase results from the previously discussed increase in EBITDA, offset
partially by additional depreciation and amortization attributed to the WMF
Proctor and Askew acquisitions, increased interest expense primarily related to
the advances from NHP, and increased income taxes.
10
<PAGE> 13
Servicing fees were $3.1 million and $2.4 million for the three months
ended September 30, 1997 and 1996, respectively, and $8.7 million and $6.7
million for the nine months ended September 30, 1997 and 1996, respectively.
Revenue related to mortgage servicing is based upon the unpaid principal
balance of loans serviced. The increase in servicing fees for the three and
nine months and nine months ending September 30, 1997 and 1996 is a result of
the principal balance of the Company's servicing portfolio increasing. Such
balances were $5.1 billion on September 30, 1996 and $8.7 billion on September
30, 1997. The increase in the servicing portfolio for the three months ended
September 30, 1997 is attributable primarily to loan originations. The increase
in the servicing portfolio for the nine months ended September 30, 1997 is
attributable primarily to loan originations of $1.6 billion and the
acquisitions of WMF Proctor, ACR and Askew which added rights to service loans
with principal balances of $1.7 billion for the period September 30, 1996
through September 30, 1997. The percentage increase in servicing fee revenue is
less than the percentage increase in the servicing portfolio because the fee as
a percentage of unpaid principal balance on the added servicing, primarily for
insurance companies, is lower than the Company's historical average servicing
rate.
Gain on sale of mortgage loans were $6.3 million and $1.8 million for
the three months ended September 30, 1997 and 1996, respectively, and $12.2
million and $6.6 million for the nine months ended September 30, 1997 and 1996,
respectively. For the three months ended September 30, 1997 and 1996 the Company
originated $1,006 million and $319 million mortgage loans, respectively, and for
the nine months ended September 30, 1997 and 1996 the Company originated $1,637
million and $827 million mortgage loans, respectively. The increase in gain on
sale of mortgage loans is a result of the increase in loan origination fees and
includes the gain on recognizing originated mortgage servicing rights of $0.5
million and $0.7 million for the three months ended September 30, 1997 and 1996,
respectively, and $1.7 million and $1.9 million for the nine months ended
September 30, 1997 and 1996, respectively.
Gain on sale of servicing of $0.3 million, for the three and nine months
ended September 30, 1997, represents the sale of the Company's servicing
portfolio of loans held by Federal Home Loan Mortgage Corporation. The Company
does not expect the sale of this portfolio to have a material impact on future
results.
Interest income of $1.5 million and $1.1 million for the three months
ended September 30, 1997 and 1996, respectively, and $3.7 million and $3.1
million for the nine months ended September 30, 1997 and 1996, respectively,
increased due to the increase in originations for the three and nine months
ended September 30, 1997 compared to the three and nine months ended September
30, 1996, as discussed above.
Placement fee income of $1.6 million and $1.3 million for the three
months ended September 30, 1997 and 1996, respectively, and $3.9 million and
$3.6 million for the nine months ended September 30, 1997 and 1996 respectively,
was the result of earnings on invested mortgagor escrow amounts. Earnings on
such amounts increased over this period as a result of an increase in the
Company's escrow balance of 28.6% from $220 million on September 30, 1996 to
$283 million on September 30, 1997. The slower growth in placement fee income
compared to escrow balances reflects the Company's increased utilization of
escrow balances to reduce interest expense related to the warehousing of loans
rather than the generation of placement fee income.
Other income of $0.2 million and $0.4 million for the three months ended
September 30, 1997 and 1996, respectively, and $0.8 million and $1.2 for the
nine months ended September 30, 1997 and 1996, respectively, was the result of
loan modifications, prepayment penalties and recoveries. The change in the nine
month period is primarily related to the recovery of approximately $475,000 in
escrow advances that had previously been written off during the nine months
ended September 30, 1996.
The Company's total expenses consist of salaries and benefits (including
commissions), other general and administrative expenses, provision for loan
servicing losses, operating interest expense, amortization of mortgage servicing
rights, and other depreciation and amortization.
Salaries and benefits, the largest category of costs for the Company,
increase with loan production due primarily to the payment of commissions on
loan originations. Salaries and benefits of $5.5 million and $3.1 million for
the three months ended September 30, 1997 and 1996, respectively, and $13.1
million and $8.7 million for the
11
<PAGE> 14
nine months ended September 30, 1997 and 1996, respectively, represents a $2.4
and $4.4 million increase respectively. This increase is due primarily to
increased originations, as discussed above, and the acquisitions of WMF Proctor
and Askew which occurred subsequent to the nine months ended September 30, 1996
and the acquisition of ACR in May, 1996. These three acquisitions, combined
with the Company's expansion into non-multifamily commercial lending
contributed to the increase in the Company's number of employees from 171 at
September 30, 1996 to 239 at September 30, 1997.
General and administrative expenses consist of professional fees,
travel, management information, occupancy, telephone and equipment rental, and
other expenses. General and administrative expenses were $2.9 million and $1.6
million for the three months ended September 30, 1997 and 1996, respectively,
and $6.7 million and $4.5 million for the nine months ended September 30, 1997
and 1996, respectively. The increase is a result of costs associated with
acquisitions and the resulting additional offices.
The Company increased the provision for loan servicing losses by $27,000
and $300,000 for each of the three months ended September 30, 1997 and 1996,
respectively, and $0.5 million and $0.8 million for the nine months ended
September 30, 1997 and 1996, respectively. The decrease in addition to reserves
is the result of management's determination, as part of its ongoing assessment
of the reserve, that current market conditions do not require a further increase
in reserves. The Company's principal balance of Fannie Mae DUS loans in the
servicing portfolio was $838 million and $698 million as of September 30, 1997
and 1996, respectively.
Interest expense of $0.7 million and $0.2 million for the three months
ended September 30, 1997 and 1996, respectively, and $1.3 million and $1.1
million for the nine months ended September 30, 1997 and 1996, respectively,
increased due to the Company's increased production and acquisition borrowings.
The interest expense for the three months ended September 30, 1997 and 1996
included approximately 34% and 29%, respectively, and for the nine months ended
September 30, 1997 and 1996 included approximately 44% and 26%, respectively,
of expense relating to the acquisition borrowings.
Depreciation and amortization of $1.6 million and $1.3 million for the
three months ended September 30, 1997 and 1996, respectively, and $4.5 million
and $3.1 million for the nine months ended September 30, 1997 and 1996,
respectively represent increases of $0.3 million and $0.8 million for the
respective periods. Approximately $576,000 of this increase during the nine
months ended September 30, 1997 is due to the increased asset basis as a result
of the acquisition of the Company by NHP discussed above. The remainder of the
increase is primarily a result of the amortization of additional servicing
rights and goodwill.
Losses from Beverly Hills Securities of $0 and $600,000 for the nine
months ended September 30, 1997 and 1996, respectively, decreased due to the
Company writing off its investment/advances in Beverly Hills Securities during
the first quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash inflow from operating activities for the period January 1, 1997
through September 30, 1997 of $11.1 million increased from operating cash inflow
of $3.6 million for the period January 1, 1996 through September 30, 1996. Such
increase was primarily due to: (i) increased other liabilities; and (ii)
increased borrowings from affiliates.
The Company's principal capital needs are the financing of loan funding
activities, servicing advances, and the acquisition of commercial and
multifamily mortgage companies and servicing portfolios. To meet these needs,
the Company currently utilizes the following warehouse lines of credit, credit
lines and term loans.
The Company has a warehouse line of credit which can be drawn for
purposes of originating loans that had an $80 million credit limit in 1995 that
was subsequently increased to $150 million in the third quarter of 1996. This
credit limit has been temporarily increased at times to allow increased
borrowings beyond the credit limit. The warehouse line of credit is secured by
mortgage loans held for sale and is required to be repaid with interest upon
sale of the mortgage loans. The interest rate on the warehouse line of credit
was 3/4 percent for the period January
12
<PAGE> 15
1, 1997, to September 30, 1997 to the extent compensating balances are
maintained and as equal to the London InterBank Offered Rate ("LIBOR") plus 3/4
percent for the period January 1, 1997 to September 30, 1997 for amounts
borrowed in excess of compensating balances.
The Company has a separate $10 million line of credit which was used
exclusively for servicing acquisitions. In October 1996, this facility was
converted to a term loan. The debt is to be repaid in twenty equal quarterly
installments based on a 10-year amortization schedule beginning on October 31,
1996, with the remaining balance due in June 2001. The interest rate on the
servicing acquisition line of credit was 3 percent for the period January 1,
1997 to September 30, 1997 to the extent compensating balances are maintained
and was equal to LIBOR plus 3 percent for the period January 1, 1997 to
September 30, 1997 for amounts borrowed in excess of compensating balances.
Interest is payable monthly. The servicing acquisition line is collateralized by
servicing rights relating to loans with an approximate unpaid principal balance
of $5.8 billion as of September 30, 1997. Because this facility was converted to
a term loan, the Company cannot borrow any additional amounts under this line.
This facility will mature as follows: $0.25 million in the fourth quarter of
1997, $1 million in each year from 1998 through 2000 and $1.5 million in 2001.
The Company has a $10 million revolving credit agreement to be used for
servicing acquisitions or working capital purposes. On November 5, 1997, the
Company utilized this credit facility to purchase 100 percent of the
outstanding stock of The Robert C. Wilson Company and its Arizona subsidiaries
("Wilson"), a Houston based commercial mortgage banking company. The purchase
price will be allocated between the fair value of the assets acquired with the
difference between the fair value and purchase price recorded as goodwill. The
Company acquired all of Wilson's issued and outstanding common stock for a
purchase price of approximately $4 million (80 percent of which was paid at
closing and the remaining 20 percent of which would be paid in the form of
earnouts upon the attainment of certain performance objectives over a 42 month
period). The revolving credit agreement is renewable annually through June
2001 and requires monthly interest payments. Any principal balance
outstanding in June 2001 would be converted to a term loan due in quarterly
installments through June 2006. The interest rate on the term loan is 3 1/2
percent for amounts borrowed to the extent compensating balances are maintained
and is equal to LIBOR plus 3 1/2 percent for amounts borrowed in excess of
compensating balances. The term loan is collateralized by all nonrecourse
servicing rights.
On May 1, 1997, the Company entered into a $35 million revolving line of
credit which will be principally drawn for purposes of originating loans. The
warehouse advances are secured by mortgage loans held for sale and are required
to be repaid upon sale of the mortgage loans. The interest rate on the warehouse
advances is 3/4 percent to the extent compensating balances are maintained and
is equal to the LIBOR plus 3/4 percent for amounts borrowed in excess of the
compensating balances. Interest is payable monthly. The facility can also be
used for principal and interest advances and working capital purposes with
credit limits of $2.5 million to $5.0 million, respectively. The interest rate
on the principal and interest advances and working capital portion of the
facility are 1.5% and 2.0% to the extent compensating balances are maintained
and LIBOR plus 1.5% or 2% for amounts borrowed in excess of the compensating
balances, respectively. Interest is payable monthly. The maximum principal
amount that may be borrowed under the three different facilities is $35 million.
There were no borrowings under this facility as of September 30, 1997.
The Company has also established a letter of credit of $4,400,000 and
$4,200,000 on behalf of Fannie Mae for the DUS program as of September 30, 1997
and December 31, 1996 respectively. This letter of credit is secured by cash
equivalents and mortgage-backed securities with a market value of $5,343,995 and
$5,091,568 as of September 30, 1997 and December 31, 1996 respectively.
As of September 30, 1997, the Company utilized the Federal National
Mortgage Association's (Fannie Mae) "As Soon as Pooled" program to sell
approximately $350 million in conforming mortgage loans. Under the terms of the
program, the Company delivered the mortgage loans to Fannie Mae and assigned a
forward trade. The forward trade is an agreement between the Company and Fannie
Mae or a third party whereby the Company agrees to sell the mortgage loans on a
specified date for a specified price. The $2.7 million due from investors
represents the cash to be received by the Company upon settlement of the forward
trade.
The Company's debt agreements require the maintenance of certain
financial ratios relating to liquidity, leverage, working capital, and net worth
among other restrictions, all of which were met at September 30, 1997.
13
<PAGE> 16
PART II.
OTHER INFORMATION
Item 1: Legal Proceedings
None
Item 2: Changes in Securities.
None
Item 3: Defaults upon senior securities.
None
Item 4: Submission of matter to a vote of security holders.
None
Item 5: Other Information.
None
Item 6: Exhibits and reports on Form 8-K.
(a) Exhibits
10.1 Key Employee Incentive Plan. (1)
10.2 Key Employee Incentive Award Agreement. (1)
10.3 Key Employee Referral Compensation Plan. (1)
10.4 Employee Stock Purchase Plan. (1)
10.5 Stock Purchase Agreement dated as of October 31, 1997
between Washington Mortgage Financial Group, Ltd. and
The Robert C. Wilson Company (2)
11 Statement re computation of per share earnings. (2)
27 Financial Data Schedule (2)
(1) Incorporated by reference to the Company's registration
statement on Form S-1 No. 333-37447 filed by the registrant on
October 8, 1997.
(2) Filed herewith
(3) Confidential treatment has been requested. The copy filed
omits the information subject to a confidentiality request.
(b) Report on Form 8-K.
None
14
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
registrant has duly caused to be signed on its behalf by the undersigned,
thereunto duly authorized.
THE WMF GROUP, LTD.
Date: November 14, 1997 By: /s/ Shekar Narasimhan
----------------------------------
Shekar Narasimhan
Director, President and Chief
Executive Officer
Date: November 14, 1997 By: /s/ Michael D. Ketcham
-----------------------------------
Michael D. Ketcham
Executive Vice President, Chief Financial
Officer and Treasurer (Principal Financial
Officer)
15
<PAGE> 1
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement ("Agreement") is made as of October 31,
1997, by and among WASHINGTON MORTGAGE FINANCIAL GROUP, LTD., a Delaware
corporation ("Purchaser"), THE ROBERT C. WILSON COMPANY, a Texas corporation
(the "Company"), and each of the following natural persons, two (2) of whom are
resident in the State of Texas: ROBERT C. WILSON, III ("Wilson") and HARRY D.
HOPSON, JR. ("Hopson"), and JOHN C. SMECK, III ("Smeck), who is a resident of
Arizona. (The aforesaid natural persons are individually a "Seller" and
collectively, the "Sellers".)
RECITALS
The Company is wholly owned by the Sellers and is engaged in the
commercial mortgage banking business.
Each of the Sellers owns the following percentage of Shares: (i) Wilson:
68.75%; (ii) Hopson: 25%; and (iii) Smeck: 6.25%.
Sellers desire to sell, and Purchaser desires to purchase, all of the
issued and outstanding shares (the "Shares") of capital stock of the Company,
i.e., 61,322 shares, for the consideration and on the terms set forth in this
Agreement.
The parties hereto believe that the purchase and sale of the Shares will
provide mutual benefits to the Purchaser and to the Sellers.
NOW, THEREFORE, in consideration of the premises, the representations,
warranties, covenants and agreements herein contained, and for other good and
valuable consideration, the sufficiency and receipt of which are hereby
acknowledged by the parties, the parties, intending to be legally bound, agree
as follows:
1. DEFINITIONS
For purposes of this Agreement, the following terms have the meanings
specified or referred to in this Section 1:
"ACQUIRED COMPANIES"--the Company and its Subsidiaries, collectively.
"APPLICABLE CONTRACT"--any Contract (a) under which any Acquired Company
has or may acquire any rights, (b) under which any Acquired Company has or may
become subject to any obligation or liability, or (c) by which any Acquired
Company or any of the assets owned or used by it is or may become bound.
16
<PAGE> 2
"BALANCE SHEET"--as defined in Section 3.4.
"BEST EFFORTS"--the efforts that a prudent Person desirous of achieving
a result would use in similar circumstances to ensure that such result is
achieved as expeditiously as possible, provided, however, that an obligation to
use Best Efforts under this Agreement does not require the Person subject to
that obligation to take actions that would result in a materially adverse change
in the benefits to such Person of this Agreement and the Contemplated
Transactions or to initiate litigation.
"BREACH"--a "Breach" of a representation, warranty, covenant,
obligation, or other provision of this Agreement or any instrument delivered
pursuant to this Agreement will be deemed to have occurred if there is or has
been (a) any material inaccuracy in or material breach of, or any failure to
perform or comply with, such representation, warranty, covenant, obligation, or
other provision, or (b) any claim by any Person or other occurrence or
circumstance that is or was inconsistent with such representation, warranty,
covenant, obligation, or other provision, and the term "Breach" means any such
material inaccuracy, material breach, failure, claim, occurrence, or
circumstance.
"CLOSING"--as defined in Section 2.3.
"CLOSING DATE"--the date and time as of which the Closing actually takes
place.
"COLLATERAL"--the real and personal property securing a Mortgage Loan or
a bond, mortgage-backed security or other obligation relating to a Mortgage
Loan.
"COMPANY"--the Company as defined in the Recitals of this Agreement and
each of its Subsidiaries.
"CONSENT"--any approval, consent, ratification, waiver, or other
authorization (including any Governmental Authorization).
"CONTEMPLATED TRANSACTIONS"--all of the transactions contemplated by
this Agreement, including:
(a) the sale of the Shares to Purchaser;
(b) the execution, delivery, and performance of the Employment
Agreements and the Sellers' Releases;
(c) the performance by Purchaser and Sellers of their respective
covenants and obligations under this Agreement; and
(d) Purchaser's acquisition and ownership of the Shares and
exercise of control over the Acquired Companies.
17
<PAGE> 3
"CONTRACT"--any agreement, contract, obligation, promise, or undertaking
(whether written or oral and whether express or implied) that is legally
binding.
"DAMAGES"--as defined in Section 10.2.
"DISCLOSURE LETTER"--the disclosure letter delivered by Sellers to
Purchaser concurrently with the execution and delivery of this Agreement.
"EMPLOYMENT AGREEMENTS"--as defined in Section 2.4(a)(iii).
"ENCUMBRANCE"--any charge, claim, community property interest,
condition, equitable interest, lien, option, pledge, security interest, right of
first refusal, or restriction of any kind, including any restriction on use,
voting, transfer, receipt of income, or exercise of any other attribute of
ownership.
"ENVIRONMENT"--soil, land surface or subsurface strata, surface waters
(including navigable waters, ocean waters, streams, ponds, drainage basins, and
wetlands), groundwaters, drinking water supply, stream sediments, ambient air
(including indoor air), plant and animal life, and any other environmental
medium or natural resource.
"ENVIRONMENTAL, HEALTH, AND SAFETY LIABILITIES"--any cost, damages,
expense, liability, obligation, or other responsibility arising from or under
Environmental Law or Occupational Safety and Health Law and consisting of or
relating to:
(a) any environmental, health, or safety matters or conditions
(including on-site or off- site contamination, occupational safety and health,
and regulation of chemical substances or products);
(b) fines, penalties, judgments, awards, settlements, legal or
administrative proceedings, damages, losses, claims, demands and response,
investigative, remedial, or inspection costs and expenses arising under
Environmental Law or Occupational Safety and Health Law;
(c) financial responsibility under Environmental Law or Occupational
Safety and Health Law for cleanup costs or corrective action, including any
investigation, cleanup, removal, containment, or other remediation or response
actions ("Cleanup") required by applicable Environmental Law or Occupational
Safety and Health Law (whether or not such Cleanup has been required or
requested by any Governmental Body or any other Person) and for any natural
resource damages; or
(d) any other compliance, corrective, investigative, or remedial
measures required under Environmental Law or Occupational Safety and Health Law.
18
<PAGE> 4
The terms "removal," "remedial," and "response action," include the
types of activities covered by the United States Comprehensive Environmental
Response, Compensation, and Liability Act, 42 U.S.C.Section9601 et seq., as
amended ("CERCLA").
"ENVIRONMENTAL LAW"--any Legal Requirement that requires or relates to:
(a) advising appropriate authorities, employees, and the public of
intended or actual releases of pollutants or hazardous substances or materials,
violations of discharge limits, or other prohibitions and of the commencements
of activities, such as resource extraction or construction, that could have
significant impact on the Environment;
(b) preventing or reducing to acceptable levels the release of
pollutants or hazardous substances or materials into the Environment;
(c) reducing the quantities, preventing the release, or minimizing
the hazardous characteristics of wastes that are generated;
(d) assuring that products are designed, formulated, packaged, and
used so that they do not present unreasonable risks to human health or the
Environment when used or disposed of;
(e) protecting resources, species, or ecological amenities;
(f) reducing to acceptable levels the risks inherent in the
transportation of hazardous substances, pollutants, oil, or other potentially
harmful substances;
(g) cleaning up pollutants that have been released, preventing the
threat of release, or paying the costs of such clean up or prevention; or
(h) making responsible parties pay private parties, or groups of
them, for damages done to their health or the Environment, or permitting
self-appointed representatives of the public interest to recover for injuries
done to public assets.
"ERISA"--the Employee Retirement Income Security Act of 1974 or any
successor law, and regulations and rules issued pursuant to that Act or any
successor law.
"FACILITIES"--any real property, leaseholds, or other interests
currently or formerly owned or operated by any Acquired Company and any
buildings, plants, structures, or equipment (including motor vehicles, tank
cars, and rolling stock) currently or formerly owned or operated by any Acquired
Company.
"FANNIE MAE"--Fannie Mae or any successor organization.
19
<PAGE> 5
"FHA"--the Federal Housing Administration, an agency within HUD, or any
successor thereto and including the Federal Housing Commissioner and the
Secretary of HUD where appropriate under the FHA regulations.
"FHA LOAN"--a Mortgage Loan insured in whole or in part by the FHA.
"FLOW SERVICING AGREEMENT"--an agreement between the Company and a
Mortgage originator setting forth the terms and conditions under which the
Company agrees to buy loan servicing rights from the Mortgage originator.
"GAAP"--generally accepted United States accounting principles, applied
on a basis consistent with the basis on which the Balance Sheet and the other
financial statements referred to in Section 3.4 were prepared.
"GNMA"--the Government National Mortgage Association, an agency within
HUD, or any successor thereto and including the Secretary of HUD where
appropriate under the HUD regulations.
"GOVERNMENTAL AUTHORIZATION"--any approval, consent, license, permit,
waiver, or other authorization issued, granted, given, or otherwise made
available by or under the authority of any Governmental Body or pursuant to any
Legal Requirement.
"GOVERNMENTAL BODY"--any:
(a) nation, state, county, city, town, village, district, or other
jurisdiction of any nature;
(b) federal, state, local, municipal, foreign, or other government;
(c) governmental or quasi-governmental authority of any nature
(including any governmental agency, branch, department, official, or entity and
any court or other tribunal);
(d) multi-national organization or body; or
(e) body exercising, or entitled to exercise, any administrative,
executive, judicial, legislative, police, regulatory, or taxing authority or
power of any nature.
"HAZARDOUS ACTIVITY"--the distribution, generation, handling, importing,
management, manufacturing, processing, production, refinement, Release, storage,
transfer, transportation, treatment, or use (including any withdrawal or other
use of groundwater) of Hazardous Materials in, on, under, about, or from the
Facilities or any part thereof into the Environment, and any other act,
business, operation, or thing that increases the danger, or risk of danger, or
poses an unreasonable risk of harm to persons or property on or off the
Facilities, or that may affect the value of the Facilities or the Acquired
Companies.
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<PAGE> 6
"HAZARDOUS MATERIALS"--any waste or other substance that is listed,
defined, designated, or classified as, or otherwise determined to be, hazardous,
radioactive, or toxic or a pollutant or a contaminant under or pursuant to any
Environmental Law, including any admixture or solution thereof, and specifically
including petroleum and all derivatives thereof or synthetic substitutes
therefor and asbestos or asbestos-containing materials.
"HUD"--the United States Department of Housing and Urban Development, or
any successor thereto or to the Secretary of HUD where appropriate under the
laws of the United States.
"INTELLECTUAL PROPERTY ASSETS" --as defined in Section 3.22.
"INTERIM BALANCE SHEET"--as defined in Section 3.4.
"INVESTOR"--FHA, GNMA, Fannie Mae and Freddie Mac or any private or
public Person for which the Company or any of its Subsidiaries is originating
and/or servicing (or to the extent of any continuing obligation, has in the past
originated or serviced) Mortgage Loans pursuant to either a Mortgage Servicing
Agreement or any other agreement with the Investor.
"IRC"--the Internal Revenue Code of 1986 or any successor law, and
regulations issued by the IRS pursuant to the Internal Revenue Code or any
successor law.
"IRS"--the United States Internal Revenue Service or any successor
agency, and, to the extent relevant, the United States Department of the
Treasury.
"KNOWLEDGE"--an individual will be deemed to have "Knowledge" or
"knowledge" of a particular fact or other matter if:
(a) such individual is actually aware of such fact or other matter;
or
(b) a prudent individual could be expected to become aware of such
fact or other matter in the course serving as an officer or director of the
Company.
A Person (other than an individual) will be deemed to have
"Knowledge" of a particular fact or other matter if any individual who is
serving, or who has at any time served, as a director, officer, partner,
executor, or trustee of such Person (or in any similar capacity) has, or at any
time had, Knowledge of such fact or other matter.
"LEGAL REQUIREMENT"--any federal, state, local, municipal, foreign,
international, multinational, or other administrative order, constitution, law,
ordinance, principle of common law, regulation, statute, or treaty.
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"LIEN"--all liens (including judgment and mechanics' liens, regardless
of whether liquidated), mortgages, assessments, security interests, easements,
claims, pledges, trusts (constructive or other), deeds of trust, options or
other charges, encumbrances or restrictions.
"LOAN DOCUMENTS"--any Mortgage Note or Mortgage or similar instrument,
and all amendments thereto, evidencing or securing a Mortgage Loan, including
hard copies where available, and all machine-readable copies on any media.
"MORTGAGE"--a mortgage, deed of trust, security deed or other security
instrument on real property securing a Mortgage Note.
"MORTGAGE LOAN"--a mortgage loan evidenced by a Mortgage Note and
secured by a Mortgage which is either an Owned Mortgage Loan or a Mortgage Loan
in the Mortgage Servicing Portfolio.
"MORTGAGE LOAN FILE"--the underwriting, credit and closing
documentation, custodial documents, escrow documents, and all other documents in
the possession of the Company pertaining to a Mortgage Loan or reasonably
necessary for prudent servicing of a Mortgage Loan, or as may be specifically
required by any Investor.
"MORTGAGE NOTE"--a written promise to pay a sum of money at a fixed or
variable interest rate during a specified term evidencing a Mortgage Loan.
"MORTGAGE SERVICING AGREEMENT"--an agreement between the Company and an
Investor or a servicer or other party setting forth the terms and conditions
under which Mortgage Loans or other obligations relating to Mortgage Loans have
been and are to be serviced or subserviced and which may be incorporated in
general guidelines and issuances of an Investor.
"MORTGAGE SERVICING PORTFOLIO"--as of the date of this Agreement, all
the Mortgage Loans which have been, are and, subject to existing Mortgage
Servicing Agreements, are to be serviced or subserviced by the Company, other
than the Owned Mortgage Loans, as more particularly identified on Schedule 3.24,
and, from time to time after the date of this Agreement, as and when Owned
Mortgage Loans are delivered to Investors, such previously Owned Mortgage Loans
as well.
"NATIONAL HOUSING ACT"--the National Housing Act of 1934, as amended.
"NON-ORIGINATED MORTGAGE LOANS"--all Mortgage Loans with respect to
which none of the Acquired Companies was the initial mortgagee of record.
"OCCUPATIONAL SAFETY AND HEALTH LAW"--any Legal Requirement designed to
provide safe and healthful working conditions and to reduce occupational safety
and health hazards, and any program, whether governmental or private (including
those promulgated or sponsored by industry associations and insurance
companies), designed to provide safe and healthful working conditions.
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"ORDER"--any award, decision, injunction, judgment, order, ruling,
subpoena, or verdict entered, issued, made, or rendered by any court,
administrative agency, or other Governmental Body or by any arbitrator.
"ORDINARY COURSE OF BUSINESS"--an action taken by a Person will be
deemed to have been taken in the "Ordinary Course of Business" only if:
(a) such action is consistent with the past practices of such Person
and is taken in the ordinary course of the normal day-to-day operations of such
Person;
(b) such action is not required to be authorized by the board of
directors of such Person (or by any Person or group of Persons exercising
similar authority) [and is not required to be specifically authorized by the
parent company (if any) of such Person]; and
(c) such action is similar in nature and magnitude to actions
customarily taken, without any authorization by the board of directors (or by
any Person or group of Persons exercising similar authority), in the ordinary
course of the normal day-to-day operations of other Persons that are in the same
line of business as such Person.
"ORGANIZATIONAL DOCUMENTS"--(a) the articles or certificate of
incorporation and the bylaws of a corporation;
(b) the partnership agreement and any statement of partnership of a
general partnership;
(c) the limited partnership agreement and the certificate of limited
partnership of a limited partnership;
(d) any charter or similar document adopted or filed in connection
with the creation, formation, or organization of a Person; and
(e) any amendment to any of the foregoing.
"ORIGINATED MORTGAGE LOANS"--all Mortgage Loans other than
Non-Originated Mortgage Loans.
"OWNED MORTGAGE LOANS"--all the Mortgage Loans the legal and/or
beneficial ownership interests in which are vested in the Company (or any of its
Subsidiaries) as of the date of this Agreement. For the purpose of this
Agreement, Owned Mortgage Loans shall not include Mortgage Loans backed by
mortgage pass-through certificates guaranteed by GNMA (since such Mortgage Loans
are transferred in trust to the owner of the related GNMA guaranteed
mortgagebacked securities.)
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"PERSON"--any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, labor union, or other entity
or Governmental Body.
"PROCEEDING"--any action, arbitration, audit, hearing, investigation,
litigation, or suit (whether civil, criminal, administrative, investigative, or
informal) commenced, brought, conducted, or heard by or before, or otherwise
involving, any Governmental Body or arbitrator.
"PURCHASER"--as defined in the first paragraph of this Agreement.
"RELATED PERSON"--with respect to a particular individual:
(a) each other member of such individual's Family;
(b) any Person that is directly or indirectly controlled by such
individual or one or more members of such individual's Family;
(c) any Person in which such individual or members of such
individual's Family hold (individually or in the aggregate) a Material Interest;
and
(d) any Person with respect to which such individual or one or more
members of such individual's Family serves as a director, officer, partner,
executor, or trustee (or in a similar capacity).
With respect to a specified Person other than an individual:
(a) any Person that directly or indirectly controls, is directly or
indirectly controlled by, or is directly or indirectly under common control with
such specified Person;
(b) any Person that holds a Material Interest in such specified
Person;
(c) each Person that serves as a director, officer, partner,
executor, or trustee of such specified Person (or in a similar capacity);
(d) any Person in which such specified Person holds a Material
Interest;
(e) any Person with respect to which such specified Person serves as
a general partner or a trustee (or in a similar capacity); and
(f) any Related Person of any individual described in clause (b) or
(c).
For purposes of this definition, (a) the "Family" of an individual
includes (i) the individual, (ii) the individual's spouse [and former spouses],
(iii) any other natural person who is related to the individual or the
individual's spouse within the second degree, and (iv) any other natural person
who resides with such individual, and (b) "Material Interest" means direct or
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<PAGE> 10
indirect beneficial ownership (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934) of voting securities or other voting interests
representing at least twenty percent (20%) of the outstanding voting power of a
Person or equity securities or other equity interests representing at least
twenty percent (20%) of the outstanding equity securities or equity interests
in a Person.
"RELEASE"--any spilling, leaking, emitting, discharging, depositing,
escaping, leaching, dumping, or other releasing into the Environment, whether
intentional or unintentional.
"REO"--real estate obtained by the Company in its name (or in the name
of its Subsidiaries) or on behalf of Investors in connection with foreclosure
proceedings or deed in lieu of foreclosure proceedings on Mortgage Loans.
"REPRESENTATIVE"--with respect to a particular Person, any director,
officer, employee, agent, consultant, advisor, or other representative of such
Person, including legal counsel, accountants, and financial advisors.
"SECURITIES ACT"--the Securities Act of 1933 or any successor law, and
regulations and rules issued pursuant to that Act or any successor law.
"SELLERS"--as defined in the first paragraph of this Agreement.
"SELLERS' RELEASES"--as defined in Section 2.4.
"SERVICING RIGHTS"--the right to receive the servicing fee income and
any other income arising from or connected to the Mortgage Servicing Agreements
or the servicing of the Mortgage Loans in the Mortgage Servicing Portfolio.
"SHARES"--as defined in the Recitals of this Agreement.
"SUBSIDIARY"--(i) each corporation in which a Person owns or controls,
directly or indirectly, capital stock representing more than 10% of the
outstanding voting stock and (ii) each other partnership, joint venture, limited
liability company or partnership or other business entity in which a Person owns
or controls, directly or indirectly, an equity, ownership or equivalent interest
representing more than 10% of the voting rights or interests therein.
"TAX" OR "TAXES"--any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Code Section
59A), customs, duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-on
minimum, estimated, or other tax of any kind whatsoever imposed on the Company
or for which the Company is liable, including any interest, penalty, or addition
thereto, whether disputed or not.
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"TAX RETURN"--any return (including any information return), report,
statement, schedule, notice, form, or other document or information filed with
or submitted to, or required to be filed with or submitted to, any Governmental
Body in connection with the determination, assessment, collection, or payment of
any Tax or in connection with the administration, implementation, or enforcement
of or compliance with any Legal Requirement relating to any Tax.
"THREAT OF RELEASE"--a substantial likelihood of a Release that may
require action in order to prevent or mitigate damage to the Environment that
may result from such Release.
"THREATENED"--a claim, Proceeding, dispute, action, or other matter will
be deemed to have been "Threatened" if any demand or statement has been made
(orally or in writing) or any notice has been given (orally or in writing), or
if any other event has occurred or any other circumstances exist, that would
lead a prudent Person to conclude that such a claim, Proceeding, dispute,
action, or other matter is likely to be asserted, commenced, taken, or otherwise
pursued in the future.
2. SALE AND TRANSFER OF SHARES; CLOSING
2.1 SHARES
Subject to the terms and conditions of this Agreement, at the Closing,
Sellers will sell and transfer the Shares to Purchaser, and Purchaser will
purchase the Shares from Sellers.
2.2 PURCHASE PRICE
(a) The purchase price (the "Purchase Price") for the Shares will
be FOUR MILLION AND NO/100 DOLLARS ($4,000,000), and shall be payable to the
Sellers pursuant to the written instructions of the Sellers as follows: (i)
$3,200,000 of the Purchase Price (the "Initial Portion") shall be paid by
Purchaser in immediately available funds to Sellers at the Closing, and (ii) the
remaining $800,000 of the Purchase Price (the "Deferred Portion") shall be
payable by Purchaser to Sellers after the Closing Date in immediately available
funds in three (3) installments as follows: (A) $266,667 upon the receipt after
the Closing Date by the Company of loan origination fees and loan brokerage
fees as more specifically described below (the "Fees") in the aggregate amount
of at least [ * ] (B) an additional $266,667 upon the receipt after the Closing
Date by the Company of Fees in the aggregate amount of [ * ] and (C) an
additional $266,666 upon the receipt after the Closing Date by the Company of
Fees in the aggregate amount of [ * ] Purchaser's obligation to pay any or all
of the Deferred Portion shall terminate as of the first day of the [ * ] after
the Closing Date (the "Deferral Termination Date"). The Deferred Portion shall
bear interest at the annual rate of six and one-half percent (6.50%) and such
interest shall accumulate and be payable by Purchaser to Sellers (x) at the
time of the final payment of the Deferred Portion, or (y) on the Deferral
Termination Date, whichever occurs first, even if only a portion of the
Deferred Portion is actually due and paid to the Sellers. The aforesaid
interest shall be calculated on the amount of the Deferred Portion actually due
and paid by Purchaser to Sellers. For purposes of this Agreement, "Fees" shall
mean those fees payable to, and received and retained by, the Company after the
Closing Date and which are generated by or originated by employees of the
Company who were employees of the Company as of the Closing Date (the "Former
Employees") and which are included in any of the following categories: (1) loan
placement or brokerage fees with respect to both new mortgage loans and
refinanced Mortgage Loans, (2) equity placement or brokerage fees, (3) real
estate brokerage fees and tenant representation fees, (4) asset management,
including mortgage servicing, fees, (5) [ * ] and (6) loan assumption fees with
respect to both new mortgage loans and refinanced Mortgage Loans. All Fees
shall be net of any amounts payable by the Company to third-party brokers or
correspondents. The Former Employees are identified on EXHIBIT 2.2(a). Prior
to the Deferral Termination Date, none of such persons listed on Exhibit 2.2(a)
may be terminated by the Company without cause. If any of the Former Employees
are terminated without cause by the Company prior to the Deferral Termination
Date, then any unpaid portion of the Deferred Portion shall be immediately due
and payable to the Sellers. In the event that any of the Former Employees are
no longer employed by the Company prior to the Deferral Termination Date for
any reason, then any person replacing such Former Employee shall be deemed to
be a Former Employee for the purposes of computing the Fees pursuant to this
Section 2.2(a).
[ * ]
Notwithstanding anything in this Section 2.2(a) to the contrary,
in the event that the Servicing Agreements between the Company and (i)
Equitable Life Insurance Company of Iowa, (ii) USG Annuity & Life Company, and
(iii) Golden American Life Insurance Company are terminated, then, from and
after the termination of said Servicing Agreements, the value of (A) the
Merrill Lynch Accounts, and (B) any mortgage servicing accounts obtained by the
Company after the Closing Date for free shall not be included in the
calculation of Fees as provided in Section 2.2(a)(5) until such time as the
combined value of (A) and (B) exceeds $75,824,595.70, after which time the
value of (A) and (B) shall resume being included in the calculation of Fees.
(b) If, at any time during the period from the Closing Date to
six (6) months after the Deferral Termination Date, Sellers believe that the
threshold amount(s) of Fees for the Deferred Portion have been achieved and the
Purchaser and the Company do not agree, then Sellers shall notify Purchaser and
the Company in writing ("Disapproval Notice") that Sellers disagree with the
Company's calculation of the Fees. The Disapproval Notice shall state with
reasonable specificity the particular objections to the Company's calculation
of the Fees. The Purchase, the Company and the Sellers agree to endeavor in
good faith to resolve any disputes with respect to the calculation of Fees. In
the absence of such mutual resolution of any disputed Fees, and if the
Purchaser does not pay the Sellers the disputed amount of the Deferred Portion
within fifteen (15) days of the Purchaser's and Company's receipt of the
Disapproval Notice, then the Sellers shall select an independent certified
public accounting firm (the "CPA"), and the Company may simultaneously select
the accounting firm of KPMG Peat Marwick (the "Auditors") to resolve the
disputed matters within thirty (30) days after such selection. The decision of
the CPA, or in the event that the Purchaser opts to select the Auditors to
participate, the mutual decision of the CPA and the Auditors, shall be final,
conclusive and binding upon the Purchaser, the Company and the Sellers. If the
Company selects the Auditors to participate in the dispute resolution, and a
mutual decision of the Auditors and the CPA cannot resolve the disputed
matters, then the CPA and the Auditors shall select an independent certified
public accounting firm (the "Arbitrator") to arbitrate the disputed matters and
to resolve the disputed matters within thirty (30) days after such selection.
The decision of the Arbitrator shall be final, conclusive and binding upon the
Purchaser, the Company and the Sellers. If as a result of the final decision,
the Fees are increased, the Fees and expenses of the CPA, the Auditors and the
Arbitrator shall be borne by the Purchaser, otherwise the expenses of the CPA,
the Auditors and the Arbitrator shall be borne by the Sellers.
(c) Notwithstanding anything in this Agreement to the contrary,
in the event that a change in the ownership of the Purchaser occurs prior to
the Deferral Termination Date such that any Person owns capital stock of the
Purchaser representing more than fifty percent (50%) of the outstanding voting
stock of the Purchaser, then any unpaid part of the Deferred Portion shall
immediately become due and payable to the Sellers.
(d) Notwithstanding anything in this Agreement to the contrary,
the Purchaser agrees to cause the board of directors of the Company to include
each of the Sellers as directors of the Company at least for that period of
time from the Closing Date through the earlier of (i) the Deferral Termination
Date or (ii) the payment in full of the Deferred Portion.
- ----------------------------
* Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, market by "*" have been seperately
filed with the commission.
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2.3 CLOSING
The purchase and sale (the "Closing") provided for in this Agreement
will take place at the offices of Krooth & Altman in Washington, D.C. at 10:00
a.m. (local time) on November 6, 1997 (the "Closing Date"). Notwithstanding
anything in this Agreement to the contrary, failure to consummate the purchase
and sale provided for in this Agreement on the date and time and at the place
determined pursuant to this Section 2.3 will result in the termination of this
Agreement and will relieve all parties of any and all obligations under this
Agreement except for those arising under Section 11.3.
2.4 CLOSING OBLIGATIONS
At the Closing:
(a) Sellers will deliver to Purchaser:
(i) certificates representing the Shares, duly endorsed by
the respective Seller (or accompanied by duly executed stock powers) for
transfer and assignment to Purchaser;
(ii) releases in the form of Exhibit 2.4(a)(ii) executed by
Sellers (collectively, "Sellers' Releases");
(iii) employment agreements containing noncompetition
covenants in the form of Exhibit 2.4(a)(iii), executed by Sellers (collectively,
"Employment Agreements"); and
(iv) a certificate executed by Sellers representing and
warranting to Purchaser that each of Sellers' representations and warranties in
this Agreement was accurate in all respects as of the date of this Agreement and
is accurate in all respects as of the Closing Date as if made on the Closing
Date (giving full effect to any supplements to the Disclosure Letter that were
delivered by Sellers to Purchaser prior to the Closing Date in accordance with
Section 5.5);
(v) the written Consents of each of the Company's Investors
listed in Schedule 3.27(c) of the Disclosure Letter, and of each agency or
instrumentality listed in Schedule 3.14 of the Disclosure Letter, consenting to
the purchase and sale contemplated by this Agreement; and
(vi) evidence reasonably satisfactory to the Purchaser that
the line of credit from Compass Bank to the Company (the "Line of Credit") has
been terminated and that Wilson has been released by said bank from his guaranty
of the Line of Credit. Sellers represent and warrant the outstanding balance on
the Line of Credit is $60,326.25, and Purchaser acknowledges and agrees that
said balance may be paid prior to the Closing Date from monies of the Company.
(b) Purchaser will deliver to Sellers:
(i) the following amount by wire transfer to account(s)
specified by the Sellers in writing: $3,200,000;
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(ii) a certificate executed by Purchaser to the effect that,
except as otherwise stated in such certificate, each of Purchaser's
representations and warranties in this Agreement was accurate in all respects as
of the date of this Agreement and is accurate in all respects as of the Closing
Date as if made on the Closing Date; and
(iii) the Employment Agreements, executed by Purchaser.
3. REPRESENTATIONS AND WARRANTIES OF SELLERS
Sellers jointly and severally represent and warrant to Purchaser as
follows, provided however, that the representations and warranties of Smeck with
respect to the Company and Acquired Company or Acquired Companies shall be
limited to The Robert C. Wilson Company - Arizona.:
3.1 ORGANIZATION AND GOOD STANDING
(a) Schedule 3.1 of the Disclosure Letter contains a complete and
accurate list for each Acquired Company of its name, its jurisdiction of
incorporation, other jurisdictions in which it is authorized to do business, and
its capitalization (including the identity of each stockholder and the number of
shares held by each). Each Acquired Company is a corporation duly organized,
validly existing, and in good standing under the laws of its jurisdiction of
incorporation, with full corporate power and authority to conduct its business
as it is now being conducted, to own or use the properties and assets that it
purports to own or use, and to perform all its obligations under Applicable
Contracts. Each Acquired Company is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each state or other
jurisdiction in which the nature of the activities conducted by it requires such
qualification.
(b) Sellers have delivered to Purchaser copies of the Organizational
Documents of each Acquired Company, as currently in effect.
3.2 AUTHORITY; NO CONFLICT
(a) This Agreement constitutes the legal, valid, and binding
obligation of Sellers, enforceable against Sellers in accordance with its terms.
Upon the execution and delivery by each of the Sellers of the Employment
Agreements (the "Sellers' Closing Documents"), the Sellers' Closing Documents
will constitute the legal, valid, and binding obligations of Sellers,
enforceable against Sellers in accordance with their respective terms. Sellers
have the absolute and unrestricted right, power, authority, and capacity to
execute and deliver this Agreement and the Sellers' Closing Documents and to
perform their obligations under this Agreement and the Sellers' Closing
Documents.
(b) Except as set forth in Schedule 3.2 of the Disclosure Letter,
neither the execution and delivery of this Agreement nor the consummation or
performance of any of the Contemplated Transactions will, directly or indirectly
(with or without notice or lapse of time):
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<PAGE> 14
(i) contravene, conflict with, or result in a violation of
(A) any provision of the Organizational Documents of the Acquired Companies, or
(B) any resolution adopted by the board of directors or the stockholders of any
Acquired Company;
(ii) to the Knowledge of the Sellers, after diligent
inquiry, contravene, conflict with, or result in a violation of, or give any
Governmental Body or other Person the right to challenge any of the Contemplated
Transactions or to exercise any remedy or obtain any relief under, any Legal
Requirement or any Order to which any Acquired Company or Sellers, or any of the
assets owned or used by any Acquired Company, may be subject;
(iii) to the Knowledge of the Sellers, after diligent
inquiry, contravene, conflict with, or result in a violation of any of the terms
or requirements of, or give any Governmental Body the right to revoke, withdraw,
suspend, cancel, terminate, or modify, any Governmental Authorization that is
held by any Acquired Company or that otherwise relates to the business of, or
any of the assets owned or used by, any Acquired Company;
(iv) cause Purchaser or any Acquired Company to become
subject to, or to become liable for the payment of, any Tax;
(v) cause any of the assets owned by any Acquired Company to
be reassessed or revalued by any taxing authority or other Governmental Body;
(vi) contravene, conflict with, or result in a violation or
breach of any provision of, or give any Person the right to declare a default or
exercise any remedy under, or to accelerate the maturity or performance of, or
to cancel, terminate, or modify, any Applicable Contract; or
(vii) result in the imposition or creation of any
Encumbrance upon or with respect to any of the assets owned or used by any
Acquired Company.
Except as set forth in Schedule 3.2 of the Disclosure Letter, no Seller
or Acquired Company is or will be required to give any notice to or obtain any
Consent from any Person other than each of the Sellers in connection with the
execution and delivery of this Agreement or the consummation or performance of
any of the Contemplated Transactions.
3.3 CAPITALIZATION
The authorized equity securities of the Company consist of 202,000
shares of common stock, par value $1.00 per share, of which 61,322 shares are
issued and outstanding and constitute the Shares. Sellers are and will be on the
Closing Date the record and beneficial owners and holders of the Shares, free
and clear of all Encumbrances. The Shares are owned by the following Sellers in
the following amounts: Wilson - 42,159 shares (68.75%); Hopson - 15,330 shares
(25%); and Smeck - 3,833 shares (6.25%). As of the Closing Date, with the
exception of the Shares which are owned by Sellers, all of the outstanding
equity securities and
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other securities of each Acquired Company are owned of record and beneficially
by one or more of the Acquired Companies, free and clear of all Encumbrances. No
legend or other reference to any purported Encumbrance appears upon any
certificate representing equity securities of any Acquired Company. All of the
outstanding equity securities of each Acquired Company have been duly authorized
and validly issued and are fully paid and nonassessable. As of the Closing Date,
there are no Contracts relating to the issuance, sale, or transfer of any equity
securities or other securities of any Acquired Company. None of the outstanding
equity securities or other securities of any Acquired Company was issued in
violation of the Securities Act or any other Legal Requirement. As of the
Closing Date, no Acquired Company owns, or has any Contract to acquire, any
equity securities or other securities of any Person (other than Acquired
Companies) or any direct or indirect equity or ownership interest in any other
business.
3.4 FINANCIAL STATEMENTS
Sellers have delivered to Purchaser: (a) audited consolidated balance
sheets of the Acquired Companies as at August 31 in each of the years 1994
through 1996, and the related audited consolidated statements of income, changes
in stockholders' equity, and cash flow for each of the fiscal years then ended,
together with the report thereon of John James (with respect to 1994 and 1995),
and Harper & Pearson Company (with respect to 1996), independent certified
public accountants, (b) an audited consolidated balance sheet of the Acquired
Companies as at August 31, 1997 (including the notes thereto, the "Balance
Sheet"), and the related consolidated statements of income, changes in
stockholders' equity, and cash flow for the fiscal year then ended, together
with the report thereon of Harper & Pearson Company, independent certified
public accountants, and (c) an unaudited consolidated balance sheet of the
Acquired Companies as at September 30, 1997 (the "Interim Balance Sheet") and
the related unaudited consolidated statements of income, changes in
stockholders' equity, and cash flow for the one (1) month then ended, including
in each case the notes thereto. Such financial statements and notes fairly
present the financial condition and the results of operations, changes in
stockholders' equity, and cash flow of the Acquired Companies as at the
respective dates of and for the periods referred to in such financial
statements, all in accordance with GAAP, subject, in the case of interim
financial statements, to normal recurring year-end adjustments (the effect of
which will not, individually or in the aggregate, be materially adverse) and the
absence of notes (that, if presented, would not differ materially from those
included in the Balance Sheet); the financial statements referred to in this
Section 3.4 reflect the consistent application of such accounting principles
throughout the periods involved. No financial statements of any Person other
than the Acquired Companies are required by GAAP to be included in the
consolidated financial statements of the Company.
3.5 BOOKS AND RECORDS
The books of account, minute books, stock record books, and other
records of the Acquired Companies, complete and accurate copies of all of which
have been delivered to Purchaser with or prior to the delivery of the Disclosure
Letter, are complete and correct and have been maintained in accordance with
sound business practices, including the maintenance of an adequate system of
internal controls. The minute books of the Acquired Companies contain accurate
and complete records of all meetings held of, and corporate action taken by, the
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stockholders, the Boards of Directors, and committees of the Boards of Directors
of the Acquired Companies, and no meeting of any such stockholders, Board of
Directors, or committee has been held for which minutes have not been prepared
and are not contained in such minute books. At the Closing, all of those books
and records will be in the possession of the Acquired Companies.
3.6 TITLE TO PROPERTIES; ENCUMBRANCES
Schedule 3.6 of the Disclosure Letter contains a complete and accurate
list of all real property, leaseholds, or other interests therein owned by any
Acquired Company. Sellers have delivered or made available to Purchaser copies
of all Leases and copies of the deeds and other instruments (as recorded) by
which the Acquired Companies acquired such real property and interests, and
copies of all title insurance policies, opinions, abstracts, and surveys in the
possession of Sellers or the Acquired Companies and relating to such property or
interests. The Acquired Companies own (with good and marketable title in the
case of real property, subject only to the matters permitted by the following
sentence) all the properties and assets (whether real, personal, or mixed and
whether tangible or intangible) that they purport to own located in the
facilities owned or operated by the Acquired Companies or reflected as owned in
the books and records of the Acquired Companies, including all of the properties
and assets reflected in the Balance Sheet and the Interim Balance Sheet (except
for assets held under capitalized leases disclosed or not required to be
disclosed in Schedule 3.6 of the Disclosure Letter and personal property sold
since the date of the Balance Sheet and the Interim Balance Sheet, as the case
may be, in the Ordinary Course of Business), and all of the properties and
assets purchased or otherwise acquired by the Acquired Companies since the date
of the Balance Sheet (except for personal property acquired and sold since the
date of the Balance Sheet in the Ordinary Course of Business and consistent with
past practice), which subsequently purchased or acquired properties and assets
(other than inventory and short-term investments) are listed in Schedule 3.6 of
the Disclosure Letter. All material properties and assets reflected in the
Balance Sheet and the Interim Balance Sheet are free and clear of all
Encumbrances and are not, in the case of real property, subject to any rights of
way, building use restrictions, exceptions, variances, reservations, or
limitations of any nature except, with respect to all such properties and
assets, (a) mortgages or security interests shown on the Balance Sheet or the
Interim Balance Sheet as securing specified liabilities or obligations, with
respect to which no default (or event that, with notice or lapse of time or
both, would constitute a default) exists, (b) mortgages or security interests
incurred in connection with the purchase of property or assets after the date of
the Interim Balance Sheet (such mortgages and security interests being limited
to the property or assets so acquired), with respect to which no default (or
event that, with notice or lapse of time or both, would constitute a default)
exists, (c) liens for current taxes not yet due, and (d) with respect to real
property, (i) minor imperfections of title, if any, none of which is substantial
in amount, materially detracts from the value or impairs the use of the property
subject thereto, or impairs the operations of any Acquired Company, and (ii)
zoning laws and other land use restrictions that do not impair the present or
anticipated use of the property subject thereto. All buildings, plants, and
structures owned by the Acquired Companies lie wholly within the boundaries of
the real property owned by the Acquired Companies and do not encroach upon the
property of, or otherwise conflict with the property rights of, any other
Person.
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3.7 CONDITION AND SUFFICIENCY OF ASSETS
To the Knowledge of the Sellers, the buildings, plants, structures, and
equipment of the Acquired Companies are structurally sound, are in good
operating condition and repair, and are adequate for the uses to which they are
being put, and none of such buildings, plants, structures, or equipment is in
need of maintenance or repairs except for ordinary, routine maintenance and
repairs that are not material in nature or cost. The building, plants,
structures, and equipment of the Acquired Companies are sufficient for the
continued conduct of the Acquired Companies' businesses after the Closing in
substantially the same manner as conducted prior to the Closing.
3.8 ACCOUNTS RECEIVABLE
All accounts receivable of the Acquired Companies that are reflected on
the Balance Sheet or the Interim Balance Sheet or on the accounting records of
the Acquired Companies as of the Closing Date (collectively, the "Accounts
Receivable") represent or will represent valid obligations arising from sales
actually made or services actually performed in the Ordinary Course of Business.
Unless paid prior to the Closing Date, the Accounts Receivable are or will be as
of the Closing Date current and collectible net of the respective reserves shown
on the Balance Sheet or the Interim Balance Sheet or on the accounting records
of the Acquired Companies as of the Closing Date (which reserves are adequate
and calculated consistent with past practice and, in the case of the reserve as
of the Closing Date, will not represent a greater percentage of the Accounts
Receivable as of the Closing Date than the reserve reflected in the Interim
Balance Sheet represented of the Accounts Receivable reflected therein and will
not represent a material adverse change in the composition of such Accounts
Receivable in terms of aging). Subject to such reserves, each of the Accounts
Receivable either has been or will be collected in full, without any set-off,
within ninety days after the day on which it first becomes due and payable,
except as disclosed on Schedule 3.8. There is no contest, claim, or right of
set-off, other than returns in the Ordinary Course of Business, under any
Contract with any obligor of an Accounts Receivable relating to the amount or
validity of such Accounts Receivable. Schedule 3.8 of the Disclosure Letter
contains a complete and accurate list of all Accounts Receivable as of the date
of the Interim Balance Sheet, which list sets forth the aging of such Accounts
Receivable.
3.9 INVENTORY
All inventory of the Acquired Companies, whether or not reflected in the
Balance Sheet or the Interim Balance Sheet, consists of a quality and quantity
usable and salable in the Ordinary Course of Business, except for obsolete items
and items of below-standard quality, all of which have been written off or
written down to net realizable value in the Balance Sheet or the Interim Balance
Sheet or on the accounting records of the Acquired Companies as of the Closing
Date, as the case may be. All inventories not written off have been priced at
the lower of cost or market value. The quantities of each item of inventory
(whether raw materials, work-in-process, or finished goods) are not excessive,
but are reasonable in the present circumstances of the Acquired Companies.
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3.10 NO UNDISCLOSED LIABILITIES
Except as set forth in Schedule 3.10 of the Disclosure Letter, the
Acquired Companies have no liabilities or obligations of any nature (whether
known or unknown and whether absolute, accrued, contingent, or otherwise) except
for liabilities or obligations reflected or reserved against in the Balance
Sheet or the Interim Balance Sheet and current liabilities incurred in the
Ordinary Course of Business since the respective dates thereof.
3.11 TAXES
(a) The Acquired Companies have filed or caused to be filed on a
timely basis all Tax Returns that are or were required to be filed by or with
respect to any of them, either separately or as a member of a group of
corporations, pursuant to applicable Legal Requirements. Sellers have delivered
to Purchaser copies of, and Schedule 3.11 of the Disclosure Letter contains a
complete and accurate list of, all such Tax Returns filed since August 31, 1994.
The Acquired Companies have paid, or made provision for the payment of, all
Taxes that have or may have become due pursuant to those Tax Returns or
otherwise, or pursuant to any assessment received by Sellers or any Acquired
Company, except such Taxes, if any, as are listed in Schedule 3.11 of the
Disclosure Letter and are being contested in good faith and as to which adequate
reserves (determined in accordance with GAAP) have been provided in the Balance
Sheet and the 0Interim Balance Sheet.
(b) The United States federal and state Tax Returns of each
Acquired Company subject to Taxes have not been audited by the IRS or relevant
state tax authorities or are closed by the applicable statute of limitations for
all taxable years through August 31, 1992, or Schedule 3.11 of the Disclosure
Letter contains a complete and accurate list of all audits of all such Tax
Returns, including a reasonably detailed description of the nature and outcome
of each audit. All deficiencies proposed as a result of such audits have been
paid, reserved against, settled, or, as described in Schedule 3.11 of the
Disclosure Letter, are being contested in good faith by appropriate proceedings.
Schedule 3.11 of the Disclosure Letter describes all adjustments to the United
States federal income Tax Returns filed by any Acquired Company or any group of
corporations including any Acquired Company for all taxable years since 1992,
and the resulting deficiencies proposed by the IRS. Except as described in
Schedule 3.11 of the Disclosure Letter, No Seller or Acquired Company has given
or been requested to give waivers or extensions (or is or would be subject to a
waiver or extension given by any other Person) of any statute of limitations
relating to the payment of Taxes of any Acquired Company or for which any
Acquired Company may be liable.
(c) The charges, accruals, and reserves with respect to Taxes on
the respective books of each Acquired Company are adequate (determined in
accordance with GAAP) in all material respects for payment of all accrued and
unpaid federal, state, county, local, and foreign taxes for the period then
ended and for all prior periods. Federal income Tax Returns of the Sellers have
not been audited by the Internal Revenue Service, and no controversy with
respect to taxes of any type is pending or, to the best knowledge of the
Sellers, threatened. The Sellers have filed or has obtained presently effective
extensions with respect to all Federal, state, county,
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local, and foreign tax returns that are required to be filed by it, such returns
are true and correct and all taxes shown thereon to be due have been timely paid
with exceptions not material to the Sellers. The Sellers' net operating losses
for federal income tax purposes, as set forth in the Financial Statements, are
not subject to any limitations imposed by Section 382 of the Code, and
consummation of the transactions contemplated by this Agreement or by any other
agreement, understanding or commitment, contingent or otherwise, to which the
Sellers are a party or by which it is otherwise bound will not have the effect
of limiting the Sellers' ability to use such net operating losses in full to
offset such taxable income and are at least equal to that Acquired Company's
liability for Taxes. There exists no proposed tax assessment against any
Acquired Company except as disclosed in the Balance Sheet or in Schedule 3.11 of
the Disclosure Letter. No consent to the application of Section 341(f)(2) of the
IRC has been filed with respect to any property or assets held, acquired, or to
be acquired by any Acquired Company. All Taxes that any Acquired Company is or
was required by Legal Requirements to withhold or collect have been duly
withheld or collected and, to the extent required, have been paid to the proper
Governmental Body or other Person.
(d) All Tax Returns filed by (or that include on a consolidated
basis) any Acquired Company are true, correct, and complete. There is no tax
sharing agreement that will require any payment by any Acquired Company after
the date of this Agreement. No Acquired Company is, or within the five-year
period preceding the Closing Date has been, an "S" corporation. During the
consistency period (as defined in Section 338(h)(4) of the IRC with respect to
the sale of the Shares to Purchaser), no Acquired Company or target affiliate
(as defined in Section 338(h)(6) of the IRC with respect to the sale of the
Shares to Purchaser) has sold or will sell any property or assets to Purchaser
or to any member of the affiliated group (as defined in Section 338(h)(5) of the
IRC) that includes Purchaser. Schedule 3.11 of the Disclosure Letter lists all
such target affiliates.
3.12 NO MATERIAL ADVERSE CHANGE
Since the date of the Balance Sheet, there has not been any material
adverse change in the business, operations, properties, prospects, assets, or
condition of any Acquired Company, and no event has occurred or circumstance
exists that may result in such a material adverse change.
3.13 ERISA AND EMPLOYEE BENEFITS
(a) Schedule 3.13 of the Disclosure Letter contains a true and
complete list of each "employee benefit plan," as defined in Section 3(3) of
ERISA, and of all other employee compensation plans, programs, agreements or
arrangements, currently maintained by the Company or any trade or business,
whether or not incorporated, which is part of a controlled group within the
meaning of Section 414(b), (c) or (m) of the Code with the Company
(collectively, the "Company Group"), or under which any member of the Company
Group has any liability in respect of current or former employees (collectively,
the "Company Plans"). All the Company Plans which constitute employee "pension
plans" as defined in Section 3(2) of ERISA are referred to herein as the "the
Company Pension Plans." Each of the Company Plans is in compliance in all
material respects with the terms thereof and the applicable provisions of
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ERISA and the Code, including any applicable qualification requirements of the
Code. The Company Group has fulfilled its obligations under the minimum funding
standards of ERISA and the Code with respect to each Company Pension Plan, and
the Company Group has not incurred, and the Company Group does not have any
knowledge of any event or condition which would cause the Company Group to
incur, any liability to the Pension Benefit Guaranty Corporation, any trustee
under Section 4049 of ERISA, or any Company Pension Plan in connection with the
termination of any Company Pension Plan under Title IV of ERISA. No Company
Pension Plan has an accumulated or waived funding deficiency, or has applied for
an extension of any amortization period within the meaning of Section 412 of the
Code and no event or condition exists which could be deemed a reportable event
within the meaning of Section 4043 of ERISA. Each Company Pension Plan which is
intended to be a qualified plan under Section 401 (a) of the Code is so
qualified and has received a favorable determination letter from the Internal
Revenue Service. The Company has previously delivered to the Purchaser with
respect to each Company Plan, true and correct copies of (A) each Company Plan
(or, in the case of an oral or informal Company Plan, a written description
thereof); (B) the most recent annual report (Form 5500 series); (C) the most
recent actuarial valuation report; and (iv) the most recent Summary Plan
Description, as described in Section 102(a)(1) of ERISA.
(b) The actuarial present value of accrued benefits (both vested
and unvested) of Company Pension Plans subject to Title IV of ERISA does not
exceed the assets of such Company Pension Plans based upon the actuarial
assumptions used in funding such plan for the 1996 valuation, which assumptions
are reasonable in light of the experience of such plan.
(c) Except as set forth on Schedule 3.13 of the Disclosure Letter,
there are no pending claims or lawsuits which have been asserted or instituted
(other than in respect of benefits due in the ordinary course which, in the
aggregate, are not material) against the assets of any of the Company Plans or
against the Company Group or any fiduciary of the Company Plans with respect to
the Company Plans.
(d) As of the date hereof, there are no benefits to be provided to
current or future retirees under any "welfare benefit plans" within the meaning
of Section 3(1) of ERISA which are maintained by the Company Group.
(e) The Company Group has not maintained or contributed to, or
been obligated or required to contribute to, a "multiemployer plan," as such
term is defined in Section 3(37) of ERISA, and no withdrawal liability has been
incurred by or asserted against any of the Company Group with respect to a
withdrawal from any multiemployer pension plan, and the Company Group does not
have any knowledge of any event of condition which would cause any of the
Company Group to incur any such withdrawal liability.
(f) Except as set forth in Schedule 3.13 of the Disclosure Letter,
no Company Plan exists which would result in the payment to any individual of
any money or other property or rights or accelerate or provide any other rights
or benefits to any individual as a result of the transactions contemplated by
this Agreement.
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3.14 COMPLIANCE WITH LEGAL REQUIREMENTS; GOVERNMENTAL AUTHORIZATIONS
(a) Except as set forth in Schedule 3.14 of the Disclosure Letter:
(i) each Acquired Company is, and at all times has been, in full
compliance with each Legal Requirement that is or was applicable to it or to the
conduct or operation of its business or the ownership or use of any of its
assets;
(ii) no event has occurred or circumstance exists that (with or
without notice or lapse of time) (A) may constitute or result in a violation by
any Acquired Company of, or a failure on the part of any Acquired Company to
comply with, any Legal Requirement, or (B) may give rise to any obligation on
the part of any Acquired Company to undertake, or to bear all or any portion of
the cost of, any remedial action of any nature; and
(iii) no Acquired Company has received any notice or other
communication (whether oral or written) from any Governmental Body or any other
Person regarding (A) any actual, alleged, possible, or potential violation of,
or failure to comply with, any Legal Requirement, or (B) any actual, alleged,
possible, or potential obligation on the part of any Acquired Company to
undertake, or to bear all or any portion of the cost of, any remedial action of
any nature.
(b) Schedule 3.14 of the Disclosure Letter contains a complete and
accurate list of each Governmental Authorization that is held by any Acquired
Company or that otherwise relates to the business of, or to any of the assets
owned or used by, any Acquired Company. Each Governmental Authorization listed
or required to be listed in Schedule 3.14 of the Disclosure Letter is valid and
in full force and effect. Except as set forth in Schedule 3.14 of the Disclosure
Letter:
(i) each Acquired Company is, and at all times has been, in full
compliance with all of the terms and requirements of each Governmental
Authorization identified or required to be identified in Schedule 3.14 of the
Disclosure Letter;
(ii) no event has occurred or circumstance exists that may (with
or without notice or lapse of time) (A) constitute or result directly or
indirectly in a violation of or a failure to comply with any term or requirement
of any Governmental Authorization listed or required to be listed in Schedule
3.14 of the Disclosure Letter, or (B) result directly or indirectly in the
revocation, withdrawal, suspension, cancellation, or termination of, or any
modification to, any Governmental Authorization listed or required to be listed
in Schedule 3.14 of the Disclosure Letter;
(iii) no Acquired Company has received any notice or other
communication (whether oral or written) from any Governmental Body or any other
Person regarding (A) any actual, alleged, possible, or potential violation of or
failure to comply with any term or requirement of any Governmental
Authorization, or (B) any actual, proposed, possible,
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or potential revocation, withdrawal, suspension, cancellation, termination of,
or modification to any Governmental Authorization; and
(iv) all applications required to have been filed for the renewal
of the Governmental Authorizations listed or required to be listed in Schedule
3.14 of the Disclosure Letter have been duly filed on a timely basis with the
appropriate Governmental Bodies, and all other filings required to have been
made with respect to such Governmental Authorizations have been duly made on a
timely basis with the appropriate Governmental Bodies.
The Governmental Authorizations listed in Schedule 3.14 of the
Disclosure Letter collectively constitute all of the Governmental Authorizations
necessary to permit the Acquired Companies to lawfully conduct and operate their
businesses in the manner they currently conduct and operate such businesses and
to permit the Acquired Companies to own and use their assets in the manner in
which they currently own and use such assets.
3.15 LEGAL PROCEEDINGS; ORDERS
(a) Except as set forth in Schedule 3.15 of the Disclosure
Letter, there is no pending Proceeding against either any Acquired Company or
any of the Sellers:
(i) that has been commenced by or against any Acquired
Company or that otherwise relates to or may affect the business of, or any of
the assets owned or used by, any Acquired Company; or
(ii) that challenges, or that may have the effect of
preventing, delaying, making illegal, or otherwise interfering with, any of the
Contemplated Transactions; or
(iii) that challenges the right of any of the Sellers to
enter into or perform its obligations under this Agreement; or
(iv) relating to any matters arising by reason of the past
employment relationships of any of the Sellers or of any of the Company's
employees.
To the Knowledge of Sellers and the Acquired Companies, (1) no
such Proceeding has been Threatened, and (2) no event has occurred or
circumstance exists that may give rise to or serve as a basis for the
commencement of any such Proceeding. Sellers have delivered to Purchaser copies
of all pleadings, correspondence, and other documents relating to each
Proceeding listed in Schedule 3.15 of the Disclosure Letter. The Proceedings
listed in Schedule 3.15 of the Disclosure Letter will not have a material
adverse effect on the business, operations, assets, condition, or prospects of
any Acquired Company.
(b) Except as set forth in Schedule 3.15 of the Disclosure Letter:
(i) there is no Order to which any of the Acquired
Companies, or any of the assets owned or used by any Acquired Company, is
subject;
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(ii) No Seller is subject to any Order that relates to the
business of, or any of the assets owned or used by, any Acquired Company; and
(iii) to the Knowledge of Sellers and the Acquired
Companies, no officer, director, agent, or employee of any Acquired Company is
subject to any Order that prohibits such officer, director, agent, or employee
from engaging in or continuing any conduct, activity, or practice relating to
the business of any Acquired Company.
(c) Except as set forth in Schedule 3.15 of the Disclosure
Letter:
(i) each Acquired Company and each of the Sellers is in full
compliance with all of the terms and requirements of each Order to which it, or
any of the assets owned or used by it, is or has been subject;
(ii) no event has occurred or circumstance exists that may
constitute or result in (with or without notice or lapse of time) a violation of
or failure to comply with any term or requirement of any Order to which any
Acquired Company, or any of the assets owned or used by any Acquired Company, or
any of the Sellers are subject; and
(iii) no Acquired Company or any of the Sellers has received
any notice or other communication (whether oral or written) from any
Governmental Body or any other Person regarding any actual, alleged, possible,
or potential violation of, or failure to comply with, any term or requirement of
any Order to which any Acquired Company, or any of the assets owned or used by
any Acquired Company, is or has been subject.
3.16 ABSENCE OF CERTAIN CHANGES AND EVENTS
Except as set forth in Schedule 3.16 of the Disclosure Letter, since the
date of the Balance Sheet, the Acquired Companies have conducted their
businesses only in the Ordinary Course of Business and there has not been any:
(a) change in any Acquired Company's authorized or issued capital
stock; grant of any stock option or right to purchase shares of capital stock of
any Acquired Company; issuance of any security convertible into such capital
stock; grant of any registration rights; purchase, redemption, retirement, or
other acquisition by any Acquired Company of any shares of any such capital
stock; or declaration or payment of any dividend or other distribution or
payment in respect of shares of capital stock;
(b) amendment to the Organizational Documents of any Acquired
Company;
(c) payment or increase by any Acquired Company of any bonuses,
salaries, or other compensation to any stockholder, director, officer, or
(except in the Ordinary Course of Business) employee or entry into any
employment, severance, or similar Contract with any director, officer, or
employee;
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(d) adoption of, or increase in the payments to or benefits under,
any profit sharing, bonus, deferred compensation, savings, insurance, pension,
retirement, or other employee benefit plan for or with any employees of any
Acquired Company;
(e) damage to or destruction or loss of any asset or property of
any Acquired Company, whether or not covered by insurance, materially and
adversely affecting the properties, assets, business, financial condition, or
prospects of the Acquired Companies, taken as a whole;
(f) entry into, termination of, or receipt of notice of
termination of (i) any license, distributorship, dealer, sales representative,
joint venture, credit, or similar agreement, or (ii) any Contract or transaction
involving a total remaining commitment by or to any Acquired Company of at least
$10,000.00
(g) sale (other than sales of inventory in the Ordinary Course of
Business), lease, or other disposition of any asset or property of any Acquired
Company or mortgage, pledge, or imposition of any lien or other encumbrance on
any material asset or property of any Acquired Company, including the sale,
lease, or other disposition of any of the Intellectual Property Assets;
(h) cancellation or waiver of any claims or rights with a value to
any Acquired Company in excess of $10,000.00.
(i) material change in the accounting methods used by any Acquired
Company; or
(j) agreement, whether oral or written, by any Acquired Company to
do any of the foregoing.
3.17 CONTRACTS; NO DEFAULTS
(a) Schedule 3.17(a) of the Disclosure Letter contains a complete and
accurate list, and Sellers have delivered to Purchaser true and complete copies,
of:
(i) each Applicable Contract that involves performance of services
or delivery of goods or materials by one or more Acquired Companies of an amount
or value in excess of $10,000.00;
(ii) each Applicable Contract that involves performance of
services or delivery of goods or materials to one or more Acquired Companies of
an amount or value in excess of $10,000.00;
(iii) each Applicable Contract that was not entered into in the
Ordinary Course of Business and that involves expenditures or receipts of one or
more Acquired Companies in excess of $10,000.00;
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(iv) each lease, rental or occupancy agreement, license,
installment and conditional sale agreement, and other Applicable Contract
affecting the ownership of, leasing of, title to, use of, or any leasehold or
other interest in, any real or personal property (except personal property
leases and installment and conditional sales agreements having a value per item
or aggregate payments of less than $10,000.00 and with terms of less than one
year);
(v) each licensing agreement or other Applicable Contract with
respect to patents, trademarks, copyrights, or other intellectual property,
including agreements with current or former employees, consultants, or
contractors regarding the appropriation or the non-disclosure of any of the
Intellectual Property Assets;
(vi) each collective bargaining agreement and other Applicable
Contract to or with any labor union or other employee representative of a group
of employees;
(vii) each joint venture, partnership, and other Applicable
Contract (however named) involving a sharing of profits, losses, costs, or
liabilities by any Acquired Company with any other Person;
(viii) each Applicable Contract containing covenants that in any
way purport to restrict the business activity of any Acquired Company or any
Affiliate of an Acquired Company or limit the freedom of any Acquired Company or
any Affiliate of an Acquired Company to engage in any line of business or to
compete with any Person;
(ix) each Applicable Contract providing for payments to or by any
Person based on sales, purchases, or profits, other than direct payments for
goods;
(x) each power of attorney that is currently effective and
outstanding;
(xi) each Applicable Contract entered into other than in the
Ordinary Course of Business that contains or provides for an express undertaking
by any Acquired Company to be responsible for consequential damages;
(xii) each Applicable Contract for capital expenditures in excess
of $10,000.00;
(xiii) each written warranty, guaranty, and or other similar
undertaking with respect to contractual performance extended by any Acquired
Company other than in the Ordinary Course of Business;
(xiv) each Owned Mortgage Loan and any Servicing Agreements and
escrow agreement relating thereto;
(xv) each Applicable Contract with each of the Company's
Investors, and
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(xvi) each amendment, supplement, and modification (whether oral
or written) in respect of any of the foregoing;
Schedule 3.17(a) of the Disclosure Letter sets forth reasonably complete
details concerning such Contracts, including the parties to the Contracts, the
amount of the remaining commitment of the Acquired Companies under the
Contracts, and the Acquired Companies' office where details relating to the
Contracts are located.
(b) Except as set forth in Schedule 3.17(b) of the Disclosure Letter:
(i) no Seller (and no Related Person of Sellers) has or may
acquire any rights under, and no Seller has or may become subject to any
obligation or liability under, any Contract that relates to the business of, or
any of the assets owned or used by, any Acquired Company; and
(ii) no officer, director, agent, employee, consultant, or
contractor of any Acquired Company is bound by any Contract that purports to
limit the ability of such officer, director, agent, employee, consultant, or
contractor to (A) engage in or continue any conduct, activity, or practice
relating to the business of any Acquired Company, or (B) assign to any Acquired
Company or to any other Person any rights to any invention, improvement, or
discovery.
(c) Except as set forth in Schedule 3.17(c) of the Disclosure Letter,
each Contract identified or required to be identified in Schedule 3.17(a) of the
Disclosure Letter is in full force and effect and is valid and enforceable in
accordance with its terms.
(d) Except as set forth in Schedule 3.17(d) of the Disclosure Letter:
(i) each Acquired Company is and at all times has been in full
compliance with all applicable terms and requirements of each Contract under
which such Acquired Company has or had any obligation or liability or by which
such Acquired Company or any of the assets owned or used by such Acquired
Company is or was bound;
(ii) each other Person that has or had any obligation or liability
under any Contract under which an Acquired Company has or had any rights is and
at all times has been, in full compliance with all applicable terms and
requirements of such Contract;
(iii) no event has occurred or circumstance exists that (with or
without notice or lapse of time) may contravene, conflict with, or result in a
violation or breach of, or give any Acquired Company or other Person the right
to declare a default or exercise any remedy under, or to accelerate the maturity
or performance of, or to cancel, terminate, or modify, any Applicable Contract;
and
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(iv) no Acquired Company has given to or received from any other
Person at any time any notice or other communication (whether oral or written)
regarding any actual, alleged, possible, or potential violation or breach of, or
default under, any Contract.
(e) There are no renegotiations of, attempts to renegotiate, or
outstanding rights to renegotiate any material amounts paid or payable to any
Acquired Company under current or completed Contracts with any Person and no
such Person has made written demand for such renegotiation.
(f) The Contracts relating to the sale, design, manufacture, or
provision of products or services by the Acquired Companies have been entered
into in the Ordinary Course of Business and have been entered into without the
commission of any act alone or in concert with any other Person, or any
consideration having been paid or promised, that is or would be in violation of
any Legal Requirement.
3.18 INSURANCE
(a) Sellers have delivered to Purchaser:
(i) true and complete copies of all policies of insurance to
which any Acquired Company is a party or under which any Acquired Company, or
any director of any Acquired Company, is or has been covered at any time within
the seven (7) years preceding the date of this Agreement;
(ii) true and complete copies of all pending applications
for policies of insurance; and
(iii) any statement by the auditor of any Acquired Company's
financial statements with regard to the adequacy of such entity's coverage or of
the reserves for claims.
(b) Schedule 3.18(b) of the Disclosure Letter describes:
(i) any self-insurance arrangement by or affecting any
Acquired Company, including any reserves established thereunder;
(ii) any contract or arrangement, other than a policy of
insurance, for the transfer or sharing of any risk by any Acquired Company; and
(iii) all obligations of the Acquired Companies to third
parties with respect to insurance (including such obligations under leases and
service agreements) and identifies the policy under which such coverage is
provided.
(c) Schedule 3.18(c) of the Disclosure Letter sets forth, by
year, for the current policy year and each of the seven (7) preceding policy
years:
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(i) a summary of the loss experience under each policy;
(ii) a statement describing each claim under an insurance
policy which sets forth:
(A) the name of the claimant;
(B) a description of the policy by insurer, type of
insurance, and period of coverage; and
(C) the amount and a brief description of the claim;
and
(iii) a statement describing the loss experience for
all claims that were self-insured, including the number and aggregate cost of
such claims.
(d) Except as set forth on Schedule 3.18(d) of the Disclosure
Letter:
(i) All policies to which any Acquired Company is a party
or that provide coverage to Sellers, any Acquired Company, or any director or
officer of an Acquired Company:
(A) are valid, outstanding, and enforceable;
(B) are issued by an insurer that is financially sound
and reputable;
(C) taken together, provide adequate insurance coverage
for the assets and the operations of the Acquired Companies [for all risks
normally insured against by a Person carrying on the same business or businesses
as the Acquired Companies] [for all risks to which the Acquired Companies are
normally exposed];
(D) are sufficient for compliance with all Legal
Requirements and Contracts to which any Acquired Company is a party or by which
any of them is bound;
(E) will continue in full force and effect following
the consummation of the Contemplated Transactions; and
(F) do not provide for any retrospective premium
adjustment or other experienced-based liability on the part of any Acquired
Company.
(ii) No Seller or Acquired Company has received (A) any
refusal of coverage or any notice that a defense will be afforded with
reservation of rights, or (B) any notice of cancellation or any other indication
that any insurance policy is no longer in full force or effect or will not be
renewed or that the issuer of any policy is not willing or able to perform its
obligations thereunder.
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(iii) The Acquired Companies have paid all premiums due, and
have otherwise performed all of their respective obligations, under each policy
to which any Acquired Company is a party or that provides coverage to any
Acquired Company or director thereof.
(iv) The Acquired Companies have given notice to the insurer
of all claims that may be insured thereby.
3.19 ENVIRONMENTAL MATTERS
Except as set forth in part 3.19 of the disclosure letter:
(a) Each Acquired Company is, and at all times has been, in full
compliance with, and has not been and is not in violation of or liable under,
any Environmental Law. No Seller or Acquired Company has any basis to expect,
nor has any of them or any other Person for whose conduct they are or may be
held to be responsible received, any actual or Threatened order, notice, or
other communication from (i) any Governmental Body or private citizen acting in
the public interest, or (ii) the current or prior owner or operator of any
Facilities, of any actual or potential violation or failure to comply with any
Environmental Law, or of any actual or Threatened obligation to undertake or
bear the cost of any Environmental, Health, and Safety Liabilities with respect
to any of the Facilities or any other properties or assets (whether real,
personal, or mixed) in which Sellers or any Acquired Company has had an
interest, or with respect to any property or Facility at or to which Hazardous
Materials were generated, manufactured, refined, transferred, imported, used, or
processed by Sellers, any Acquired Company, or any other Person for whose
conduct they are or may be held responsible, or from which Hazardous Materials
have been transported, treated, stored, handled, transferred, disposed,
recycled, or received.
(b) There are no pending or, to the Knowledge of Sellers and the
Acquired Companies, Threatened claims, Encumbrances, or other restrictions of
any nature, resulting from any Environmental, Health, and Safety Liabilities or
arising under or pursuant to any Environmental Law, with respect to or affecting
any of the Facilities or any other properties and assets (whether real,
personal, or mixed) in which Sellers or any Acquired Company has or had an
interest.
(c) No Seller or Acquired Company has Knowledge of any basis to
expect, nor has any of them or any other Person for whose conduct they are or
may be held responsible, received, any citation, directive, inquiry, notice,
Order, summons, warning, or other communication that relates to Hazardous
Activity, Hazardous Materials, or any alleged, actual, or potential violation or
failure to comply with any Environmental Law, or of any alleged, actual, or
potential obligation to undertake or bear the cost of any Environmental, Health,
and Safety Liabilities with respect to any of the Facilities or any other
properties or assets (whether real, personal, or mixed) in which Sellers or any
Acquired Company had an interest, or with respect to any property or facility to
which Hazardous Materials generated, manufactured, refined, transferred,
imported, used, or processed by Sellers, any Acquired Company, or any other
Person
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for whose conduct they are or may be held responsible, have been transported,
treated, stored, handled, transferred, disposed, recycled, or received.
(d) No Seller or Acquired Company, or any other Person for whose
conduct they are or may be held responsible, has any Environmental, Health, and
Safety Liabilities with respect to the Facilities or, to the Knowledge of
Sellers and the Acquired Companies, with respect to any other properties and
assets (whether real, personal, or mixed) in which Sellers or any Acquired
Company (or any predecessor), has or had an interest, or at any property
geologically or hydrologically adjoining the Facilities or any such other
property or assets.
(e) There are no Hazardous Materials present on or in the
Environment at the Facilities or at any geologically or hydrologically adjoining
property, including any Hazardous Materials contained in barrels, above or
underground storage tanks, landfills, land deposits, dumps, equipment (whether
moveable or fixed) or other containers, either temporary or permanent, and
deposited or located in land, water, sumps, or any other part of the Facilities
or such adjoining property, or incorporated into any structure therein or
thereon. No Seller, Acquired Company, any other Person for whose conduct they
are or may be held responsible, or to the Knowledge of Sellers and the Acquired
Companies, any other Person, has permitted or conducted, or is aware of, any
Hazardous Activity conducted with respect to the Facilities or any other
properties or assets (whether real, personal, or mixed) in which Sellers or any
Acquired Company has or had an interest except in full compliance with all
applicable Environmental Laws.
(f) There has been no Release or, to the Knowledge of Sellers and
the Acquired Companies, Threat of Release, of any Hazardous Materials at or from
the Facilities or at any other locations where any Hazardous Materials were
generated, manufactured, refined, transferred, produced, imported, used, or
processed from or by the Facilities, or from or by any other properties and
assets (whether real, personal, or mixed) in which Sellers or any Acquired
Company has or had an interest, or any geologically or hydrologically adjoining
property, whether by Sellers, any Acquired Company, or any other Person.
(g) Sellers have delivered to Purchaser true and complete copies
and results of any reports, studies, analyses, tests, or monitoring possessed or
initiated by Sellers or any Acquired Company pertaining to Hazardous Materials
or Hazardous Activities in, on, or under the Facilities, or concerning
compliance by Sellers, any Acquired Company, or any other Person for whose
conduct they are or may be held responsible, with Environmental Laws.
3.20 EMPLOYEES
(a) Schedule 3.20 of the Disclosure Letter contains a complete and
accurate list of the following information for each employee or director of the
Acquired Companies, including each employee on leave of absence or layoff
status: employee; name; job title; current compensation paid or payable;
vacation accrued; and service credited for purposes of vesting and eligibility
to participate under any Acquired Company's pension, retirement, profit-sharing,
thrift-savings, deferred compensation, stock bonus, stock option, cash bonus,
employee stock
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ownership (including investment credit or payroll stock ownership), severance
pay, insurance, medical, welfare, or vacation plan, other Employee Pension
Benefit Plan or Employee Welfare Benefit Plan, or any other employee benefit
plan or any Director Plan.
(b) No employee or director of any Acquired Company is a party to,
or is otherwise bound by, any agreement or arrangement, including any
confidentiality, noncompetition, or proprietary rights agreement, between such
employee or director and any other Person ("Proprietary Rights Agreement") that
in any way adversely affects or will affect (i) the performance of his duties as
an employee or director of the Acquired Companies, or (ii) the ability of any
Acquired Company to conduct its business, including any Proprietary Rights
Agreement with Sellers or the Acquired Companies by any such employee or
director. To Sellers' Knowledge, no director, officer, or other key employee of
any Acquired Company intends to terminate his employment with such Acquired
Company.
(c) Schedule 3.20 of the Disclosure Letter also contains a
complete and accurate list of the following information for each retired
employee or director of the Acquired Companies, or their dependents, receiving
benefits or scheduled to receive benefits in the future: name, pension benefit,
pension option election, retiree medical insurance coverage, retiree life
insurance coverage, and other benefits.
3.21 LABOR RELATIONS; COMPLIANCE
No Acquired Company has been or is a party to any collective bargaining
or other labor Contract. There has not been, there is not presently pending or
existing, and there is not Threatened, (a) any strike, slowdown, picketing, work
stoppage, or employee grievance process, (b) any Proceeding against or affecting
any Acquired Company relating to the alleged violation of any Legal Requirement
pertaining to labor relations or employment matters, including any charge or
complaint filed by an employee or union with the National Labor Relations Board,
the Equal Employment Opportunity Commission, or any comparable Governmental
Body, organizational activity, or other labor or employment dispute against or
affecting any of the Acquired Companies or their premises, or (c) any
application for certification of a collective bargaining agent. To Sellers'
Knowledge, no event has occurred or circumstance exists that could provide the
basis for any work stoppage or other labor dispute. There is no lockout of any
employees by any Acquired Company, and no such action is contemplated by any
Acquired Company. Each Acquired Company has complied in all respects with all
Legal Requirements relating to employment, equal employment opportunity,
nondiscrimination, immigration, wages, hours, benefits, collective bargaining,
the payment of social security and similar taxes, occupational safety and
health, and plant closing. No Acquired Company is liable for the payment of any
compensation, damages, taxes, fines, penalties, or other amounts, however
designated, for failure to comply with any of the foregoing Legal Requirements.
3.22 INTELLECTUAL PROPERTY
(a) Intellectual Property Assets--The term "Intellectual
Property Assets" includes:
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(i) the name [the Company's name], all fictional business
names, trading names, registered and unregistered trademarks, service marks, and
applications (collectively, "Marks");
(ii) all patents, patent applications, and inventions and
discoveries that may be patentable (collectively, "Patents");
(iii) all copyrights in both published works and unpublished
works (collectively, "Copyrights");
(iv) all rights in mask works (collectively, "Rights in Mask
Works"); and
(v) all know-how, trade secrets, confidential information,
customer lists, software, technical information, data, process technology,
plans, drawings, and blue prints (collectively, "Trade Secrets"); owned, used,
or licensed by any Acquired Company as licensee or licensor.
(b) Agreements--Schedule 3.22(b) of the Disclosure Letter
contains a complete and accurate list and summary description, including any
royalties paid or received by the Acquired Companies, of all Contracts relating
to the Intellectual Property Assets to which any Acquired Company is a party or
by which any Acquired Company is bound, except for any license implied by the
sale of a product and perpetual, paid-up licenses for commonly available
software programs under which an Acquired Company is the licensee. There are no
outstanding and, to Sellers' Knowledge, no Threatened disputes or disagreements
with respect to any such agreement.
(c) Know-How Necessary for the Business
(i) The Intellectual Property Assets are all those necessary
for the operation of the Acquired Companies' businesses as they are currently
conducted. One or more of the Acquired Companies is the owner of all right,
title, and interest in and to each of the Intellectual Property Assets, free and
clear of all liens, security interests, charges, encumbrances, equities, and
other adverse claims, and has the right to use without payment to a third party
all of the Intellectual Property Assets.
(ii) Except as set forth in Schedule 3.22(c) of the
Disclosure Letter, all former and current employees of each Acquired Company
have executed written Contracts with one or more of the Acquired Companies that
assign to one or more of the Acquired Companies all rights to any inventions,
improvements, discoveries, or information relating to the business of any
Acquired Company. No employee of any Acquired Company has entered into any
Contract that restricts or limits in any way the scope or type of work in which
the employee may be engaged or requires the employee to transfer, assign, or
disclose information concerning his work to anyone other than one or more of the
Acquired Companies.
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(d) Patents
(i) Schedule 3.22(d) of the Disclosure Letter contains a
complete and accurate list and summary description of all Patents. One or more
of the Acquired Companies is the owner of all right, title, and interest in and
to each of the Patents, free and clear of all liens, security interests,
charges, encumbrances, entities, and other adverse claims.
(ii) All of the issued Patents are currently in compliance
with formal legal requirements (including payment of filing, examination, and
maintenance fees and proofs of working or use), are valid and enforceable, and
are not subject to any maintenance fees or taxes or actions falling due within
ninety days after the Closing Date.
(iii) No Patent has been or is now involved in any
interference, reissue, reexamination, or opposition proceeding. To Sellers'
Knowledge, there is no potentially interfering patent or patent application of
any third party.
(iv) No Patent is infringed or, to Sellers' Knowledge, has
been challenged or threatened in any way. None of the products manufactured and
sold, nor any process or know-how used, by any Acquired Company infringes or is
alleged to infringe any patent or other proprietary right of any other Person.
(v) All products made, used, or sold under the Patents have
been marked with the proper patent notice.
(e) Trademarks
(i) Schedule 3.22(e) of Disclosure Letter contains a
complete and accurate list and summary description of all Marks. One or more of
the Acquired Companies is the owner of all right, title, and interest in and to
each of the Marks, free and clear of all liens, security interests, charges,
encumbrances, equities, and other adverse claims.
(ii) All Marks that have been registered with the United
States Patent and Trademark Office are currently in compliance with all formal
legal requirements (including the timely post-registration filing of affidavits
of use and incontestability and renewal applications), are valid and
enforceable, and are not subject to any maintenance fees or taxes or actions
falling due within ninety days after the Closing Date.
(iii) No Mark has been or is now involved in any opposition,
invalidation, or cancellation and, to Sellers' Knowledge, no such action is
Threatened with the respect to any of the Marks.
(iv) To Sellers' Knowledge, there is no potentially
interfering trademark or trademark application of any third party.
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(v) No Mark is infringed or, to Sellers' Knowledge, has been
challenged or threatened in any way. None of the Marks used by any Acquired
Company infringes or is alleged to infringe any trade name, trademark, or
service mark of any third party.
(vi) All products and materials containing a Mark bear the
proper federal registration notice where permitted by law.
(f) Copyrights
(i) Schedule 3.22(f) of the Disclosure Letter contains a
complete and accurate list and summary description of all Copyrights. One or
more of the Acquired Companies is the owner of all right, title, and interest in
and to each of the Copyrights, free and clear of all liens, security interests,
charges, encumbrances, equities, and other adverse claims.
(ii) All the Copyrights have been registered and are
currently in compliance with formal legal requirements, are valid and
enforceable, and are not subject to any maintenance fees or taxes or actions
falling due within ninety days after the date of Closing.
(iii) No Copyright is infringed or, to Sellers' Knowledge,
has been challenged or threatened in any way. None of the subject matter of any
of the Copyrights infringes or is alleged to infringe any copyright of any third
party or is a derivative work based on the work of a third party.
(iv) All works encompassed by the Copyrights have been
marked with the proper copyright notice.
(g) Trade Secrets
(i) With respect to each Trade Secret, the documentation
relating to such Trade Secret is current, accurate, and sufficient in detail and
content to identify and explain it and to allow its full and proper use without
reliance on the knowledge or memory of any individual.
(ii) Sellers and the Acquired Companies have taken all
reasonable precautions to protect the secrecy, confidentiality, and value of
their Trade Secrets.
(iii) One or more of the Acquired Companies has good title
and an absolute (but not necessarily exclusive) right to use the Trade Secrets.
The Trade Secrets are not part of the public knowledge or literature, and, to
Sellers' Knowledge, have not been used, divulged, or appropriated either for the
benefit of any Person (other than one or more of the Acquired Companies) or to
the detriment of the Acquired Companies. No Trade Secret is subject to any
adverse claim or has been challenged or threatened in any way.
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3.23 CERTAIN PAYMENTS
No Acquired Company or director, officer, agent, or employee of any
Acquired Company, or any other Person associated with or acting for or on behalf
of any Acquired Company, has directly or indirectly (a) made any contribution,
gift, bribe, rebate, payoff, influence payment, kickback, or other payment to
any Person, private or public, regardless of form, whether in money, property,
or services (i) to obtain favorable treatment in securing business, (ii) to pay
for favorable treatment for business secured, (iii) to obtain special
concessions or for special concessions already obtained, for or in respect of
any Acquired Company or any Affiliate of an Acquired Company, or (iv) in
violation of any Legal Requirement, (b) established or maintained any fund or
asset that has not been recorded in the books and records of the Acquired
Companies.
3.24 DISCLOSURE
(a) No representation or warranty of Sellers in this Agreement and
no statement in the Disclosure Letter omits to state a material fact necessary
to make the statements herein or therein, in light of the circumstances in which
they were made, not misleading.
(b) No notice given pursuant to Section 5.5 will contain any
untrue statement or omit to state a material fact necessary to make the
statements therein or in this Agreement, in light of the circumstances in which
they were made, not misleading.
(c) Sellers have no Knowledge of any fact that has specific
application to Sellers or any Acquired Company (other than general economic or
industry conditions) and that materially adversely affects or, as far as Sellers
can reasonably foresee, materially threatens, the assets, business, prospects,
financial condition, or results of operations of the Acquired Companies (on a
consolidated basis) that has not been set forth in this Agreement or the
Disclosure Letter.
3.25 RELATIONSHIPS WITH RELATED PERSONS
Except as set forth in Schedule 3.25 of the Disclosure Letter, no Seller
or any Related Person of Sellers or of any Acquired Company has, or has had, any
interest in any property (whether real, personal, or mixed and whether tangible
or intangible), used in or pertaining to the Acquired Companies' businesses. No
Seller or any Related Person of Sellers or of any Acquired Company owns, or has
owned, (of record or as a beneficial owner) an equity interest or any other
financial or profit interest in, a Person that has (i) had business dealings or
a material financial interest in any transaction with any Acquired Company other
than business dealings or transactions conducted in the Ordinary Course of
Business with the Acquired Companies at substantially prevailing market prices
and on substantially prevailing market terms, or (ii) engaged in competition
with any Acquired Company with respect to any line of the products or services
of such Acquired Company (a "Competing Business") in any market presently served
by such Acquired Company. Except as set forth in Schedule 3.25 of the Disclosure
Letter, no Seller
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or any Related Person of Sellers or of any Acquired Company is a party to any
Contract with, or has any claim or right against, any Acquired Company.
3.26 BROKERS OR FINDERS
Sellers and their agents have incurred no obligation or liability,
contingent or otherwise, for brokerage or finders' fees or agents' commissions
or other similar payment in connection with this Agreement.
3.27 MORTGAGE LOANS AND SERVICING RIGHTS
(a) The Acquired Company is (i)a GNMA approved issuer in good
standing, (ii) an FHA-approved mortgagee in good standing, (iii) a Fannie Mae
and a Freddie Mac approved seller/servicer in good standing, and (iv) in full
compliance with all of the material provisions contained in the applicable GNMA,
FHA, Freddie Mac and Fannie Mae guides, any subsequent amendments in or to any
of them, and all other applicable regulations, and with the requirements of all
Investors. Except as set forth on Schedule 3.27 (a) of the Disclosure Letter,
neither the Company nor any of the Sellers have at any time in the past received
notice from any Investor or from any governmental, quasi-governmental or private
agency of pending or threatened actions or investigations which would question
the status of the Company as an approved mortgagee, seller/servicer or issuer as
provided in this Section. No outstanding claims exist against the Company
(directly or indirectly) from or through GNMA, FHA, Fannie Mae, Freddie Mac or
any Investors (including, without limitation, claims under FHA multifamily
co-insurance program). No event has occurred which, with the passage of time or
the giving of notice, or both, would result in the loss by the Company of its
qualification as an approved mortgagee, seller/servicer or issuer as set forth
in this Section or of the Company or any officer, director or employee of the
Company as a contractor or as a Person otherwise permitted to transact business
with any Investor.
(b) Set forth on Schedule 3.27(b) of the Disclosure Letter is a
complete and correct list, as of the date of this Agreement, of all Owned
Mortgage Loans, the aggregate unpaid principal of each Owned Mortgage Loan, the
Investor and the PMI (if applicable) with respect to each Owned Mortgage Loan,
the interest rate, maturity date, amendments, adjustment dates and terms (if
applicable), debt service coverage ratios, loan to value ratios, lock-out dates,
prepayment penalties, yield maintenance fees, servicing fees, current and
previous default status (including, without limitation, workouts and threatened
defaults), amounts of balloon payments, if any, due on maturity, descriptions of
any additional Collateral beyond real property, fixtures and leases, and other
material terms of each Owned Mortgage Loan, and all other information reasonably
required by the Purchaser.
(c) Set forth on Schedule 3.27(c) of the Disclosure Letter is a
true and complete list of each Investor with which the Company has a Mortgage
Servicing Agreement or an agreement for the acquisition of Mortgage Loans
originated or brokered by the Company ("Correspondent Agreements"), listing for
each such Investor the Investor's name and address, and, as applicable, the
aggregate principal amount and number of Mortgage Loans subject to a
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Mortgage Servicing Agreement or a Correspondent Agreement, the weighted average
servicing rate, the unpaid principal balance, the overall interest payable by
the borrower, the maturity date, amendments, adjustment dates and terms (if
applicable), debt service coverage ratios, loan to value ratios, lock-out dates,
prepayment penalties, yield maintenance fees, servicing fees, current and
previous default status (including, without limitation, workouts and threatened
defaults), amounts of balloon payments, if any, due on maturity, descriptions of
any additional Collateral beyond real property, fixtures and leases, the
applicable aggregate escrow balance under each such Mortgage Servicing
Agreement, and other material terms, and listing for the Mortgage Servicing
Portfolio interest rates by group and principal balances by age. The Sellers
have made available to the Purchaser true and complete copies of each Mortgage
Servicing Agreement and Correspondent Agreement, and all amendments,
modifications and extensions thereof.
(d) Each Originated Mortgage Loan, the related Loan Documents and
Loan Files have complied with (i) all Legal Requirements applicable to such
Mortgage Loan and (ii) the terms of any sales contracts with Investors by which
the Mortgage Loans were transferred to the Investors ("Correspondent
Agreements") and any schedule, statement or certificate furnished to the
Investors pursuant to any of the Mortgage Servicing Agreements or the
Correspondent Agreements. Except as described in Schedule 3.27 (d) of the
Disclosure Letter, each Mortgage Loan (i) is evidenced by an enforceable note or
other evidence of indebtedness and is subject to no defense, offset or
counterclaim, and (ii) is secured by a duly recorded and enforceable first
Mortgage. The Company has not assumed any obligations with respect to
Non-Originated Mortgage Loans other than non-recourse servicing obligations. The
Company has complied with all guidelines, procedures, rules and regulations of
GNMA, FHA, Fannie Mae, Freddie Mac and all other Investors and/or state banking
authorities relating to the origination, underwriting and servicing of mortgage
loans, which are applicable to the Company.
(e) Except as set forth on Schedule 3.27(e) of the Disclosure
Letter, all Taxes, governmental assessments, insurance premiums, water, sewer
and municipal charges, leasehold payments and ground rents which previously
became due and owing with respect to any Collateral or REO have been paid, or an
escrow of funds identified on Schedule 3.27(e) of the Disclosure Letter has been
established in an amount sufficient to pay for every such item which remains
unpaid and which has been assessed but is not yet due and payable. Except as set
forth on Schedule 3.27(e), the Company has not advanced funds, directly or
indirectly, for the payment of any amount required under the Loan Documents
except for interest accruing from the date of the Mortgage Note or date of
disbursement of the Mortgage Loan proceeds, whichever is earlier, to the date
which precedes by one month the due date of the first installment of principal
and interest.
(f) Except as set forth in the Loan Documents or the Loan Files
and identified on Schedule 3.27(f) of the Disclosure Letter, the terms of each
Mortgage Note and Mortgage have not been impaired, waived, altered or modified
in any respect from the date of their origination except by a written
instrument, which written instrument has been recorded if recordation is
necessary to protect the interests of the owner thereof. The substance of any
such waiver, alteration or modification has been communicated to and approved in
writing by (i) the relevant Investor and PMI (if any), to the extent required by
the relevant Investor and PMI
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requirements, and (ii) the title insurer, to the extent required by the relevant
policies, and its terms are reflected in the Loan Documents or the applicable
Loan Files. Except as set forth in the Loan Documents or the Loan Files and
identified on Schedule 3.27(f) of the Disclosure Letter, the Company has not (i)
subordinated the Lien of any Mortgage Loan to any other Mortgage or Lien, (ii)
released any portion of the Collateral from the Lien of any Mortgage Loan or
(iii) executed any instrument of release, cancellation or satisfaction with
respect to any Mortgage Loan.
(g) Except to the extent that the enforceability may be affected
by bankruptcy or other laws affecting the rights of creditors generally, each of
the Originated Mortgage Loans and Loan Documents and, to the best of Sellers'
Knowledge, each Non-Originated Mortgage Loan, is enforceable in accordance with
its terms and the exercise of any right thereunder will not render the Mortgage
Loan or Loan Documents unenforceable, in whole or in part, or subject to any
right of rescission, and no such right of rescission has been asserted with
respect thereto.
(h) Except as set forth on Schedule 3.27(h) of the Disclosure
Letter, none of the Servicing Rights is subject to recourse against the Company
for losses on liquidation of a Mortgage Loan, borrower defaults or repurchase
obligations upon the occurrence of non-payment or other events, and the Company
has no obligation or recourse to any Person to which it may have sold or
transferred any Mortgage Loans or Servicing Rights. For the purposes of this
Section, "recourse" shall not include industry standard representations and
warranties (such as those concerning title, zoning, etc.), except to the extent
that such representations and/or warranties relate generally to economic
performance.
(i) Except as set forth on Schedule 3.27(i) of the Disclosure
Letter, neither the Sellers nor the Company has any notice or knowledge of (i)
any proceeding pending or threatened for the partial or total condemnation of
any of the property securing a Mortgage Loan or that all or any part of the
property securing a Mortgage Loan has been or will be condemned or (ii) any
casualty affecting any portion of the property securing a Mortgage Loan.
(j) To the best knowledge of the Sellers, after diligent inquiry,
all Persons which have had any interest in a Mortgage Loan, whether as
mortgagee, assignee, pledgee or otherwise, are (or, during the period in which
they held and disposed of such interest, were) (i) in compliance with any and
all applicable licensing requirements of the laws of the state in which the
Collateral is located, and (ii) (1) organized under the laws of such state, (2)
qualified to do business in such state, (3) federal savings and loan
associations or national banks having principal offices in such state, or (4)
not doing business in such state. No act or acts by any Person which has had an
interest in an Owned Mortgage Loan will render the Mortgage Loan or Loan
Documents unenforceable, in whole or in part, or subject to any right of
rescission, and no such right of rescission has been asserted with respect
thereto.
(k) To the extent required by the applicable Investor, each
Originated Mortgage Loan and, to the best of Sellers' knowledge, each
Non-Originated Mortgage Loan is insured by an ALTA lender's title insurance
policy or other generally acceptable form of policy or insurance acceptable to
the relevant Investor, containing such endorsements and affirmative
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insurance as is customary for similar transactions; each such title insurance
policy is issued by a title insurer acceptable to the applicable Investor
qualified to do business in the jurisdiction where the Collateral is located,
and insures the originator and its successors and assigns as to the first
priority Lien of the Mortgage in the original principal amount of the Mortgage
Loan subject only to those Liens shown on the title policy and approved in
writing by the Investor. The applicable Investor, as assignee of the
originator's rights, is an insured of such lender's title insurance policy, and
such lender's policy is in full force and effect. Neither the Company nor any
prior servicer has committed or suffered any act or omission which would impair
the coverage of such lender's policy.
(l) Except as set forth on Schedule 3.27(l) of the Disclosure
Letter, there are no payment defaults under the Loan Documents nor any events
which, with the giving of notice or the passage of time, or both, would
constitute a payment default.
(m) In the event a Mortgage Loan is secured by a deed of trust,
all applicable requirements of law with respect to the trustee service under
such deed of trust have been complied with or, if not complied with, can be
cured solely by substituting trustees thereunder and by filing a substitution of
trustee document in the appropriate filing or recording office.
(n) The Collateral securing each of the Mortgage Loans has been
covered by policies of hazard, builders' risk, all-risk property and flood
insurance, to the extent required by all applicable Legal Requirements or
Investor requirements applicable to such Mortgage Loan, all in a form usual and
customary in the industry and all of which are in full force and effect, and all
amounts due and payable under each policy have been, or will be, paid prior to
the Closing Date. Any and all claims under such insurance policies have been
submitted and processed in accordance with the applicable Investor requirements.
The Company has not been informed of any uninsured casualty losses to the
premises securing the Mortgage Loans or any casualty losses to such premises
where coinsurance has been, or the Company has reason to believe will be,
claimed by the insurance company or where the loss, exclusive of contents, is
greater than the net recovery from the casualty insurance carrier. To the best
knowledge of the Sellers, all damage with respect to which casualty insurance
proceeds have been received by or through the Company has been repaired or is in
the process of being repaired with such proceeds. Except as set forth in
Schedule 3.27(n) of the Disclosure Letter, the Company has not been informed nor
does the Company have any independent knowledge that any property subject to a
Mortgage has been or will be condemned in whole or in part.
(o) Each Mortgage Loan which is represented on Schedule 3.27(o) of
the Disclosure Letter to have FHA Insurance is insured under the National
Housing Act. As to each contract of FHA mortgage insurance and each Mortgage
Loan which is represented on Schedule 3.27(o) of the Disclosure Letter to be
insured by PMI, the Company has complied with all applicable provisions of the
related insurance or guarantee contract and all applicable Legal Requirements,
the insurance or guarantee is in full force and effect with respect to each
Mortgage Loan or related obligation, and there does not exist any event or
condition which currently, or but for the passage of time or the giving of
notice or both, can result in a revocation, impairment or reduction of or set
off with respect to any such insurance or guarantee.
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(p) Except as set forth on Schedule 3.27(p) of the Disclosure
Letter, the Company collects all escrows related to the Mortgage Loans. Except
as set forth on Schedule 3.27(p) of the Disclosure Letter, all escrow accounts
have been maintained by the Company and, to the best of the Sellers' Knowledge,
all prior servicers in accordance with all applicable Legal Requirements and the
requirements of Investors and PMIs, and in accordance with the Mortgage
Servicing Agreements and the Loan Documents related thereto. Except as set forth
on Schedule 3.27(p) of the Disclosure Letter, the Company has credited to the
account of mortgagors all interest required to be paid on any escrow account
through the Closing Date. All escrow, custodial, and suspense accounts related
to the Owned Mortgage Loans are held in the Company's name or the Investor's
name by the Company. Schedule 3.27(p) of the Disclosure Letter sets forth the
correct account number and location of each escrow account.
(q) The Company is the sole owner and holder of legal title to
each of the Owned Mortgage Loans and no other Person has any interest in the
Owned Mortgage Loan other than the applicable Investor.
(r) Except as set forth on Schedule 3.27(r), no defaults of any
nature under the terms of any of the FHA Loans have occurred and are continuing
or are reasonably expected by the Company to occur, which would entitle the
Company to assign the FHA Loan to the FHA in exchange for mortgage insurance
benefits.
(s) Set forth on Schedule 3.27(s) of the Disclosure Letter is a
complete and correct list of all letters of credit held by the Company,
identifying for each the Investor or PMI, amount, expiration date, reason held,
account party and other material information relating thereto. Each such letter
of credit is irrevocable, unconditional, fully enforceable and satisfies all
applicable Investor requirements.
(t) Except as identified on Schedule 3.27(t) of the Disclosure
Letter, the Company's warehousing lender or other Investor or a custodian
therefor has physical possession of the executed original Mortgage Note for each
Mortgage Loan, which Mortgage Notes are located in the location set forth in
Schedule 3.27(t) of the Disclosure Letter and are held in a fire-proof vault.
(u) Except as identified on Schedule 3.27(u) of the Disclosure
Letter, the Company is under no obligation to make any future advances under any
of the Mortgage Loans. Except as identified on Schedule 3.27(u) which also
identifies the source and amount of future funding, any mortgage amounts that
may hereafter be required to be disbursed to the applicable borrower are held in
escrow or other reserve accounts with or on behalf of the Company. All
agreements to provide future funding from Investors are in full force and effect
and the Sellers have no reason to believe, after diligent inquiry, that such
funding will not be available as and when necessary.
(v) All of the real property and improvements included in the
Collateral securing the Originated Mortgage Loans and, to the best of Sellers'
knowledge, all of the real
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property and improvements included in the Collateral securing the Non-Originated
Mortgage Loans comply in all material respects with all applicable zoning, land
use, environmental and, to the best knowledge of the Sellers, after diligent
inquiry, other Legal Requirements applicable to the property or the related
borrower as well as any regulatory agreement or restrictive covenant affecting
the Collateral.
(w) Each of the Originated Mortgage Loans and, to the best of
Sellers' knowledge, each of the Non-Originated Mortgage Loans complies with or
is exempt from applicable Legal Requirements pertaining to usury. The
requirements of all applicable Legal Requirements governing consumer credit and
truth-in-lending have been complied with respect to each Originated Mortgage
Loan and to the best of Sellers' knowledge, with respect to each Non-Originated
Mortgage Loan.
(x) To the best Knowledge of the Sellers, after diligent inquiry,
there are no structural defects affecting any of the improvements included in
the Collateral securing the Mortgage Loans, other than defects for which
adequate reserves have been established by the borrower with the Company which
are identified on Schedule 3.27(x) of the Disclosure Letter.
(y) The Company has filed or caused to be filed all necessary UCC
financing statements, including all necessary extension statements, in the
appropriate offices to perfect and maintain the first Lien security interest in
all Collateral for which such filings are necessary.
(z) Except as set forth on Schedule 3.27(z) of the Disclosure
Letter, there exists a binding contract or agreement providing for the purchase
of each of the Owned Mortgage Loans by an Investor; each such contract or
agreement is in full force and effect; there exists no basis upon which any of
such Investors could refuse to purchase any of the Owned Mortgage Loans pursuant
to such contracts or agreements; and the Sellers have no reason to believe,
after diligent inquiry, that any of the Owned Mortgage Loans will not be
purchased by the applicable Investors in due course in accordance with such
contracts or agreements.
(aa) Except as set forth on Schedule 3.27(aa) of the Disclosure
Letter, the Company has never been required to re-purchase any Mortgage Loan and
has never been subject to any surcharge or experienced any deduction from the
amount of any claim that it has presented for mortgage insurance, guarantee or
similar benefits with respect to any defaulted Mortgage Loan.
(bb) The Company has no Flow Servicing Agreements.
(cc) Attached hereto as Schedule 3.27(cc) of the Disclosure Letter
are true and complete lists of (i) all outstanding loan commitments, other than
repurchase obligations under Mortgage Servicing Agreements and purchase
obligations made by the Company, (ii) all commitments made by Investors to
purchase Mortgage Loans from the Company (or to guarantee and purchase
mortgage-backed securities with respect thereto), (iii) the discount/purchase
price of each of the Investor commitments, and (iv) all future and option
contracts.
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(dd) Except as set forth in Schedule 3.27(dd) of the Disclosure
Letter, the Company owns the entire right, title and interest in and to the
servicing of each Mortgage Loan in the Mortgage Servicing Portfolio and the sole
right to service such Mortgage Loans subject to the Mortgage Servicing
Agreements, free and clear of all Liens. Except as set forth in Schedule
3.27(dd) of the Disclosure Letter, the Company has the full right, power and
authority to enter into and consummate this Agreement without any negative
impact on any of the Mortgage Servicing Agreements and to sell the Servicing
Rights under the Mortgage Servicing Agreements, including the Servicing Rights
to the Mortgage Loans in the Mortgage Servicing Portfolio and the Company is not
obligated to sell all or any part of same to any other party.
(ee) Except as set forth in Schedule 3.27(ee) of the Disclosure
Letter, the Company has not received notice of a servicing impropriety for any
Mortgage Loan in the Mortgage Servicing Portfolio, and each Mortgage Loan
serviced by the Company has been properly serviced and accounted for in all
respects in accordance with standard industry practices. To the extent that any
applicable Legal Requirement in any jurisdiction or of any Investor requires the
payment of interest on escrow accounts by the Company with respect to any
particular Mortgage Loan, all such interest has been properly paid. All amounts
payable in respect of a Mortgage Note, Mortgage, or the property covered by a
Mortgage which the Company is responsible for paying, directly or on behalf of a
mortgagor, have been paid when due and payable. All pools for which the Company
is responsible are in compliance with all applicable Investor requirements,
procedures, rules, regulations and guidelines. The custodial files for each
Mortgage Loan will contain upon the Closing Date all items required by all
applicable Investor requirements, procedures, rules, regulations and guidelines
for the certification of such pools. The securities backed by such pools are
issued on uniform documents in accordance with the applicable Investor
requirements, procedures, rules, regulations and guidelines. The principal
balances outstanding and owing on the Mortgage Loans in each pool equal or
exceed the amounts owing to the security holders of each pool.
(ff) Each Mortgage Servicing Agreement is valid, binding and
enforceable in accordance with its terms. The Company has serviced all Mortgage
Loans in accordance with all applicable Investor requirements. There are no
pending or threatened claims by any Investor against the Company relating
directly or indirectly to any Mortgage Loan or any Mortgage Servicing Agreement.
The Company has no notice of any default by other parties under any Mortgage
Servicing Agreement or Flow Servicing Agreement. No material default of the
Company exists under any Mortgage Servicing Agreement or Flow Servicing
Agreement, including any default arising with notice or lapse of time, or both.
(gg) Each Mortgage Loan File is complete in all material respects,
and all monies received with respect to each Mortgage Loan have been properly
accounted for and applied. There are no defects in any Mortgage Loan File,
Mortgage Loan or pool.
(hh) Except as set forth in Schedule 3.27(hh) of the Disclosure
Letter, the Company has received no notice from the FHA or any PMI disclaiming
liability on the insurance or guaranty of any Mortgage Loan in the Mortgage
Servicing Portfolio, and neither the Sellers
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nor the Company has any knowledge, after diligent inquiry, of any facts or
circumstances which if disclosed to any such entities would result in such a
disclaimer of liability.
(ii) The Company has properly conducted, in all material respects,
an escrow analysis for each Mortgage Loan within the 12 month period immediately
preceding the Closing Date. All books and records with respect to each such
Mortgage Loan are in good condition and are adjusted to reflect properly the
results of the escrow analysis. The Company has delivered notification to the
mortgagor under each such Mortgage Loan of all payment adjustments resulting
from such escrow analysis.
(jj) All Mortgage Loans with adjustable rates, if any, have been
timely and appropriately adjusted, in all material respects, and the mortgagors
appropriately advised where it is the obligation of the Company to do so. All
buydown funds with respect to such Mortgage Loans have been properly applied.
All real estate taxes, assessments and similar charges due in respect of the
property covered by each such Mortgage Loan having an impound account
administered by the Company are current.
(kk) No amounts are owing to HUD or any other entity with respect
to Mortgage Loans in the Mortgage Servicing Portfolio for overpaid subsidies,
except in the ordinary course of business and in an amount which in the
aggregate is less than $20,000. No amounts are owing to the Company by
mortgagors or anyone else with respect to Mortgage Loans in the Mortgage
Servicing Portfolio for overpaid subsidies.
3.28 REAL ESTATE OWNED
The Company does not hold any REO and does not own or lease real property other
than as disclosed in Schedule 3.28 of the Disclosure Letter. No properties are
in foreclosure by the Company on behalf of itself or on behalf of any Investor
other that as disclosed in Schedule 3.28 of the Disclosure Letter.
3.29 OWNERSHIP OF THE SHARES
As of the Closing Date, the Sellers own of record and beneficially all
of the Shares, and as of the Closing Date, Sellers will have good title to such
Shares free and clear of all Liens.
3.30 DELIVERY OF GOOD TITLE
Upon delivery of the Shares to be sold by Sellers hereunder and payment
of the Purchase Price therefor pursuant to the terms of this Agreement,
Purchaser will have good title to such Shares at Closing free and clear of all
Liens.
3.31 GOVERNMENTAL CONSENTS
No consent, approval, order, or authorization of, or registration,
qualification, designation, declaration, or filing with, any governmental
authority is required on the part of the
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Sellers in connection with the execution and delivery of this Agreement, the
offer, sale, and delivery of the Shares, or the other transactions to be
consummated at the Closing, as contemplated by this Agreement, except as set
forth on Schedule 3.31 of the Sellers Disclosure Schedule.
4. REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants to Sellers as follows:
4.1 ORGANIZATION AND GOOD STANDING
Purchaser is a corporation duly organized, validly existing, and in good
standing under the laws of the State of Delaware.
4.2 AUTHORITY; NO CONFLICT; ADEQUATE CAPITALIZATION
(a) This Agreement constitutes the legal, valid, and binding
obligation of Purchaser, enforceable against Purchaser in accordance with its
terms. Upon the execution and delivery by Purchaser of the Employment Agreements
(collectively, the "Purchaser's Closing Documents"), the Purchaser's Closing
Documents will constitute the legal, valid, and binding obligations of
Purchaser, enforceable against Purchaser in accordance with their respective
terms. Purchaser has the absolute and unrestricted right, power, and authority
to execute and deliver this Agreement, and as of the Closing Date will have
obtained all requisite corporate approvals with respect to the execution and
delivery of the Purchaser's Closing Documents and the performance of its
obligations under this Agreement and the Purchaser's Closing Documents.
(b) Except as set forth in Schedule 4.2, neither the execution
and delivery of this Agreement nor the consummation or performance of any of the
Contemplated Transactions will give any Person the right to prevent, delay, or
otherwise interfere with any of the Contemplated Transactions pursuant to:
(i) any provision of Purchaser's Organizational Documents;
(ii) any resolution adopted by the board of directors or the
stockholders of Purchaser;
(iii) any Legal Requirement or Order to which Purchaser may
be subject; or
(iv) any Contract to which Purchaser is a party or by which
Purchaser may be bound.
(c) The Purchaser has sufficient funds to consummate the
Contemplated Transactions, including the payment of the Deferred Portion of the
Purchase Price.
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Except for the authorization and approval by its parent, The WMF Group,
Ltd. , Purchaser is not and will not be required to obtain any Consent from any
Person in connection with the execution and delivery of this Agreement or the
consummation or performance of any of the Contemplated Transactions.
4.3 INVESTMENT INTENT
Purchaser is acquiring the Shares for its own account and not with a
view to their distribution within the meaning of Section 2(11) of the Securities
Act.
4.4 CERTAIN PROCEEDINGS
There is no pending Proceeding that has been commenced against Purchaser
and that challenges, or may have the effect of preventing, delaying, making
illegal, or otherwise interfering with, any of the Contemplated Transactions. To
Purchaser's Knowledge, no such Proceeding has been Threatened.
4.5 BROKERS OR FINDERS
Purchaser and its officers and agents have incurred no obligation or
liability, contingent or otherwise, for brokerage or finders' fees or agents'
commissions or other similar payment in connection with this Agreement and will
indemnify and hold Sellers harmless from any such payment alleged to be due by
or through Purchaser as a result of the action of Purchaser or its officers or
agents.
4.6 TAX ELECTION
In the event that Purchaser elects to cause the Company to step-up the
basis of its assets after Closing pursuant to Section 338 of the IRC, Sellers
shall have no obligation or responsibility whatsoever, jointly or severally, for
any tax liability resulting from such election either prior to or after the
Closing Date.
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5. COVENANTS OF SELLERS PRIOR TO CLOSING DATE
5.1 ACCESS AND INVESTIGATION
Between the date of this Agreement and the Closing Date, Sellers will,
and will cause each Acquired Company and its Representatives to, (a) afford
Purchaser and its Representatives and prospective lenders and their
Representatives (collectively, "Purchaser's Advisors") full and free access to
each Acquired Company's personnel, properties (including subsurface testing),
contracts, books and records, and other documents and data, (b) furnish
Purchaser and Purchaser's Advisors with copies of all such contracts, books and
records, and other existing documents and data as Purchaser may reasonably
request, and (c) furnish Purchaser and Purchaser's Advisors with such additional
financial, operating, and other data and information as Purchaser may reasonably
request.
5.2 OPERATION OF THE BUSINESSES OF THE ACQUIRED COMPANIES
Between the date of this Agreement and the Closing Date, Sellers will,
and will cause each Acquired Company to:
(a) conduct the business of such Acquired Company only in the
Ordinary Course of Business;
(b) use their Best Efforts to preserve intact the current business
organization of such Acquired Company, keep available the services of the
current officers, employees, and agents of such Acquired Company, and maintain
the relations and good will with Investors, customers, landlords, creditors,
employees, agents, and others having business relationships with such Acquired
Company; and
(c) confer with Purchaser concerning operational matters of a
material nature.
5.3 NEGATIVE COVENANT
Except as otherwise expressly permitted by this Agreement, between the
date of this Agreement and the Closing Date, Sellers will not, and will cause
each Acquired Company not to, without the prior consent of Purchaser, take any
affirmative action, or fail to take any reasonable action within their or its
control, as a result of which any of the changes or events listed in Section
3.16 is likely to occur.
5.4 REQUIRED APPROVALS
As promptly as practicable after the date of this Agreement, Sellers
will, and will cause each Acquired Company to, make all filings required by
Legal Requirements to be made by them in order to consummate the Contemplated
Transactions (including all filings under the HSR Act). Between the date of this
Agreement and the Closing Date, Sellers will, and will cause each Acquired
Company to, (a) cooperate with Purchaser with respect to all filings that
Purchaser
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elects to make or is required by Legal Requirements to make in connection with
the Contemplated Transactions, and (b) cooperate with Purchaser in obtaining
all consents identified in Schedule 4.2 (including taking all actions requested
by Purchaser to cause early termination of any applicable waiting period under
the HSR Act).
5.5 NOTIFICATION
Between the date of this Agreement and the Closing Date, each Sellers
will promptly notify Purchaser in writing if such Sellers or any Acquired
Company becomes aware of any fact or condition that causes or constitutes a
Breach of any of Sellers' representations and warranties as of the date of this
Agreement, or if such Sellers or any Acquired Company becomes aware of the
occurrence after the date of this Agreement of any fact or condition that would
(except as expressly contemplated by this Agreement) cause or constitute a
Breach of any such representation or warranty had such representation or
warranty been made as of the time of occurrence or discovery of such fact or
condition. Should any such fact or condition require any change in the
Disclosure Letter if the Disclosure Letter were dated the date of the occurrence
or discovery of any such fact or condition, Sellers will promptly deliver to
Purchaser a supplement to the Disclosure Letter specifying such change. During
the same period, each Sellers will promptly notify Purchaser of the occurrence
of any Breach of any covenant of Sellers in this Section 5 or of the occurrence
of any event that may make the satisfaction of the conditions in Section 7
impossible or unlikely.
5.6 PAYMENT OF INDEBTEDNESS BY RELATED PERSONS
Except as expressly provided in this Agreement, Sellers will cause all
indebtedness owed to an Acquired Company by Sellers or any Related Person of
Sellers to be paid in full prior to Closing.
5.7 NO NEGOTIATION
Until such time, if any, as this Agreement is terminated pursuant to
Section 9, Sellers will not, and will cause each Acquired Company and each of
their Representatives not to, directly or indirectly solicit, initiate, or
encourage any inquiries or proposals from, discuss or negotiate with, provide
any non-public information to, or consider the merits of any unsolicited
inquiries or proposals from, any Person (other than Purchaser) relating to any
transaction involving the sale of the business or assets (other than in the
Ordinary Course of Business) of any Acquired Company, or any of the capital
stock of any Acquired Company, or any merger, consolidation, business
combination, or similar transaction involving any Acquired Company.
5.8 BEST EFFORTS
Between the date of this Agreement and the Closing Date, Sellers will
use their Best Efforts to cause the conditions in Articles 7 and 8 to be
satisfied.
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6. COVENANTS OF PURCHASER PRIOR TO CLOSING DATE
6.1 APPROVALS OF GOVERNMENTAL BODIES
As promptly as practicable after the date of this Agreement, Purchaser
will, and will cause each of its Related Persons to, make all filings required
by Legal Requirements to be made by them to consummate the Contemplated
Transactions. Between the date of this Agreement and the Closing Date, Purchaser
will, and will cause each Related Person to, cooperate with Sellers with respect
to all filings that Sellers are required by Legal Requirements to make in
connection with the Contemplated Transactions, and (ii) cooperate with Sellers
in obtaining all consents identified in Schedule 3.2 of the Disclosure Letter;
provided that this Agreement will not require Purchaser to dispose of or make
any change in any portion of its business or to incur any other burden to obtain
a Governmental Authorization.
6.2 BEST EFFORTS
Except as set forth in the proviso to Section 6.1, between the date of
this Agreement and the Closing Date, Purchaser will use its Best Efforts to
cause the conditions in Article 8 to be satisfied.
7. CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATION TO CLOSE
Purchaser's obligation to purchase the Shares and to take the other
actions required to be taken by Purchaser at the Closing is subject to the
satisfaction, at or prior to the Closing, of each of the following conditions
(any of which may be waived by Purchaser, in whole or in part):
7.1 ACCURACY OF REPRESENTATIONS
All of Sellers' representations and warranties in this Agreement
(considered collectively), and each of these representations and warranties
(considered individually), must have been accurate in all material respects as
of the date of this Agreement, and must be accurate in all material respects as
of the Closing Date as if made on the Closing Date, without giving effect to any
supplement to the Disclosure Letter.
7.2 SELLERS' PERFORMANCE
(a) All of the covenants and obligations that Sellers are required
to perform or to comply with pursuant to this Agreement at or prior to the
Closing (considered collectively), and each of these covenants and obligations
(considered individually), must have been duly performed and complied with in
all material respects.
(b) Each document required to be delivered pursuant by the Sellers
to Section 2.4 must have been delivered, and each of the other covenants and
obligations of the Sellers in this Agreement must have been performed and
complied with in all respects.
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7.3 CONSENTS
Each of the Consents must have been obtained by the Sellers and must be
in full force and effect.
7.4 ADDITIONAL DOCUMENTS
Each of the following documents must have been delivered to Purchaser:
(a) an opinion of Campbell & Riggs, P.C., Houston, Texas, counsel
to the Company and to the Wilson and Hopson, and an opinion of Thomas, Lawless,
Esq., counsel to Smeck, each dated the Closing Date, in a form substantially in
the form of Exhibit 7.4(a) - I and 7.4(a) -II, respectively, which are attached
to and made a part of this Agreement; and
(b) such other documents as Purchaser may reasonably request for
the purpose of (i) enabling its counsel to provide the opinion referred to in
Section 8.4(a), (ii) evidencing the accuracy of any of Sellers' representations
and warranties, (iii) evidencing the performance by Sellers of, or the
compliance by Sellers with, any covenant or obligation required to be performed
or complied with by such Sellers, (iv) evidencing the satisfaction of any
condition referred to in this Article 7, or (v) otherwise facilitating the
consummation or performance of any of the Contemplated Transactions.
7.5 NO PROCEEDINGS
Since the date of this Agreement, there must not have been commenced or
Threatened against Purchaser, or against any Person affiliated with Purchaser,
any Proceeding (a) involving any challenge to, or seeking damages or other
relief in connection with, any of the Contemplated Transactions, or (b) that may
have the effect of preventing, delaying, making illegal, or otherwise
interfering with any of the Contemplated Transactions.
7.6 NO CLAIM REGARDING STOCK OWNERSHIP OR SALE PROCEEDS
There must not have been made or Threatened by any Person any claim
asserting that such Person (a) is the holder or the beneficial owner of, or has
the right to acquire or to obtain beneficial ownership of, any stock of, or any
other voting, equity, or ownership interest in, any of the Acquired Companies,
or (b) is entitled to all or any portion of the Purchase Price payable for the
Shares.
7.7 NO PROHIBITION
Neither the consummation nor the performance of any of the Contemplated
Transactions will, directly or indirectly (with or without notice or lapse of
time), materially contravene, or conflict with, or result in a material
violation of, or cause Purchaser or any Person affiliated with Purchaser to
suffer any material adverse consequence under, (a) any applicable Legal
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Requirement or Order, or (b) any Legal Requirement or Order that has been
published, introduced, or otherwise proposed by or before any Governmental Body.
8. CONDITIONS PRECEDENT TO SELLERS' OBLIGATION TO CLOSE
Sellers' obligation to sell the Shares and to take the other actions
required to be taken by Sellers at the Closing is subject to the satisfaction,
at or prior to the Closing, of each of the following conditions (any of which
may be waived by Sellers, in whole or in part):
8.1 ACCURACY OF REPRESENTATIONS
All of Purchaser's representations and warranties in this Agreement
(considered collectively), and each of these representations and warranties
(considered individually), must have been accurate in all material respects as
of the date of this Agreement and must be accurate in all material respects as
of the Closing Date as if made on the Closing Date.
8.2 PURCHASER'S PERFORMANCE
(a) All of the covenants and obligations that Purchaser is
required to perform or to comply with pursuant to this Agreement at or prior to
the Closing (considered collectively), and each of these covenants and
obligations (considered individually), must have been performed and complied
with in all material respects.
(b) Purchaser must have delivered each of the documents required
to be delivered by Purchaser pursuant to Section 2.4 and must have made the cash
payments required to be made by Purchaser pursuant to Sections 2.4(b)(i) and
2.4(b)(ii).
8.3 CONSENTS
Each of the Consents required from the Purchaser pursuant to this
Agreement must have been obtained and must be in full force and effect.
8.4 ADDITIONAL DOCUMENTS
Purchaser must have caused the following documents to be delivered to
Sellers:
(a) an opinion of Krooth & Altman, counsel to the Purchaser, dated
the Closing Date, in a form reasonably acceptable to the Sellers and their
counsel; and
(b) such other documents as Sellers may reasonably request for the
purpose of (i) enabling their counsel to provide the opinion referred to in
Section 7.4(a), (ii) evidencing the accuracy of any representation or warranty
of Purchaser, (iii) evidencing the performance by Purchaser of, or the
compliance by Purchaser with, any covenant or obligation required to be
performed or complied with by Purchaser, (ii) evidencing the satisfaction of any
condition
65
<PAGE> 51
referred to in this Article 8, or (v) otherwise facilitating the consummation of
any of the Contemplated Transactions.
8.5 NO INJUNCTION
There must not be in effect any Legal Requirement or any injunction or
other Order that (a) prohibits the sale of the Shares by Sellers to Purchaser,
and (b) has been adopted or issued, or has otherwise become effective, since the
date of this Agreement.
9. TERMINATION
9.1 TERMINATION EVENTS
In addition to termination pursuant to Section 2.3, this Agreement may,
by notice given prior to or at the Closing, be terminated:
(a) by either Purchaser or Sellers if a material Breach of any
provision of this Agreement has been committed by the other party and such
Breach has not been waived;
(b)(i) by Purchaser if any of the conditions in Article 7 has not
been satisfied as of the Closing Date or if satisfaction of such a condition is
or becomes impossible (other than through the failure of Purchaser to comply
with its obligations under this Agreement) and Purchaser has not waived such
condition on or before the Closing Date; or (ii) by Sellers, if any of the
conditions in Article 8 has not been satisfied of the Closing Date or if
satisfaction of such a condition is or becomes impossible (other than through
the failure of Sellers to comply with their obligations under this Agreement)
and Sellers have not waived such condition on or before the Closing Date; or
(c) by mutual consent of Purchaser and Sellers.
9.2 EFFECT OF TERMINATION
Each party's right of termination under Section 9.1 is in addition to
any other rights it may have under this Agreement or otherwise, and the exercise
of a right of termination will not be an election of remedies. If this Agreement
is terminated pursuant to Section 9.1, all further obligations of the parties
under this Agreement will terminate, except that the obligations in Sections
11.1 and 11.3 will survive; provided, however, that if this Agreement is
terminated by a party because of the Breach of the Agreement by the other party
or because one or more of the conditions to the terminating party's obligations
under this Agreement is not satisfied as a result of the other party's failure
to comply with its obligations under this Agreement, the terminating party's
right to pursue all legal remedies will survive such termination unimpaired.
66
<PAGE> 52
10. INDEMNIFICATION; REMEDIES
10.1 SURVIVAL; RIGHT TO INDEMNIFICATION NOT AFFECTED BY KNOWLEDGE
All representations, warranties, covenants, and obligations in this
Agreement, the Disclosure Letter, the supplements to the Disclosure Letter, the
certificate delivered pursuant to Section 2.4(a)(v), and any other certificate
or document delivered pursuant to this Agreement (with the exception of the
Employment Agreements, which shall be contracts between the Company and the
respective Sellers independent of this Agreement except as otherwise
specifically provided therein or herein) shall survive the Closing for a period
of * from the Closing Date, except to the extent that Damages relate to the
fraud or any willful misconduct of any of the Sellers, or to the fact that
prior to Closing all employees of the Company were deemed by the Company not to
be subject to laws entitling certain employees to the receipt of payment for
overtime, in which event such time limitation shall not apply. Notwithstanding
the aforesaid, the representations and warranties of the Sellers in Section 3.29
and Section 3.30 shall not be qualified by or subject to any limitation as to
time. The right to indemnification, payment of Damages or other remedy based
on such representations, warranties, covenants, and obligations will not be
affected by any investigation conducted with respect to, or any Knowledge
acquired (or capable of being acquired) at any time, whether before or after
the execution and delivery of this Agreement or the Closing Date, with respect
to the accuracy or inaccuracy of or compliance with, any such representation,
warranty, covenant, or obligation. The waiver of any condition based on the
accuracy of any representation or warranty, or on the performance of or
compliance with any covenant or obligation, will not affect the right to
indemnification, payment of Damages, or other remedy based on such
representations, warranties, covenants, and obligations. Purchaser shall inform
the Sellers immediately upon becoming aware of any Breach by the Sellers under
this Agreement, provided however, that any failure by the Purchaser so to
notify the Sellers shall not relieve the Sellers of any liability under this
Agreement nor constitute a waiver by the Purchaser of any of its rights under
this Agreement.
10.2 INDEMNIFICATION AND PAYMENT OF DAMAGES BY SELLERS
Sellers, jointly and severally (subject to the personal limitations
specified hereinafter in this Section 10.2), will indemnify and hold harmless
Purchaser, the Acquired Companies, and their respective Representatives,
stockholders, controlling persons, and affiliates (collectively, the
"Indemnified Persons") for, and will pay to the Indemnified Persons the amount
of, any loss, liability, claim, damage (including incidental and consequential
damages), expense (including costs of investigation and defense and reasonable
attorneys' fees) or diminution of value, whether or not involving a third- party
claim (collectively, "Damages"), arising, directly or indirectly, from or in
connection with:
(a) any Breach of any representation or warranty made by Sellers
in this Agreement (without giving effect to any supplement to the Disclosure
Letter), the Disclosure Letter, the supplements to the Disclosure Letter, or any
other certificate or document delivered by Sellers pursuant to this Agreement;
- -----------------------------
* Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, market by "*" have been
seperately filed with the commission.
67
<PAGE> 53
(b) any Breach of any representation or warranty made by Sellers
in this Agreement as if such representation or warranty were made on and as of
the Closing Date without giving effect to any supplement to the Disclosure
Letter, other than any such Breach that is disclosed in a supplement to the
Disclosure Letter and is expressly identified in the certificate delivered
pursuant to Section 2.4(a)(v) as having caused the condition specified in
Section 7.1 not to be satisfied;
(c) any Breach by any of the Sellers of any covenant or obligation
of such Sellers in this Agreement;
(d) any services provided by, any Acquired Company prior to the
Closing Date; or
(e) any claim by any Person for brokerage or finder's fees or
commissions or similar payments based upon any agreement or understanding
alleged to have been made by any such Person with Sellers or any Acquired
Company (or any Person acting on their behalf) in connection with any of the
Contemplated Transactions.
Notwithstanding anything in this Section 10.2 to the contrary, and
except as provided in the following paragraph of this Agreement, the joint and
several liability of the Sellers with respect to liability under this Section
10, shall be subject to the following limitations as to amount *. Further
notwithstanding anything in this Agreement to the contrary, any liability of
Smeck with respect to indemnification and Damages is limited to (x) any and all
matters relating to the organization, operations and business activities of the
Robert C. Wilson Company - Arizona, and (y) any and all matters relating to
Section 3.3 of this Agreement, ownership of the Shares and title (including
the quality thereof) of the Shares.
The aforesaid threshold of [*] shall not be applicable with respect to
any representations or warranties of the Sellers with respect to (i) Section
3.29 and Section 3.30 of this Agreement, (ii) claims against the Company or any
Acquired Company or amounts which the Company or any Acquired Company is
obligated to pay with respect to health insurance or health care of any of the
employees of the Company or any Acquired Company and which arise from matters
occurring prior to the Closing Date, (iii) Damages arising from the fact
that prior to Closing all employees of the Company were deemed by the Company
not to be subject to laws entitling certain employees to the receipt of payment
for overtime and (iv) the licensure and good standing of the Company in the
States of California and Wisconsin, it being acknowledged by the Sellers that
the Company is not in compliance with licensure requirements in said States.
Notwithstanding anything to the contrary in this Agreement, the Sellers shall
be liable to the Company and to the Purchaser for any Damages with respect to
licensure and good standing requirements in the States of California and
Wisconsin. The Sellers represent and warrant to the Purchaser that the Company
has commenced the licensing process in California and Wisconsin. The Purchaser
agrees that, after the Closing, it will cause the Company to continue to pursue
the license application so as to mitigate any Damages which might occur as a
result of the absence of such licenses.
The remedies provided in this Section 10.2 will not be exclusive of or
limit any other remedies that may be available to Purchaser or the other
Indemnified Persons.
10.3 INDEMNIFICATION AND PAYMENT OF DAMAGES BY SELLERS-- ENVIRONMENTAL
MATTERS
In addition to the provisions of Section 10.2, Sellers, jointly and
severally, will indemnify and hold harmless Purchaser, the Acquired Companies,
and the other Indemnified Persons for, and will pay to Purchaser, the Acquired
Companies, and the other Indemnified Persons the amount of, any Damages
(including costs of cleanup, containment, or other remediation) arising,
directly or indirectly, from or in connection with:
(a) any Environmental, Health, and Safety Liabilities arising out
of or relating to: (i) (A) the ownership, operation, or condition at any time on
or prior to the Closing Date of the Facilities or any other properties and
assets (whether real, personal, or mixed and whether tangible or intangible) in
which Sellers or any Acquired Company has or had an interest, or (B) any
Hazardous Materials or other contaminants that were present on the Facilities or
such other properties and assets at any time on or prior to the Closing Date; or
(ii) (A) any Hazardous Materials or other contaminants, wherever located, that
were, or were allegedly, generated, transported, stored, treated, Released, or
otherwise handled by Sellers or any Acquired Company or by any other Person for
whose conduct they are or may be held responsible at any time on or prior to the
Closing Date, or (B) any Hazardous Activities that were, or were allegedly,
- -----------------------------
* Portions of this exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, market by "*" have been
seperately filed with the commission.
68
<PAGE> 54
conducted by Sellers or any Acquired Company or by any other Person for whose
conduct they are or may be held responsible; or
(b) any bodily injury (including illness, disability, and death,
and regardless of when any such bodily injury occurred, was incurred, or
manifested itself), personal injury, property damage (including trespass,
nuisance, wrongful eviction, and deprivation of the use of real property), or
other damage of or to any Person, including any employee or former employee of
Sellers or any Acquired Company or any other Person for whose conduct they are
or may be held responsible, in any way arising from or allegedly arising from
any Hazardous Activity conducted or allegedly conducted with respect to the
Facilities or the operation of the Acquired Companies prior to the Closing Date,
or from Hazardous Material that was (i) present or suspected to be present on or
before the Closing Date on or at the Facilities (or present or suspected to be
present on any other property, if such Hazardous Material emanated or allegedly
emanated from any of the Facilities and was present or suspected to be present
on any of the Facilities on or prior to the Closing Date) or (ii) Released or
allegedly Released by Sellers or any Acquired Company or any other Person for
whose conduct they are or may be held responsible, at any time on or prior to
the Closing Date.
Purchaser will be entitled to control any Cleanup, any related
Proceeding, and, except as provided in the following sentence, any other
Proceeding with respect to which indemnity may be sought under this Section
10.3. The procedure described in Section 10.9 will apply to any claim solely for
monetary damages relating to a matter covered by this Section 10.3.
10.4 INDEMNIFICATION AND PAYMENT OF DAMAGES BY PURCHASER
Purchaser will indemnify and hold harmless Sellers, and will pay to
Sellers the amount of any Damages arising, directly or indirectly, from or in
connection with (a) any Breach of any representation or warranty made by
Purchaser in this Agreement or in any certificate delivered by Purchaser
pursuant to this Agreement, (b) any Breach by Purchaser of any covenant or
obligation of Purchaser in this Agreement, or (c) any claim by any Person for
brokerage or finder's fees or commissions or similar payments based upon any
agreement or understanding alleged to have been made by such Person with
Purchaser (or any Person acting on its behalf) in connection with any of the
Contemplated Transactions.
10.5 PROCEDURE FOR INDEMNIFICATION--THIRD PARTY CLAIMS
(a) Promptly after receipt by an indemnified party under Section
10.2, 10.4, or (to the extent provided in the last sentence of Section 10.3)
Section 10.3 of notice of the commencement of any Proceeding against it, such
indemnified party will, if a claim is to be made against an indemnifying party
under such Section, give notice to the indemnifying party of the commencement of
such claim, but the failure to notify the indemnifying party will not relieve
the indemnifying party of any liability that it may have to any indemnified
party, except to the extent that the indemnifying party demonstrates that the
defense of such action is prejudiced by the indemnifying party's failure to give
such notice.
69
<PAGE> 55
(b) If any Proceeding referred to in Section 10.9(a) is brought
against an indemnified party and it gives notice to the indemnifying party of
the commencement of such Proceeding, the indemnifying party will, unless the
claim involves Taxes, be entitled to participate in such Proceeding and, to the
extent that it wishes (unless (i) the indemnifying party is also a party to such
Proceeding and the indemnified party determines in good faith that joint
representation would be inappropriate, or (ii) the indemnifying party fails to
provide reasonable assurance to the indemnified party of its financial capacity
to defend such Proceeding and provide indemnification with respect to such
Proceeding), to assume the defense of such Proceeding with counsel reasonably
satisfactory to the indemnified party and, after notice from the indemnifying
party to the indemnified party of its election to assume the defense of such
Proceeding, the indemnifying party will not, as long as it diligently conducts
such defense, be liable to the indemnified party under this Article 10 for any
fees of other counsel or any other expenses with respect to the defense of such
Proceeding, in each case subsequently incurred by the indemnified party in
connection with the defense of such Proceeding, other than reasonable costs of
investigation. If the indemnifying party assumes the defense of a Proceeding,
(i) no compromise or settlement of such claims may be effected by the
indemnifying party without the indemnified party's consent unless (A) there is
no finding or admission of any violation of Legal Requirements or any violation
of the rights of any Person and no effect on any other claims that may be made
against the indemnified party, and (B) the sole relief provided is monetary
damages that are paid in full by the indemnifying party; and (ii) the
indemnified party will have no liability with respect to any compromise or
settlement of such claims effected without its consent. If notice is given to an
indemnifying party of the commencement of any Proceeding and the indemnifying
party does not, within ten days after the indemnified party's notice is given,
give notice to the indemnified party of its election to assume the defense of
such Proceeding, the indemnifying party will be bound by any determination made
in such Proceeding or any compromise or settlement effected by the indemnified
party.
(c) Notwithstanding the foregoing, if an indemnified party
determines in good faith that there is a reasonable probability that a
Proceeding may adversely affect it or its affiliates other than as a result of
monetary damages for which it would be entitled to indemnification under this
Agreement, the indemnified party may, by notice to the indemnifying party,
assume the exclusive right to defend, compromise, or settle such Proceeding, but
the indemnifying party will not be bound by any determination of a Proceeding so
defended or any compromise or settlement effected without its consent (which may
not be unreasonably withheld).
(d) Sellers hereby consent to the non-exclusive jurisdiction of
any court in which a Proceeding is brought against any Indemnified Person for
purposes of any claim that an Indemnified Person may have under this Agreement
with respect to such Proceeding or the matters alleged therein, and agree that
process may be served on Sellers with respect to such a claim anywhere in the
world.
70
<PAGE> 56
10.6 PROCEDURE FOR INDEMNIFICATION--OTHER CLAIMS
A claim for indemnification for any matter not involving a third-party
claim may be asserted by notice to the party from whom indemnification is
sought.
11. GENERAL PROVISIONS
11.1 EXPENSES
Except as otherwise expressly provided in this Agreement, each party to
this Agreement will bear its respective expenses incurred in connection with the
preparation, execution, and performance of this Agreement and the Contemplated
Transactions, including all fees and expenses of agents, representatives,
counsel, and accountants. Sellers will cause the Acquired Companies not to incur
any out-of-pocket expenses in connection with this Agreement in excess of
Seventy-five Thousand and no/100 Dollars ($75,000). In the event of termination
of this Agreement, the obligation of each party to pay its own expenses will be
subject to any rights of such party arising from a breach of this Agreement by
another party.
11.2 PUBLIC ANNOUNCEMENTS
Any public announcement or similar publicity with respect to this
Agreement or the Contemplated Transactions will be issued, if at all, at such
time and in such manner as Purchaser determines. Unless consented to by
Purchaser in advance or required by Legal Requirements, prior to the Closing
Sellers shall, and shall cause the Acquired Companies to, keep this Agreement
strictly confidential and may not make any disclosure of this Agreement to any
Person. Sellers and Purchaser will consult with each other concerning the means
by which the Acquired Companies' employees, customers, and suppliers and others
having dealings with the Acquired Companies will be informed of the Contemplated
Transactions, and Purchaser will have the right to be present for any such
communication.
11.3 CONFIDENTIALITY
Between the date of this Agreement and the Closing Date, Purchaser and
Sellers will maintain in confidence, and will cause the directors, officers,
employees, agents, and advisors of Purchaser and the Acquired Companies to
maintain in confidence, and not use to the detriment of another party or an
Acquired Company any written, oral, or other information obtained in confidence
from another party or an Acquired Company in connection with this Agreement or
the Contemplated Transactions, unless (a) such information is already known to
such party or to others not bound by a duty of confidentiality or such
information becomes publicly available through no fault of such party, (b) the
use of such information is necessary or appropriate in making any filing or
obtaining any consent or approval required for the consummation of the
Contemplated Transactions, or (c) the furnishing or use of such information is
required by or necessary or appropriate in connection with legal proceedings.
71
<PAGE> 57
If the Contemplated Transactions are not consummated, each party will
return or destroy as much of such written information, including but not limited
to the Disclosure Letter, as the other party may reasonably request.
Except as and to the extent required by law, without the prior written
consent of the other Party, neither the Purchaser nor the Company nor the
Sellers will, and each will direct its representatives not to make, directly or
indirectly, any public comment, statement, or communication with respect to, or
otherwise to disclose or to permit the disclosure of the existence of
discussions regarding, a possible transaction between the Parties or any of the
terms, conditions, or other aspects of the transaction proposed in this letter.
If a Party is required by law to make any such disclosure, it must first provide
to the other Party the content of the proposed disclosure, the reasons that such
disclosure is required by law, and the time and place that the disclosure will
be made.
11.4 NOTICES
All notices, consents, waivers, and other communications under this
Agreement must be in writing and will be deemed to have been duly given when (a)
delivered by hand (with written confirmation of receipt by the recipient or by
the delivery service making the delivery), (b) sent by telecopier (with written
confirmation of receipt), provided that a copy is mailed by registered mail,
return receipt requested, or (c) when received by the addressee, if sent by a
nationally recognized overnight delivery service (receipt requested), in each
case to the appropriate addresses and telecopier numbers set forth below (or to
such other addresses and telecopier numbers as a party may designate by notice
to the other parties):
Sellers: c/o Robert C. Wilson, III
19 Briarhollow Lane, Suite 200
Houston, Texas 77027
Facsimile No.:
----------------
with a copy to: Campbell & Riggs
1980 Post Oak Boulevard, Suite 2300
Houston, Texas 77056
Attention: Winfield M. Campbell, Esq.
Facsimile No.: 713-621-5453
72
<PAGE> 58
Purchaser: Washington Mortgage Financial Group, Ltd.
1593 Spring Hill Road, Suite 400
Vienna, Virginia 22182
Attention: Howard S. Perkins
Executive Vice President
Facsimile No.: 703-610-1401
with a copy to: Patrick J. Clancy, Esq.
Krooth & Altman
1850 M. Street, N.W., Suite 400
Washington, D.C. 20036
Facsimile No.: 202-872-0145
11.5 JURISDICTION; SERVICE OF PROCESS
Any action or proceeding seeking to enforce any provision of, or based
on any right arising out of, this letter may be brought against any of the
parties in the courts of the Commonwealth of Virginia, County of Fairfax, or, if
it has or can acquire jurisdiction, in the United States District Court for the
Eastern District of Virginia, and each of the parties consents to the
jurisdiction of such courts (and of the appropriate appellate courts) in any
such action or proceeding and waives any objection to venue laid therein.
Process in any action or proceeding referred to in the preceding sentence may be
served on any party anywhere in the world.
11.6 FURTHER ASSURANCES
The parties agree (a) to furnish upon request to each other such further
information, (b) to execute and deliver to each other such other documents, and
(c) to do such other acts and things, all as the other party may reasonably
request for the purpose of carrying out the intent of this Agreement and the
documents referred to in this Agreement.
11.7 WAIVER
The rights and remedies of the parties to this Agreement are cumulative
and not alternative. Neither the failure nor any delay by any party in
exercising any right, power, or privilege under this Agreement or the documents
referred to in this Agreement will operate as a waiver of such right, power, or
privilege, and no single or partial exercise of any such right, power, or
privilege will preclude any other or further exercise of such right, power, or
privilege or the exercise of any other right, power, or privilege. To the
maximum extent permitted by applicable law, (a) no claim or right arising out of
this Agreement or the documents referred to in this Agreement can be discharged
by one party, in whole or in part, by a waiver or renunciation of the claim or
right unless in writing signed by the other party; (b) no waiver that may be
given by a party will be applicable except in the specific instance for which it
is given; and (c) no
73
<PAGE> 59
notice to or demand on one party will be deemed to be a waiver of any obligation
of such party or of the right of the party giving such notice or demand to take
further action without notice or demand as provided in this Agreement or the
documents referred to in this Agreement.
11.8 ENTIRE AGREEMENT AND MODIFICATION
This Agreement supersedes all prior agreements between the parties with
respect to its subject matter, and constitutes (along with the documents
referred to in this Agreement) a complete and exclusive statement of the terms
of the agreement between the parties with respect to its subject matter. This
Agreement may not be amended except by a written agreement executed by the party
to be charged with the amendment.
11.9 DISCLOSURE LETTER
(a) The disclosures in the Disclosure Letter, and those in any
Supplement thereto, must relate only to the representations and warranties in
the Section of the Agreement to which they expressly relate and not to any other
representation or warranty in this Agreement.
(b) In the event of any inconsistency between the statements in
the body of this Agreement and those in the Disclosure Letter (other than an
exception expressly set forth as such in the Disclosure Letter with respect to a
specifically identified representation or warranty), the statements in the body
of this Agreement will control.
11.10 ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS
Neither party may assign any of its rights under this Agreement without
the prior consent of the other parties, except that Purchaser may assign any of
its rights under this Agreement to any Subsidiary of Purchaser. Subject to the
preceding sentence, this Agreement will apply to, be binding in all respects
upon, and inure to the benefit of the successors and permitted assigns of the
parties. Nothing expressed or referred to in this Agreement will be construed to
give any Person other than the parties to this Agreement any legal or equitable
right, remedy, or claim under or with respect to this Agreement or any provision
of this Agreement. This Agreement and all of its provisions and conditions are
for the sole and exclusive benefit of the parties to this Agreement and their
successors and assigns.
11.11 SEVERABILITY
If any provision of this Agreement is held invalid or unenforceable by
any court of competent jurisdiction, the other provisions of this Agreement will
remain in full force and effect. Any provision of this Agreement held invalid or
unenforceable only in part or degree will remain in full force and effect to the
extent not held invalid or unenforceable.
74
<PAGE> 60
11.12 SECTION HEADINGS, CONSTRUCTION
The headings of Sections in this Agreement are provided for convenience only and
will not affect its construction or interpretation. All references to "Section"
or "Sections" refer to the corresponding Section or Sections of this Agreement.
All words used in this Agreement will be construed to be of such gender or
number as the circumstances require. Unless otherwise expressly provided, the
word "including" does not limit the preceding words or terms.
11.13 TIME OF ESSENCE
With regard to all dates and time periods set forth or referred to in
this Agreement, time is of the essence.
11.14 GOVERNING LAW
This Agreement will be governed by the laws of the Commonwealth of Virginia,
without regard to conflicts of laws principles.
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<PAGE> 61
11.15 COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of
which will be deemed to be an original copy of this Agreement and all of which,
when taken together, will be deemed to constitute one and the same agreement.
11.16 AGENT OF SELLERS
Hopson and Smeck appoint and designate Wilson as their agent, and Wilson
accepts such appointment and designation, for the purpose of giving to the
Purchaser, and receiving from the Purchaser, any and all notices and
communications with respect to this Agreement and the Contemplated Transactions.
The Sellers agree that any notices and communications from the Purchaser to
Wilson in accordance with the provisions of this Agreement shall be deemed to be
notices and communications to all of the Sellers.
SIGNATURE PAGE FOLLOWS
76
<PAGE> 62
IN WITNESS WHEREOF, the parties have executed and delivered this
Stock Purchase Agreement as of the date first written above.
Witness: PURCHASER:
----------
WASHINGTON MORTGAGE
FINANCIAL GROUP, LTD.
By:
- --------------------------------- ---------------------------------
Howard S. Perkins
Its: Executive Vice President
SELLERS:
--------
- --------------------------------- -------------------------------------
ROBERT C. WILSON, III
- -------------------------------- -------------------------------------
HARRY D. HOPSON, JR.
- -------------------------------- -------------------------------------
JOHN C. SMECK, III
THE COMPANY:
THE ROBERT C. WILSON COMPANY
By:
- -------------------------------- ---------------------------------
Robert C. Wilson, III
Its:
---------------------------------
77
<PAGE> 1
THE WMF GROUP, LTD.
EXHIBIT 11
COMPUTATION OF NET INCOME
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
NINE MONTHS APRIL 1, 1996 JANUARY 1,
ENDING TO 1996 TO
SEPTEMBER 31, SEPTEMBER 31, MARCH 31,
1997 1996 1996
--------------- --------------- -------------
(Unaudited)
<S> <C> <C> <C>
NET INCOME 1,724,229 603,580 $305,209
Weighted-average share outstanding:
Shares outstanding, beginning of period 4,217,478 4,217,478 4,217,478
Weighted-average shares outstanding 4,217,478 4,217,478 4,217,478
NET INCOME PER SHARE $0.41 $0.15 $.07
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 9,912
<SECURITIES> 3,866
<RECEIVABLES> 5,051
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 52,106
<PP&E> 2,404
<DEPRECIATION> 706
<TOTAL-ASSETS> 93,783
<CURRENT-LIABILITIES> 55,240
<BONDS> 0
0
0
<COMMON> 42
<OTHER-SE> 24,210
<TOTAL-LIABILITY-AND-EQUITY> 93,783
<SALES> 0
<TOTAL-REVENUES> 29,497
<CGS> 0
<TOTAL-COSTS> 19,329
<OTHER-EXPENSES> 4,534
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,289
<INCOME-PRETAX> 3,344
<INCOME-TAX> 1,620
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,724
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.41
</TABLE>
